In this report, the terms "ISC.", "Irvine Sensors," "Irvine Sensors Corporation," "Company," "we," "us" and "our" refer to ISC8, Inc. and its subsidiaries.

This report contains forward-looking statements regarding ISC8 which include, but are not limited to, statements concerning our projected revenues, expenses, gross profit and income, mix of revenue, demand for our products, the need for additional capital, our ability to obtain and successfully perform additional new contract awards and the related funding of such awards, market acceptance of our products and technologies, the competitive nature of our business and markets, the success and timing of new product introductions and commercialization of our technologies, product qualification requirements of our customers, our significant accounting policies and estimates, and the outcome of expense audits. These forward-looking statements are based on our current expectations, estimates and projections about our industry, management's beliefs, and certain assumptions made by us. Words such as "anticipates," "expects," "intends," "plans," "predicts," "potential," "believes," "seeks," "estimates," "should," "may," "will", "with a view to" and variations of these words or similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors. Such factors include, but are not limited to the following:

• our ability to obtain additional financing for working capital and operational needs, if required, on acceptable terms, in a timely manner or at all;

• our ability to divest assets as we deem necessary on favorable terms, in a timely manner or at all;

• changes in the fair value of derivative instruments expense;

• our ability to repay our outstanding debt and settlement obligations when due;

• U.S Government agendas, budget issues and constraints and funding or approval delays;

• our ability to obtain critical and timely product and service deliveries from key vendors;

• our ability to successfully execute our business and operating plans and control costs and expenses;

• our ability to obtain expected and timely bookings and orders resulting from existing contracts;

• our ability to secure and successfully execute additional product orders and contracts, and achieve greater backlog;

• our ability to fulfill our backlog;

• our ability to maintain adequate internal controls and disclosure procedures, and maintain compliance with Section 404 of the Sarbanes-Oxley Act;

• our ability to introduce new products, gain broad market acceptance for such products and ramp up manufacturing in a timely manner;

• new products or technologies introduced by our competitors, many of whom are bigger and better financed than us;

• the pace at which new markets develop;

• our ability to establish and maintain strategic partnerships to develop our business;

• our market capitalization;

• those additional factors which are listed under the section "Risk Factors" in Part II, Item 1A of this report.

We do not undertake any obligation to revise or update publicly any forward-looking statements for any reason, except as required by law. Additional information on the various risks and uncertainties potentially affecting our operating results are discussed below and are contained in our publicly filed documents available through the SEC's website (www.sec.gov) or upon written request to our Investor Relations Department at 3001 Red Hill Avenue, Costa Mesa, California 92626.

Overview

We are actively engaged in the design, development, manufacture and sale of security products, particularly cyber security solutions for commercial and U.S. Government applications, that utilize technologies that we have pioneered for three-dimensional 3-D stacking of semiconductors, anti-tamper systems, high-speed processor assemblies and miniaturized vision systems and sensors. In addition, we offer 3-D chip stacking solutions for other customer applications. We also perform customer-funded contract research and development related to these products, mostly for U.S. Government customers or prime contractors, including for applications that utilize miniature vision systems and sensors. We generally use contract manufacturers to produce our products or their subassemblies, and most of our current operations, other than those of our Texas office at which our cyber security development operations are based, occur at a leased facility in Costa Mesa, California, although we have a few employees and consultants in various other locations nationwide.

We have historically derived a substantial majority of our total revenues from U.S. Government-funded sources and anticipate this to continue in the immediately foreseeable future. However, as discussed below, we have products in development intended to shift our focus toward commercial applications. We are in the process of introducing cyber security products and have introduced 3-D stacked semiconductor products that incorporate our technologies, which are intended for both U.S. Government and commercial applications,. In October 2011, we entered into an Asset Purchase Agreement with our strategic partner in our thermal imaging business (the "Thermal Imaging APA") to monetize our thermal imaging assets and market position through a sale of those assets (the "Thermal Imaging Asset Sale"). Consummation of the Thermal Imaging Asset Sale was subject to stockholder approval, which was obtained at a special meeting of our stockholders on January 19, 2012 (the "Special Stockholders Meeting"), and U.S. Government regulatory approval, which was also obtained on January 23, 2012. The Thermal Imaging Asset Sale was consummated on January 31, 2012. As a result, we will no longer sell thermal imaging products.

Even as we continue to serve and support our customers, we are focusing our resources toward increasing revenues from sales of commercial products and services, particularly in cyber security applications and 3-D chip stacking products. To facilitate the development of our family of scalable cyber security products and solutions, such as intrusion prevention systems, in April 2011, we opened and commenced staffing of a new development office in Richardson, Texas, a suburb of Dallas. We selected that location because the Dallas area has a concentration of the highly technical personnel that we need to develop and enhance our offerings in cyber security.

In November 2011, we rebranded our company to "ISC8", in order to highlight our cyber security commercialization activities. At the Special Stockholders Meeting, our stockholders approved an amendment to our Certificate of Incorporation to formally change our name from "Irvine Sensors Corporation" to "ISC8 Inc."

Other than the fiscal year ended September 27, 2009 ("Fiscal 2009"), during which we sold substantial patent assets (our "Patent Sale and License"), we have a history of unprofitable operations. In the 53 weeks ended October 3, 2010 ("Fiscal 2010") and the 52 weeks ended October 2, 2011 ("Fiscal 2011"), we continued, and in the first 13 weeks of the fiscal year that will end on September 30, 2012 ("Fiscal 2012") we expect to continue to experience unprofitable operations due to insufficient total revenues to fully absorb our costs and expenses. With respect to our investments in staff and infrastructure, the advanced technical and multi-disciplinary content of our technologies places a premium on a stable and well-trained work force. As a result, we have historically maintained our work force as much as possible even when anticipated revenues were delayed, a recurring circumstance that has resulted in under-utilization of our labor force for revenue generation from time to time. Our current increased emphasis on securing commercial sales of our products is, in part, motivated by the desire to achieve more predictable revenues that could mitigate this effect, but we anticipate we may continue to experience underutilization of our workforce in the near future. We have not yet demonstrated the level of sustained revenue that we believe is required to sustain profitable operations. Our ability to recover our investments through the cost-reimbursement features of certain of our U.S. Government contracts is constrained due to both regulatory and competitive pricing considerations.

In Fiscal 2010, one of our existing purchase orders with Optics 1, Inc. ("Optics 1"), of Manchester, New Hampshire, an optical systems designer and manufacturer and our strategic partner for certain thermal imaging products, was modified to include initial units of clip-on thermal imager systems to be built under a $37.8 million contract awarded to Optics 1 by the Naval Surface Warfare Center of Crane, Indiana. Prior to the consummation of the Thermal Imaging Asset Sale, we acted as a subcontractor for this contract and supplied thermal imaging cores to Optics 1 for integration into such clip-on systems. Prior to this award, we had been jointly developing a clip-on thermal imaging system with Optics 1 over the prior several years under U.S. Government sponsorship, based on technology originally conceived by us. This clip-on thermal imaging system was designed to clip onto existing military night vision goggles to provide users with thermal images to complement the amplified low-light images that such goggles currently provide. Such dual capability was intended to both enhance imagery obtainable from the existing night vision goggles as well as provide images in circumstances where physical barriers, atmospheric conditions or lack of light limit the effectiveness of the existing goggles. We had subsequently received additional releases of clip-on thermal imager orders from Optics 1 that contributed to a substantial increase in our backlog and our realized product sales in the first 13 weeks of Fiscal 2012. We sold this technology and capability for manufacturing clip-on thermal imagers in the Thermal Imaging Asset Sale.

To offset the adverse working capital effect of our net losses, we have historically financed our operations through multiple debt and equity financings. To finance the December 2005 acquisition of a subsidiary, now discontinued, we had incurred material long-term debt at that time, and we exchanged a significant portion of that debt for preferred stock that was convertible into our common stock. From September 30, 2007 through January 1, 2012, we have issued approximately 111.2 million shares of our common stock, an increase of approximately 4,143% from the approximately 2.7 million shares of our common stock outstanding at that date, which has resulted in a substantial dilution of stockholder interests. At January 1, 2012, our fully diluted common stock position was approximately 457.2 million shares, which assumes the conversion into common stock of all of the Company's preferred stock and convertible notes outstanding at January 1, 2012 and the exercise for cash of all warrants and options to purchase the Company's securities outstanding as of that time. At January 1, 2012, we had approximately $25.5 million of debt, exclusive of debt discounts, of which a substantial majority was incurred in Fiscal 2011 and the first 13 weeks of Fiscal 2012.

None of our subsidiaries accounted for more than 10% of our total assets at January 1, 2012 or have separate employees or facilities. As a result of institutional financing and related management and organizational changes that occurred in Fiscal 2011, we currently manage our operations and report our operating results and financial condition in a single segment. We continue to evaluate the current and potential business derived from sales of our products and, in the future, may present our consolidated statement of operations in more than one segment if we segregate the management of various product lines in response to business and market conditions.

Critical Accounting Estimates

Our consolidated financial statements have been prepared in conformity with the Generally Accepted Accounting Principles in the United States of America ("GAAP"). As such, management is required to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The significant accounting policies that are most critical to aid in fully understanding and evaluating reported financial results are the same as those disclosed in our Form 10-K for the 52-week period ended October 2, 2011 filed with the Securities and Exchange Commission on December 29, 2011.

Results of Operations

Total Revenues. Our total revenues are generally derived from sales of miniaturized camera products, specialized chips, modules, stacked chip products and amounts realized or realizable from funded research and development contracts, largely from U.S. Government agencies and U.S. Government contractors. Our total revenues decreased in the 13-week period ended January 1, 2012 as compared to the 13-week period ended January 2, 2011 and changed markedly in composition as shown in the following table and discussed more fully below:

                                                            September 30,
        13-Week Comparisons                                Total Revenue
        13 weeks ended January 2, 2011                    $     4,300,900
        Dollar decrease in current comparable 13 weeks         (1,021,700 )

        13 weeks ended January 1, 2012                    $     3,279,200
        Percentage decrease in current 13 weeks                        24 %

The decrease in our total revenues in the 13-week period ended January 1, 2012 as compared to the 13-week period ended January 2, 2011 was largely the result of decreased sales of our thermal imaging products in the current period, particularly our cores for clip-on thermal imager ("COTI") products intended to add thermal imaging capability to existing night vision goggles. Sales of our COTI products were substantially derived from a government contract awarded to our strategic partner Optics 1, with whom we have a teaming agreement, in the first half of Fiscal 2010, but not released for significant shipments by the government customer until the 13-week period ended January 2, 2011. Optics 1 depended largely on the order release requirements of its customer which was incidentally lower in the 13-week period ended January 1, 2012 compared to the 13-week period ended January 2, 2011. This decrease in sales of COTI cores more than offset an increase in our revenues derived from funded research and development contracts in the 13-week period ended January 1, 2012 as compared to the 13-week period ended January 2, 2011. Subsequent to the Thermal Imaging Asset Sale which was consummated on January 31, 2012, we will no longer sell COTI products and other thermal imaging products. Sales of the COTI products amounted to $3,218,400 and $1,970,400 for the 13-week periods ended January 1, 2012 and January 2, 2011, respectively.

Cost of Revenues. Cost of revenues includes wages and related benefits of our personnel, as well as subcontractor, independent consultant and vendor expenses directly incurred in the manufacture of products sold or in the performance of funded research and development contracts, plus related overhead expenses and, in the case of funded research and development contracts, such other indirect expenses as are permitted to be charged pursuant to the relevant contracts. Our cost of revenues for the first 13 weeks of Fiscal 2012 decreased as compared to the first 13 weeks of Fiscal 2011 in terms of both absolute dollars and as a percentage of total revenues, as shown in the following table:

                                                            September 30,           September 30,
                                                                                  Percentage of
13-Week Comparisons                                       Cost of Revenues       Total  Revenues
13 weeks ended January 2, 2011                           $        4,039,200                    94 %
Dollar decrease in current comparable 13 weeks                   (1,268,200 )

13 weeks ended January 1, 2012                           $        2,771,000                    85 %
Percentage decrease in current 13 weeks                                  31 %

The current period decrease in absolute dollar cost of revenues as compared to the prior fiscal year's first quarter was partially the result of the corresponding decrease in total revenues in the 13-week period ended January 1, 2012 as compared to the 13-week period ended January 2, 2011. However, the decrease in cost of revenues in the current period was proportionately greater than the related decrease in total revenues, resulting in the large decrease in cost of revenues as a percentage of total revenues in the 13-week period ended January 1, 2012 as compared to the 13-week period ended January 2, 2011. This disproportionate decrease in cost of revenues for the current fiscal year first quarter compared to the first quarter of Fiscal 2011 was largely the result of the timing and amount of overhead expenses recorded in the current period, which did not occur in the prior fiscal year's first fiscal quarter.

General and Administrative Expense. General and administrative expense largely consists of wages and related benefits for our executive, financial, administrative and marketing staff, as well as professional fees, primarily legal and accounting fees and costs, plus various fixed costs such as rent, utilities and telephone. The comparison of general and administrative expense for the 13-week periods ended January 1, 2012 and January 2, 2011 is shown in the following table:

                                                            September 30,         September 30,
                                                            General and
                                                          Administrative        Percentage of
13-Week Comparisons                                           Expense          Total  Revenues
13 weeks ended January 2, 2011                            $     1,914,400                    45 %
Dollar increase in current comparable 13 weeks                    678,200

13 weeks ended January 1, 2012                            $     2,592,600                    79 %
Percentage increase for current 13 weeks                               35 %

A major portion of the increase in absolute dollars of general and administrative expense in the 13-week period ended January 1, 2012 as compared to the 13-week period ended January 2, 2011 was derived from an increase in stock-based compensation related expenses recorded as general and administrative expenses. During the current period we recorded a total expense of approximately

$772,800 compared to approximately $325,200 for the first fiscal quarter 2011. The increase primarily resulted from the effect of full acceleration of non-vested stock options held by Mr. John J. Stuart, Jr., our former Chief Financial Officer by virtue of his retirement from ISC8 in December, 2011. Such acceleration resulted in an additional expense of approximately $509,000 which we believe to be of non-recurring nature. Further, in the 13-week period ended January 1, 2012, a new senior executive was added to our staff along with the full 13-week period effect of salaries of senior executive we hired in December 2010 along with salary adjustments of our existing executives in connection with our institutional financing in December 2010 and the related management and organizational changes. The aggregate impact of all such factors was to increase general and administrative labor and labor-related expense by approximately $269,000 in the 13-week ended January 1, 2012 as compared to the 13-week January 2, 2011. The increases in general and administrative expenses from these sources in the current year period were offset by reductions in other categories of general and administrative expense, the largest such reduction being an approximate $274,000 decrease in bid and proposal and other marketing related expenses during the 13-week period ended January 1, 2012 compared to 13-week period ended January 2, 2011.

Research and Development Expense. Research and development expense consists of wages and related benefits for our research and development staff, independent contractor consulting fees and subcontractor and vendor expenses directly incurred in support of internally funded research and development projects, plus associated overhead expenses. Research and development expense for the first quarter of Fiscal 2012 as compared to the first quarter of Fiscal 2011 is shown in the following table:

                                                            September 30,         September 30,
                                                           Research  and
                                                            Development         Percentage of
13-Week Comparisons                                           Expense          Total  Revenues
13 weeks ended January 2, 2011                            $       533,900                    12 %
Dollar increase in current comparable 13 weeks                  1,650,400

13 weeks ended January 1, 2012                            $     2,184,300                    67 %
Percentage increase for current 13 weeks                              309 %

In April 2011, we opened and commenced staffing of an office in Texas for development of cyber security products. Many of the expenses of this office have been allocated to research and development expense relating to hiring of highly-skilled development and support staff, software licensing expenses, consulting fees and operating leases of two facilities and equipment to support product development. Approximately $1.4 million of the total increase in research and development expenses for the 13-week ended January 1, 2012 of approximately $1.6 million was contributed by our Texas-based cyber security product development operations with no comparable expense for the 13-week ended January 2, 2011. Concurrent with implementation of this focused cyber security product development activity, we de-emphasized other internal research and development activities. We expect to continue to allocate significant resources to the development of our cyber security products in future periods, which may result in further increases in research and development expense as compared to prior fiscal periods.

Interest Expense. Our interest expense for the first 13 weeks of Fiscal 2012, compared to the first 13 weeks of Fiscal 2011, increased, as shown in the following table:

                                                           September 30,
                                                         Interest Expense
      13 weeks ended January 2, 2011                    $        2,156,300
      Dollar decrease in current comparable 13 weeks              (487,600 )

      13 weeks ended January 1, 2012                    $        1,668,700
      Percentage decrease for current 13 weeks                          23 %

The decrease in interest expense in the first quarter of Fiscal 2012 as compared to the fiscal quarter ended January 2, 2011 was attributable primarily to interest and amortization of debt discounts and financing related costs on the Bridge Notes which was settled in March, 2011, and therefore no similar expenses were incurred during fiscal quarter ending January 1, 2012. This decrease was primarily offset by interest and amortization of debt discounts and financing related costs incurred during fiscal quarter ended January 1, 2012 resulting from the issuance of our Senior Subordinated Notes and Subordinated Notes in December 2010, March 2011 and July 2011. See the discussion below under the section titled "Contractual Obligations and Commitments" for further information regarding the Bridge Notes, Senior Subordinated Notes and Subordinated Notes.

Change in Fair Value of Derivative Liability. We recorded a substantial decrease in our change in fair value of derivative liability for the first 13 weeks of Fiscal 2012, compared to the first 13 weeks of Fiscal 2011, as shown in the following table:

                                                      September 30,
                                                    Change in Fair Value  of
                                                      Derivative Liability
   13 weeks ended January 2, 2011                  $               (6,482,700 )
   Dollar change in current comparable 13 weeks                    (4,172,700 )

   13 weeks ended January 1, 2012                  $               (2,310,000 )
   Percentage change for current 13 weeks                                 -64 %

As of January 1, 2012, instruments deemed to be derivatives consisted of embedded derivatives related to the Subordinate Notes and certain warrants issued in connection with our Senior Secured Revolving Line of Credit. The Company revalued these derivatives as of January 1, 2012 and recorded a reduction in their fair value of approximately $2.3 million. Given the price volatility of our common stock, we anticipate that there could be additional substantial change in fair value of derivative liability expense that we will be required to record in future reporting periods, unless and until the Subordinated Notes are converted into our common stock pursuant to their terms. In the event of such conversion, which we cannot guarantee, the derivative liability associated with these instruments would be eliminated.

Net Loss Attributable to ISC8. Our net loss attributable to ISC8 decreased in the 13-week period ended January 1, 2012, compared to the 13-week period ended January 2, 2011, as shown in the following table:

                                                        September 30,
                                                      Net Loss Attributable
     13-Week Comparisons                                   to Company
     13 weeks ended January 2, 2011                  $           (10,832,200 )
     Dollar change in current comparable 13 weeks                 (2,582,800 )

     13 weeks ended January 1, 2012                  $            (8,249,400 )
     Percentage decrease for current 13 weeks                            -24 %

. . .