Form of Series 2 Senior Subordinated Secured Convertible Note



 Exhibit 10.8 
  
 NEITHER THIS NOTE NOR THE SECURITIES INTO WHICH THIS NOTE IS CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES
LAWS OR BLUE SKY LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. NOTWITHSTANDING THE FOREGOING, THIS NOTE AND THE SECURITIES ISSUABLE UPON
CONVERSION OF THIS NOTE MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT SECURED BY SUCH SECURITIES. 
  
 THIS SENIOR SUBORDINATED SECURED CONVERTIBLE NOTE AND THE INDEBTEDNESS EVIDENCED HEREBY ARE SUBORDINATED IN RIGHT OF PAYMENT TO THE EXTENT AND IN THE MANNER SET FORTH IN
THAT CERTAIN SUBORDINATION AGREEMENT DATED AS OF DECEMBER 30, 2005 BY AND AMONG SQUARE 1 BANK, PEQUOT PRIVATE EQUITY FUND III, L.P. AND PEQUOT OFFSHORE PRIVATE EQUITY PARTNERS III, L.P., TO THE PRIOR PAYMENT IN FULL OF ALL SENIOR DEBT (AS
DEFINED THEREIN). 
  

			
	 No. [NOTE NO.]
	  	$[PRINCIPAL AMOUNT]
	 Date: December 30, 2005
	  	 

  
 IRVINE SENSORS
CORPORATION 
 SERIES 2 SENIOR SUBORDINATED SECURED CONVERTIBLE NOTE DUE 
 December 30, 2007 
  
 THIS NOTE is one of a series of duly authorized and issued senior secured promissory notes of Irvine Sensors Corporation, a Delaware corporation (the “Company”), designated as its Series 2 Senior
Subordinated Secured Convertible Notes due December 30, 2007, in the aggregate principal amount of $2,554,507.00 (collectively, the “Series 2 Notes”). 
  
 FOR VALUE RECEIVED, the Company promises to pay to the order of [HOLDER] or its registered assigns (the
“Holder”), the principal sum of [PRINCIPAL AMOUNT] Dollars $([PRINCIPAL AMOUNT]), on December 30, 2007 (the “Maturity Date”), or such other date as the Notes are required or permitted to be repaid as provided
hereunder, and to pay interest to the Holder on the then outstanding principal amount of this Note in accordance with the provisions hereof. In addition, the Company shall pay to the order of the Holder interest on any principal or interest payable
hereunder that is not paid in full when due, whether at the time of any stated interest payment date or maturity or by prepayment, acceleration or declaration or otherwise, for the period from and including the due date of such payment to but
excluding the 








 
date the same is paid in full, at a rate of 18% per annum (but in no event in excess of the maximum rate permitted under applicable law). 
  
 Interest payable under this Note shall be computed on the basis of a year of
360 days and actual days elapsed (including the first day but excluding the last day) occurring in the period for which interest is payable. 
  
 Payments of principal and interest shall be made in lawful money of the United States of America to the Holder at its address as provided in
Section 12 or by wire transfer to such account specified from time to time by the Holder hereof for such purpose as provided in Section 12. 
  
 The Holder is entitled to the benefits of the Security Agreements and the Guaranty. 
  
 1. Definitions. In addition to the terms defined elsewhere in this
Note, (a) capitalized terms that are not otherwise defined herein have the meanings given to such terms in the Securities Purchase Agreement, dated as of December 30, 2005, among the Company and the Purchasers identified therein (the
“Purchase Agreement”), and (b) the following terms have the meanings indicated: 
  
 “Conversion Date” means the date a Conversion Notice is delivered to the Company (as determined in accordance with the
notice provisions hereof) together with a Conversion Schedule pursuant to Section 6(a). 
  
 “Conversion Notice” means a written notice in the form attached hereto as Schedule 1. 
  
 “Conversion Price” means $2.60, subject to
adjustment from time to time pursuant to Section 10. 
  
 “Current Market Price” means, on any calculation date, the arithmetic average of the VWAPs for each of the 20 consecutive Trading Days immediately preceding the applicable date. 
  
 “Daily Trading Volume” means on any given
Trading Day the total volume of Common Stock traded on an Eligible Market as reported by Bloomberg L.P. 
  
 “Equity Conditions” means, with respect to Common Stock issuable pursuant to the Transaction Documents (including,
without limitation, upon conversion or exercise in full of the Notes and Warrants), that each of the following conditions is satisfied: (i) the number of authorized but unissued and otherwise unreserved shares of Common Stock is sufficient for
such issuance; (ii) such shares of Common Stock are registered for resale by the Holder and may be sold by the Holder pursuant to an effective Registration Statement covering the Underlying Shares or all such shares may be sold without volume
restrictions pursuant to Rule 144 under the Securities Act or are eligible for sale under Rule 144(k) under the Securities Act; (iii) the Common Stock is listed or quoted (and is not suspended from trading) on an Eligible Market and such shares
of Common Stock are approved for listing upon issuance; (iv) such issuance would be permitted in full without violating Section 6(b) hereof or the rules or regulations of any Trading Market; (v) no 

  

 2 








 
Event of Default nor any event or circumstance that with the passage of time and without being cured would constitute an Event of Default has occurred and
not been cured; (vi) neither the Company nor any Subsidiary is in default or has breached any material obligation under any Transaction Document; and (vii) no public announcement of a pending or proposed Change of Control transaction has
occurred that has not been consummated. 
  
 “Event Equity Value” means 125% of the average of the Closing Prices for the five Trading Days preceding the date of delivery of the notice requiring payment of the Event Equity Value, provided that if the Company
does not make such required payment (together with any other payments, expenses and liquidated damages then due and payable under the Transaction Documents) when due or, in the event the Company disputes in good faith the occurrence of the event
pursuant to which such notice relates, does not instead deposit such required payment (together with such other payments, expenses and liquidated damages then due) in escrow with an independent third-party escrow agent within five Trading Days of
the date such required payment is due, then the Event Equity Value shall be 125% of the greater of (a) the average of the Closing Prices for the five Trading Days preceding the date of delivery of the notice requiring payment of the Event
Equity Value and (b) the average of the Closing Prices for the five Trading Days preceding the date on which such required payment (together with such other payments, expenses and liquidated damages) is paid in full. 
  
 “Factor” means 1.25, increased by 0.25 for
each Interest Rate Adjustment Event occurring after the original issue of this Note. 
  
 “Interest Rate” has the meaning set forth in Section 2(a) herein. 
  
 “Interest Rate Adjustment Event” means any
Interest Payment Date on which the Current Market Price exceeds the product of the Conversion Price and the Factor. 
  
 “Majority Holders” means Holders of a majority of the outstanding principal amount of all Notes. 
  
 “Original Issue Date” means
December 30, 2005, regardless of the number of transfers of any particular Note and regardless of the number of New Notes that may be issued in respect of such transfers. 
  
 “Triggering Event” means any of the following events: (a) the Common Stock is not
listed or quoted, or is suspended from trading, on an Eligible Market for a period of five or more Trading Days (which need not be consecutive Trading Days) in any 180 Trading Day period; (b) the exercise or conversion rights of the Holders
pursuant to any Transaction Document are suspended for any reason other than pursuant to Section 6(b) of the Notes and Section 11 of the Warrants; (c) the Company fails to have available a sufficient number of authorized
but unissued and otherwise unreserved shares of Common Stock available to issue Underlying Shares upon any exercise of the Notes and Warrants or fails to have full authority, including under all laws, rules and regulations of any Trading Market, to
issue such Underlying Shares (other than stockholder approval); 

  

 3 








 
(d) at any time after the Closing Date, any Common Stock issuable pursuant to the Transaction Documents is not listed on an Eligible Market; (e) after
the effectiveness of the Registration Statement, the Equity Conditions fail to be satisfied for five or more Trading Days (which need not be consecutive Trading Days) in any 180 Trading Day period; (f) the Company or any Subsidiary fails to
make any cash payment required under any Transaction Document to which it is a party and such failure is not cured within five days after notice of such default is first given to the Company by a Holder; (g) the Company or any Subsidiary
defaults in the timely performance of any other material obligation under any Transaction Document to which it is a party and such default continues uncured for a period of fifteen days after the date on which notice of such default is first given
to the Company by a Holder (it being understood that no prior notice need be given in the case of a default that cannot reasonably be cured within fifteen days); (h) the Company or any Subsidiary breaches in any material respect any of its
representations or warranties under any Transaction Document to which it is a party; or (i) any change, event or circumstance that has had or could reasonably be expected to result in a Material Adverse Effect. 
  
 2. Principal and Interest. 
  
 (a) The Company shall pay interest to the Holder on the then outstanding
principal amount of this Note at a rate of 3.5% per annum, as the same may be adjusted from time to time pursuant to the terms hereof (the “Interest Rate”). The Interest Rate shall be reduced from time to time by 50 basis
points (0.5%) for each Interest Rate Adjustment Event (if any), as of the date of that Interest Rate Adjustment Event, but in no event below zero, provided that the Equity Conditions are satisfied on, and at all times during the sixty day period
preceding, the applicable Interest Payment Date. Once reduced the Interest Rate shall not be subsequently increased as a result of an Interest Rate Adjustment Event. Interest shall be payable quarterly in arrears in cash on each of
March 31, June 30, September 30 and December 31, except if such date is not a Trading Day in which case such interest shall be payable on the next succeeding Trading Day (each, an “Interest Payment
Date”). The first Interest Payment Date shall be March 31, 2006. Subject to the limitations set forth in Section 6(b) below, the Holder may, upon written notice to the Company not less than 10 Trading Days prior to an
Interest Payment Date, require the Company to pay such interest payable on such Interest Payment Date in shares of Common Stock in accordance with Section 2(c) below. 
  
 (b) The Company shall pay the principal balance of this Note to the Holder on the Maturity Date (or such later date or dates
(or schedule) as the Holder may, in its sole discretion, determine by written notice to the Company, but not later than December 30, 2009) (the “Principal Payment Date(s)”) in cash. Subject to the limitations set forth in
Sections 2(c), 2(d) and 6(b) below, the Company may, upon written notice to the Holder not less than 10 Trading Days prior to a Principal Payment Date, pay the principal due on such Principal Payment Date in shares of Common Stock in
accordance with Sections 2(c) and 2(d) below. 
  
 (c) In the event
that principal or interest is to be paid in shares of Common Stock (subject to the limitations set forth in Section 6(b) below), the number of shares of Common Stock to be issued to the Holder as payment for such interest or principal shall be
(i) with respect to interest, determined by dividing the aggregate amount of interest payable to the Holder by the 

  

 4 








 
Market Price (as defined below) as of the applicable Interest Payment Date, and rounding up to the nearest whole share, (ii) with respect to principal,
determined by dividing the principal balance by the Conversion Price (as adjusted in accordance herewith) and rounding up to the nearest whole share, and paid to the Holder in accordance with Section 2(e) below. The term “Market
Price” shall mean 93% of the arithmetic average of the VWAP for each of the 20 consecutive Trading Days prior to the applicable Principal Payment Date (not including such date). 
  
 (d) The Company may make payments of the principal amount of this Note on a Principal Payment Date in shares of Common Stock
pursuant to Section 2(b) if, and only if, (i) all of the Equity Conditions are satisfied on and at all times during the sixty days preceding such Principal Payment Date (or the Holder otherwise waives in writing the Equity Conditions), and
(ii) the arithmetic average of the VWAP for each of the 15 consecutive Trading Days prior to such Principal Payment Date is greater than $2.86 (as adjusted for any stock splits, stock combinations and similar events); and in each case only to
the extent that (unless and to the extent waived by the Holder) the aggregate number of shares issuable by the Company to the Holder as payment in respect of such Principal Payment Date does not exceed 25% of the arithmetic average of the Daily
Trading Volume for each of the 20 consecutive Trading Days preceding such Principal Payment Date. Any payment of principal (or portion thereof) that is not permitted to be paid in Common Stock pursuant to this Section 2(d) shall be paid in cash
by the Company on the applicable Principal Payment Date. 
  
 (e)
In the event that any interest is paid in Common Stock, the Company shall on such Interest Payment Date or Principal Payment Date, as applicable, (i) issue (or cause to be issued) and deliver (or cause to be delivered) to the Holder a
certificate, bearing the restrictive legends set forth herein, registered in the name of the Holder, for the number of shares of Common Stock to which the Holder shall be entitled, or (ii) at all times after (x) the Company is eligible to
deliver its Common Stock electronically through The Depository Trust Company (the “DTC”) in connection with a resale by the Holder of such shares pursuant to the Registration Statement and (y) the Holder has notified the
Company that this clause (ii) shall apply, credit the number of shares of Common Stock to which the Holder shall be entitled to the Holder’s or its designee’s balance account with the DTC through its Deposit Withdrawal Agent
Commission System. 
  
 (f) Notwithstanding the foregoing, the
Holder may elect to defer (i) any principal payment prior to the Principal Payment Date and/or (ii) any interest payment prior to its Interest Payment Date. If the Holder elects to defer an interest payment, the Company shall pay such
deferred interest payment (together with all other amounts that may be due and payable by the Company) on the Maturity Date or such earlier date as the Holder may otherwise elect in writing (but not prior to the applicable Interest Payment Date when
it was otherwise due). If the Holder elects to defer an interest payment, no interest shall accrue on any such deferred amounts. 
  
 (g) This Note may not be prepaid in whole or in part absent the consent of the Majority Holders. 
  

 5 








 3. Ranking and Covenants. 
  
 (a) Except as permitted in Section 4.10(a) of the Purchase Agreement, (i) no Indebtedness of the Company is senior
to or on a parity with this Note in right of payment, whether with respect to interest, damages or upon liquidation or dissolution or otherwise, and (ii) the Company will not, and will not permit any Subsidiary to, directly or indirectly, enter
into, create, incur, assume or suffer to exist any Indebtedness of any kind, on or with respect to any of its property or assets now owned or hereafter acquired or any interest therein or any income or profits therefrom. 
  
 (b) So long as any Notes are outstanding, neither the Company nor any
Subsidiary shall, directly or indirectly, (i) redeem, purchase or otherwise acquire any capital stock or set aside any monies for such a redemption, purchase or other acquisition of its capital stock (other than pursuant to the Company’s
stock option plan or similar employee incentive plan as described in Section 3.1(g) of the Purchase Agreement) or (ii) issue any Floating Price Security (as defined in Section 10(d)(ii)). 
  
 (c) If, at any time while any Note is outstanding, the Company or any
Subsidiary (i) issues or incurs any Indebtedness for borrowed money, including, without limitation, Indebtedness evidenced by notes, bonds, debentures or other similar instruments, but excluding Indebtedness permitted in Section 4.10(a) of
the Purchase Agreement, or (ii) effects any Subsequent Placement (other than the issuance of Common Stock pursuant to the definition of Excluded Stock except for clause (D) thereof), the Company shall notify the Holder of such event and
offer to repurchase an amount of this Note from the Holder having an aggregate price (as determined below) equal to the lesser of (A) the aggregate amount of such Indebtedness or Subsequent Placement, and (B) the aggregate amount required
to repurchase this entire Note pursuant to this Section 3(c). All Notes repurchased under this Section 3(c) shall be repurchased at a price equal to the greater of (x) the outstanding principal amount of the Notes
purchased, plus all accrued but unpaid interest thereon through the date of payment, and (y) the Event Equity Value of the Underlying Shares then issuable upon conversion of the Notes purchased (without regard to any restrictions on conversion)
and the closing of such repurchase shall occur promptly upon notice from the Holder of an exercise of rights hereunder. 
  
 (d) The Company covenants that it will at all times reserve and keep available out of its authorized but unissued and otherwise unreserved Common Stock,
solely for the purpose of enabling it to issue Underlying Shares as required hereunder, the number of Underlying Shares which are then issuable and deliverable upon the conversion of (and otherwise in respect of) each Note (taking into account the
adjustments set forth in Section 10 and subject to the limitations set forth in Section 6(b)), free from preemptive rights or any other contingent purchase rights of Persons other than the Holder. The Company covenants that
all Underlying Shares so issuable and deliverable shall, upon issuance in accordance with the terms hereof, be duly and validly authorized and issued and fully paid and nonassessable. 
  
 4. Registration of Notes. The Company shall register the Notes upon records to be maintained by the Company for that
purpose (the “Note Register”) in the name of each record holder thereof from time to time. The Company may deem and treat the registered Holder of this 

  

 6 








 
Note as the absolute owner hereof for the purpose of any conversion hereof or any payment of interest or principal hereon, and for all other purposes, absent
actual notice to the contrary. 
  
 5. Registration of Transfers
and Exchanges. This Note and all rights hereunder are transferable in whole or in part upon the books of the Company by the Holder hereof; provided, however, that the transferee shall agree in writing to be bound by the terms and subject to the
conditions of this Note and the Purchase Agreement. The Company shall register the transfer of any portion of this Note in the Note Register upon surrender of this Note to the Company at its address for notice set forth herein. Upon any such
registration or transfer, a new Note, in substantially the form of this Note (any such new Note, a “New Note”), evidencing the portion of this Note so transferred shall be issued to the transferee and a New Note evidencing the
remaining portion of this Note not so transferred, if any, shall be issued to the transferring Holder. The acceptance of the New Note by the transferee thereof shall be deemed the acceptance by such transferee of all of the rights and obligations of
a holder of a Note. This Note is exchangeable for an equal aggregate principal amount of Notes of different authorized denominations, as requested by the Holder surrendering the same. No service charge or other fee will be imposed in connection with
any such registration of transfer or exchange. 
  
 6.
Conversion. 
  
 (a) At the Option of the Holder. All
or any portion of this Note shall be convertible into shares of Common Stock (subject to the limitations set forth in Section 6(b)), at the option of the Holder, at any time and from time to time from and after the Original Issue Date.
The number of Underlying Shares issuable upon any conversion hereunder shall equal the outstanding principal amount of this Note to be converted, plus the amount of any accrued but unpaid interest on this Note through the Conversion Date, divided by
the Conversion Price on the Conversion Date. The Holder shall effect conversions under this Section 6(a) by delivering to the Company a Conversion Notice together with a schedule in the form of Schedule 2 attached hereto (the
“Conversion Schedule”). If the Holder is converting less than all of the principal amount of this Note, or if a conversion hereunder may not be effected in full due to the application of Section 6(b), the Company shall
honor such conversion to the extent permissible hereunder and shall promptly deliver to the Holder a Conversion Schedule indicating the principal amount (and accrued interest) which has not been converted. 
  
 (b) Certain Conversion Restrictions. Notwithstanding anything to the
contrary contained herein or in the Transaction Documents, this Series 2 Note shall not be convertible for any number of shares of Common Stock (nor shall the Company be required or permitted to pay in shares of Common Stock any principal or
interest due under the Series 2 Notes), unless the Company obtains stockholder approval. The Holder acknowledges that if such stockholder approval is not obtained, the principal amount (and accrued and unpaid interest thereon) of this Series 2 Note
shall be paid only in cash as, if and when due and payable in accordance with the terms of this Series 2 Note. 
  
 7. Mechanics of Conversion; Restrictive Legends. 
  
 (a) Upon conversion of this Note, the Company shall promptly (but in no event later than three Trading Days after the Conversion Date) issue or cause to
be issued and cause to be 

  

 7 








 
delivered to or upon the written order of the Holder and in such name or names as the Holder may designate a certificate for the Underlying Shares issuable
upon such conversion. The Holder, or any Person so designated by the Holder to receive Underlying Shares, shall be deemed to have become holder of record of such Underlying Shares as of the Conversion Date. The Company shall, upon request of the
Holder, use its reasonable best efforts to deliver the Underlying Shares hereunder electronically through the DTC in connection with a resale by the Holder of such shares pursuant to the Registration Statement. 
  
 (b) The Holder shall not be required to deliver the original Note in order to
effect a conversion hereunder. Execution and delivery of the Conversion Notice shall have the same effect as cancellation of the original Note and issuance of a New Note representing the remaining outstanding principal amount; provided that
the cancellation of the original Note shall not be deemed effective until a certificate for such Underlying Shares is delivered to the Holder, or the Holder or its designee receives a credit for such Underlying Shares to its balance account with the
DTC through its Deposit Withdrawal Agent Commission System. Upon surrender of this Note following one or more partial conversions, the Company shall promptly deliver to the Holder a New Note representing the remaining outstanding principal amount.

  
 (c) The Company’s obligations to issue and deliver
Underlying Shares upon conversion of this Note in accordance with the terms and subject to the conditions hereof are absolute and unconditional, irrespective of any action or inaction by the Holder to enforce the same, any waiver or consent with
respect to any provision hereof, the recovery of any judgment against any Person or any action to enforce the same, or any set-off, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the Holder or any other
Person of any obligation to the Company or any violation or alleged violation of law by the Holder or any other Person, and irrespective of any other circumstance which might otherwise limit such obligation of the Company to the Holder in connection
with the issuance of such Underlying Shares (other than such limitations contemplated by this Note). 
  
 (d) If by the fifth Trading Day after a Conversion Date the Company fails to deliver or cause to be delivered to the Holder such Underlying Shares in such
amounts and in the manner required pursuant to Section 7(a), then the Holder will have the right to rescind such conversion. 
  
 (e) If by the third Trading Day after a Conversion Date the Company fails to deliver or cause to be delivered to the Holder such Underlying Shares in such
amounts and in the manner required pursuant to Section 7(a), and if after such third Trading Day the Holder purchases (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the Holder
of the Underlying Shares which the Holder anticipated receiving upon such conversion (a “Buy-In”), then the Company shall either (i) pay cash to the Holder (in addition to any other remedies available to or elected by the
Holder) in an amount equal to the Holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased (the “Buy-In Price”), at which point the Company’s obligation to deliver
such certificate (and to issue such Common Stock) shall terminate, or (ii) promptly honor its obligation to deliver to the Holder a certificate or certificates representing such Common Stock and pay cash to the Holder in an amount equal to the
excess (if any) of the Buy-In Price over the product of (A) such number of shares of Common Stock, times (B) the Closing Price on the date of the event giving rise to the Company’s obligation to deliver such certificate. 

 

 8 








 (f) Each certificate for Underlying Shares shall bear a restrictive legend to the extent and as provided
in the Purchase Agreement and any certificate issued at any time in exchange or substitution for any certificate bearing such legend, shall also bear such legend, unless, in the opinion of counsel for the holder thereof (which opinion shall be
reasonably satisfactory to counsel for the Company), the securities represented thereby are not, at such time, required by law to bear such legend. 
  
 8. Events of Default. 
  
 (a) “Event of Default” means any one of the following events (whatever the reason and whether it shall be voluntary or involuntary or
effected by operation of law or pursuant to any judgment, decree or order of any court, or any order, rule or regulation of any administrative or governmental body): 
  
 (i) any default in the payment (free of any claim of subordination) of principal, interest or liquidated
damages in respect of any Notes, as and when the same becomes due and payable (whether on a date specified for the payment of interest or the date on which the obligations under the Note mature or by acceleration, redemption, prepayment or
otherwise); 
  
 (ii) the Company or any
Significant Subsidiary defaults in any of its covenants or other obligations in respect of (A) any Indebtedness permitted by Section 4.10(a) of the Purchase Agreement, or (B) any other note or any mortgage, credit agreement or other
facility, indenture agreement, factoring agreement or other instrument under which there may be issued, or by which there may be secured or evidenced, any Indebtedness for borrowed money or money due under any long term leasing or factoring
arrangement of the Company or any Significant Subsidiary in an amount exceeding $500,000, whether such Indebtedness now exists or is hereafter created, and any such default is not cured within the time permitted by such agreements; or any event or
circumstance occurs that with notice or lapse of time would constitute such a default. 
  
 (iii) the Company or any Significant Subsidiary is in default under any contract or agreement, financial or otherwise, between the Company
or any Significant Subsidiary, as applicable, and any other Person and such default involves claimed actual damages in excess of $1,000,000 or the other party thereto commences litigation or arbitration proceedings to exercise its rights and
remedies under such contract or agreement as a consequence of such default and such default is not waived or cured within 90 days of the occurrence thereof; 
  
 (iv) there is entered against the Company or any Significant Subsidiary (A) a final judgment or order for the payment of money in an
aggregate amount exceeding $1,000,000, or (B) any one or more non-monetary final judgments that have, or could reasonably be expected to have, individually or in the aggregate, a material adverse effect on the Company or any Significant
Subsidiary; 
  

 9 








 (v) (i) the Company or any Significant Subsidiary is (A) debarred from contracting
with any Government Authority, (B) suspended from contracting with any part of any Government Authority for more than 60 days, or (C) subject to a suspension which prevents the Company or any Significant Subsidiary from being granted an
award, extension or renewal of a material Government Contract sought by the Company; (ii) a notice of termination for default shall have been issued under any material Government Contract and such notice has not been withdrawn in 60 days;
(iii) an investigation by a Government Authority shall have been commenced in connection with any Government Contract or the Company which could result in criminal liability, suspension or debarment; or (iv) the termination of any material
Government Contract due to fraud or willful misconduct; 
  
 (vi) any provision of any Transaction Document, at any time after the Original Issue Date, and for any reason other than as expressly permitted thereunder, ceases to be in full force and effect; or the Company or any
Subsidiary contests in any manner the validity or enforceability of any Transaction Document or any provision thereof; or the Company or any Subsidiary denies that it has any or further liability or obligation under any Transaction Document, or
purports to revoke, terminate or rescind any Transaction Documents; 
  
 (vii) any Security Agreement ceases to give the Agent (as defined in the Security Agreements) the primary benefits thereof, including a perfected, enforceable first priority security interest in, and Lien on, all of
the Collateral (as defined therein) subject to the priority of security interests of the Indebtedness permitted under Section 4.10(a) of the Purchase Agreement; 
  
 (viii) the occurrence of a Triggering Event; or 
  
 (ix) the occurrence of a Bankruptcy Event. 
  
 (b) At any time or times following the occurrence of an Event of Default, the
Holder shall have the option to elect, by notice to the Company (an “Event Notice”), to require the Company to repurchase all or any portion of (i) the outstanding principal amount of this Note, at a repurchase price equal to
the greater of (A) 125% of such outstanding principal amount, plus all accrued but unpaid interest thereon through the date of payment, or (B) the Event Equity Value of the Underlying Shares issuable upon conversion of such principal
amount and all such accrued but unpaid interest thereon, and (ii) any Underlying Shares issued to the Holder upon conversion of Notes and then owned by the Holder, at a price per share equal to the Event Equity Value of such issuable and issued
Underlying Shares. The aggregate amount payable pursuant to the preceding sentence is referred to as the “Event Price.” The Company shall pay the Event Price to the Holder no later than the third Trading Day following the date of
delivery of the Event Notice, and upon receipt thereof the Holder shall deliver this Note and certificates evidencing any Underlying Shares so repurchased to the Company (to the extent such certificates have been delivered to the Holder).

  

 10 








 (c) Upon the occurrence of any Bankruptcy Event, all amounts pursuant to Section 8(b) shall
immediately become due and payable in full in cash, without any further action by the Holder. 
  
 (d) In connection with any Event of Default, the Holder need not provide, and the Company hereby waives, any presentment, demand, protest or other notice of any kind, and the Holder may immediately and without
expiration of any grace period enforce any and all of its rights and remedies hereunder and all other remedies available to it under applicable law. Any such declaration may be rescinded and annulled by the Holder at any time prior to payment
hereunder. No such rescission or annulment shall affect any subsequent Event of Default or impair any right incidental thereto. 
  
 9. Charges, Taxes and Expenses. Issuance of certificates for Underlying Shares upon conversion of (or otherwise in respect of) this Note shall be
made without charge to the Holder for any issue or transfer tax, withholding tax, transfer agent fee or other incidental tax or expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company;
provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the registration of any certificates for Underlying Shares or Notes in a name other than that of the
Holder. The Holder shall be responsible for all other tax liability that may arise as a result of holding or transferring this Note or receiving Underlying Shares in respect hereof. 
  
 10. Certain Adjustments. The Conversion Price is subject to adjustment from time to time as set forth in this
Section 10. 
  
 (a) Stock Dividends and Splits.
If the Company, at any time while this Note is outstanding, (i) pays a stock dividend on its Common Stock or otherwise makes a distribution on any class of capital stock that is payable in shares of Common Stock, (ii) subdivides
outstanding shares of Common Stock into a larger number of shares, or (iii) combines outstanding shares of Common Stock into a smaller number of shares, then in each such case the Conversion Price shall be multiplied by a fraction of which the
numerator shall be the number of shares of Common Stock outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event. Any adjustment made pursuant to
clause (i) of this Section 10(a) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution, and any adjustment pursuant to clause (ii) or
(iii) of this Section 10(a) shall become effective immediately after the effective date of such subdivision or combination. 
  
 (b) Pro Rata Distributions. If the Company, at any time while this Note is outstanding, distributes to all holders of Common Stock
(i) evidences of its indebtedness, (ii) any security (other than a distribution of Common Stock described in Section 10(a)), (iii) rights or warrants to subscribe for or purchase any security, or (iv) cash or any
other asset (in each case, “Distributed Property”), then the Company shall deliver to the Holder (on the effective date of such distribution), the Distributed Property that the Holder would have been entitled to receive in respect
of the Underlying Shares for which this Note could have been converted immediately prior to the date on which holders of Common Stock became entitled to receive such Distributed Property (without giving effect to any limitation on conversion in
Section 6(b)). 
  

 11 








 (c) Fundamental Changes. If, at any time while this Note is outstanding, (i) the Company
effects any merger or consolidation of the Company with or into another Person, (ii) the Company effects any sale of all or substantially all of its assets in one or more transactions, (iii) any tender offer or exchange offer (whether by
the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to tender or exchange their shares for other securities, cash or property, (iv) the Company effects any reclassification of the Common Stock or
any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property (other than as a result of a subdivision or combination of shares of Common Stock described in
Section 10(a)), or (v) there is a Change of Control (each case in clauses (i) through (v) above, a “Fundamental Change”), then upon any subsequent conversion of this Note, the Holder shall have the right
to receive (except to the extent previously distributed to the Holder pursuant to Section 10(b)), for each Underlying Share that would have been issuable upon such conversion absent such Fundamental Change (without giving effect to any
limitation on conversion in Section 6(b)), the same kind and amount of securities, cash or property as it would have been entitled to receive upon the occurrence of such Fundamental Change if it had been, immediately prior to such
Fundamental Change, the holder of one share of Common Stock (the “Alternate Consideration”). If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Change, then the
Holder shall be given the same choice as to the Alternate Consideration it receives upon any conversion of this Note following such Fundamental Change. In the event of a Fundamental Change, the Company or the successor or purchasing Person, as the
case may be, shall execute with the Holder a written agreement providing that: 
  
 (x) this Note shall thereafter entitle the Holder to purchase the Alternate Consideration; 
  
 (y) in the case of any such successor or purchasing Person,
upon such consolidation, merger, statutory exchange, combination, sale or conveyance such successor or purchasing Person shall be jointly and severally liable with the Company for the performance of all of the Company’s obligations under this
Note and the other Transaction Documents; and 
  
 (z) if registration or qualification is required under the Exchange Act or applicable state law for the public resale by the Holder of shares of stock and other securities so issuable upon exercise of this Note, such registration or
qualification shall be completed prior to such reclassification, change, consolidation, merger, statutory exchange, combination or sale. 
  
 If, in the case of any Fundamental Change, the Alternate Consideration includes shares of stock, other securities, other property or assets of a Person other than the
Company or any such successor or purchasing Person, as the case may be, in such Fundamental Change, then such written agreement shall also be executed by such other Person and shall contain such additional provisions to protect the interests of the
Holder as the Board of Directors of the Company shall reasonably consider necessary by reason of the foregoing. At the Holder’s request, any successor to the Company or surviving Person in such Fundamental Change shall issue to the Holder a new
Note consistent with the foregoing provisions and evidencing the Holder’s right to 

  

 12 








 
convert such Note into Alternate Consideration. The terms of any agreement pursuant to which a Fundamental Change is effected shall include terms requiring
any such successor or surviving Person to comply with the provisions of this Section 10(c) and insuring that this Note (or any such replacement security) will be similarly adjusted upon any subsequent transaction analogous to a
Fundamental Change. If any Fundamental Change constitutes or results in a Change of Control, then at the request of the Holder, the Company (or any such successor or surviving entity) will purchase this Note from the Holder for a purchase price,
payable in cash within five Trading Days after such request, equal to the greater of (x) 125% of such outstanding principal amount, plus all accrued but unpaid interest thereon through the date of payment, and (y) the Event Equity Value of
the Underlying Shares issuable upon conversion of such principal amount and all such accrued but unpaid interest thereon. 
  
 (d) Subsequent Equity Sales. 
  
 (i) If, at any time while this Note is outstanding, the Company directly or indirectly issues additional shares of Common Stock or rights,
warrants, options or other securities or debt convertible, exercisable or exchangeable for shares of Common Stock or otherwise entitling any Person to acquire shares of Common Stock (collectively, “Common Stock Equivalents”) at an
effective net price to the Company per share of Common Stock (the “Effective Price”) less than the Conversion Price (as adjusted hereunder to such date), then the Conversion Price shall be reduced to equal (A) the Effective
Price, if such issuance or deemed issuance occurs on or prior to June 30, 2007, or (B) if such issuance or deemed issuance occurs after June 30, 2007, an amount equal to the product of the Conversion Price then in effect multiplied by
a fraction of which the numerator shall be the number of shares of Common Stock outstanding prior to such issuance plus the number of shares of Common Stock which the aggregate purchase price or exercise price for such Common Stock (plus, if
applicable, the aggregate consideration received from the issuance of the Common Stock Equivalents) would purchase at the then current Conversion Price and the denominator shall be the number of shares of Common Stock outstanding or deemed to be
outstanding immediately after such issuance. For purposes of this paragraph, in connection with any issuance of any Common Stock Equivalents, (A) the maximum number of shares of Common Stock potentially issuable at any time upon conversion,
exercise or exchange of such Common Stock Equivalents (the “Deemed Number”) shall be deemed to be outstanding upon issuance of such Common Stock Equivalents, (B) the Effective Price applicable to such Common Stock shall equal
the minimum dollar value of consideration payable to the Company to purchase such Common Stock Equivalents and to convert, exercise or exchange them into Common Stock (net of any discounts, fees, commissions and other expenses), divided by the
Deemed Number, and (C) no further adjustment shall be made to the Conversion Price upon the actual issuance of Common Stock upon conversion, exercise or exchange of such Common Stock Equivalents. 
  
 (ii) If, at any time while this Note is outstanding, the
Company directly or indirectly issues Common Stock Equivalents with an Effective Price or a number of underlying shares that floats or resets or otherwise varies or is subject to adjustment based (directly or indirectly) on market prices of the
Common Stock (a “Floating Price Security”), then for purposes of applying the preceding paragraph in connection with any 

  

 13 








 
subsequent conversion, the Effective Price will be determined separately on each Conversion Date and will be deemed to equal the lowest Effective Price at
which any holder of such Floating Price Security is entitled to acquire Common Stock on such Conversion Date (regardless of whether any such holder actually acquires any shares on such date). 
  
 (iii) Notwithstanding the foregoing, no adjustment will be
made under this paragraph (d) in respect of any issuances of Common Stock and Common Stock Equivalents made pursuant to the definition of Excluded Stock, except for clause (D) thereof. 
  
 (e) Calculations. All calculations under this Section 10
shall be made to the nearest cent or the nearest 1/100th of a share, as applicable. The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition
of any such shares shall be considered an issue or sale of Common Stock. 
  
 (f) Notice of Adjustments. Upon the occurrence of each adjustment pursuant to this Section 10, the Company at its expense will promptly compute such adjustment in accordance with the terms hereof
and prepare and deliver to the Holder a certificate describing in reasonable detail such adjustment and the transactions giving rise thereto, including all facts upon which such adjustment is based. 
  
 (g) Notice of Corporate Events. If the Company (i) declares a
dividend or any other distribution of cash, securities or other property in respect of its Common Stock, including without limitation any granting of rights or warrants to subscribe for or purchase any capital stock of the Company or any Subsidiary
(other than Incentives or pursuant to Incentives), (ii) authorizes or approves, enters into any agreement contemplating or solicits stockholder approval for a Fundamental Change or (iii) authorizes the voluntary dissolution, liquidation or
winding up of the affairs of the Company, then the Company shall deliver to the Holder a notice describing the material terms and conditions of such transaction, at least 20 Trading Days prior to the applicable record or effective date on which a
Person would need to hold Common Stock in order to participate in or vote with respect to such transaction, and the Company will take all steps reasonably necessary in order to insure that the Holder is given the practical opportunity to convert
this Note prior to such time so as to participate in or vote with respect to such transaction. 
  
 11. No Fractional Shares. The Company shall not issue or cause to be issued fractional Underlying Shares on conversion of this Note. If any fraction of an Underlying Share would, except for the provisions of
this Section 11, be issuable upon conversion of this Note, the number of Underlying Shares to be issued will be rounded up to the nearest whole share. 
  
 12. Notices. Any and all notices or other communications or deliveries hereunder (including any Conversion Notice)
shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Section 12 prior to
6:30 p.m. (New York City time) on a Trading Day, (ii) the next Trading Day after the date of transmission, if such notice or 

  

 14 








 
communication is delivered via facsimile at the facsimile number specified in this Section 12 on a day that is not a Trading Day or later than
6:30 p.m. (New York City time) on any Trading Day, (iii) the Trading Day following the date of mailing, if sent by nationally recognized overnight courier service specifying next Business Day delivery, or (iv) upon actual receipt by the
party to whom such notice is required to be given, if by hand delivery. The address and facsimile number of a party for such notices or communications shall be as set forth in the Purchase Agreement, unless changed by such party by two Trading
Days’ prior notice to the other party in accordance with this Section 12. 
  
 13. Miscellaneous. 
  
 (a)
This Note shall be binding on and inure to the benefit of the parties hereto and their respective successors and permitted assigns. Subject to the restrictions on transfer set forth herein, this Note may be assigned by the Holder. The Company shall
not be permitted to assign this Note absent the prior written consent of the Holder. 
  
 (b) Subject to Section 12(a), nothing in this Note shall be construed to give to any person or corporation other than the Company and the Holder any legal or equitable right, remedy or cause under this
Note. 
  
 (c) GOVERNING LAW;
VENUE; WAIVER OF JURY TRIAL. ALL QUESTIONS CONCERNING THE CONSTRUCTION,
VALIDITY, ENFORCEMENT AND INTERPRETATION OF THIS NOTE SHALL BE GOVERNED BY
AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF
THE STATE OF NEW YORK (EXCEPT FOR MATTERS GOVERNED BY CORPORATE LAW
IN THE STATE OF DELAWARE), WITHOUT REGARD TO THE PRINCIPLES OF
CONFLICTS OF LAW THEREOF. EACH PARTY HEREBY IRREVOCABLY SUBMITS TO THE
EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS SITTING IN THE
CITY OF NEW YORK, BOROUGH OF MANHATTAN, FOR THE ADJUDICATION OF ANY
DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR WITH ANY TRANSACTION CONTEMPLATED
HEREBY OR DISCUSSED HEREIN (INCLUDING WITH RESPECT TO THE ENFORCEMENT OF
ANY OF THE TRANSACTION DOCUMENTS), AND HEREBY IRREVOCABLY WAIVES, AND AGREES
NOT TO ASSERT IN ANY SUIT, ACTION OR PROCEEDING, ANY CLAIM THAT
IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF ANY SUCH COURT,
THAT SUCH SUIT, ACTION OR PROCEEDING IS IMPROPER. EACH PARTY HEREBY
IRREVOCABLY WAIVES PERSONAL SERVICE OF PROCESS AND CONSENTS TO PROCESS BEING
SERVED IN ANY SUCH SUIT, ACTION OR PROCEEDING BY MAILING A COPY
THEREOF VIA REGISTERED OR CERTIFIED MAIL OR OVERNIGHT DELIVERY (WITH EVIDENCE
OF DELIVERY) TO SUCH PARTY AT THE ADDRESS IN EFFECT FOR NOTICES
TO IT UNDER THIS AGREEMENT AND AGREES THAT SUCH SERVICE SHALL
CONSTITUTE GOOD AND SUFFICIENT SERVICE OF PROCESS AND NOTICE THEREOF. NOTHING
CONTAINED HEREIN SHALL BE DEEMED TO LIMIT IN ANY WAY ANY RIGHT
TO SERVE PROCESS IN ANY MANNER PERMITTED BY LAW. THE COMPANY HEREBY
WAIVES ALL RIGHTS TO A TRIAL BY JURY. 
  
 (d) The headings herein are for convenience only, do not constitute a part of this Note and shall not be deemed to limit or affect any of the provisions
hereof. 
  
 (e) In case any one or more of the provisions of this
Note shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Note shall not in any way be affected or impaired thereby and the parties will 

  

 15 








 
attempt in good faith to agree upon a valid and enforceable provision which shall be a commercially reasonable substitute therefor, and upon so agreeing,
shall incorporate such substitute provision in this Note. 
  
 (f)
In the event of any stock split, subdivision, dividend or distribution payable in shares of Common Stock (or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly shares of Common Stock),
combination or other similar recapitalization or event occurring after the date hereof, each reference in this Note to a price (if not otherwise adjusted) shall be amended to appropriately account for such event. 
  
 (g) This Note, together with the other Transaction Documents, constitutes the
entire agreement of the parties with respect to the subject matter hereof. No provision of this Note may be waived or amended except in a written instrument signed, in the case of an amendment, by the Company and the Majority Holders or, in the case
of a waiver, by the Majority Holders. Any waiver executed by the Majority Holders shall be binding on the Company and all Holders. No waiver of any default with respect to any provision, condition or requirement of this Note shall be deemed to be a
continuing waiver in the future or a waiver of any subsequent default or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of either party to exercise any right hereunder in any manner impair the
exercise of any such right. The restrictions set forth in Section 6(b) hereof may not be amended or waived. 
  
 (h) The Holder shall have no rights as a holder of Common Stock as a result of being a holder of this Note, except as required by law or rights expressly
provided in this Note. 
  
 [REMAINDER OF PAGE INTENTIONALLY LEFT
BLANK 
 SIGNATURE PAGE FOLLOWS] 
  

 16 








 IN WITNESS WHEREOF, the Company has caused this Note to be duly executed by a duly authorized officer as
of the date first above indicated. 
  

			
	IRVINE SENSORS CORPORATION
		
	 By
	 	 
	 Name: 
	 	 
	 Title:
	 	 


  

 17 








 Schedule 1 
  
 FORM OF CONVERSION NOTICE 
  
 (To be executed by the registered Holder in order to convert Note) 
  
 The undersigned hereby elects to convert the specified principal amount of Senior Secured Convertible Notes (the “Notes”) into shares of common stock, no
par value (the “Common Stock”), of Irvine Sensors Corporation, a Delaware corporation, according to the conditions hereof, as of the date written below. 
  

			
	
	 
	 Date to Effect Conversion

	
	 
	 Principal amount of Notes owned prior to conversion

	
	 
	 Principal amount of Notes to be converted
 (including accrued but unpaid interest thereon)

	
	 
	 Number of shares of Common Stock to be Issued

	
	 
	 Applicable Conversion Price

	
	 
	 Principal amount of Notes owned subsequent to Conversion

	
	 
	 Name of Holder
  

		
	By	 	 
	 Name: 
	 	 
	 Title:
	 	 









 Schedule 2 
  
 CONVERSION SCHEDULE 
  
 This Conversion Schedule reflects conversions of the Senior Secured Convertible Notes issued by Irvine Sensors Corporation 
  

					
	 Date of Conversion

	  	 Amount of Conversion

	  	 Aggregate Principal Amount
 Remaining Subsequent to Conversion


	 	  	 	  	 
	 	  	 	  	 
	 	  	 	  	 
	 	  	 	  	 
	 	  	 	  	 
	 	  	 	  	 
	 	  	 	  	 
	 	  	 	  	 
	 	  	 	  	 
	 	  	 	  	 
	 	  	 	  	 
	 	  	 	  	 
	 	  	 	  	 
	 	  	 	  	 
	 	  	 	  	 
	 	  	 	  	 

  

 19 








 SCHEDULE OF MATERIAL DIFFERENCES 
 TO EXHIBIT 10.8 
  

						
	 Note No.

	  	 Name of Holder

	  	Principal Amount


	 S-II-1
	  	Pequot Private Equity Fund III, L.P.	  	$	2,238,895.00
	 S-II-2
	  	Pequot Offshore Private Equity Partners III, L.P.	  	$	315,612.00

  

 20