ANNEX A

FORM OF SENIOR SUBORDINATED SECURED CONVERTIBLE PROMISSORY NOTE

NEITHER THIS NOTE NOR THE SECURITIES ISSUABLE UPON THE CONVERSION HEREOF HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE
STATE SECURITIES LAWS. THE SECURITIES REPRESENTED HEREBY MAY NOT BE OFFERED FOR
SALE, SOLD, TRANSFERRED OR ASSIGNED (i) IN THE ABSENCE OF (A) AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR (B) AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT
REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (ii) UNLESS SOLD PURSUANT TO RULE
144 OR RULE 144A UNDER SAID ACT.

ISC8 INC.

SENIOR SUBORDINATED SECURED CONVERTIBLE PROMISSORY NOTE

Issuance Date: ________________

Principal: U.S. $_______________

FOR VALUE RECEIVED, ISC8 Inc., a Delaware corporation (the “Company”), hereby
promises to pay to [Holder] or its registered assigns (the “Holder”) the amount
set out above opposite the caption “Principal” (as such amount may be increased
or reduced from time to time pursuant to the terms hereof, whether through the
payment of PIK Interest (as defined below) or through prepayment or otherwise,
the “Principal”) when due, whether upon the Maturity Date (as defined below),
acceleration, prepayment or otherwise (in each case, in accordance with the
terms hereof) and to pay Interest (as defined below) on the outstanding
Principal at the rates, in the manner and at the times set forth herein.  This
Senior Subordinated Secured Convertible Promissory Note (including all Senior
Subordinated Secured Convertible Promissory Notes issued in exchange, transfer
or replacement hereof) is part of the same series of notes (the “Notes”) as
those 12% senior subordinated promissory notes issued on or after September 27,
2012 to The Griffin Fund, LP and its affiliates and certain other investors (the
“Griffin Notes”).  The Company’s $4,000,000 in aggregate principal amount of 12%
senior subordinated promissory notes due 2013 and previously issued in 2011 to
Costa Brava Partnership III, L.P. and certain other investors are referred to
herein as the “Other Senior Subordinated Notes”.  Certain capitalized terms used
herein are defined in Section 31.

1)

PAYMENTS OF PRINCIPAL.

(a)

Voluntary.  The Company may prepay this Note at any time, in whole or in part,
without penalty or premium; provided that at least an aggregate of 90 days of
interest is being repaid with such prepayment in the event such prepayment is
less than 90 days after the issuance of the Note being prepaid.  All prepayments
of Principal made pursuant to this Section 1(a) shall be accompanied by accrued
and unpaid Interest thereon through such prepayment date and subject to the
proviso in the foregoing sentence.

(b)

Mandatory.  On the Maturity Date, the Holder shall surrender this Note to the
Company and the Company shall pay to the Holder in cash an amount equal to the
outstanding Principal and accrued and unpaid Interest thereon.  The “Maturity
Date” shall be the earlier of (i) six (6) months from the Issuance Date, and
(ii) the closing of a Qualified Financing.

2)

INTEREST.  Simple interest (“Interest”) shall accrue on the outstanding
Principal at the Interest Rate from and including the date set forth above
opposite the caption “Issuance Date” (the “Issuance Date”) until the Principal
is paid in full, shall be computed on the basis of a 365-day year and actual
days elapsed.

(a)

Payment of Interest.  Interest shall be payable on the Maturity Date to the
record holder of this Note as of the last day of the Interest Period, subject to
Section 2(b), in cash (“Cash Interest”).

(b)

Restrictions on Cash Interest Payments.  Notwithstanding the foregoing, in the
event that the Company would otherwise be required under this Section 2 to pay
Interest in the form of Cash Interest but is

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not permitted to do so pursuant to Section 33 hereof, the Company shall instead
pay such Interest through the addition of the amount of such Interest to the
then outstanding Principal (any Interest paid in such manner, “PIK Interest”).
 Interest that is paid in the form of PIK Interest shall be considered paid or
duly provided for, for all purposes under this Note, and shall not be considered
overdue.

3)

CONVERSION OF NOTE. This Note shall be convertible into shares of the Company’s
common stock, par value $0.01 per share (the “Company Common Stock”) or shares
or units of Company Financing Securities, on the terms and conditions set forth
in this Section 3.

(a)

Conversion Right. (i) At any time after Issuance Date, upon election by the
Holder, all of the outstanding Principal and accrued and unpaid Interest on this
Note shall automatically convert, in whole without any further action by the
Holder, into fully paid and nonassessable shares of Company Common Stock at the
Conversion Rate (as defined below).  Also, at the discretion of the noteholder,
the outstanding principal of a Note and any accrued interest thereon may be
converted within fifteen (15) business days after receiving notice from the
Company of the closing of the “Qualified Financing” (as defined herein) into
Company Financing Securities (defined below) at the Financing Conversion Rate
(as defined below).  The Company shall not issue any fraction of a share or unit
of a Company Conversion Security upon any conversion.  If the issuance would
otherwise result in the issuance of a fraction of a share or unit of a Company
Conversion Security, the Company shall round such fraction of a share or unit of
Company Conversion Security up to the nearest whole share or unit and issue such
rounded up number of shares or units upon conversion.  The Company shall pay any
and all taxes that may be payable with respect to the issuance and delivery of
Company Conversion Securities upon conversion of the Conversion Amount; provided
that the Company shall not be required to pay any tax that may be payable in
respect of any transfer involved in the issue and delivery of Company Conversion
Securities to any Person other than the Holder or with respect to any income tax
due by the Holder with respect to such Company Conversion Securities issued upon
conversion.

(b)

Standard Conversion Rate. The number of shares of Company Common Stock issuable
upon conversion of the Conversion Amount pursuant to Section 3(a)(i) shall be
determined by dividing (x) the Conversion Amount by (y) $0.12 (the “Standard
Conversion Rate”).

(c)

Financing Conversion Rate. The number of shares or units of Company Financing
Securities issuable upon conversion of the Conversion Amount pursuant to
Section 3(a)(ii) shall be determined by dividing (x) the Conversion Amount by
(y) the price per share or unit of Company Financing Security sold in any
Qualified Financing (the “Financing Conversion Rate”).

(d)

Mechanics of Conversion. To convert the Notes into Company Conversion Securities
on any date (the “Conversion Date”), the Holder shall (A) transmit by facsimile
(or otherwise deliver), for receipt on or prior to 5:00 p.m., Pacific Time, on
such date, written notice to the Company electing to convert all of the Notes
(the “Conversion Notice”); provided, however, that in the event the Holder
desires to convert the Conversion Amount into shares of units of Company
Financing Securities issued in a Qualified Financing, the Holder must deliver
the Conversion Notice within fifteen (15) business days after receiving the
Qualified Financing Note (as defined_below).  The Conversion Notice shall
specify whether the Notes shall be converted into Company Common Stock at the
Standard Conversion Rate or Company Financing Securities at the Financing
Conversion Rate.  In addition, in the event of a conversion of the Conversion
Amount into shares of Company Common Stock, the Holder must be an Accredited
Investor (as such term is defined in Rule 501 under the Securities Act) at the
time of such conversion and, in the event of a conversion of the Conversion
Amount into Company Financing Securities, that Holder must be an Accredited
Investor at the time of such conversion and must enter into and execute the same
documents, satisfy the same conditions and agree to be bound by the same terms
as all other investors in the Qualified Financing.  As soon as practicable after
the Conversion Date (but in no event more than ten (10) Business Days after the
Conversion Date), the Company shall issue and deliver to the Holder a
certificate (bearing such legends as are required by applicable state and
federal securities laws in the opinion of counsel to the Company), registered in
the name of the Holder or its designee, for the number of shares or units of
Company Conversion Securities to which the Holder shall be entitled.  The Person
or Persons entitled to receive the shares or units of Company Conversion
Securities issuable upon a conversion of this Note shall be treated for all
purposes as the

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record holder or holders of such shares or units of Company Conversion
Securities on the Conversion Date to the extent permitted by applicable law.  

4)

[Reserved]

5)

EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT.

(a)

Events of Default.  Each of the following events (so long as it is continuing)
shall constitute an “Event of Default”:

i.

any Change of Control;

ii.

the Company’s failure to pay to the Holder any amount of Principal, Interest, or
other amounts when and as due under this Note, provided, that in the case of a
failure to pay Interest when and as due, such failure shall constitute an Event
of Default only if such failure continues for a period of at least five (5)
Business Days;

iii.

any event of default under, redemption of or acceleration prior to maturity of
any Indebtedness of the Company or any of its Subsidiaries (other than this
Note) in an aggregate principal amount in excess of $500,000;

iv.

the Company or any of its Subsidiaries pursuant to or within the meaning of
Title 11, U.S. Code, or any similar Federal, foreign or state law for the relief
of debtors (collectively, “Bankruptcy Law”), (A) commences a voluntary case, (B)
consents to the entry of an order for relief against it in an involuntary case,
(C) consents to the appointment of a receiver, trustee, assignee, liquidator or
similar official (a “Custodian”), (D) makes a general assignment for the benefit
of its creditors or (E) admits in writing that it is generally unable to pay its
debts as they become due;

v.

a court of competent jurisdiction enters an order or decree under any Bankruptcy
Law that (A) is for relief against the Company or any of its Subsidiaries in an
involuntary case, (B) appoints a Custodian of the Company or any of its
Subsidiaries or (C) orders the liquidation of the Company or any of its
Subsidiaries;

vi.

a final judgment or judgments for the payment of money aggregating in excess of
$500,000 are rendered against the Company or any of its Subsidiaries and which
judgments are not, within sixty (60) days after the entry thereof, bonded,
discharged or stayed pending appeal, or are not discharged within sixty (60)
days after the expiration of such stay; provided, however, that any judgment
which is covered by insurance or an indemnity from a creditworthy party shall
not be included in calculating the $500,000 amount set forth above so long as
the Company provides the Holder Representative with a written statement from
such insurer or indemnity provider (which written statement shall be reasonably
satisfactory to the Holder Representative) to the effect that such judgment is
covered by insurance or an indemnity and the Company will receive the proceeds
of such insurance or indemnity within thirty (30) days of the issuance of such
judgment or such later date as provided by the terms of such insurance policy;

vii.

any representation or warranty made by the Company in this Note or the Security
Agreement shall prove to be materially false or misleading as of the date made
or deemed made;

viii.

the Company shall breach any covenant or other term or condition of this Note or
the Security Agreement and, in the case of a breach of a covenant or term or
condition which is curable, such breach continues for a period of at least ten
(10) consecutive Business Days;

ix.

any material provision of this Note or the Security Agreement ceases to be of
full force and effect other than by its terms, or the Company contests in
writing (or supports any other person in contesting) the validity or
enforceability of any provision of this Note or the Security Agreement;

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x.

the Security Agreement, dated December 23, 2010, between the Company and Costa
Brava Partnership III L.P., as amended from time to time (the “Security
Agreement”) shall for any reason (other than pursuant to the terms thereof) case
to create a valid and perfected lien, with the priority required by the Security
Agreement, on, and security interest in, any material portion of the Collateral
purported to be covered thereby, subject to Permitted Liens and Liens security
the Existing Secured Debt; or

xi.

any Event of Default (as defined in the Other Senior Subordinated Notes) occurs
with respect to any Other Senior Subordinated Note.

(b)

Acceleration.  Upon the occurrence and during the continuance of an Event of
Default, but subject to Section 33, the Holder Representative may, and at the
request of the Required Holders shall, take either or both of the following
actions: (i) declare all or any part of the outstanding Principal, accrued and
unpaid Interest and any other amounts outstanding under this Note (the aggregate
of such amounts, the “Outstanding Note Obligations”) and the Other Senior
Subordinated Notes to be immediately due and payable; provided, however, that if
an Event of Default shall occur under either clause (iv) or clause (v) of
Section 5(a), the outstanding Principal, accrued and unpaid Interest and any
other amounts outstanding under this Note shall automatically become immediately
due and payable, and (ii) exercise on behalf of itself and the other Holders all
rights and remedies available to it under the Security Agreement and applicable
law.  To the extent that the Holder Representative declares this Note to be
immediately due and payable (or this Note become due and payable following an
Event of Default under clauses (iv) or (v) of Section 5(a)), the Company shall
pay the sum of the Outstanding Note Obligations to the Holder within five (5)
Business Days after the date that the Outstanding Note Obligations are declared
due and payable, and upon full payment, the Note shall be extinguished.

6)

RIGHTS UPON FUNDAMENTAL TRANSACTION.  The Company shall not enter into or be
party to a Fundamental Transaction unless the Successor Entity assumes in
writing all of the obligations of the Company under this Note in accordance with
the provisions of this Section 6 pursuant to written agreements in form and
substance satisfactory to and approved by the Required Holders (such approval
not to be unreasonably withheld or delayed and the Required Holders shall not be
permitted to approve any written agreement that materially modifies, alters or
changes the terms of the Notes in a manner adverse to the Holders) prior to such
Fundamental Transaction, including agreements to deliver to the Holder in
exchange for this Note a security of the Successor Entity evidenced by a written
instrument substantially similar in form and substance to this Note, including,
without limitation, having a principal amount and interest rate equal to the
principal amount and the interest rate of this Note and having similar ranking
to this Note, and satisfactory to the Required Holders (any such approval not to
be unreasonably withheld or delayed).  Upon the occurrence of any Fundamental
Transaction, the Successor Entity shall succeed to, and be substituted for (so
that from and after the date of such Fundamental Transaction, the provisions of
this Note referring to the “Company” shall refer instead to the Successor
Entity), and may exercise every right and power of the Company and shall assume
all of the obligations of the Company under this Note with the same effect as if
such Successor Entity had been named as the Company herein.  The provisions of
this Section shall apply similarly and equally to successive Fundamental
Transactions and shall be applied without regard to any limitations on the
redemption of this Note.

7)

[Reserved]

8)

[Reserved]

9)

[Reserved]

10)

[Reserved]

11)

[Reserved]

12)

[Reserved]

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13)

RESERVATION OF AUTHORIZED SHARES.  Prior to the Issuance Date, the Company shall
reserve out of its authorized and unissued Company Common Stock a number of
shares of Company Common Stock equal to the number of shares of Company Common
Stock as shall be necessary to effect the conversion of this Note.  Thereafter,
so long as this Note is outstanding, the Company shall take all action necessary
to reserve and keep available out of its authorized and unissued Company Common
Stock, solely for the purpose of effecting the conversion of this Note, the
number of shares of Company Common Stock as shall from time to time be necessary
to effect the conversion of this Note.

14)

REPRESENTATIONS AND WARRANTIES OF THE COMPANY.  The Company hereby represents
and warrants to the Holder that:

(a)

Organization.  The Company and each of its Subsidiaries (a) is duly incorporated
or otherwise organized, validly existing and in good standing under the laws of
the jurisdiction of its formation, except, in the case of its Subsidiaries,
where the failure to be so incorporated, organized, existing or in good standing
would not have a Material Adverse Effect, (b) is duly qualified to do business
as a foreign entity and is in good standing in each jurisdiction where the
nature of the property owned or leased by it or the nature of the business
conducted by it makes such qualification necessary, except where the failure to
be so qualified would not have a Material Adverse Effect, (c) has its principal
place of business and chief executive office at 3001 Red Hill Avenue, Building
4, Suite 108, Costa Mesa, CA 92626 and (d) has all requisite corporate or other
power and authority to own or lease and operate its assets and carry on its
business as presently being conducted.

(b)

Authorization; Enforcement.  The Company has all requisite corporate power and
has taken all necessary corporate action required for the due authorization,
execution, delivery and performance by the Company of this Note and no action on
the part of the stockholders of the Company is required.  This Note has been
duly executed and delivered by the Company, and this Note constitutes a legal,
valid and binding obligation of the Company enforceable against it in accordance
with its terms, except to the extent that enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, and
any other laws of general application affecting enforcement of creditors’ rights
generally, and as limited by laws relating to the availability of specific
performance, injunctive relief, or other equitable remedies.

(c)

Governmental Consents.  All consents, approvals, orders, or authorizations of,
or registrations, qualifications, designations, declarations, or filings with,
any governmental authority, required on the part of the Company in connection
with the valid execution and delivery of the offer, sale or issuance of the
Notes, and the equity securities issuable upon conversion of the Note shall have
been obtained and will be effective prior to the Issuance Date.

(d)

No Conflicts.  Neither the execution and issuance of this Note or the
consummation of any of the transactions contemplated hereby nor compliance with
or fulfillment of the terms, conditions and provisions hereof or thereof will
conflict with, result in a breach of the terms, conditions or provisions of, or
constitute a default (with or without notice or lapse of time, or both), or an
event creating rights of acceleration, termination or cancellation or a loss of
rights under (i) any material note, instrument, agreement, mortgage, lease,
license, franchise, permit or other authorization, right, restriction or
obligation to which the Company is a party or by which the Company or any of its
properties is bound, (ii) any judgment or decree applicable to, or affecting,
the Company or (iii) any statute, law or rule to which the Company is subject.

(e)

No Litigation.  There is no action, suit, proceeding, judgment, claim or
investigation pending or, to the knowledge of the Company, threatened against
the Company which could reasonably be expected in any manner to challenge or
seek to prevent, enjoin, alter or materially delay any of the transactions
contemplated by this Note.

(f)

SEC Filings.  

i.

Since December 31, 2011, the Company has filed all reports, registrations,
documents, filings, statements and submissions, together with any amendments
thereto, that the Company was

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required to file with the SEC (the “SEC Filings”).  As of the time it was filed
(or, if amended or superseded by a filing prior to the date of this Note, then
on the date of such filing): (i) each of the SEC Filings complied as to form in
all material respects with the applicable requirements of the Securities Act or
the Exchange Act (as the case may be), and (ii) none of the SEC Filings
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.

ii.

The consolidated financial statements contained in the SEC Filings: (i) complied
as to form in all material respects with the published rules and regulations of
the SEC applicable thereto; (ii) were prepared in accordance with generally
accepted accounting principles applied on a consistent basis throughout the
periods covered, except as may be indicated in the notes to such financial
statements and (in the case of unaudited financial statements) as permitted by
Form 10-Q of the SEC, and except that unadjusted financial statements may not
contain footnotes and are subject to year-end audit adjustments; and
(iii) fairly present the consolidated financial position of the Company and its
subsidiaries as of the respective dates thereof and the consolidated results of
operations of the Company and its subsidiaries for the periods covered thereby.

15)

REPRESENTATIONS AND WARRANTIES OF THE HOLDER.  By its acceptance of this Note,
the Holder hereby represents and warrants to the Company that:

(a)

Organization.  The Holder is duly formed, validly existing and in good standing
under the laws of its jurisdiction of formation, has not been organized,
reorganized or recapitalized specifically for the purpose of investing in the
Company and has all power and authority to purchase this Note and instruments
referred to herein to which it is a party.

(b)

Investment Representations and Warranties.  The Holder understands and agrees
that the offering and sale of this Note has not been registered under the
Securities Act or any applicable state securities laws and are being made in
reliance upon federal and state exemptions for transactions not involving a
public offering which depend upon, among other things, the bona fide nature of
the investment intent and the accuracy of the Holder’s representations as
expressed herein.  The Holder acknowledges that the Company has no obligation to
register or qualify this Note for resale.

(c)

Acquisition for Own Account.  The Holder is acquiring the Note for its own
account for investment and not with a view toward distribution in a manner which
would violate the Securities Act or any applicable state securities laws.

(d)

Ability to Protect Its Own Interests and Bear Economic Risks.  The Holder, by
reason of the business and financial experience of its management, has the
capacity to protect its own interests in connection with the transactions
contemplated by this Note and is capable of evaluating the merits and risks of
the investment in this Note.  The Holder is able to bear the economic risk of an
investment in this Note and is able to sustain a loss of all of its investment
in this Note without economic hardship if such a loss should occur.

(e)

Accredited Investor.  The Holder is an “accredited investor” as that term is
defined in Regulation D promulgated under the Securities Act.

(f)

Access to Information.  The Holder has been given access to all Company
documents, records, and other information, and has had adequate opportunity to
ask questions of, and receive answers from, the Company’s officers, employees,
agents, accountants, and representatives concerning the Company’s business,
operations, financial condition, assets, liabilities, and all other matters
relevant to its investment in this Note.  The foregoing, however, does not limit
or modify the representations and warranties made by the Company pursuant to
Section 14 of this Note or the right of the Holder to rely thereon.

(g)

Restricted Securities.

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i.

The Holder understands that this Note and the Company Conversion Securities
issuable upon conversion of any Conversion Amount will be characterized as
“restricted securities” under the federal securities laws inasmuch as they are
being acquired from the Company in a transaction not involving a public offering
and that under such laws and applicable regulations this Note may be resold
without registration under the Securities Act only in certain limited
circumstances.

ii.

The Holder acknowledges that this Note and the Company Conversion Securities
issuable upon conversion of any Conversion Amount must be held indefinitely
unless subsequently registered under the Securities Act and under applicable
state securities laws or an exemption from such registration is available.  The
Holder understands that the Company is under no obligation to register this Note
or the Company Conversion Securities issuable upon conversion of any Conversion
Amount.

iii.

The Holder is aware of the provisions of Rule 144 under the Securities Act which
permit limited resale of securities purchased in a private placement.

(h)

Legends.  It is understood that the certificates evidencing any Company
Conversion Securities issuable upon conversion of any Conversion Amount may bear
substantially the following legends (in addition to any other legends as legal
counsel for the Company deems necessary or advisable under the applicable state
and federal securities laws or any other agreement to which the Company is a
party):

“THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 OR ANY APPLICABLE STATE SECURITIES LAWS.  THEY MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION
STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR APPLICABLE
STATE SECURITIES LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT
SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OR RULE
144A OF SUCH ACT.”

16)

[Reserved]

17)

COVENANTS.

(a)

Incurrence of Indebtedness.  So long as this Note is outstanding, the Company
shall not, and the Company shall not permit any of its Subsidiaries to, directly
or indirectly, incur or guarantee, assume or suffer to exist any Indebtedness,
other than (i) the Indebtedness evidenced by this Note, and (ii) Permitted
Indebtedness.

(b)

Existence of Liens.  So long as this Note is outstanding, the Company shall not,
and the Company shall not permit any of its Subsidiaries to, directly or
indirectly, allow or suffer to exist any mortgage, lien, pledge, charge,
security interest or other similar encumbrance upon or in any property or assets
(including accounts and contract rights) owned by the Company or any of its
Subsidiaries (collectively “Liens”) other than Permitted Liens.

(c)

Restricted Payments.  The Company shall not, and the Company shall not permit
any of its Subsidiaries to, directly or indirectly, redeem, defease, repurchase,
repay or make any payments in respect of, by the payment of cash or cash
equivalents (in whole or in part, whether by way of open market purchases,
tender offers, private transactions or otherwise), all or any portion of any
Indebtedness described in clause (A) of the definition of “Permitted
Indebtedness”, whether by way of payment in respect of principal of (or premium,
if any) or interest on such Indebtedness if at the time such payment is due or
is otherwise made or, after giving effect to such payment, an event
constituting, or that with the passage of time and without being cured would
constitute, an Event of Default has occurred and is continuing.

(d)

Qualified Financing.  So long as this Note is outstanding, the Company shall
provide the Holder written notice of any proposed Qualified Financing no later
than five (5) Business Days prior to the

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consummation of such Qualified Financing (the “Qualified Financing Notice”).
 The Company shall be required to use the net proceeds from such Qualified
Financing to, first, pay such amounts to the Existing Secured Debt Holder as is
necessary to permit payments on the Notes under that certain Loan and Security
Agreement, dated December 14, 2011, by and among the Company and the Existing
Secured Debt Holder and any other agreement between the Company and Existing
Secured Debt Holder, and, second, to pay all amounts owing under the Turner
Notes (other than those Turner Notes that the holder thereof converts into the
securities issued in the Qualified Financing) on a pro rata basis.  The Company
shall not be permitted to pay any other Indebtedness, including, without
limitation, the Griffin Notes, the Other Senior Subordinated Notes or the 2015
Notes, from the proceeds of a Qualified Financing for as long as any Turner Note
is outstanding.

18)

[Reserved]

19)

AMENDMENTS.  The written consent of the Holder of this Note shall be required
for any amendment or waiver of this Note.  Furthermore, the affirmative vote at
a meeting duly called for such purpose or the written consent without a meeting
of the Required Holders (or the Holder Representative acting at the direction of
the Required Holders) shall be required for any amendment or waiver to the
Security Agreement (including to release all or substantially all of the
Collateral, in any transaction or series of related transactions); provided that
no such amendment or waiver shall adversely affect the rights of the holders of
the Turner Notes.

20)

HOLDER REPRESENTATIVE.

(a)

Appointment of Holder Representative.  By acceptance of this Note, the Holder
hereby appoints Griffin Partners, LLC (“Griffin”) to serve as Holder
Representative. The Holder further agrees that the Holder Representative may be
removed at any time by a vote of the Required Holders, and that if the Holder
Representative is so removed, or if it at any time resigns or declines to serve
as Holder Representative, the successor Holder Representative shall be the
holder of the Notes that at any given time holds Notes in an aggregate principal
amount that is greater than the aggregate principal amount of the Notes held by
any other holder of the Notes. The Holder hereby (a) irrevocably authorizes the
Holder Representative to (i) enter into the Security Agreement and (ii) at its
discretion, to take or refrain from taking such actions as Holder Representative
and to exercise or refrain from exercising such powers under the Notes or the
Security Agreement as are delegated by the terms hereof or thereof, as
applicable, together with all powers reasonably related thereto and (b) agrees
and consents to all of the provisions of the Security Agreement.

(b)

Concerning the Holder Representative.

i.

Standard of Conduct. The Holder Representative and its officers, directors,
employees and agents shall be under no liability to the Holder or to any of its
successors or assigns for any action or failure to act taken or suffered in its
capacity as Holder Representative in the absence of gross negligence and willful
misconduct, and any action or failure to act in accordance with an opinion of
its counsel shall conclusively be deemed to be in the absence of gross
negligence and willful misconduct.

ii.

No Implied Duties. The Holder Representative shall have no duties or
responsibilities except as set forth in the Note and the Security Agreement, nor
shall it have any fiduciary relationship with the Holder, and no implied
covenants, responsibilities, duties, obligations or liabilities shall be read
into the Note or the Security Agreement or otherwise exist against the Holder
Representative.

iii.

Validity. The Holder Representative shall not be responsible to the Holder or to
any of its successors or assigns (a) for the legality, validity, enforceability
or effectiveness of the Note or the Security Agreement, (b) for any recitals,
reports, representations, warranties or statements contained in or made in
connection with the Note or the Security Agreement, (c) for the existence or
value of any assets included in the Collateral, (d) for the effectiveness of any
Lien purported to be created by the Security Agreement, or (e) unless the Holder
Representative shall have failed to comply with sub-paragraph (i) above, for the
perfection of the security interests created by the Security Agreement.

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(c)

Compliance. The Holder Representative shall not be obligated to ascertain or
inquire as to the performance or observance of any of the terms of this Note.

(d)

Employment of Agents and Counsel. The Holder Representative may execute any of
its duties as Holder Representative under this Note by or through employees,
agents and attorneys-in-fact and shall not be responsible to any of the parties
hereto for the default or misconduct of any such agents or attorneys-in-fact
selected by the Holder Representative acting in the absence of gross negligence
and willful misconduct. The Holder Representative shall be entitled to advice of
counsel concerning all matters pertaining to the agency hereby created and its
duties hereunder.

(e)

Reliance on Documents and Counsel. The Holder Representative shall be entitled
to rely, and shall be fully protected in relying, upon any affidavit,
certificate, cablegram, consent, instrument, letter, notice, order, document,
statement, telecopy, telegram, telex or teletype message or writing reasonably
believed in good faith by the Holder Representative to be genuine and correct
and to have been signed, sent or made by the Person in question, including any
telephonic or oral statement made by such Person, and, with respect to legal
matters, upon an opinion or the advice of counsel selected by the Holder
Representative.

(f)

Holder Representative’s Reimbursement. The Company agrees to indemnify the
Holder Representative for any losses arising from its appointment as Holder
Representative or from the performance of its duties hereunder and to reimburse
the Holder Representative for any reasonable expenses; provided, however, that
the Holder Representative shall not be indemnified or reimbursed for liabilities
or expenses to the extent resulting from its own gross negligence, bad faith or
willful misconduct.

21)

REISSUANCE OF THIS NOTE.

(a)

Transfer.  The Company may, as a condition to the transfer of any of this Note,
require that the request for transfer be accompanied by an opinion of counsel
reasonably satisfactory to the Company, to the effect that the proposed transfer
does not result in a violation of the Securities Act, unless such transfer is
covered by an effective registration statement or by Rule 144 or Rule 144A under
the Securities Act; provided, however, that an opinion of counsel shall not be
required for a transfer by a Holder that is (A) a partnership transferring to
its partners or former partners in accordance with partnership interests, (B) a
corporation transferring to a wholly owned subsidiary or a parent corporation
that owns all of the capital stock of the Holder, (C) a limited liability
company transferring to its members or former members in accordance with their
interest in the limited liability company, (D) an individual transferring to the
Holder’s family member or trust for the benefit of an individual Holder, or (E)
transferring its Note to any Affiliate of the Holder, in the case of an
institutional investor, or other Person under common management with such
Holder; provided, further, that (i) the transferee in each case agrees to be
subject to the restrictions in this Section 21 and provides the Company with a
representation letter containing substantially the same representations and
warranties set forth in Section 15 hereof, (ii) the Company satisfies itself
that the number of transferees is sufficiently limited and (iii) in the case of
transferees that are partners or limited liability company members, the transfer
is for no consideration.  It is understood that the certificates evidencing any
Notes may bear substantially the following legends (in addition to any other
legends as legal counsel for the Company deems necessary or advisable under the
applicable state and federal securities laws or any other agreement to which the
Company is a party):

“NEITHER THIS NOTE NOR THE SECURITIES ISSUABLE UPON THE CONVERSION HEREOF HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE
STATE SECURITIES LAWS. THE SECURITIES REPRESENTED HEREBY MAY NOT BE OFFERED FOR
SALE, SOLD, TRANSFERRED OR ASSIGNED (i) IN THE ABSENCE OF (A) AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR (B) AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT
REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (ii) UNLESS SOLD PURSUANT TO RULE
144 OR RULE 144A UNDER SAID ACT.”

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If this Note is to be transferred in compliance with the foregoing, the Holder
shall surrender this Note to the Company, whereupon the Company will forthwith
issue and deliver upon the order of the Holder a new Note (in accordance with
Section 21(d)), registered as the Holder may request, representing the
outstanding Principal being transferred by the Holder and, if less then the
entire outstanding Principal is being transferred, a new Note (in accordance
with Section 21(d)) to the Holder representing the outstanding Principal not
being transferred.

(b)

Lost, Stolen or Mutilated Note.  Upon receipt by the Company of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of this Note, and, in the case of loss, theft or destruction, of an
indemnification undertaking by the Holder to the Company, in customary form and,
in the case of mutilation, upon surrender and cancellation of this Note, the
Company shall execute and deliver to the Holder a new Note (in accordance with
Section 21(d)) representing the outstanding Principal.

(c)

Note Exchangeable for Different Denominations.  This Note is exchangeable, upon
the surrender hereof by the Holder at the principal office of the Company, for a
new Note or Notes (in accordance with Section 21(d)) representing in the
aggregate the outstanding Principal of this Note, and each such new Note will
represent such portion of such outstanding Principal as is designated by the
Holder at the time of such surrender.

(d)

Issuance of New Notes.  Whenever the Company is required to issue a new Note
pursuant to the terms of this Note, such new Note (i) shall be of like tenor
with this Note, (ii) shall represent, as indicated on the face of such new Note,
the Principal remaining outstanding (or in the case of a new Note being issued
pursuant to Section 21(a) or Section 21(c), the Principal designated by the
Holder which, when added to the principal represented by the other new Notes
issued in connection with such issuance, does not exceed the Principal remaining
outstanding under this Note immediately prior to such issuance of new Notes),
(iii) shall have an issuance date, as indicated on the face of such new Note
which is the same as the Issuance Date of this Note, (iv) shall have the same
rights and conditions as this Note, and (v) shall represent accrued and unpaid
Interest of this Note from the Issuance Date.

22)

REMEDIES, CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF.

(a)

The remedies provided in this Note shall be cumulative and in addition to all
other remedies available at law or in equity (including a decree of specific
performance and/or other injunctive relief), and, subject to Section 22(b) and
Section 33 below, nothing herein shall limit the Holder’s right to pursue
monetary damages for any failure by the Company to comply with the terms of this
Note.  Amounts set forth or provided for herein with respect to payments and the
like (and the computation thereof) shall be the amounts to be received by the
Holder and shall not, except as expressly provided herein, be subject to any
other obligation of the Company (or the performance thereof).  The Company
acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to the Holder and that the remedy at law for any such breach
may be inadequate.  The Company therefore agrees that, in the event of any such
breach or threatened breach, the Holder shall be entitled, in addition to all
other available remedies, to an injunction restraining any breach, without the
necessity of showing economic loss and without any bond or other security being
required.

(b)

Notwithstanding the foregoing, but subject to Section 33, the right of the
Holder to receive payment of Principal and Interest on this Note, on or after
the respective due dates set forth herein, or to bring suit for the enforcement
of any such right to payment, shall not be impaired or affected without the
consent of the Holder.

23)

PAYMENT OF COLLECTION, ENFORCEMENT AND OTHER COSTS.  If (a) this Note is placed
in the hands of an attorney for collection or enforcement or is collected or
enforced through any legal proceeding or the Holder otherwise takes action to
collect amounts due under this Note or to enforce the provisions of this Note or
(b) there occurs any bankruptcy, reorganization, receivership of the Company or
other proceedings affecting Company creditors’ rights and involving a claim
under this Note, then the Company shall pay the costs incurred by the Holder for
such collection, enforcement or action or in connection with such bankruptcy,

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reorganization, receivership or other proceeding, including, but not limited to,
reasonable attorneys’ fees and disbursements.

24)

CONSTRUCTION; HEADINGS.  This Note shall be deemed to be jointly drafted by the
Company and the Holder and shall not be construed against any person as the
drafter hereof.  The headings of this Note are for convenience of reference and
shall not form part of, or affect the interpretation of, this Note.

25)

FAILURE OR INDULGENCE NOT WAIVER.  No failure or delay on the part of the Holder
in the exercise of any power, right or privilege hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any such power,
right or privilege preclude other or further exercise thereof or of any other
right, power or privilege.

26)

[Reserved]

27)

NOTICES; PAYMENTS.

(a)

Notices.  All notices, requests, consents, and other communications under this
Note shall be in writing and shall be deemed delivered (a) when delivered, if
delivered personally, (b) four business days after being sent by registered or
certified mail, return receipt requested, postage prepaid; (c) one Business Day
after being sent via a reputable nationwide overnight courier service
guaranteeing next business day delivery, or (d) when receipt is acknowledged, in
the case of facsimile, in each case to the intended recipient as set forth
below:

i.

If to the Holder, at its address set forth on the signature page hereto.

ii.

If to the Company:

ISC8 Inc.

3001 Red Hill Avenue

Building 4, Suite 108

Costa Mesa, CA 92626

Attention: Marcus A. Williams

Facsimile No.: (714) 444-8773

iii.

with a copy to:

Butzel Long, a professional corporation

150 W. Jefferson, Suite 100

Detroit, MI 48226

Attention: Arthur Dudley II, Esq.

Facsimile No: (313) 225-7080

or at such other address as the Company or the Holder each may specify by
written notice to the other parties hereto in accordance with this Section 27.

The Company shall provide the Holder with prompt written notice of all actions
taken pursuant to this Note, including in reasonable detail a description of
such action and the reason therefore.

(b)

Payments.  Whenever any payment of cash is to be made by the Company to any
Person pursuant to this Note, such payment shall be made in lawful money of the
United States of America by a check drawn on the account of the Company and sent
via overnight courier service to such Person at such address as previously
provided to the Company in writing; provided that the Holder may elect to
receive a payment of cash via wire transfer of immediately available funds by
providing the Company with prior written notice setting out such request and the
Holder’s wire transfer instructions.  Whenever any amount expressed to be due by
the terms of this Note is due on any day which is not a Business Day, the same
shall instead be due on the next succeeding day which is a Business Day.

(c)

Withholding Taxes.  All payments made by the Company hereunder shall be made
without withholding for or on account of any present or future taxes (other than
overall net income taxes imposed on the recipient).  If any such withholding is
so required, the Company shall make the withholding, pay the amount withheld to
the appropriate authority before penalties attach thereto or interest accrues
thereon and pay to the recipient such additional amount as may be necessary to
ensure that the net amount actually received by the recipient free and clear of
such taxes (including taxes on such additional amount) is equal to the amount
that the recipient would have received had such withholding not been made.  If
the recipient is required to pay any such taxes, penalties or interest, the
Company shall reimburse the recipient for that payment on demand.  If the
Company pays any such taxes, penalties or interest, it shall deliver official
tax receipts or other evidence of payment to the recipient on whose account such
withholding was made on or before the thirtieth day after payment.  The Holder
agrees to provide, promptly following the Company’s request therefore, such
forms or certifications as it is legally able to provide to establish an
exemption from, or a reduction in, any withholding taxes that might otherwise
apply.

28)

CANCELLATION.  After all Principal, accrued Interest and other amounts at any
time owed on this Note have been paid in full, this Note shall automatically be
deemed canceled, shall be surrendered to the Company for cancellation and shall
not be reissued.

29)

WAIVER OF NOTICE.  To the extent permitted by law, the Company hereby waives
demand, notice, protest and all other demands and notices in connection with the
delivery, acceptance, performance, default or enforcement of this Note.

30)

GOVERNING LAW.  This Note shall be construed and enforced in accordance with,
and all questions concerning the construction, validity, interpretation and
performance of this Note shall be governed by, the internal laws of the State of
New York, without giving effect to any choice of law or conflict of law
provision or rule (whether of the State of New York or any other jurisdictions)
that would cause the application of the laws of any jurisdictions other than the
State of New York.

31)

CERTAIN DEFINITIONS.  For purposes of this Note, the following terms shall have
the following meanings:

(a)

“Affiliate” means, with respect to any Person, any other Person directly or
indirectly controlling, controlled by, or under common control with such entity
provided that, for purposes of this definition, “control” (including, with
correlative meanings, the terms “controlled by” and “under common control
with”), as used with respect to any Person, means the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of such Person, whether through the ownership of voting securities or
by contract or otherwise.

(b)

“Business Day” means any day other than Saturday, Sunday or other day on which
commercial banks in The City of New York are authorized or required by law to
remain closed.

(c)

“Change of Control” means any Fundamental Transaction other than (A) a
Fundamental Transaction in which holders of the Company’s voting power
immediately prior to the Fundamental Transaction continue after the Fundamental
Transaction to hold publicly traded securities and, directly or indirectly, the
voting power of the surviving entity or entities necessary to elect a majority
of the members of the board of directors (or their equivalent if other than a
corporation) of such entity or entities, (B) a Fundamental Transaction with any
Holder, any Affiliate of any Holder or any person otherwise related to or
associated with a Holder, or (C) pursuant to a migratory merger effected solely
for the purpose of changing the jurisdiction of incorporation of the Company.

(d)

“Collateral” has the meaning given to such term in the Security Agreement.

(e)

“Company Financing Securities” means any debt or equity security of the Company,
or securities of the Company convertible into or exchangeable therefor, or any
combination thereof (including but not limited to Company Common Stock,
Preferred Stock, Warrants or a combination thereof) offered for sale by the
Company to one or more investors in a Qualified Financing.

(f)

“Company Conversion Securities” means the Company Common Stock and/or Company
Financing Securities issuable upon conversion of this Note.

(g)

“Contractual Obligation” means, with respect to any Person, any contract,
agreement, deed, mortgage, lease, sublease, license, sublicense or other legally
enforceable commitment, promise, undertaking, obligation, arrangement,
instrument or understanding, whether written or oral, to which or by which such
Person is a party or otherwise subject or bound or to which or by which any
property, business, operation or right of such Person is subject or bound.

(h)

“Conversion Amount” means, on the Conversion Date, the sum of (A) the Principal,
and (B) accrued and unpaid Interest with respect to the Principal.

(i)

“Distribution” means (i) any payment or distribution made by the Company on
account of the Note, whether in the form of cash, securities or other property,
by setoff or otherwise, or (ii) any redemption, purchase or other acquisition by
the Company of all or a portion of the Note, in each of cases (i) and (ii),
other than any payment, distribution, redemption, purchase or other acquisition
made (x) through the exchange of all or a portion of the Note into or for (I)
equity securities of the Company or (II) debt securities of the Company that (A)
are subordinated in right of payment to the Existing Secured Debt to at least
the same extent as this Note is subordinated to the Existing Secured Debt, (B)
do not have the benefit of any obligation of any Person (whether as issuer,
guarantor or otherwise) unless the Existing Secured Debt has at least the same
benefit of the obligation of such Person and the obligation of such Person to
the Holder is subordinated to the obligations of such Person to the Existing
Secured Debt Holder to at least the same extent that this Note is subordinated
to the Existing Secured Debt and (C) is either unsecured or secured by liens
that are subordinated to the liens securing the Existing Secured Debt, (y) at
any time that no “Default” (as defined in the Existing Secured Debt) has
occurred and is continuing under Section 6(a) or 6(c) of the Existing Secured
Debt or (z) through the accrual and addition to principal of capitalized
interest in the amounts and at the times specified in this Note.

(j)

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

(k)

“Existing Secured Debt” means all obligations, liabilities and indebtedness of
every nature of the Company from time to time owed to Partners for Growth III,
L.P. pursuant to that certain Loan and Security Agreement dated December 14,
2011 between the Company and Partners for Growth III, L.P.

(l)

“Existing Secured Debt Holder” means Partners for Growth III, L.P. and any of
its grantees, successors or assigns.

(m)

“Fundamental Transaction” means that the Company shall, directly or indirectly,
in one or more related transactions, (i) consolidate or merge with or into
(whether or not the Company is the surviving corporation) another Person, or
(ii) sell, assign, transfer, convey or otherwise dispose of all or substantially
all of the assets of the Company to another Person, or (iii) allow another
Person to make a purchase, tender or exchange offer that is accepted by the
holders of more than the 50% of the outstanding shares of Company Common Stock
(not including any shares of Company Common Stock held by the Person or Persons
making or party to, or associated or affiliated with the Persons making or party
to, such purchase, tender or exchange offer), or (iv) consummate a stock
purchase agreement or other business combination (including, without limitation,
a reorganization, recapitalization, spin-off or scheme of arrangement) with
another Person whereby such other Person acquires more than the 50% of the
outstanding shares of Company Common Stock (not including any shares of Company
Common Stock held by the other Person or other Persons making or party to, or
associated or affiliated with the other Persons making or party to, such stock
purchase agreement or other business combination), or (v) reorganize,
recapitalize or reclassify its Company Common Stock.  

(n)

“Guarantee” means, with respect to any Person, (a) any guarantee of the payment
or performance of, or any contingent obligation in respect of, any Indebtedness
or other Liability of any other Person, (b) any other arrangement whereby credit
is extended to any obligor (other than such Person) on the basis of any

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promise or undertaking of such Person (i) to pay the Indebtedness or other
Liability of such obligor, (ii) to purchase any obligation owed by such obligor,
(iii) to purchase or lease assets under circumstances that are designed to
enable such obligor to discharge one or more of its obligations or (iv) to
maintain the capital, working capital, solvency or general financial condition
of such obligor and (c) any liability as a general partner of a partnership or
as a venturer in a joint venture in respect of Indebtedness or other Liabilities
of such partnership or venture.

(o)

“Holder Representative” means Costa Brava Partnership III L.P., or such other
Person appointed to act as Holder Representative pursuant to Section 20(a).

(p)

“Indebtedness” means, with respect to any Person, and without duplication, all
Liabilities, including all obligations in respect of principal, accrued
interest, penalties, fees and premiums, of such Person (a) for borrowed money
(including amounts outstanding under overdraft facilities), (b) evidenced by
notes, bonds, debentures or other similar Contractual Obligations, (c) in
respect of “earn-out” obligations and other obligations for the deferred
purchase price of property, goods or services (other than trade payables or
accruals incurred in the ordinary course of business), (d) for the capitalized
liability under all capital leases of such Person (determined in accordance with
GAAP), (e) in respect of letters of credit and bankers’ acceptances, (f) for
Contractual Obligations relating to interest rate protection, swap agreements
and collar agreements, in each case, to the extent payable if such Contractual
Obligation is terminated at the Closing, and (g) in the nature of Guarantees of
the obligations described in clauses (a) through (f) above of any other Person.

(q)

“Interest Period” means the period beginning on and including the Issuance Date
and ending on and including the Maturity Date.

(r)

“Interest Rate” means twelve percent (12.0%) per annum; provided that upon the
occurrence and during the continuance of an Event of Default, the Interest Rate
shall be increased to twenty percent (20.0%) per annum.  In the event that such
Event of Default is subsequently cured or waived, the Interest Rate shall be
reduced to twelve percent (12.0%) per annum as of the date of such cure or
waiver, it being understood, however, that unless the Holder otherwise agrees in
writing, such reduction shall not apply retroactively to the period when such
Event of Default was continuing.

(s)

“Issuance Date” has the meaning set forth in Section 2 hereof.

(t)

“Liability” means, with respect to any Person, any liability or obligation of
such Person whether known or unknown, whether asserted or unasserted, whether
determined, determinable or otherwise, whether absolute or contingent, whether
accrued or unaccrued, whether liquidated or unliquidated, whether directly
incurred or consequential, whether due or to become due and whether or not
required under GAAP to be accrued on the financial statements of such Person.

(u)

“Material Adverse Effect” means any (i) adverse effect on the issuance or
validity of this Note or the transactions contemplated hereby or on the ability
of the Company to perform its obligations under this Note, or (ii) material
adverse effect on the condition (financial or otherwise), properties, assets,
liabilities, business or operations of the Company and its Subsidiaries taken as
a whole.

(v)

“Outstanding Note Obligations” shall have the meaning given to such term in
Section 5(b).

(w)

“Permitted Indebtedness” means (A) Indebtedness incurred by the Company that is
made expressly subordinate in right of payment to the Indebtedness evidenced by
this Note, as reflected in a written agreement reasonably acceptable to the
Holder Representative and approved by the Holder Representative in writing, and
which Indebtedness does not provide at any time for (1) the payment, prepayment,
repayment, repurchase or defeasance, directly or indirectly, of any principal or
premium, if any, thereon until ninety-one (91) days after the Maturity Date or
later and (2) total interest and fees at a rate in excess of six percent (6%)
per annum, (B) Indebtedness secured by Permitted Liens, (C) Indebtedness to
trade creditors or for professional services incurred in the ordinary course of
business, (D) any Indebtedness owing under the Company’s 12% convertible

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secured notes due 2015 (the “2015 Notes”), (E) any Indebtedness owing under the
Griffin Notes, Other Senior Subordinated Notes or Turner Notes, (F) any
Indebtedness owing under the Existing Secured Debt, and (G) extensions,
refinancings and renewals of any items of Permitted Indebtedness described in
clauses (A) through (F) above, provided that the principal amount is not
increased or the terms modified to impose more burdensome terms upon the Company
or its Subsidiary, as the case may be.

(x)

“Permitted Liens” means (i) any Lien for taxes not yet due or delinquent or
being contested in good faith by appropriate proceedings for which adequate
reserves have been established in accordance with GAAP, (ii) any statutory Lien
arising in the ordinary course of business by operation of law with respect to a
liability that is not yet due or delinquent, (iii) any Lien created by operation
of law, such as materialmen’s liens, mechanics’ liens and other similar liens,
arising in the ordinary course of business with respect to a liability that is
not yet due or delinquent or that are being contested in good faith by
appropriate proceedings, (iv) Liens securing the Company’s obligations under the
Griffin Notes, the Other Senior Subordinated Notes and the Turner Notes, (v)
Liens (A) upon or in any equipment acquired or held by the Company or any of its
Subsidiaries to secure the purchase price of such equipment or indebtedness
incurred solely for the purpose of financing the acquisition or lease of such
equipment, or (B) existing on such equipment at the time of its acquisition,
provided that the Lien is confined solely to the property so acquired and
improvements thereon, and the proceeds of such equipment, (vi) Liens securing
the 2015 Notes, (vii) Liens securing the Company’s obligations under the
Existing Secured Debt, (viii) Liens incurred in connection with the extension,
renewal or refinancing of the indebtedness secured by Liens of the type
described in clauses (i) through (vii) above, provided that any extension,
renewal or replacement Lien shall be limited to the property encumbered by the
existing Lien and the principal amount of the Indebtedness being extended,
renewed or refinanced does not increase, (ix) leases or subleases and licenses
and sublicenses granted to others in the ordinary course of the Company’s
business, not interfering in any material respect with the business of the
Company and its Subsidiaries taken as a whole, (x) Liens in favor of customs and
revenue authorities arising as a matter of law to secure payments of custom
duties in connection with the importation of goods, and (xi) Liens arising from
judgments, decrees or attachments in circumstances not constituting an Event of
Default under Section 5(a)(vi).

(y)

“Person” means an individual, a limited liability company, a partnership, a
joint venture, a corporation, a trust, an unincorporated organization, any other
entity and a government or any department or agency thereof.

(z)

“Qualified Financing” means any sale by the Company of Company Financing
Securities to one or more investors and raising gross proceeds to the Company of
at least $5,000,000 (not including any conversion of the Notes).

(aa)

“Required Holders” means the holders of Notes representing at least a majority
of the aggregate principal amount of the Notes then outstanding.

(bb)

“SEC” means the United States Securities and Exchange Commission.

(cc)

“Securities Act” means the Securities Act of 1933, as amended.

(dd)

“Subsidiary” means any corporation, association trust, limited liability
company, partnership, joint venture or other business association or entity (i)
at least 50% of the outstanding voting securities of which are at the time owned
or controlled directly or indirectly by the Company or (ii) with respect to
which the Company possesses, directly or indirectly, the power to direct or
cause the direction of the affairs or management of such Person.

(ee)

“Successor Entity” means the Person, which may be the Company, formed by,
resulting from or surviving any Fundamental Transaction or the Person with which
such Fundamental Transaction shall have been made.

32)

SECURITY. The Notes shall be secured by and to the extent provided in the
Security Agreement.

33)

SUBORDINATION.  It is a requirement of the Existing Secured Debt that any
Indebtedness of the Company, including this Note, be subordinated in right of
payment to the Existing Secured Debt.  Accordingly, each of the Company and, by
acceptance of this Note, the Holder and each of its successors and assigns
hereby covenants and agrees that for so long (but only for so long) as the
Outstanding Note Obligations are secured by any of the assets of the Company,
the following provisions of this Section 33 shall apply:

(a)

Subordination of Note to Existing Secured Debt.  Notwithstanding anything to the
contrary set forth herein, this Note shall be subordinated in right and time of
payment, to the extent and in the manner set forth in this Section 33, to the
prior indefeasible payment in full in cash of the Existing Secured Debt.

(b)

Payment Restrictions.  The Company hereby agrees that it may not make, and the
Holder hereby agrees that it will not accept, any Distribution with respect to
this Note until the earlier of (a) the date that is one (1) day following the
date the Existing Secured Debt is indefeasibly paid in full in cash and (b) in
the event that the Existing Secured Debt Holder has acknowledged in writing that
the Existing Secured Debt has been indefeasibly paid in full in cash, the date
of such payment and acknowledgment in writing.

34)

Registered Obligation.  The Company shall establish and maintain a record of
ownership (the “Register”) in which it will register by book entry the interest
of the Holder and of each subsequent assignee in this Note, and in the right to
receive any payments of principal and interest or any other payments hereunder,
and any assignment of any such interest.  Notwithstanding anything herein to the
contrary, this Note is intended to be treated as a registered obligation for
federal income tax purposes and the right, title, and interest of the Holder and
its assignees in and to payments under this Note shall be transferable only upon
notation of such transfer in the Register.  This Section shall be construed so
that the Note is at all times maintained in “registered form” within the meaning
of Sections 163(f), 871(h)(2) and 881(c)(2) of the Internal Revenue Code and any
related regulations (or any successor provisions of the Code or such
regulations).

[Signature Page Follows]

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IN WITNESS WHEREOF, the Company has caused this Note to be duly executed as of
the Issuance Date set out above.

ISC8 INC.

By:

__________________________________

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