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&lt;p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"&gt;On June 21, 2013,
the Company sold assets associated with the discontinued Government Business (see Note 15) and received as consideration a one-year
note for $200,000 payable quarterly at an interest rate of prime plus 2% per annum. The first quarterly payment of the note is
due on September 30, 2013. Under the terms of the Senior Revolving Credit Facility with PFG, the proceeds from this note receivable
will be used to reduce the outstanding balance under the Senior Revolving Credit Facility.&amp;#160;&amp;#160;This note is entered into
with Irvine Sensors Corporation, whose Chief Executive Officer is ISC8&amp;#146;s former Vice Chairman and Chief Strategist, John
Carson.&lt;/p&gt;

&lt;p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"&gt;&amp;#160;&lt;/p&gt;

&lt;p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"&gt;On January&amp;#160;31,
2012, the Company sold its Thermal Imaging Business (see Note 1) and as of September 30, 2013, had a balance of $1.2 million as
the final receivable associated with the sale. On February 1, 2013, the final payment against this receivable was received.&lt;/p&gt;



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