Exhibit 10.17

December 28, 2006

Pequot Private Equity Fund III, L.P.

c/o Pequot Capital Management, Inc.

500 Nyala Farm Road

Westport, CT 06880

Attention: Aryeh Davis

   Carlos Rodrigues

Ladies and Gentlemen:

Reference is made to the Securities Purchase Agreement, dated as of December 30,
2005 (as amended, the “Agreement”) as amended, by and among Irvine Sensors
Corporation and the purchasers listed on the signature pages thereto.
Capitalized terms used but not defined herein shall have the meanings given to
them in the Agreement.

Notwithstanding anything to the contrary in the Side Letter, Pequot Private
Equity Fund III, L.P. hereby waives its right to designate a director to serve
on the Company’s Board of Directors.

In addition, notwithstanding anything to the contrary contained in the Notes,
Warrants or any other Transaction Document, the Company and the Purchasers
hereby agree that the maximum number of shares of Common Stock that may be
acquired at any particular time by any Purchaser upon any exercise of Warrants
and/or a conversion of Notes shall be limited to the extent necessary to insure
that, following such conversion, exercise and/or payment (or other issuance),
the total number of shares of Common Stock then beneficially owned by such
Purchaser and its Affiliates and any other Persons whose beneficial ownership of
Common Stock would be aggregated with the Purchaser’s for purposes of
Section 13(d) of the Exchange Act, does not exceed 9.9% (the “Maximum
Percentage”) of the total number of issued and outstanding shares of Common
Stock (including for such purpose the shares of Common Stock issuable upon such
exercise, conversion or other issuance). For such purposes, beneficial ownership
shall be determined in accordance with Section 13(d) of the Exchange Act and the
rules and regulations promulgated thereunder. The Company’s obligation to issue
shares of Common Stock in excess of the limitation referred to herein shall be
suspended (and shall not terminate or expire notwithstanding any contrary
provisions herein or in any Transaction Document) until such time, if any, as
such shares of Common Stock may be issued in compliance with such limitation.

In consideration of its agreements under this letter, the Company shall pay to
Pequot on the date hereof, by wire transfer of available funds, $25,000 (the
“Fee”) in accordance with the instructions set forth on Exhibit A hereto.

This letter (including the provisions set forth in the second and third
paragraphs above) shall terminate and no longer be of any force or effect
(except that the Fee shall be non-refundable) and all rights of Pequot Private
Equity Fund III, L.P., and all obligations of the Company, under the Side Letter
shall be reinstated, on March 7, 2007, unless the Company has prior to such date
consummated a refinancing of its outstanding indebtedness, including a repayment
or assignment of all Notes held by Pequot Private Equity Fund III, L.P. and its
affiliates.

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This letter shall be governed by and construed in accordance with the laws of
the State of New York and each of the parties hereto irrevocably consents to the
exclusive jurisdiction of all courts, federal and state, located in the City of
New York for the adjudication of any dispute arising hereunder. This letter is
intended for the benefit of the parties hereto and their respective successors
and permitted assigns and is not for the benefit of, nor may any provision
hereof be enforced by, any other person. This letter may not be amended or
waived except in writing, by a document executed by the Company and the
Purchasers. This letter may be executed in two or more counterparts, together
constituting one agreement, and may be executed by facsimile, having the same
force as if originally executed.

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Very truly yours, IRVINE SENSORS CORPORATION By:  

/s/ JOHN C. CARSON

Name:   John C. Carson Title:   President & CEO Accepted: PEQUOT PRIVATE EQUITY
FUND III, L.P. By:   Pequot Capital Management, Inc.,   its Investment Manager
By:  

/s/ CARLOS RODRIGUES

Name:   Carlos Rodrigues Title:   Chief Financial Officer – Pequot Ventures

PEQUOT OFFSHORE PRIVATE EQUITY PARTNERS III, L.P.

 

By:   Pequot Capital Management, Inc.,   its Investment Manager By:  

/s/ CARLOS RODRIGUES

Name:   Carlos Rodrigues Title:   Chief Financial Officer – Pequot Ventures

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EXHIBIT A

Wire Transfer Instructions

Fee:

 

Pequot Private Equity Fund III, L.P.:

   $ 21,911.23

Pequot Offshore Private Equity Partners III, L.P.

   $ 3,088.77       

Total:

   $ 25,000.00

Wiring Instructions:

Pequot Private Equity Fund III, L.P.:

CITIBANK, N.Y. ABA # 021-000-089

MORGAN STANLEY A/C # 388-90774

FOR THE ACCOUNT OF: Pequot Private Equity Fund III, L.P.

MORGAN STANLEY A/C # 038-11136

Pequot Offshore Private Equity Partners III, L.P.:

CITIBANK, N.Y. ABA # 021-000-089

MORGAN STANLEY A/C # 388-90774

FOR THE ACCOUNT OF: Pequot Offshore Private Equity Partners III, L.P.

MORGAN STANLEY A/C # 038-11926