I understand that over 65's can get a tax exemption of 10,500 pounds in the new tax year 2012/2013 provided their total incomes for the year do not exceed 25,400 pounds. Does this 25,400 pounds include any interests earned on Cash ISAs?

No, it does not.

Income arising in ISAs of whichever type is not taken into account for income tax, nor does capital gains tax apply.

TJH