sc13d

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SEzj7WoO0AwhTMCRGHxYeloK0e8unuzAQtn4dxebezS23IdtkRNIlztJ8BNojp0G /gzO+18/HK0pPa3HOm9JiA== 0000950133-07-002641.txt : 20070611 0000950133-07-002641.hdr.sgml : 20070611 20070611165645 ACCESSION NUMBER: 0000950133-07-002641 CONFORMED SUBMISSION TYPE: SC 13D PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 20070611 DATE AS OF CHANGE: 20070611 GROUP MEMBERS: FRANK H. PEARL SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: DISTRIBUTED ENERGY SYSTEMS CORP CENTRAL INDEX KEY: 0001261482 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 200177690 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D SEC ACT: 1934 Act SEC FILE NUMBER: 005-79414 FILM NUMBER: 07912988 BUSINESS ADDRESS: STREET 1: 10 TECHNOLOGY DR CITY: WALLINGFORD STATE: CT ZIP: 06492 BUSINESS PHONE: 2036782000 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: PERSEUS PARTNERS VII L P CENTRAL INDEX KEY: 0001362295 IRS NUMBER: 000000000 FILING VALUES: FORM TYPE: SC 13D BUSINESS ADDRESS: STREET 1: 2099 PENNSYLVANIA AVE N W STREET 2: SUITE 900 CITY: WASHINGTON STATE: DC ZIP: 20006 BUSINESS PHONE: 202-452-0101 MAIL ADDRESS: STREET 1: 2099 PENNSYLVANIA AVE N W STREET 2: SUITE 900 CITY: WASHINGTON STATE: DC ZIP: 20006 SC 13D 1 w35316sc13d.htm SCHEDULE 13D sc13d


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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 13D

Under the Securities Exchange Act of 1934
(Amendment No. )*

Distributed Energy Systems Corp.

(Name of Issuer)

Common Stock, Par Value $0.01 per Share

(Title of Class of Securities)

25475V104

(CUSIP Number)

Perseus Partners VII, L.P.
c/o Perseus, L.L.C.
2099 Pennsylvania Avenue, N.W., 9th Floor
Washington, D.C. 20006
(202) 452-0101

(Name, Address and Telephone Number of Person Authorized to
Receive Notices and Communications)

June 1, 2007

(Date of Event Which Requires Filing of this Statement)

If the filing person has previously filed a statement on Schedule 13G to report the acquisition that is the subject of this Schedule 13D, and is filing this schedule because of §§240.13d-1(e), 240.13d-1(f) or 240.13d-1(g), check the following box. o

Note: Schedules filed in paper format shall include a signed original and five copies of the schedule, including all exhibits. See §240.13d-7 for other parties to whom copies are to be sent.

* The remainder of this cover page shall be filled out for a reporting person’s initial filing on this form with respect to the subject class of securities, and for any subsequent amendment containing information which would alter disclosures provided in a prior cover page.

The information required on the remainder of this cover page shall not be deemed to be “filed” for the purpose of Section 18 of the Securities Exchange Act of 1934 (“Act”) or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes).


CUSIP No.		25475V104		Page		2		of		11

NAMES OF REPORTING PERSONS:

Perseus Partners VII, L.P.

I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (ENTITIES ONLY):

CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (SEE INSTRUCTIONS):

(a) o

(b) o

SEC USE ONLY:

SOURCE OF FUNDS (SEE INSTRUCTIONS):

CHECK IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) OR 2(e):

CITIZENSHIP OR PLACE OF ORGANIZATION:

Delaware

SOLE VOTING POWER:

NUMBER OF

7,954,536¹

SHARED VOTING POWER:

BENEFICIALLY

OWNED BY

EACH

SOLE DISPOSITIVE POWER:

REPORTING

PERSON

7,954,536¹

WITH

SHARED DISPOSITIVE POWER:

AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON:

7,954,536

CHECK IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES (SEE INSTRUCTIONS):

PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11):

16.66%²

TYPE OF REPORTING PERSON (SEE INSTRUCTIONS):

¹ This number represents the maximum number of shares of common stock of Distributed Energy Systems Corp. (the “Issuer”) that potentially could be issued to Perseus Partners VII, L.P. (“Perseus VII”) in connection with the exercise of a warrant that was issued by the Issuer to Perseus VII on June 1, 2007. The warrant was issued pursuant to a Securities Purchase Agreement by and between the Issuer and Perseus VII that was signed on May 10, 2007. The warrant has an exercise price of $0.80 per share, may be exercised at any time and will expire on June 1, 2012. This statement on Schedule 13D (the “Statement”) assumes that the warrant will be fully exercised.

² This number represents the percentage obtained by: (a) dividing the total number of shares of the Issuer’s common stock being reported in this Statement (7,954,536) by (b) the sum of (i) the number of shares of the Issuer’s common stock outstanding on May 31, 2007 (39,792,574) and (ii) the total number of shares of the Issuer’s common stock being reported in this Statement (7,954,536).


CUSIP No.		25475V104		Page		3		of		11

NAMES OF REPORTING PERSONS:

Frank H. Pearl³

I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (ENTITIES ONLY):

CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (SEE INSTRUCTIONS):

(a) o

(b) o

SEC USE ONLY:

SOURCE OF FUNDS (SEE INSTRUCTIONS):

CHECK IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) OR 2(e):

CITIZENSHIP OR PLACE OF ORGANIZATION:

United States

SOLE VOTING POWER:

NUMBER OF

SHARED VOTING POWER:

BENEFICIALLY

OWNED BY

7,954,536⁴

EACH

SOLE DISPOSITIVE POWER:

REPORTING

PERSON

WITH

SHARED DISPOSITIVE POWER:

7,954,536⁴

AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON:

7,954,536

CHECK IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES (SEE INSTRUCTIONS):

PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11):

16.66%⁵

TYPE OF REPORTING PERSON (SEE INSTRUCTIONS):

³ All of the securities reported herein are held directly for the account of Perseus VII. Frank Pearl has been included in this Statement solely because of the indirect control he exercises over Perseus VII. By virtue of such control, he may be deemed to have beneficial ownership of the securities being reported in this Statement.

⁴ This number represents the maximum number of shares of common stock of the Issuer that potentially could be issued to Perseus VII in connection with the exercise of a warrant that was issued by the Issuer to Perseus VII on June 1, 2007. The warrant was issued pursuant to a Securities Purchase Agreement by and between the Issuer and Perseus VII that was signed on May 10, 2007. The warrant has an exercise price of $0.80 per share, may be exercised at any time and will expire on June 1, 2012. This Statement assumes that the warrant will be fully exercised.

⁵ This number represents the percentage obtained by: (a) dividing the total number of shares of the Issuer’s common stock being reported in this Statement (7,954,536) by (b) the sum of (i) the number of shares of the Issuer’s common stock outstanding on May 31, 2007 (39,792,574) and (ii) the total number of shares of the Issuer’s common stock being reported in this Statement (7,954,536).

ITEM 1. SECURITY AND ISSUER.

The class of equity securities to which this statement on Schedule 13D (this “Statement”) relates is the common stock, par value $0.01 per share (the “Common Stock”), of Distributed Energy Systems Corp. (the “Issuer”). The address of the principal executive offices of the Issuer is 10 Technology Drive, Wallingford, CT 06492. This Statement is being filed by the Reporting Persons (as defined below) to report the acquisition by Perseus Partners VII, L.P. (“Perseus VII”) of a warrant that is exercisable for more than 5% of the Common Stock of the Issuer, and as a result of such acquisition, each of the Reporting Persons may be deemed the beneficial owner of more than 5% of the Common Stock of the Issuer.

ITEM 2. IDENTITY AND BACKGROUND.

(a), (b) and (c). This Statement is filed on behalf of each of the following persons pursuant to Rule 13d-1(k) promulgated by the Securities and Exchange Commission pursuant to Section 13 of the Act:

Perseus Partners VII, L.P., and

Frank H. Pearl (“Mr. Pearl”).

Perseus VII and Mr. Pearl are collectively referred to herein as the “Reporting Persons.”

The business address of Perseus VII and Mr. Pearl is 2099 Pennsylvania Avenue, N.W., 9th Floor, Washington, D.C. 20006.

Perseus VII was organized for the purpose of acquiring, holding, managing, supervising and disposing of investments in various businesses.

Mr. Pearl is the Chairman and Chief Executive Officer of Perseus, L.L.C., a Delaware limited liability company. Mr. Pearl controls Perseus, L.L.C., which was formed to engage, indirectly, in the acquiring, holding, disposing and management of various forms of investments in various businesses, and which, through certain subsidiary entities, controls Perseus VII.⁶ Mr. Pearl has been included as a Reporting Person in this Statement solely because of the indirect control he exercises over Perseus VII. By virtue of such control, Mr. Pearl may be deemed to have beneficial ownership of any shares of the Issuer’s Common Stock that will be issued to Perseus VII.

(d) None of the Reporting Persons has been convicted in any criminal proceeding (excluding traffic violations or similar misdemeanors) during the past five years.

(e) None of the Reporting Persons has been party to a civil proceeding of a judicial or administrative body of competent jurisdiction which resulted in a judgment, decree or final order

⁶

Perseus Partners VII GP, L.P., a Delaware limited partnership, is the general partner of Perseus VII. Perseus Partners VII GP, L.L.C., a Delaware limited liability company, is the general partner of Perseus Partners VII GP, L.P. The sole member of Perseus Partners VII GP, L.L.C. is Perseus, L.L.C. Perseuspur, L.L.C., a Delaware limited liability company, is the managing member of Perseus, L.L.C. Mr. Pearl, individually, owns 72.7% of Perseuspur, L.L.C. Mr. Pearl also is the sole director and sole shareholder of Rappahannock Investment Company, a Delaware corporation, which in turn owns the remaining 27.3% of Perseuspur, L.L.C.

enjoining future violations of, or prohibiting or mandating activities subject to federal or state securities law or finding any violations with respect to such laws during the past five years.

(f) Perseus VII is a limited partnership organized under the laws of the State of Delaware. Mr. Pearl is a United States citizen.

ITEM 3. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.

The shares being reported in this Statement were acquired by the Reporting Persons in a financing transaction that closed on June 1, 2007 pursuant to a Securities Purchase Agreement (the “Purchase Agreement”) by and between Perseus VII and the Issuer, dated May 10, 2007.

Under the Purchase Agreement, the Issuer also issued and sold to Perseus VII a senior secured promissory note with an aggregate principal amount of $12,500,000 and a maturity date of March 1, 2008 (the “Senior Secured Note”). The Senior Secured Note bears interest at a rate of 12.5% per annum, such interest being payable, in the Issuer’s discretion, in cash or in kind by the issuance of additional senior secured promissory notes (the “Additional Senior Secured Notes”, and together with the Senior Secured Note, the “Senior Secured Notes”). Perseus VII’s consent is required to prepay the Senior Secured Note. In addition to the usual covenants and events of default, events of default under the Senior Secured Note include the removal of the Chief Executive Officer or the Chief Financial Officer of the Issuer without cause and without Perseus VII’s consent, the Issuer’s failure to allow Perseus VII to appoint an observer to attend meetings of the Issuer’s Board of Directors (the “Board”) and the Board’s failure to recommend stockholder approval of the issuance of additional shares of Common Stock as described below.

Concurrent with its issuance of the Senior Secured Note, the Issuer issued to Perseus VII a warrant (the “Initial Warrant”) to purchase 7,954,536 shares of the Issuer’s Common Stock. The Initial Warrant has an exercise price of $0.80 per share, may be exercised at any time after the date of issuance and will expire on June 1, 2012. This Statement assumes that the Initial Warrant will be fully exercised. The Initial Warrant includes a cashless exercise provision.

The source of the purchase price for the Senior Secured Note was capital contributions from the partners of Perseus VII.

ITEM 4. PURPOSE OF TRANSACTION.

The Reporting Persons are acquiring the Initial Warrant for investment purposes. The Reporting Persons may, from time to time, depending upon market conditions and other factors deemed relevant by the Reporting Persons, acquire other promissory notes, warrants or shares of Common Stock, outside of those contemplated by the Purchase Agreement. The Reporting Persons reserve the right to, and may in the future choose to, change their purpose with respect to the investment and take such actions as they deem appropriate in light of the circumstances including, without limitation, to dispose of, in the open market, in a private transaction or by gift, all or a portion of the promissory notes, warrants or shares of Common Stock which they now own or may hereafter acquire from the Issuer.

Except as described below, at the date of this Statement, the Reporting Persons do not have plans or proposals which would result in:

(a) The acquisition by any person of additional securities of the Issuer, or the disposition of securities of the Issuer;

(b) An extraordinary corporate transaction involving the Issuer or any of its subsidiaries;

(d) Any change in the present board of directors or management of the Issuer, including any plans or proposals to change the number or term of directors or to fill any existing vacancies on the board;

(e) Any material change in the present capitalization or dividend policy of the Issuer;

(f) Any other material change in the Issuer’s business or corporate structure, including but not limited to, if the Issuer is a registered closed-end investment company, any plans or proposals to make any changes in its investment policy for which a vote is required by section 13 of the Investment Company Act of 1940;

(g) Changes in the Issuer’s charter, bylaws or instruments corresponding thereto or other actions which may impede the acquisition of control of the Issuer by any person;

(h) Causing a class of securities of the Issuer to be delisted from a national securities exchange or to cease to be authorized to be quoted in an inter-dealer quotation system of a registered national securities association;

(i) A class of equity securities of the Issuer becoming eligible for termination of registration pursuant to Section 12(g)(4) of the Act; or

(j) Any action similar to any of those actions enumerated above.

Notwithstanding the foregoing, at the date of this Statement, the Reporting Persons do have plans or proposals which would result in:

(a) The acquisition of additional securities of the Issuer.

Pursuant to the Purchase Agreement, prior to the maturity date of the Senior Secured Note, the Issuer will seek stockholder approval for the issuance and sale to Perseus VII of: (i) a senior secured convertible promissory note with an aggregate principal amount of $15,000,000 (the “Senior Secured Convertible Note”) and (ii) a warrant to purchase shares of Common Stock (the “Subsequent Warrant” and together with the Initial Warrant, the “Warrants”).

Assuming such stockholder approval is obtained and other conditions set forth in the Purchase Agreement are satisfied or waived, the Issuer will issue and sell to Perseus VII the Senior Secured Convertible Note, the proceeds of which will be used in part to repay in full the Senior Secured Notes. The Senior Secured Convertible Note will be convertible at Perseus VII’s election into shares of Common Stock at a price per share equal to the lower of $1.20 and 75% of the volume weighted average price of the Common Stock on the NASDAQ Global Market for the ten trading day period ending on the day prior to the date of the closing of the sale of the Senior Secured Convertible Note. The Senior Secured Convertible Note will bear interest at a rate of 12.5% per annum and will, in the Issuer’s discretion, be paid either in cash or in kind by the issuance of additional senior secured convertible promissory notes (the “Additional Convertible Notes” and together with the Senior Secured Convertible Note, the “Convertible Notes”). The Additional Convertible Notes would also be convertible into shares of Common Stock on the same terms as described above for the Senior Secured Convertible Note.

Simultaneously with the issuance of the Senior Secured Convertible Note, the Issuer will issue to Perseus VII the Subsequent Warrant. The Subsequent Warrant will allow Perseus VII to purchase a maximum of (i) 1,989,629 shares of Common Stock at an exercise price of $0.80 per share and (ii) 33,000,000 shares of Common Stock at exercise prices ranging from $1.00 to $3.00 per share.

(b) An extraordinary corporate transaction.

The Issuer has undertaken in the Purchase Agreement to use commercially reasonable efforts to sell the business of its wholly owned subsidiary, Proton Energy Systems, Inc (“Proton”). The Purchase Agreement requires the Issuer to engage an investment bank to assist in soliciting offers to purchase this business by June 21, 2007.

As noted directly above, the Issuer has undertaken to use commercially reasonable efforts to sell the business of its wholly owned subsidiary, Proton. Such a transaction may constitute the sale of a material amount of assets of the Issuer and its subsidiary.

(d) A change in the present board of directors of the Issuer.

A precondition to the purchase of the Senior Secured Convertible Note by Perseus VII is that the Issuer shall have reduced the size of its Board to five members. Upon the issuance of the Senior Secured Convertible Note, Perseus VII will be entitled to representation on the Issuer’s Board equal to at least its percentage ownership of the Issuer assuming exercise of the Warrants and conversion of the Convertible Notes. Based upon the Issuer’s current capitalization, we believe that Perseus VII could have the right to name three of five directors.

(g) Impede the acquisition of control of the Issuer by any person.

Under the terms of the Purchase Agreement, Perseus VII has a right of first refusal with respect to (i) all subsequent transactions to finance wind projects and (ii) all other financings until the Issuer has, in the aggregate, raised $20,000,000 in net investment proceeds, including financings through the issuance of any equity security or any security convertible into or exercisable for any equity security of the Issuer. By exercising its right of first refusal, Perseus VII could impede the acquisition of control of the Issuer by other persons.

Additionally, the Senior Secured Notes provide that Perseus VII’s prior written consent is required for the Issuer to enter into any transaction, or a series of related transactions, which would result in, a change of control. “Change of control” is defined to include, among other things: (i) any merger, consolidation, reorganization, recapitalization or other business combination involving the Issuer or any of its material subsidiaries, in which the shareholders of the Issuer immediately prior thereto do not own, directly or indirectly, outstanding voting power of the surviving entity or (ii) the sale of voting securities of the Issuer in a transaction or series of related transactions that results in the purchaser owning more than 50% of the outstanding voting securities of the Issuer or any of its material subsidiaries.

Perseus VII also has plans or proposals that would result in changes in the Issuer’s charter. In connection with the issuance of the Senior Secured Convertible Note and the Subsequent Warrant, it will be necessary for the Issuer to amend its Amended and Restated Certificate of Incorporation to increase the number of Common Shares authorized for issuance. The Issuer will seek stockholder approval of such amendment.

ITEM 5. INTEREST IN SECURITIES OF ISSUER.

(a) Each of the Reporting Persons may be deemed to beneficially own an aggregate of 7,954,536 shares of Common Stock. This number represents the maximum number of shares of Common Stock that the Reporting Persons could beneficially own, assuming full exercise of the Initial

Warrant. Based on calculations made in accordance with Rule 13d-3, this number represents approximately 16.66% of the Issuer’s Common Stock (based on the 39,792,574 shares outstanding on May 31, 2007 plus the 7,954,536 shares of Common Stock reported in this Statement ).

(b) Perseus VII will have sole voting and dispositive power with respect to the 7,954,536 shares of Common Stock beneficially owned by Perseus VII.

By virtue of the relationships between and among the Reporting Persons described in Item 2 of this Statement, Mr. Pearl may be deemed to have the power to direct the voting and disposition of the 7,954,536 shares of Common Stock beneficially owned by Perseus VII.

(d) Not applicable.

(e) Not applicable.

ITEM 6. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT TO SECURITIES OF THE ISSUER.

Securities Purchase Agreement. As already described in the other Items of this Statement, the Common Stock being reported was acquired on June 1, 2007 pursuant to the Purchase Agreement by and between the Issuer and Perseus VII that was signed on May 10, 2007.

Under the Purchase Agreement, Perseus VII initially agreed to purchase the Senior Secured Note from the Issuer. The $12,500,000 loan evidenced by this note bears interest at a rate of 12.5% per annum and will be due in full on March 1, 2008. The Issuer may elect to pay interest in cash or in kind by the issuance of Additional Senior Secured Notes. The obligations of the Issuer pursuant to the Senior Secured Notes are secured by a security interest in all of the Issuer’s assets and guaranteed by, and secured by all of the assets of, three of the Issuer’s subsidiaries: Proton, Northern Power Systems, Inc. and Technology Drive, LLC.

Concurrent with its issuance of the Senior Secured Note, the Issuer also issued to Perseus VII the Initial Warrant being reported in this Statement. The Initial Warrant is exercisable for up to 7,954,536 shares of the Issuer’s Common Stock. The Initial Warrant has an exercise price of $0.80 per share, may be exercised at any time after the date of issuance and will expire on June 1, 2012. The Initial Warrant includes a cashless exercise provision.

Additionally, the Purchase Agreement provides that the Issuer will seek stockholder approval for the issuance and sale of the Senior Secured Convertible Note and the Subsequent Warrant to Perseus VII. Assuming such stockholder approval is obtained and other conditions set forth in the Purchase Agreement are satisfied or waived, the Issuer will issue and sell to Perseus VII the $15,000,000 Senior Secured Convertible Note. This note will bear interest at a rate of 12.5% per annum and will, in the Issuer’s discretion, be paid either in cash or in kind by the issuance of Additional Convertible Notes. The Convertible Notes will be due in full on November 30, 2008. The proceeds of the sale of the Senior Secured Convertible Note will be used in part to repay in full the Senior Secured Notes. The Convertible Notes will be convertible at Perseus VII’s election into shares of Common Stock at a price per share equal to the lower of $1.20 and 75% of the volume weighted average price of the Common Stock on the NASDAQ Global Market for the ten trading day period ending on the day prior to the date of the closing of the sale of the Senior Secured Convertible Note. The obligations of the Issuer pursuant to the Convertible Notes will be secured by a security interest in all of the Issuer’s assets and guaranteed

by, and secured by all of the assets of, three of the Issuer’s subsidiaries: Proton, Northern Power Systems, Inc. and Technology Drive, LLC.

Simultaneously with the issuance of the Senior Secured Convertible Note, the Issuer will also issue the Subsequent Warrant to Perseus VII. The Subsequent Warrant will allow Perseus VII to purchase a maximum of (i) 1,989,629 shares of Common Stock at an exercise price of $0.80 per share and (ii) 33,000,000 shares of Common Stock at exercise prices ranging from $1.00 to $3.00 per share. The Subsequent Warrant would be exercisable at any time after the date of issuance and will expire five years after the date of issuance. The Subsequent Warrant will include a cashless exercise provision.

The Purchase Agreement includes a variety of covenants, including, among others:

	•		Perseus VII is entitled to have one representative present in a non-voting capacity at all meetings of the Issuer’s Board;

	•		without Perseus VII’s consent, the Issuer may not authorize or issue any additional shares of capital stock, incur any debt in excess of $1,000,000, declare or pay any dividends on the Common Stock, redeem or repurchase any Common Stock, materially change the principal line of business for itself or any of its subsidiaries, or acquire assets or make capital expenditures of more than $1,500,000 per calendar year;

	•		the Board must unanimously approve (i) the Issuer’s annual budgets, beginning with the budget for 2008 and subsequent years, as well as any incurrence of expenditures that materially deviate from the annual budget and (ii) the hiring of a new chief executive officer;

	•		Perseus VII has a right of first refusal to fund certain future financing transactions as described in more detail in Item 4 above; and

	•		the Issuer has undertaken to use commercially reasonable efforts to sell the business of its wholly owned subsidiary, Proton, as promptly as practicable on terms and conditions reasonably satisfactory to Perseus VII.

Registration Rights Agreement. On June 1, 2007, the Issuer and Perseus VII also entered into a Registration Rights Agreement. Pursuant to that agreement, Perseus VII is entitled to make demands that the Issuer register shares of Common Stock owned by Perseus VII or that may be acquired by Perseus VII upon the conversion of any convertible security or the exercise of any warrant, option or other right owned by it. In addition, Perseus VII has certain “piggy-back” registration rights with respect to the shares held by it on registration statements filed by the Issuer.

Senior Secured Promissory Note. On June 1, 2007, the Issuer issued and sold to Perseus VII the Senior Secured Note, the material terms of which are described in Item 3 above.

Initial Investment Warrant. On June 1, 2007, the Issuer issued to Perseus VII the Initial Warrant, the material terms of which are described in Item 3 above.

Item 7. Material to be Filed as Exhibits.

Exhibit 1 — Joint Filing Agreement, dated June 11, 2007, by and between Perseus Partners VII, L.P. and Frank H. Pearl, filed herewith.

Exhibit 2 — Securities Purchase Agreement, dated May 10, 2007, by and between Perseus Partners VII, L.P. and Distributed Energy Systems Corp., filed herewith.

Exhibit 3 — Registration Rights Agreement, dated June 1, 2007, by and between Perseus Partners VII, L.P. and Distributed Energy Systems Corp., filed herewith

Exhibit 4 — Senior Secured Promissory Note, dated June 1, 2007, issued by Distributed Energy Systems Corp. to Perseus Partners VII, L.P., filed herewith.

Exhibit 5 — Initial Investment Warrant, dated June 1, 2007, issued by Distributed Energy Systems Corp. to Perseus Partners VII, L.P., filed herewith.

Exhibit 24 — Power of Attorney, dated May 9, 2007, appointing Kenneth M. Socha and Rona Kennedy as Attorney-In-Fact for Frank H. Pearl.

SIGNATURE

After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this Statement is true, complete and correct.


Dated: June 11, 2007.	PERSEUS PARTNERS VII, L.P.
	By:	Perseus Partners VII GP, L.P., its general partner
	By:	Perseus Partners VII GP, L.L.C., its general partner
	/s/ Kenneth M. Socha
	Its:	Senior Managing Director
	FRANK H. PEARL
	/s/ Rona Kennedy
	Rona Kennedy, Attorney-In-Fact

Attention: Intentional misstatements or omissions of fact constitute Federal criminal violations (See 18 U.S.C. 1001)

EX-1 2 w35316exv1.htm EXHIBIT 1 exv1

Exhibit 1

JOINT FILING AGREEMENT

Pursuant to Rule 13d-1(k)(1) under the Securities Exchange Act of 1934, the undersigned hereby agree that only one statement containing the information required by Schedule 13D need be filed on behalf of the undersigned with respect to the ownership of shares of Common Stock of Distributed Energy Systems Corp.

This agreement may be executed in any number of counterparts, each of which shall be deemed an original.


Dated: June 11, 2007.	PERSEUS PARTNERS VII, L.P.


	By:	Perseus Partners VII GP, L.P., its general partner

	By:	Perseus Partners VII GP, L.L.C., its general partner

	/s/ Kenneth M. Socha

	Its: Senior Managing Director



	FRANK H. PEARL


	/s/ Rona Kennedy, Attorney-In-Fact

	Rona Kennedy, Attorney-In-Fact

EX-2 3 w35316exv2.htm EXHIBIT 2 exv2

Exhibit 2

EXECUTION COPY

Securities Purchase Agreement

by and between

Distributed Energy Systems Corp.

and

Perseus Partners VII, L.P.

May 10, 2007

Table of Contents


	Page
ARTICLE I ISSUANCE AND SALE		2
Section 1.1 Issuance and Sale of the Promissory Notes		2
Section 1.2 Issuance of the Warrants		2
Section 1.3 Closings		3
Section 1.4 Use of Proceeds		3

ARTICLE II CONDITIONS TO CLOSING		4
Section 2.1 Conditions to Each Party’s Obligations		4
Section 2.2 Conditions to Obligations of the Purchaser at the Initial Investment Closing		4
Section 2.3 Conditions to the Obligations of the Purchaser at the Subsequent Investment Closing		6
Section 2.4 Conditions to Obligations of the Company at the Initial Investment Closing		8
Section 2.5 Conditions to Obligations of the Company at the Subsequent Investment Closing		8

ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY		9
Section 3.1 Organization and Good Standing		9
Section 3.2 Subsidiaries		9
Section 3.3 Power, Authorization and Validity		10
Section 3.4 Noncontravention		10
Section 3.5 Consents, Etc		11
Section 3.6 Offering		11
Section 3.7 Capitalization		11
Section 3.8 SEC Documents; Financial Information		12
Section 3.9 Financial Reporting		13
Section 3.10 Liabilities		13
Section 3.11 Judgments		13
Section 3.12 Proprietary Assets		14
Section 3.13 Contracts		15
Section 3.14 Registration Rights		16
Section 3.15 Changes		16
Section 3.16 Compliance with Company Instruments and Laws		17
Section 3.17 Litigation		17
Section 3.18 Taxes		18
Section 3.19 Employees		18
Section 3.20 WARN Act Compliance		19
Section 3.21 Environmental and Safety Laws		19
Section 3.22 Title to and Sufficiency and Condition of Assets		20
Section 3.23 Indebtedness		20
Section 3.24 Insurance		20
Section 3.25 Related Party Transactions		20

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	Page
Section 3.26 Corporate Documents		21
Section 3.27 Listing		21
Section 3.28 Company Benefit Plans		21
Section 3.29 No Brokers		24
Section 3.30 Solvency		24
Section 3.31 Export Controls		24
Section 3.32 Ethical Practices		24
Section 3.33 Warranties		25
Section 3.34 Real Estate		25
Section 3.35 Inventory; Customers; Suppliers		26
Section 3.36 Government Contracts		26
Section 3.37 Indebtedness		28
Section 3.38 Accounts Receivable		28
Section 3.39 Full Disclosure		28

ARTICLE IV REPRESENTATIONS AND WARRANTIES BY THE PURCHASER		28
Section 4.1 Investment Intent; Authority		28
Section 4.2 Securities Not Registered		29
Section 4.3 Noncontravention		29
Section 4.4 Anti-Money Laundering Laws		29
Section 4.5 No Transfer		30
Section 4.6 Accredited Investor		30

ARTICLE V COVENANTS		30
Section 5.1 Access		30
Section 5.2 Communication with Accountants		30
Section 5.3 Tax Law Compliance		31
Section 5.4 Security and Pledge Agreements		31
Section 5.5 Stockholder Approval		31
Section 5.6 Board Representation		32
Section 5.7 Stop-Orders		33
Section 5.8 Listing		34
Section 5.9 Market Regulations		34
Section 5.10 Reporting Requirements		34
Section 5.11 Information		34
Section 5.12 Insurance		35
Section 5.13 Properties		35
Section 5.14 Protective Provisions		35
Section 5.15 Right of First Refusal		36
Section 5.16 Sale of Proton Business		38
Section 5.17 Compliance with Law		38
Section 5.18 Affiliate and Related Party Transactions		38
Section 5.19 Termination of Covenants		38

ARTICLE VI LEGENDS		38
Section 6.1 Legends		38
Section 6.2 Removal of Legends		39

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	Page
ARTICLE VII INDEMNIFICATION		39
Section 7.1 Indemnity		39
Section 7.2 Procedures		40

ARTICLE VIII MISCELLANEOUS		41
Section 8.1 Waivers and Amendments		41
Section 8.2 Governing Law		41
Section 8.3 Exclusive Jurisdiction		41
Section 8.4 Jury Waiver		42
Section 8.5 Entire Agreement		42
Section 8.6 Fees and Expenses		42
Section 8.7 Notices		42
Section 8.8 Validity		43
Section 8.9 Counterparts		43
Section 8.10 Publicity		43
Section 8.11 Succession and Assignment		44
Section 8.12 Termination		44
Section 8.13 Further Assurances		44
Section 8.14 No Strict Construction		45


Schedule I		List of Defined Terms
Schedule 1.3		Wire Transfer Account
Schedule 2.2(h)		Third Party Consents

EXHIBIT A		Form of Senior Secured Note
EXHIBIT B		Form of Senior Secured Convertible Note
EXHIBIT C		Form of Initial Investment Warrant
EXHIBIT D		Form of Subsequent Investment Warrant
EXHIBIT E		Form of Guaranty
EXHIBIT F		Form of Intercreditor Agreement
EXHIBIT G		Form of Management Rights Letter
EXHIBIT H		Form of Registration Rights Agreement
EXHIBIT I		Form of Security and Pledge Agreement
EXHIBIT J		Form of Subsidiary Security and Pledge Agreement

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SECURITIES PURCHASE AGREEMENT

SECURITIES PURCHASE AGREEMENT (this “Agreement”), dated as of May 10, 2007, by and between Distributed Energy Systems Corp., a Delaware corporation (the “Company”), and Perseus Partners VII, L.P., a Delaware limited partnership (the “Purchaser”). The Company and the Purchaser are sometimes referred to in this Agreement, individually, as a “Party” and, collectively, as the “Parties.” Certain capitalized terms used in this Agreement are defined in Schedule I hereto.

RECITALS

A. To provide the Company with additional funds to conduct its business, the Purchaser is willing to purchase from the Company, and the Company is willing to issue and sell to the Purchaser, on the terms and subject to the conditions contained in this Agreement, at the Initial Investment Closing (as defined herein), a senior secured promissory note, substantially in the form attached hereto as Exhibit A (the “Senior Secured Note”), that has an aggregate principal amount of $12,500,000 and a maturity date of nine months after the date of the Initial Investment Closing.

B. In the event the Company obtains the Stockholder Approval (as defined herein) prior to the maturity date of the Senior Secured Note, the Purchaser is willing to purchase from the Company, and the Company is willing to issue and sell to the Purchaser, on the terms and subject to the conditions contained in this Agreement, at the Subsequent Investment Closing (as defined herein), a senior secured convertible promissory note, substantially in the form attached hereto as Exhibit B (the “Senior Secured Convertible Note”), that has an aggregate principal amount of $15,000,000, a maturity date of eighteen months after the date of the Initial Investment Closing, and is convertible into shares of common stock, par value $0.01 per share, of the Company (“Common Shares”). The proceeds of the Senior Secured Convertible Note will be used, among other things, to repay in full all amounts owed under the Senior Secured Note (and any Additional Secured Notes issued thereunder).

C. At each of the Initial Investment Closing and any Subsequent Investment Closing, the Company shall issue to the Purchaser, for no additional consideration, warrants to purchase Common Shares as provided herein.

D. The Promissory Notes and all amounts owing to the Purchaser thereunder or pursuant to this Agreement and any other Transaction Document (collectively, the “Obligations”) will be secured by all of the assets of the Company and its Material Subsidiaries on the terms and subject to the conditions set forth in the Promissory Notes and the Security Documents.

E. The Company will also grant to the Purchaser, on the terms and subject to the conditions contained in this Agreement, (i) a right of first refusal with respect to certain subsequent financing transactions in which the Company may engage and (ii) a right to representation on the board of directors of the Company (the “Board”).

AGREEMENT

NOW, THEREFORE, in consideration of the foregoing, and the representations, warranties, covenants and conditions set forth below, the Parties, intending to be legally bound by this Agreement, agree as follows:

ARTICLE I
ISSUANCE AND SALE

Section 1.1 Issuance and Sale of the Promissory Notes.

(a) Senior Secured Note. In reliance upon the respective representations, warranties and covenants of the Parties contained in this Agreement, and subject to satisfaction of the applicable conditions set forth in Article II of this Agreement, at the Initial Investment Closing, the Company shall issue, sell and deliver to the Purchaser, and the Purchaser shall purchase from the Company, the Senior Secured Note for an aggregate purchase price of $12,500,000 (the “Senior Secured Note Amount”).

(b) Senior Secured Convertible Note. In the event the Company obtains the Stockholder Approval prior to the maturity date of the Senior Secured Note, then in reliance upon the respective representations, warranties and covenants of the Parties contained in this Agreement, and subject to satisfaction of the applicable conditions set forth in Article II of this Agreement, at the Subsequent Investment Closing, the Company shall issue, sell and deliver to the Purchaser, and the Purchaser shall purchase from the Company, the Senior Secured Convertible Note for an aggregate purchase price of $15,000,000 (the “Senior Secured Convertible Note Amount”). The proceeds from the issuance of the Senior Secured Convertible Note shall be used to repay in full at the Subsequent Investment Closing all amounts owed by the Company under the Senior Secured Note (and any Additional Secured Notes issued thereunder), which amounts shall be netted against the purchase price to be paid by the Purchaser at the Subsequent Investment Closing for the Senior Secured Convertible Note.

Section 1.2 Issuance of the Warrants.

(a) Initial Investment Warrant. In reliance upon the respective representations, warranties and covenants of the Parties contained in this Agreement, and subject to satisfaction of the applicable conditions set forth in Article II of this Agreement, the Company shall issue and deliver to the Purchaser, for no additional consideration, at the Initial Investment Closing, a warrant, substantially in the form attached hereto as Exhibit C (the “Initial Investment Warrant”).

(b) Subsequent Investment Warrant. In reliance upon the respective representations, warranties and covenants of the Parties contained in this Agreement, and subject to satisfaction of the applicable conditions set forth in Article II of this Agreement, at the Subsequent Investment Closing, the Company shall issue and deliver to the Purchaser, for no additional consideration, a warrant, substantially in the form attached hereto as Exhibit D

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(the “Subsequent Investment Warrant” and together with the Initial Investment Warrant, the “Warrants”).

Section 1.3 Closings.

(a) Each of the Initial Investment Closing and the Subsequent Investment Closing (each, individually, a “Closing” and, collectively, the “Closings”) shall take place, respectively, on the Initial Investment Closing Date and the Subsequent Investment Closing Date (each, individually, a “Closing Date” and, collectively, the “Closing Dates”), at 10:00 a.m. at the offices of Arnold & Porter llp, located at 1600 Tysons Boulevard, Suite 900, McLean, Virginia, or at such other times and places as shall be mutually agreed to by the Parties.

(b) At the Initial Investment Closing, (i) the Company shall issue and deliver to the Purchaser the Senior Secured Note and the Initial Investment Warrant, (ii) the Purchaser shall pay the purchase price for the Senior Secured Note by wire transfer of immediately available funds to the account designated by the Company on Schedule 1.3 hereto, (iii) the Company shall pay all Transaction Expenses owed to the Purchaser and (iv) the Parties (and, as applicable, their Affiliates) shall execute and deliver all other documentation contemplated hereby to be executed and delivered at such Closing.

(c) At the Subsequent Investment Closing, (i) the Company shall issue and deliver to the Purchaser the Senior Secured Convertible Note and the Subsequent Investment Warrant, (ii) the Purchaser shall pay the portion of the purchase price for the Senior Secured Convertible Note, if any, remaining after netting against such payment all amounts then owed under the Senior Secured Note (and any Additional Secured Notes issued thereunder), by wire transfer of immediately available funds to the account designated by the Company on Schedule 1.3 hereto, (iii) the Company shall pay any amounts then owed under this Agreement or any other Transaction Document and (iv) the Parties (and, as applicable, their Affiliates) shall execute and deliver all other documentation contemplated hereby to be executed and delivered at such Closing.

Section 1.4 Use of Proceeds. The net proceeds to the Company from the issuance and sale of the Senior Secured Note and the exercise of any Warrants shall be used for general corporate purposes consistent with the Business Plan. The net proceeds to the Company from the issuance and sale of the Senior Secured Convertible Note shall be used first to repay all amounts then owed under the Senior Secured Note (and any Additional Secured Notes issued pursuant to the terms of such Senior Secured Note) and, thereafter, for general corporate purposes consistent with the Business Plan.

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ARTICLE II
CONDITIONS TO CLOSING

Section 2.1 Conditions to Each Party’s Obligations. The respective obligations of each Party to consummate the transactions described in this Agreement at each Closing are subject to the satisfaction (or waiver by the respective Party), at or before such Closing, of the following conditions:

(a) No temporary restraining order, preliminary or permanent injunction or other order or decree that has the effect of preventing the consummation of the transactions contemplated in this Agreement and the other Transaction Documents shall have been issued by any court of competent jurisdiction and remain in effect.

(b) All consents of and notices to Governmental Entities required in connection with the transactions described in this Agreement and the other Transaction Documents shall have been obtained and made, as applicable, and be in full force and effect.

Section 2.2 Conditions to Obligations of the Purchaser at the Initial Investment Closing. The obligations of the Purchaser to consummate the transactions described in this Agreement at the Initial Investment Closing are subject to the satisfaction (or waiver by the Purchaser), at or before the Initial Investment Closing, of the following conditions:

(a) Representations and Warranties Correct. The representations and warranties of the Company contained in this Agreement or in any other Transaction Document that are qualified as to materiality are true and correct, and all other representations and warranties of the Company contained in this Agreement or in any other Transaction Document that are not so qualified are true and correct in all material respects, in each case as of the date of this Agreement and as of the Initial Investment Closing Date, with the same effect as though made as of the date of this Agreement except that the accuracy of representations and warranties that by their terms speak as of a specified date will be determined as of such date.

(b) Performance of Obligations. The Company shall have performed or complied with in all material respects all agreements and covenants required to be performed or complied with by it under this Agreement or any other Transaction Document at or prior to the Initial Investment Closing.

(c) Officer’s Certificate. The Company shall have delivered to the Purchaser a certificate, executed by a duly authorized officer of the Company, dated as of the Initial Investment Closing Date, certifying as to the authenticity and continued effectiveness of attached copies of the Company’s Certificate of Incorporation, as amended, Bylaws and resolutions of its Board approving the transactions contemplated by this Agreement and by the other Transaction Documents, and authorizing specific officers to execute and deliver this Agreement and each of the other Transaction Documents, including the Senior Secured Note and the Initial Investment Warrant.

(d) Compliance Certificate. The Purchaser shall have received a certificate dated as of the Initial Investment Closing Date and signed by the Chief Executive

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Officer of the Company on behalf of the Company stating that the conditions specified in Sections 2.2(a), (b), (h), (i) and (j) have been satisfied.

(e) Definitive Transaction Documents. The Senior Secured Note and the Initial Investment Warrant shall have been issued and delivered by the Company to the Purchaser. The Company and its Material Subsidiaries, as appropriate, shall have delivered to the Purchaser each of the other Transaction Documents, except for the Senior Secured Convertible Note, the Subsequent Investment Warrant and the Management Rights Letter, in each case duly executed by an authorized officer of the Company and/or, as appropriate, its Material Subsidiaries.

(f) Security Filings. The Company shall have executed and delivered to the Purchaser all UCC-1 Financing Statements to be filed and such other Security Documents necessary or appropriate for the perfection of the security interests granted by this Agreement or any other Transaction Document and by the Material Subsidiaries as may be reasonably requested by the Purchaser, including but not limited to a first priority mortgage and lender policy of title insurance in form and substance reasonably satisfactory to the Purchaser for the Wallingford Property.

(g) Opinion of Company’s Counsel. The Purchaser shall have received an opinion of Wilmer Cutler Pickering Hale and Dorr LLP, outside counsel to the Company, in form and substance reasonably satisfactory to the Purchaser.

(h) Consents and Waivers. The Company shall have received all material consents, approvals, authorizations, permits and waivers of, and delivered all notices to, third parties necessary for the Company to consummate the transactions contemplated by this Agreement and by the Transaction Documents, and all such consents, approvals, authorizations, permits and waivers shall be in full force and effect.

(i) Material Adverse Effect. Since December 31, 2006, no event shall have occurred or be reasonably likely to occur that would reasonably be expected to have a Material Adverse Effect, other than as disclosed in the Disclosure Schedule where it is clear from a reading of the disclosure that such disclosure is applicable to this clause (i), or reflected in the Draft Form 10-Q.

(j) Modification of Jefferies Engagement Letters. The engagement letter (the “Letter”), dated March 20, 2007, between the Company and Jefferies & Company, Inc. (“Jefferies”) shall have been modified to eliminate in their entirety any and all of the Company’s duties, liabilities or other obligations owed to Jefferies and all rights of any kind owed to Jefferies, including but not limited to (i) any fees, including any fees provided for under the terms of Sections 4 and 7 of the Letter, (ii) reimbursement of any expenses and (ii) right to participate in any capacity in, or earn or otherwise receive compensation in respect of, the structuring, issuance, sale or placement, whether in a public or private transaction, of equity and/or equity-linked securities of the Company; provided, that (A) upon the completion of the Initial Investment Closing, Jefferies shall have the right to a fee in an amount equal to 6.75% of the principal amount of the Senior Secured Note and (B) upon the completion of the Subsequent Investment Closing, 6.75% of the difference between the

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principal amount of the Senior Secured Convertible Note and the principal amount of the Senior Secured Note; and provided, further, that the Company shall continue to be bound by the terms of Section 6 of the Letter. The engagement letter dated August 14, 2006, between the Company and Jefferies shall have been terminated and Jefferies shall have no rights and the Company shall have no further obligations due to Jefferies related to such letter.

(k) Payoff of Indebtedness to Webster Bank. The Company shall have repaid all indebtedness owed to Webster National Bank, as reflected in Section 3.37 of the Disclosure Schedule, with cash in the Company’s restricted cash account and shall have delivered a signed Mortgage Release issued by Webster National Bank reasonably satisfactory to the Purchaser evidencing such repayment at least three Business Days prior to the Initial Investment Closing Date.

(l) Reimbursement of Expenses. The Company shall have tendered payment for reimbursement of all Transaction Expenses in accordance with Section 1.3(b) and 8.6(a).

(m) Employment Agreements. Purchaser shall have received copies of fully executed employment agreements, in form and substance reasonably satisfactory to the Purchaser, with each of (i) Ambrose L. Schwallie and (b) Peter J. Tallian, which employment agreements shall have been approved by the Company’s Compensation Committee.

(n) Other Documents. The Purchaser shall have received from the Company such other documents as it may reasonably request.

Section 2.3 Conditions to the Obligations of the Purchaser at the Subsequent Investment Closing. The obligations of the Purchaser to consummate the transactions described in this Agreement at the Subsequent Investment Closing are subject to the satisfaction (or waiver by the Purchaser), at or before the Subsequent Investment Closing, of the following conditions:

(a) Initial Investment Closing. The Initial Investment Closing shall have been consummated.

(b) Representations and Warranties Correct. The representations and warranties of the Company contained in this Agreement or in any other Transaction Document that are qualified as to materiality are true and correct, and all other representations and warranties of the Company contained in this Agreement or in any other Transaction Document that are not so qualified are true and correct in all material respects, in each case with the same effect as though made as of the date of this Agreement and as of the Subsequent Investment Closing, (i) except that the accuracy of representations and warranties that by their terms speak as of a specified date will be determined as of such date and (ii) except for matters arising after the date of this Agreement that, when viewed in the aggregate, have not had and are not reasonably likely to have a Material Adverse Effect.

(c) Performance of Obligations. The Company shall have performed or complied with in all material respects all agreements and covenants required to be performed

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or complied with by it under this Agreement and each other Transaction Document at or prior to the Subsequent Investment Closing.

(d) Officer’s Certificate. The Company shall have delivered to the Purchaser a certificate, executed by a duly authorized officer of the Company, dated as of the Subsequent Investment Closing Date, certifying as to the authenticity and continued effectiveness of attached copies of the Company’s Certificate of Incorporation, as amended, Bylaws and resolutions of its Board approving the transactions contemplated by this Agreement and by the other Transaction Documents, and authorizing specific officers to execute and deliver this Agreement and each of the other Transaction Documents, including the Senior Secured Convertible Note and the Subsequent Investment Warrant.

(e) Compliance Certificate. The Purchaser shall have received a certificate dated as of the Subsequent Investment Closing Date and signed by the Chief Executive Officer of the Company on behalf of the Company stating that the conditions specified in Sections 2.3(b), (c), (h), (j), (k) and (l) have been satisfied.

(f) Senior Secured Convertible Note. The Senior Secured Convertible Note shall have been issued and delivered by the Company to the Purchaser.

(g) Subsequent Investment Warrant. The Subsequent Investment Warrant shall have been issued and delivered by the Company to the Purchaser.

(h) Consents and Waivers. The Company shall have received (i) the Stockholder Approval and (ii) all other material consents, approvals, authorizations, permits and waivers of third parties necessary for the Company to consummate the transactions contemplated by this Agreement and by the Transaction Documents, and the Stockholder Approval and all such consents, approvals, authorizations, permits and waivers shall be in full force and effect.

(i) Opinion of Company’s Counsel. The Purchaser shall have received an opinion of Wilmer Cutler Pickering Hale and Dorr LLP, outside counsel to the Company, addressing such matters as reasonably requested by the Purchaser.

(j) Effectiveness of Other Transaction Documents; No Default. Each of the Transaction Documents executed and delivered at the Initial Investment Closing shall be in full force and effect and no Event of Default (or event or circumstance that with notice or the lapse of time would constitute an Event of Default) under the Senior Secured Note shall have occurred and be continuing as of the Subsequent Investment Closing.

(k) Reduction in Size of Board. The size of the Board shall have been reduced from nine to five members effective as of the Subsequent Investment Closing.

(l) Material Adverse Effect. Since December 31, 2006, no event shall have occurred that has had or would reasonably be expected to have a Material Adverse Effect, other than as disclosed in the Disclosure Schedule where it is clear from a reading of the disclosure that such disclosure is applicable to this clause (l), or as reflected in the Draft Form 10-Q.

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(m) Management Rights Letter. The Company shall have issued the Management Rights Letter, which shall become effective as of the date of the first appointment of a Perseus Director.

(n) Reimbursement for Expenses. The Company shall have tendered payment for reimbursement of all expenses then owed to the Purchaser or Perseus, L.L.C. in accordance with Section 1.3(c) or 8.6(a).

(o) Other Documents. The Purchaser shall have received from the Company such other documents as they may reasonably request.

Section 2.4 Conditions to Obligations of the Company at the Initial Investment Closing. The obligations of the Company to consummate the transactions described in this Agreement at the Initial Investment Closing are subject to the satisfaction (or waiver by the Company), at or before the Initial Investment Closing, of the following conditions:

(a) Representations and Warranties Correct. The representations and warranties of the Purchaser contained in this Agreement or in any other Transaction Document that are qualified as to materiality are true and correct, and all other representations and warranties of the Purchaser contained in this Agreement or in any other Transaction Document that are not so qualified are true and correct in all material respects, in each case as of the date of this Agreement and as of the Initial Investment Closing Date, with the same effect as though made as of such date, except that the accuracy of representations and warranties that by their terms speak as of a specified date will be determined as of such date.

(b) Performance of Obligations. The Purchaser shall have performed or complied with in all material respects all agreements and covenants required to be performed or complied with by it under this Agreement and each other Transaction Document at or prior to the Initial Investment Closing.

(c) Payment. The Purchaser shall have tendered payment for its Senior Secured Note in accordance with Sections 1.1(a) and 1.3 of this Agreement.

Section 2.5 Conditions to Obligations of the Company at the Subsequent Investment Closing. The obligations of the Company to consummate the transactions described in this Agreement at the Subsequent Investment Closing are subject to the satisfaction (or waiver by the Company), at or before the Subsequent Investment Closing, of the following conditions:

(a) Representations and Warranties Correct. The representations and warranties of the Purchaser contained in this Agreement or in any other Transaction Document that are qualified as to materiality are true and correct, and all other representations and warranties of the Purchaser contained in this Agreement or in any other Transaction Document that are not so qualified are true and correct in all material respects, in each case as of the date of this Agreement and as of the Subsequent Investment Closing Date, with the same effect as though made as of each such date, except that the accuracy of

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representations and warranties that by their terms speak as of a specified date will be determined as of such date.

(c) Stockholder Approval. The Company shall have received the Stockholder Approval and the Stockholder Approval shall be in full force and effect.

(d) Payment. The Purchaser shall have tendered payment for its Senior Secured Convertible Note in accordance with Sections 1.1(b) and 1.3 of this Agreement.

ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY

The Company represents and warrants to the Purchaser that, except as (i) set forth in the Company’s Disclosure Schedule delivered to the Purchaser prior to the date of this Agreement (the “Disclosure Schedule”) or (ii) expressly disclosed in the Company’s last annual report on Form 10-K as filed with the SEC, excluding any exhibits thereto, or the draft report on Form 10-Q for the first quarter of 2007, excluding any exhibits thereto, attached to the Disclosure Schedule, the statements contained in the following paragraphs of this Article III are all true and correct. The Disclosure Schedule shall be arranged in section corresponding to the numbered and lettered sections and subsections contained in this Article III, and the disclosures in any section or subsection of the Disclosure Schedule shall qualify other sections and subsections in this Article III only to the extent it is clear from a reading of the disclosure that such disclosure is applicable to such other sections and subsections.

Section 3.1 Organization and Good Standing. The Company and each of its Subsidiaries and Owned Entities (i) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and (ii) has all requisite corporate power and authority to carry on its business as now conducted and proposed to be conducted. Section 3.1 of the Disclosure Schedule lists all of the jurisdictions in which the Company, any Subsidiary and any Owned Entity is duly qualified to conduct business as a foreign corporation and is in good standing as a foreign corporation. There are no other jurisdictions where the character of the activities of the Company, any Subsidiary or any Owned Entity, or the location of the properties and assets owned or leased by the foregoing requires such qualification, except where the failure to so qualify or be in good standing is not reasonably likely to have a Material Adverse Effect.

Section 3.2 Subsidiaries. Section 3.2 of the Disclosure Schedule sets forth a complete and accurate list of all Subsidiaries and Owned Entities, together with their respective jurisdictions of formation or organization, and the authorized and outstanding capital stock or other ownership interests of each such Subsidiary or an Owned Entity, by class and number and percentage of each class owned by the Company, any Subsidiary or

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Owned Entity or any other Person. Except as set forth in Section 3.2 of the Disclosure Schedule, neither the Company nor any of its Subsidiaries or Owned Entities owns, of record or beneficially, any shares of capital stock or other ownership interest in any other corporation, partnership, limited liability company or other Person.

Section 3.3 Power, Authorization and Validity.

(a) The Company has all requisite legal and corporate power to enter into, execute, deliver and perform its obligations under this Agreement and the other Transaction Documents to which it is a party. Each Subsidiary that will execute and deliver any Transaction Document has all requisite legal and corporate power to enter into, execute, deliver and perform its obligations under each such Transaction Document.

(b) All corporate and legal action on the part of the Company, its officers, directors and stockholders necessary for the execution, delivery and performance by the Company of this Agreement and each other Transaction Document to which the Company is a party, including without limitation the sale and issuance of the Promissory Notes and the Warrants in accordance with the terms of this Agreement and the issuance of any Common Shares issuable upon conversion of the Senior Secured Convertible Note (“Note Shares”) or upon exercise or conversion of any Warrant (“Warrant Shares,” and together with the Promissory Notes, Warrants and Note Shares, the “Perseus Securities”) has been taken. All corporate and legal action on the part of each Subsidiary, its officers, directors, stockholders and members necessary for the execution and delivery of any Transaction Document to which it is a party, and the performance of such Subsidiary’s obligations under such Transaction Document, has been taken.

(c) Assuming due execution and delivery by the Purchaser, this Agreement is, and upon their execution and delivery, each of the Transaction Documents to which the Company is a party will be, valid and binding obligations, enforceable in accordance with their terms, of the Company, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors’ rights and remedies generally. Assuming due execution and delivery by the Purchaser, upon their execution and delivery, each of the Transaction Documents to which any Subsidiary is a party will be valid and binding obligations, enforceable in accordance with their terms, of such Subsidiary, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors’ rights and remedies generally.

(d) The Perseus Securities, when issued in compliance with the provisions of this Agreement, or in the case of the Note Shares or the Warrant Shares, when issued in accordance with the provisions of the Promissory Notes or the Warrants, respectively, will be validly issued and fully paid and non assessable and delivered to the Purchaser, free and clear of any Liens, other than Liens that arise by action of the Purchaser.

Section 3.4 Noncontravention. None of the execution, delivery and performance of and compliance with this Agreement and the other Transaction Documents, nor the issuance of any of the Perseus Securities as contemplated hereby or in any other Transaction

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Document, will result in or constitute any breach, default or violation of (i) the Certificate of Incorporation or Bylaws of the Company or the comparable organizational documents of any Subsidiary or Owned Entity, as in effect at that time, (ii) any agreement, contract, lease, license, instrument or commitment (oral or written) to which the Company, any of its Subsidiaries or any Owned Entity is a party or is bound or (iii) any Law, rule, regulation, statute or order applicable to the Company, its Subsidiaries, its Owned Entities, or their respective properties, including, without limitation, any Nasdaq Rule, or result in the creation of any Lien upon any of the properties or assets of the Company or its Subsidiaries or Owned Entities (other than as contemplated by the Transaction Documents), which breach, default or violation, individually or in the aggregate, would have a Material Adverse Effect.

Section 3.5 Consents, Etc. No consent, approval, order or authorization of, or designation, registration, declaration or filing with, any federal, state or local or other Governmental Entity or other Person on the part of the Company or any Subsidiary is required in connection with the valid execution, delivery and performance of this Agreement and the other Transaction Documents or the offer, sale or issuance of the Perseus Securities, other than (i) those filings required under Regulation D under the Securities Act, (ii) those filings required pursuant to Nasdaq Rules, if required, filings or qualifications under applicable state securities laws, which filings or qualifications, if required, will be timely filed or obtained by the Company, (iii) those filings required under the Registration Rights Agreement, and (iv) the filing of UCC-1 financing statements, or other documents as the Purchaser may reasonably request, in the appropriate jurisdictions and with any state agency necessary or appropriate for the perfection of the security interests granted pursuant to the terms of the Security Documents.

Section 3.6 Offering. Subject to the accuracy of and in reliance upon the Purchaser’s representations in Article IV of this Agreement, the offer, sale and issuance of the Perseus Securities in conformity with the terms of this Agreement and the Transaction Documents constitute or will constitute at the time of their offer, sale and issuance transactions exempt from the registration requirements of Section 5 of the Securities Act and the qualification or registration requirements of any applicable state securities laws, subject to the filing of any required reports of exempt distribution with securities regulatory authorities. Neither the Company or any of its Subsidiaries nor any Person acting on its or their behalf has taken or will undertake any action (including, without limitation, any offering of any securities of the Company under circumstances which would require the integration of such offering with the offering of any Perseus Securities under the Securities Act and the rules and regulations of the SEC thereunder) which might subject the offering, issuance or sale of the Perseus Securities pursuant to this Agreement to the registration requirements of Section 5 of the Securities Act.

Section 3.7 Capitalization.

(a) Section 3.7 of the Disclosure Schedule sets forth the authorized capitalization of the Company as of the Effective Date, and the issued and outstanding capitalization of the Company as of May 4, 2007, including all outstanding warrants and options. There have been no material changes in the issued and outstanding capitalization of the Company since May 4, 2007. All of the issued and outstanding shares of capital stock

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have been duly authorized and validly issued, and are fully paid and non assessable and have been offered, issued, sold and delivered by the Company in compliance with all applicable federal and state securities laws.

(b) Other than (i) shares reserved for issuance under the Company’s equity incentive plans and (ii) shares that may be issued pursuant to this Agreement and the other Transaction Documents, there are no outstanding options, warrants, rights (including conversion or preemptive rights and rights of first refusal), proxy or stockholder agreements, or arrangements or agreements of any kind for the purchase or acquisition from either the Company or any of its Subsidiaries of their shares of capital stock or any securities convertible into or ultimately exchangeable or exercisable for any shares of their capital stock. Neither the offer, issuance or sale of any of the Perseus Securities, nor the consummation of any transaction contemplated by this Agreement, will result in a change in the exercise or conversion price or number of any securities of the Company outstanding pursuant to anti-dilution or other similar provisions binding upon the Company and contained in or affecting any such securities. Neither the Company nor any of its Subsidiaries is obligated in any manner to issue any shares of its capital stock or any other securities.

(c) The rights, preferences, privileges and restrictions of the Common Shares are as stated in the Company’s Certificate of Incorporation and as provided under applicable Law. The Note Shares and Warrant Shares have been duly and validly reserved for issuance.

(d) Except as provided in the Transaction Documents, none of the Perseus Securities issued or to be issued pursuant to this Agreement or any of the other Transaction Documents are or will be subject to any preemptive rights, rights of first refusal, or other rights to purchase or otherwise acquire such Perseus Securities (whether in favor of the Company or any other Person), pursuant to any agreement or commitment of the Company.

Section 3.8 SEC Documents; Financial Information. The Company has made all filings with the SEC required under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or the Securities Act of 1933, as amended (the “Securities Act”), on a timely basis. The Company has previously made available to the Purchaser complete and accurate copies, as amended or supplemented through the date hereof, of the following forms filed with the SEC: (i) Form 10-K report under the Exchange Act for the fiscal years ended December 31, 2006 and 2005, (ii) each Form 8-K report filed by the Company during fiscal years 2005, 2006 and 2007, and (iii) each Form 10-Q report under the Exchange Act filed by the Company during fiscal years 2005 and 2006 (such reports are collectively referred to herein as the “Company Reports”). As of their respective dates, the Company Reports did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The audited financial statements and unaudited interim financial statements of the Company included in the Company Reports and the unaudited interim financial statements of the Company as of and for the quarter ended March 31, 2007 included in the draft report on Form 10-Q for the first quarter of 2007 attached to the Disclosure Schedule (the “March 31, 2007 Financial Statements”), (i) comply as to form in all material respects with applicable accounting requirements and published

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rules and regulations of the SEC with respect thereto, (ii) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) applied on a consistent basis throughout the periods covered thereby (except as may be indicated therein or in the notes thereto, and in the case of quarterly financial statements, as permitted by Form 10-Q under the Exchange Act), and (iii) fairly presented in all material respects (subject, in the case of the unaudited interim financial statements, to normal, year-end audit adjustments, none of which were material) the consolidated financial condition, results of operations and cash flows of the Company as of the respective dates thereof and for the periods referred to therein.

Section 3.9 Financial Reporting. Each of the Company and its Subsidiaries maintains accurate books and records reflecting its assets and liabilities and maintains proper and adequate internal accounting controls which provide reasonable assurance that (i) transactions are executed with management’s authorization, (ii) transactions are recorded as necessary to permit preparation of the consolidated financial statements of the Company in accordance with GAAP and to maintain accountability for the Company’s consolidated assets, (iii) access to the Company’s assets is permitted only in accordance with management’s authorization, (iv) the reporting of the Company’s assets is compared with existing assets as necessary to permit preparation of the consolidated financial statements of the Company in accordance with GAAP and to maintain accountability for the Company’s consolidated assets, (v) accounts, notes and other receivables and inventory are recorded accurately, and procedures the Company believes in good faith to be adequate under the circumstances are implemented to effect the collection thereof on a timely basis and (vi) there are procedures in place adequate to prevent, or timely detect, unauthorized acquisition, use or disposition of the Company’s assets. As of the date of this Agreement, (x) there are no significant deficiencies in the design or operation of the Company’s internal controls over financial reporting which could adversely affect in any material respect the Company’s ability to record, process, summarize and report financial data or material weaknesses in internal controls over financial reporting and (y) to the Company’s Knowledge, there has been no fraud relating to the Company or any of its Subsidiaries, whether or not material, that involved management or other employees, whether current or former, of the Company or any of its Subsidiaries who have, or had, a significant role in the Company’s internal controls over financial reporting.

Section 3.10 Liabilities. Except as reflected in the balance sheet included in the March 31, 2007 Financial Statements (the “Latest Balance Sheet”), the Company, its Subsidiaries and its Owned Entities, taken together as a whole, do not have any indebtedness, obligation or liability (contingent or otherwise) that, either alone or when combined with all similar obligations or liabilities, would be material to them, and to the Knowledge of the Company, there does not exist a set of circumstances that would reasonably be expected to result in any such material indebtedness, obligation or liability.

Section 3.11 Judgments. Neither the Company nor any of its Subsidiaries or Owned Entities is subject to the terms or provisions of any judgment, decree, order, writ or injunction of any Governmental Entity that would reasonably be expected to have a Material Adverse Effect.

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Section 3.12 Proprietary Assets.

(a) The Company and each Subsidiary and Owned Entity (i) owns or has sufficient rights to all Proprietary Assets used in or necessary for its business as currently or proposed to be conducted, free and clear of all Liens, other than Permitted Liens; and (ii) has taken reasonable and customary measures and precautions necessary to protect and maintain the confidentiality and secrecy of its Proprietary Assets (except the Proprietary Assets the value of which would be unimpaired by public disclosure) and otherwise to maintain and protect the value of its Proprietary Assets. All necessary registration, maintenance and renewal fees previously due in connection with any registered Proprietary Assets have been paid and all necessary documents and certificates previously due in connection with such Proprietary Assets have been filed with the relevant patent, copyright, trademark or other authorities in the United States or foreign jurisdictions, as the case may be, for the purposes of maintaining such Proprietary Assets.

(b) Except where such infringement, misappropriation or unlawful use has not had or would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect, the operation of the business of the Company and each of its Subsidiaries or Owned Entities (i) has not infringed or misappropriated, does not infringe or misappropriate, and will not infringe or misappropriate as a result of the execution, delivery and performance of this Agreement and the other Transaction Documents, or the issuance of any of the Perseus Securities as contemplated hereby or in any other Transaction Document, any Proprietary Asset of any Person, (ii) does not violate any right of any Person (including any right to privacy or publicity), and (iii) does not materially breach any contract related to any Proprietary Asset. Neither the Company nor any Subsidiary or Owned Entity has received notice from any Person claiming that such operation or any act, any product, technology or service (including products, technology or services currently under development by the Company, any Subsidiary or any Owned Entity) or Proprietary Assets infringes or misappropriates any rights related to or arising out of Proprietary Assets of any Person. Neither the Company nor any Subsidiary or Owned Entity has received notice to the effect that Proprietary Assets held by any of them are invalid or not subsisting. No other Person is infringing, misappropriating or making any unlawful use of any Proprietary Asset used in or pertaining to the business of the Company or any Subsidiary or Owned Entity.

(c) The Proprietary Assets used in or pertaining to the business of the Company and its Subsidiaries, and the Proprietary Assets licensed to the Owned Entities, when taken together, are sufficient to enable the Company and each of its Subsidiaries to conduct its business in the manner in which such business has been and is being conducted free from liabilities or valid claims of infringement or misappropriation by third parties. Neither the Company nor any of its Subsidiaries or Owned Entities have licensed any of its Proprietary Assets to any Person on an exclusive basis and neither the Company nor any Subsidiary or Owned Entity has entered into any covenant not to compete or contract limiting its ability to sell its products in any market or geographical area or with any Person.

(d) All current and former employees of the Company and its Subsidiaries providing technical services, or otherwise having access to confidential information, relating to the Company’s Proprietary Assets have executed and delivered to the Company or such

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Subsidiary an agreement (containing no material exceptions to or exclusions from the scope of its coverage relevant to the Company’s business) that is substantially the same as to the forms of standard employee agreement previously delivered to the Purchaser, and all current and former consultants and independent contractors to the Company or its Subsidiaries providing technical services relating to the Company’s or its Subsidiaries’ Proprietary Assets have executed and delivered to the Company or such Subsidiary, an agreement (containing no material exceptions to or exclusions from the scope of its coverage relevant to the Company’s business), the material provisions of which are in substance as protective to the Company as the terms of the forms of standard employee agreement previously delivered to the Purchaser.

(e) To the extent that any Proprietary Asset has been developed or created independently or jointly by any Person other than the Company or any Subsidiary or Owned Entity for which the Company or any Subsidiary or Owned Entity has directly or indirectly, provided consideration for such development or creation, the Company or the relevant Subsidiary or Owned Entity has a written agreement with such Person with respect thereto, and the Company or relevant Subsidiary or Owned Entity thereby has obtained ownership of, and is the exclusive owner of, all such Proprietary Assets therein by operation of law or by valid assignment, and has required the waiver of all non-assignable rights.

(f) Other than standard Proceedings involving applications pending before the U.S. Patent and Trademark office or foreign patent offices, no Proprietary Assets, product, technology, or service of the Company or any Subsidiary or Owned Entity is subject to any Proceeding or outstanding decree, order, judgment or settlement agreement or stipulation that restricts in any manner the use, transfer or licensing thereof by the Company or any Subsidiary or Owned Entity, or may affect the validity, use or enforceability of such Proprietary Asset, product technology or service.

(g) Section 3.12(g) of the Disclosure Schedule lists separately, by entity, all material Proprietary Assets owned by, or filed in the name of, the Company, each of its Subsidiaries and each of its Owned Entities that have been registered in or with, issued by, or for which an application for registration has been filed in or with, a federal, state or other governmental office or agency of appropriate jurisdiction.

Section 3.13 Contracts.

(a) Section 3.13 of the Disclosure Schedule identifies each Material Contract, other than those Material Contracts filed with the SEC and listed as exhibits to the Company’s Form 10-K for the fiscal year ended December 31, 2006.

(b) The Company has delivered to the Purchaser accurate and complete copies of all Material Contracts, including all amendments to such contracts. Neither the Company nor any Subsidiary or Owned Entity has entered into any oral Material Contracts. Each Material Contract is valid and in full force and effect, is enforceable by either the Company or its Subsidiaries or Owned Entities in accordance with its terms, and will continue to be so immediately following each Closing, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting

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creditors generally. No such contract, agreement or instrument contains any liquidated damages, penalty or similar provision that, if enforced against the Company, its Subsidiaries or Owned Entities, would, individually or in the aggregate, have a Material Adverse Effect. No party to any such contract, agreement or instrument has indicated its intention to cancel, withdraw, modify or amend such contract, agreement or instrument.

(c) The Company, its Subsidiaries and Owned Entities have not violated or breached, or committed any default under, any Material Contract in any material respect, and, to the Company’s Knowledge, no other Person has violated or breached, or committed any default under, any Material Contract in any material respect. No event has occurred, and no circumstance or condition exists, that (with or without notice or lapse of time) will, or would reasonably be expected to, (i) result in a violation or breach of any of the provisions of any Material Contract, (ii) give any Person the right to declare a default or exercise any remedy under any Material Contract, (iii) give any Person the right to accelerate the maturity or performance of any Material Contract or (iv) give any Person the right to cancel, terminate or materially modify any Material Contract, which in respect of the matters described in clauses (i) through (iv), individually or taken as a whole, would have a Material Adverse Effect.

(d) None of the Material Contracts contains any provision which would (i) require the consent of third parties to the sale and issuance of the Perseus Securities, or any of the other transactions contemplated hereunder or under any of the Transaction Documents or (ii) be altered as a result of such transaction.

Section 3.14 Registration Rights. Other than as set forth in the Registration Rights Agreement, neither the Company nor any of its Subsidiaries has agreed to grant to any Person any rights (including piggyback registration rights) to have any securities of the Company registered with the SEC under the Securities Act or with any other Governmental Entity.

Section 3.15 Changes. Since December 31, 2006, there has not occurred or could reasonably be expected to occur any of the following:

(a) Any Material Adverse Effect;

(b) Any resignation or termination of any officer, key employee or groups of employees of the Company, any Subsidiary or any Owned Entity;

(c) Any material change, except in the ordinary course of business, in the contingent obligations of the Company, its Subsidiaries or any Owned Entity by way of guaranty, endorsement, indemnity, warranty or other contractual arrangement;

(d) Any damage, destruction or loss, whether or not covered by insurance, that has had or would reasonably be expected to have a Material Adverse Effect;

(e) Any waiver by the Company, any Subsidiary or any Owned Entity of a material right or of a material debt owed to it;

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(f) Any change in any compensation arrangement or agreement with any employee, officer or director other than routine annual increases in compensation or promotions or bonuses awarded in the ordinary course of business;

(g) Any debt, obligation or liability incurred, assumed or guaranteed by the Company, any Subsidiary or any Owned Entity, except for immaterial amounts and for current liabilities incurred in the ordinary course of business;

(h) Any sale, assignment or transfer of any Proprietary Asset, other than the nonexclusive license by the Company, any Subsidiary or any Owned Entity of such Proprietary Assets to customers, suppliers or contract manufacturers in the ordinary course of business consistent with past practices;

(i) Any change in any Material Contract to which the Company, any Subsidiary or any Owned Entity is a party or by which it is bound, which change has had or could reasonably be expected to have a Material Adverse Effect;

(j) Any material Tax election or any change in any method or period of accounting or in any accounting policy, practice or procedure;

(k) Any compromise or settlement of any claims relating to Taxes, any Tax audit or other tax proceeding or the filing of any amended Tax Return;

(l) Any “reportable transaction” for Tax purposes as defined in Treasury Regulations section 1.6011-4(b); or

(m) Any arrangement or commitment by the Company, any Subsidiary or any Owned Entity to do any of the acts described in this Section 3.15.

Section 3.16 Compliance with Company Instruments and Laws. Neither the Company nor any Subsidiary or Owned Entity, is in violation of any provisions of its respective Certificate of Incorporation or Bylaws or other similar organizational document, each as currently in effect. The Company, each of its Subsidiaries and each Owned Entity, has been and is in compliance in all respects with all applicable Laws, except where failure to be in compliance would not reasonably be expected to have a Material Adverse Effect. All Permits and other authorizations by Governmental Entities held by the Company, its Subsidiaries and Owned Entities and which are necessary to their businesses are valid and sufficient in all respects for the businesses presently carried on by them, except where such failure to obtain such Permits and authorizations would not reasonably be expected to have, individually or in aggregate, a Material Adverse Effect.

Section 3.17 Litigation. There is no suit, action, Proceeding, claim or investigation pending or, to the Company’s Knowledge, threatened against the Company or its Subsidiaries before any court, administrative agency or other Governmental Entity which could result in (i) payments by the Company, any Subsidiary or any Owned Entity of greater than $250,000, (ii) individually or in aggregate, a Material Adverse Effect or (iii) which questions or challenges the validity of this Agreement or any of the other Transaction Documents.

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Section 3.18 Taxes.

(a) The Company, each of its Subsidiaries and each of its Owned Entities have timely and properly filed, or had filed on its behalf, all Tax Returns required to be filed by it in any jurisdiction to which it is subject, and such filed Tax Returns are accurate in all material respects, has paid all Taxes due and payable (whether or not shown on filed Tax Returns), and has set aside on its Latest Balance Sheet provisions reasonably adequate for the payment of all Taxes for periods subsequent to the periods to which such Tax Returns apply. There are no unpaid Taxes claimed to be due by the Taxing authority of any jurisdiction, and the officers of the Company know of no basis for any such claim.

(b) There are no outstanding agreements or waivers extending the statutory period of limitation applicable to any Tax Returns. All Taxes that the Company, any Subsidiary or any Owned Entity has been required to collect or withhold have been duly withheld or collected and, to the extent required, have been timely paid to the proper Taxing authority. Neither the Company nor any Subsidiaries or Owned Entities is a party to any Tax-sharing agreement or similar arrangement with any other Person. At no time has the Company, any Subsidiary or Owned Entity been a member of an affiliated, combined, consolidated or unitary Tax group (other than a group for which the Company is the common parent) for purposes of filing any Tax Return. None of the Company, the Subsidiaries or the Owned Entities is currently under any contractual obligation to pay to any Governmental Entity any Tax obligations of, or with respect to any transaction relating to, any other Person, or to indemnify any other Person with respect to any Tax.

(c) There have been no audits or examinations of any Tax Returns of the Company or its Subsidiaries by any Governmental Entity, and none of the Company or its Subsidiaries has received any notice from a Governmental Entity that it intends to conduct a Tax audit or examination of the Company or the Subsidiaries. There are no pending assessments, asserted deficiencies or claim for additional Taxes that have not been paid. No claim has been made by a Governmental Entity in a jurisdiction where the Company or any Subsidiary does not file Tax Returns that it is or may be subject to taxation by that jurisdiction.

(d) The Company and each of its Subsidiaries have made all necessary disclosures required by Treasury Regulation section 1.6011-4. The Company and each of its Subsidiaries have not been a participant in a reportable transaction within the meaning of Treasury Regulation section 1.6011-4(b).

Section 3.19 Employees. Neither the Company nor any of its Subsidiaries has any collective bargaining agreements with any of its or their employees. There is no labor union organizing activity pending or, to the Company’s Knowledge, threatened with respect to the Company. The Company is not a party to or bound by any currently effective employment agreement, deferred compensation arrangement, bonus plan, incentive plan, profit sharing plan, retirement agreement or other employee compensation plan or agreement. To the Company’s Knowledge, no employee of the Company or any Subsidiary, nor any consultant with whom the Company or any Subsidiary has contracted, is in violation of any material term of any material employment agreement, proprietary information agreement or any other

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agreement relating to the performance of services by any such individual on behalf of the Company or such Subsidiary because of the nature of the business conducted by the Company or such Subsidiary, which violation would result, individually or in aggregate, in a Material Adverse Effect.

Section 3.20 WARN Act Compliance. Except as set forth on the Disclosure Schedule, the Company and its Subsidiaries are in compliance with and have timely filed all notices required under the WARN Act.

Section 3.21 Environmental and Safety Laws.

(a) There are no real properties which the Company or any Subsidiary or Owned Entity, or other related organizations, or any of their predecessors or successors formerly owned, operated or leased and which the Company has ceased to own, operate or lease.

(b) With respect to the Property and the Other Property neither the Company nor any prior owner or operator is subject to any Environmental Liabilities.

(c) With respect to the Property, the Company has obtained, possesses and is in compliance in all material respects with all Environmental Permits.

(d) All of the Property is in compliance in all material respects with all Environmental Laws and the terms of any applicable leases.

(e) There are no Liens, defaults, equitable interests, covenants, deed restrictions, notice or registration requirements, or other limitations applicable to the Property, based upon any Environmental Laws.

(f) There are no USTs located in, at, on or under the Property.

(g) There are no locations at which Pollutants have been Released, or otherwise come to be, in, at, on, under, a part of, involving or otherwise related to the Property or Other Property that give rise to material Environmental Liabilities of the Company or any Subsidiary; and each of such locations is in compliance with all Environmental Laws.

(h) There are no Conditions in, at, on, under, a part of, involving or otherwise related to the Property or Other Property (including but not limited to off-site migration of Pollutants from any such Property or Other Property), involving the presence of any Pollutant, and the Company or any Subsidiary or Owned Entity or other related organizations, or any of their predecessors or successors has not Managed any Pollutant in a manner that give or gives rise to material Environmental Liabilities of the Company or any Subsidiary or Owned Entity.

(i) There are no PCBs, lead paint, asbestos (of any type or form), or materials, articles or products containing PCBs, lead paint or asbestos, located in, at, on, under, a part of, involving or otherwise related to the Property (including, without limitation,

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any building, structure, or other improvement that is a part of the Property); and all of the PCBs, lead paint, asbestos, and materials, articles and products containing PCBs, lead paint or asbestos identified on Schedule 3.21(i) of the Disclosure Schedule are in compliance with all Environmental Laws.

(j) No on-site sources of water for human consumption or other human contact in, at or on the Property, and no subsurface waters under the Property, contain a Pollutant at a level exceeding a level which is established or recommended in Environmental Laws.

Section 3.22 Title to and Sufficiency and Condition of Assets. Except as would not result in a Material Adverse Effect, (a) the Company and each of its Subsidiaries has good and marketable title to all of the assets (excluding all Proprietary Assets), free and clear of all Liens other than Permitted Liens, (b) the assets constitute all of the assets, rights and properties that are used in the operation of the business of the Company or any of its Subsidiaries as it is now conducted or that are used or held by the Company or any of its Subsidiaries for use in the operation of the Company’s business and (c) all such assets are in good operating condition and repair (reasonable wear and tear excepted) and are suitable for their intended use.

Section 3.23 Indebtedness. Except for the Obligations and indebtedness expressly permitted by the terms of this Agreement and the other Transaction Documents, there is no secured indebtedness of the Company or any of its Subsidiaries.

Section 3.24 Insurance. The Company has general commercial, product liability, fire and casualty insurance policies with coverages which are customary for companies similarly situated to the Company in the same or similar businesses.

Section 3.25 Related Party Transactions.

(a) None of the Company’s or any of its Subsidiaries’ officers, directors, members or any stockholder disclosed in public filings with the SEC, any supplier, distributor or customer of the Company or its Subsidiaries, has any material interest in any property, real or personal, tangible or intangible, including Proprietary Assets used in or pertaining to the business of the Company or its Subsidiaries, except for the normal rights of a stockholder or member.

(b) No executive officer or director of the Company or any of its Subsidiaries has any material direct or indirect ownership interest in any Person with which the Company or any of its Subsidiaries has a material business relationship, or any Person that competes in any material respect with the Company or any of its Subsidiaries. No member of the immediate family of any executive officer or director of the Company or any of its Subsidiaries is directly or indirectly interested in any Material Contract.

(c) The Company does not have outstanding, and has not arranged any outstanding, “extensions of credit” to directors or executive officers within the meaning of Section 402 of the Sarbanes-Oxley Act of 2002.

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Section 3.26 Corporate Documents. The Company and each Subsidiary have made available to the Purchaser and its counsel for their examination true and complete copies of the following documents, (i) the Certificates of Incorporation and Bylaws, or Certificates of Formation and Limited Liability Company Agreements, as applicable, each as currently in effect, (ii) minute books of the Company and each of its Subsidiaries containing required records setting forth proceedings, consents, actions, and meetings of their respective shareholders, boards of directors and any committees thereof, and (iii) all material Permits, Orders, and consents issued by any regulatory agency with respect to the Company, its Subsidiaries, or any securities of the Company or its Subsidiaries, and all applications for such Permits, Orders, and consents. The corporate minute books, stock certificate books, stock registers and other corporate records of the Company and each of its Subsidiaries are complete and accurate in all material respects, and the signatures appearing on all documents contained therein are the true signatures of the persons purporting to have signed the same. All actions reflected in such books and records were duly and validly taken in compliance in all material respects with the Laws of the applicable jurisdiction.

Section 3.27 Listing. The Common Shares are listed for trading on Nasdaq and satisfy the requirements for continuation of such listing in all respects. The Company has not received any notice from Nasdaq that its Common Shares will be delisted from Nasdaq or that its Common Shares do not meet all requirements for listing.

Section 3.28 Company Benefit Plans.

(a) Schedule 3.28(a) of the Disclosure Schedule contains a true and complete list of each “employee benefit plan” (as defined in section 3(3) of ERISA) and any other employee benefit or compensation plan, program, policy, arrangement or agreement, including bonus, deferred compensation, incentive compensation, severance pay, medical, life or other insurance, profit-sharing, stock option or other equity-based incentive compensation, stock purchase, and pension, welfare and fringe benefit plans, for the benefit of, or relating to, any current or former employee, director or independent contractor of the Company or any Subsidiary or any Owned Entity (i) which is or has been sponsored by, entered into, contributed to, established by, participated in and/or maintained by the Company, any Subsidiary, any Owned Entity or any ERISA Affiliate or (ii) under which the Company or any Subsidiary or any Owned Entity otherwise has any liability, whether or not such plan is terminated (each, a “Plan” and, collectively, as the “Plans”). No Plan covers any Person other than a current or former employee or director of the Company or any Subsidiary or any Owned Entity (and their dependents and beneficiaries), and no entity other than the Company or a Subsidiary or Owned Entity sponsors, maintains or contributes to, or is required to contribute to, any Plan. Neither the Company nor any Subsidiary or Owned Entity has any legally binding formal plan or commitment to create any additional plan or modify or change any existing Plan, other than as required to comply with applicable Law, that would affect any employee or director or former employee or former director of the Company, or any Subsidiary or any Owned Entity.

(b) No Plan is subject to section 412 of the Code or section 302 of ERISA or Title IV of ERISA. Neither the Company, any Subsidiary, any Owned Entity nor any ERISA Affiliate has incurred any liability under section 412 of the Code or section 302 of

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ERISA or Title IV of ERISA that has not been satisfied in full, and no condition exists that presents a risk to the Company or any ERISA Affiliate of incurring a liability under said sections or Title.

(c) No Plan provides benefits, including without limitation death or medical benefits (whether or not insured), to former employees or directors or their respective spouses or dependents after retirement or other termination of service, other than the health continuation coverage that may be required by section 4980B of the Code (COBRA) or similar applicable law.

(d) The Plans (and related trusts and insurance contracts) have been maintained, funded and administered in all material respects in accordance with the terms of the Plans and with applicable Law (including but not limited to ERISA and the Code). Each Plan which is intended to be qualified under section 401(a) of the Code has received a determination letter or opinion letter from the Internal Revenue Service that such Plan is so qualified, and nothing has occurred that could adversely affect the qualified status of such Plan or any related trust. Each of the Plans that is intended to satisfy the requirements of section 125, 423 or 501(c)(9) of the Code satisfies such requirements.

(e) Each option that has been issued under any Plan of the Company or any Subsidiary or Owned Entity providing for the issuance of options and that has been exercised has been properly treated as an incentive stock option under Code section 422 or as a non-statutory stock option, as applicable.

(f) With respect to each Plan, (i) no actions, audits, investigations, suits or claims against the Plan, the Company, any Subsidiary, any Owned Entity or any ERISA Affiliate or with respect to any assets of the Plan (other than routine claims for benefits) are pending or, to the Knowledge of the Company, threatened, (ii) there is no Order of any court, governmental body, commission, agency or arbitrator outstanding against or in favor of any Plan or any fiduciary thereof (other than rules of general applicability or domestic relations orders), (iii) no event has occurred and no condition exists that would subject the Company, either directly or by reason of its affiliation with any ERISA Affiliate, to any Tax, fine, Lien, penalty or other liability imposed by ERISA or, in connection with any Plan, the Code, (iv) for each Plan with respect to which a Form 5500 has been filed, no material change has occurred with respect to the matters covered by the most recent Form since the date thereof, and (v) no “reportable event” (as such term is defined in section 4043 of ERISA) has occurred with respect to any Plan. None of the Company, any Subsidiary, any Owned Entity, any ERISA Affiliate, any of the Plans, any trust created thereunder or any trustee or administrator thereof has engaged in a transaction in connection with which the Company, any Subsidiary, any Owned Entity, any of the Plans, any such trust or any trustee or administrator thereof, could, directly or indirectly, be subject to a civil penalty assessed pursuant to section 409 or 502(i) of ERISA, a Tax imposed pursuant to section 4975, 4976, 4980B, 4980D, 4980E or 4980F of the Code, or any other similar liability.

(g) With respect to each of the Plans, the Company has made available to the Purchaser true and complete copies of (i) the Plan document (including all amendments thereto), the summary plan description and any summaries of material modifications, (ii) the

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trust agreement, (iii) the two most recent Form 5500 annual reports, actuarial reports and financial statements, if any, (iv) the most recent determination letter or opinion letter received from the Internal Revenue Service with respect to each Plan that is intended to be qualified under the Code and (v) all material communications to or from the Internal Revenue Service or any other Governmental Entity relating to each Plan and all material employee communications with respect each Plan.

(h) All contributions required to have been made under the terms of any Plan have been timely made and all obligations in respect of each Plan have been paid prior to the Closing or are properly accrued and reflected on the Latest Balance Sheet to the extent required by GAAP.

(i) None of the Plans is a “multiemployer plan,” as such term is defined in section 3(37) of ERISA, a “multiple employer welfare arrangement,” as such term is defined in section 3(40) of ERISA, or a single employer plan that has two or more contributing sponsors, at least two of whom are not under common control, within the meaning of section 4063(a) of ERISA.

(j) Each Plan may be amended or terminated without liability to the Company any Subsidiary, any Owned Entity or any ERISA Affiliate other than for accrued benefits or non-material administrative expenses. No amounts payable under the Plans, and no payment made or other benefit provided, or to be made or provided, to current or former employees or directors of the Company, any Subsidiary or any Owned Entity (including pursuant to this Agreement or any other Transaction Document) will fail to be deductible for federal income tax purposes under section 280G of the Code. Each Person who performs services for the Company, any Subsidiary or any Owned Entity has been, and is, properly classified by the respective service recipient as an employee or independent contractor.

(k) Neither the execution of this Agreement or any other Transaction Document, nor the consummation of the transactions contemplated hereby or by any other Transaction Document, either alone or in combination with subsequent events, will result in, or is a precondition to, (i) any employee or director of the Company, any Subsidiary or any Owned Entity becoming entitled to severance pay or any similar payment, (ii) the acceleration of the time of payment or vesting, or an increase in the amount of, any compensation due to any employee or director of the Company, any Subsidiary or any Owned Entity or (iii) the renewal or extensions of the term of any agreement regarding the compensation of any employee of the Company, any Subsidiary or any Owned Entity.

(l) Each Plan, and each other arrangement to which any of the Company, any Subsidiary or any Owned Entity is a party, or with respect to which any of the Company, any Subsidiary or any Owned Entity has any liability or obligations that is subject to Section 409A of the Code has been operated in good faith compliance with Section 409A of the Code, the Treasury regulations relating thereto and the applicable IRS and Treasury Department guidance thereunder. None of the transactions contemplated by this Agreement or by any other Transaction Document will constitute or result in a violation of Section 409A of the Code.

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Section 3.29 No Brokers. Neither the Company or any Subsidiary, nor any of their respective shareholders or members, is obligated for the payment of fees or expenses of any broker or finder in connection with the origination, negotiation or execution of this Agreement or the Transaction Documents, or in connection with any transaction contemplated by this Agreement or any other Transaction Document.

Section 3.30 Solvency.

(a) It is the Company’s reasonable judgment that as of each Closing after giving effect to the purchase and sale of the Perseus Securities as contemplated in the applicable section of Article I of this Agreement, (i) the fair value of the assets of the Company and its Subsidiaries will exceed their respective current debts and liabilities, subordinated, contingent or otherwise, (ii) the present fair saleable value of the property of the Company and its Subsidiaries will be greater than the amount that will be required to pay the probable liability of their current debts and other liabilities, subordinated, contingent or otherwise, as such debts and other liabilities become absolute and matured, (iii) the Company and its Subsidiaries have sufficient resources to pay their debts and liabilities, subordinated, contingent or otherwise, as such debts and liabilities become absolute and matured and (iv) none of the Company or any of its Subsidiaries has unreasonably small capital with which to conduct the business in which they are engaged as such business is now conducted and is proposed to be conducted following such Closing Date.

(b) Neither the Company nor any Subsidiary is the subject of any pending, rendered or, to the Knowledge of the Company or any Subsidiary, threatened insolvency proceedings of any character. Neither the Company nor any Subsidiary has made an assignment for the benefit of creditors or taken any action with a view to or that would constitute a valid basis for the institution of any such insolvency proceedings.

Section 3.31 Export Controls. The Company, each Subsidiary and each Owned Entity has been and is in compliance in all material respects with all United States import and export Laws and regulations (including without limitation those laws under the authority of U.S. Departments of Commerce (Bureau of Industry and Security) codified at 15 CFR, Parts 700-799, Homeland Security (Customs and Border Protection) codified at 19 CFR, Parts 1-199, State (Directorate of Defense Trade Controls) codified at 22 CFR, Parts 103, 120-130 and Treasury (Office of Foreign Assets Control) codified at 31 CFR, Parts 500-599). None of the Company, any Subsidiary nor any Owned Entity has, within the last five years, violated in any material respect any United States import or export Laws, been the subject of an investigation or inquiry or subject to civil or criminal penalties imposed by a Governmental Entity or made a voluntary disclosure with respect to violations of such Laws. Section 3.31 of the Disclosure Schedule sets forth all valid and pending export control licenses, agreements and/or approvals required to be amended, assumed or transferred as a result of, or in connection with, the transactions contemplated hereby.

Section 3.32 Ethical Practices. The Company, each Subsidiary, and to the Knowledge of the Company, any Owned Entity, (including their respective Affiliates, officers, directors, employees, consultants or agents) are in compliance with all legal requirements under (i) the Foreign Corrupt Practices Act (15 U.S.C. §§ 78dd-1, et seq.) and

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the Organization for Economic Cooperation and Development Convention Against Bribery of Foreign Public Officials in International Business Transactions and legislation implementing such convention and (ii) international anti-bribery conventions (other than the convention described in clause (i)) and local anti-corruption and bribery laws, in each case, in jurisdictions in which the Company and its Subsidiaries are operating (collectively, the “Anti-Bribery Laws”). Neither the Company nor any Subsidiary or any Owned Entity has received any communication that alleges, nor have they received information based on an internal review from which it would be reasonably likely to conclude, that the Company, any Subsidiary, any Owned Entity or any agent thereof is not, or may be, in compliance with, or has, or may have, any liability under, the Anti-Bribery Laws.

Section 3.33 Warranties. Section 3.33 of the Disclosure Schedules sets forth any warranties and indemnities relating to the Company’s products or technology sold, leased or licensed, or services rendered by the Company, that are not standard warranties and indemnities (i) offered in the ordinary course of business or (ii) imposed by Law. Section 3.33 of the Disclosure Schedule sets forth the aggregate expenses incurred by the Company and its Subsidiaries in fulfilling their obligations under their guaranty, warranty, right of return and indemnity provisions during each of the last three fiscal years and the three month-period ended March 31, 2007; and the Company does not know of any reason why such expenses should significantly increase as a percentage of sales in the future.

Section 3.34 Real Estate.

(a) Leased Premises. Section 3.34(a) of the Disclosure Schedule contains a complete and accurate list of all premises leased by the Company or one of its Subsidiaries (the “Leased Premises”), and of all leases related thereto (collectively, the “Leases”). The Company has made available to the Purchaser a true and complete copy of each of the Leases, and in the case of any oral Lease, a written summary of the material terms of such Lease. The Leases are valid, binding and enforceable in accordance with their terms and are in full force and effect. No event has occurred which (whether with or without notice, lapse of time or both or the happening or occurrence of any other event) would constitute a default under any Lease on the part of the Company. Neither the Company nor any Subsidiary has Knowledge of the occurrence of any event which (whether with or without notice, lapse of time or both, or the happening or occurrence of any other event) would constitute a default under any Lease by any other party. Section 3.34(a) of the Disclosure Schedule separately identifies all Leases for which consents or waivers must be obtained on or prior to the Initial Investment Closing Date (or which have been obtained) in order for such Leases to continue in effect according to their terms after the Initial Investment Closing Date. The Company has not waived any material rights under any Lease which would be in effect on or after the date of this Agreement.

(b) Leased Improvements. The Leased Improvements are operational and available for use in the business of the Company and its Subsidiaries as it is currently conducted. All of the Leased Improvements on the Leased Premises are located entirely on such Leased Premises.

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(c) Real Property. Section 3.34(c) of the Disclosure Schedule contains a complete and accurate list of each parcel of real property owned by the Company or any of its Subsidiaries (the “Owned Properties”). Neither the Company nor any Subsidiary is obligated under or a party to, any option, right of first refusal or any other contractual right to purchase, acquire, sell, assign or dispose of any real property owned or leased by it.

Section 3.35 Inventory; Customers; Suppliers.

(a) The inventory of the Company and its Subsidiaries, whether in its possession or not, (i) is sufficient for the operation of its business in the ordinary course, and (ii) is of a quality and quantity usable or saleable in the ordinary course of its business, subject to applicable reserves reflected in its financial statements.

(b) Section 3.35(b) of the Disclosure Schedule lists each customer that accounted for 5% or more of the total sales on a consolidated basis of the Company and its Subsidiaries, and each supplier from which either the Company or any Subsidiary purchased $100,000 or more of supplies, in each case during the previous three fiscal years of the Company. Neither the Company nor any Subsidiary has received any written or oral notice from any customer or supplier disclosed in Section 3.35(b) of the Disclosure Schedule to the effect that such customer or supplier will terminate all or a substantial portion (including, as applicable, future purchase order releases) of its historical business relationship with the Company, and neither the Company nor any Subsidiary has any reason to believe that any such notice will be delivered or that any relationship of the Company or any Subsidiary with any customer or supplier set forth on Section 3.35(b) of the Disclosure Schedule will be terminated.

Section 3.36 Government Contracts.

(a) With respect to each contract between the Company, any Subsidiary or any Owned Entity, on the one hand, and any Governmental Entity, on the other hand, for which (w) performance has not been or was not completed or (x) final payment has not been or was not received, in either case, prior to the date that is three years prior to the date of this Agreement, and each outstanding bid, quotation or proposal by the Company, any Subsidiary or any Owned Entity (each, a “Bid”) that if accepted or awarded could lead to a contract between the Company, any Subsidiary or Owned Entity, on the one hand, and any Governmental Entity, on the other hand, including any facilities contract for the use of government-owned facilities (each such contract or Bid, a “Company Government Contract”) and each contract between the Company, any Subsidiary or Owned Entity, on the one hand, and any prime contractor or upper-tier subcontractor, on the other hand, relating to a Contract between such Person and any Governmental Entity for which (y) performance has not been or was not completed or (z) final payment has not been or was not received, in either case, prior to the date that is three years prior to the date of this Agreement, and each outstanding Bid that if accepted or awarded could lead to a contract between the Company, any Subsidiary or Owned Entity, on the one hand, and a prime contractor or upper-tier subcontractor, on the other hand, relating to a contract between such Person and any Governmental Entity (each such contract or Bid, a “Company Government Subcontract”):

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(i) no reasonable basis exists to give rise to a claim for fraud (as such concept is defined under the state or federal laws of the United States) in connection with any Company Government Contract or Company Government Subcontract or under the United States False Claims Act, the United States Truth in Negotiations Act or the United States Procurement Integrity Act;

(ii) neither the United States Government nor any prime contractor, subcontractor or other Person or entity has notified the Company, any Subsidiary or Owned Entity, in writing, that the Company, any Subsidiary or Owned Entity has, or may have, breached or violated in any material respect any law, certification, representation, clause, provision or requirement pertaining to such Company Government Contract or Company Government Subcontract, and all facts set forth or acknowledged by any representations, claims or certifications submitted by or on behalf of the Company, any Subsidiary or Owned Entity in connection with such Company Government Contract or Company Government Subcontract were current, accurate and complete in all material respects on the date of submission; and

(iii) neither the Company nor any Subsidiary or Owned Entity has, within the past three years, received any notice of termination for convenience, notice of termination for default, cure notice or show cause notice (or, in the case of contracts governed by laws other than the state or federal laws of the United States, the functional equivalents thereof, if any) pertaining to such Company Government Contract or Company Government Subcontract, and the Company is not aware of any basis for any such notice.

(b) Neither the Company nor any Subsidiary or Owned Entity, nor any of the respective directors, officers, employees, consultants or agents, is, or within the past three years has been, (i) under any administrative, civil or criminal investigation, audit, indictment or information by any Governmental Entity, (ii) the subject of any audit or investigation by the Company, any Subsidiary or Owned Entity, in the case of each of clauses (i) and (ii), with respect to any alleged act or omission arising under or relating to any Company Government Contract or Company Government Subcontract or (iii) debarred or suspended, or proposed for debarment or suspension, or received notice of actual or proposed debarment or suspension (or for purposes of this clause (iii), in the case of contracts governed by laws other than the state or federal laws of the United States, the functional equivalents thereof, if any), from participation in the award of any contract with, or grant of any authorization from, any Governmental Entity; provided that, in the case of clause (iii), such representation shall be made with respect to directors, officers, employees, consultants or agents of the Company, any Subsidiary or Owned Entity. There exist no facts or circumstances that, to the Knowledge of the Company, would warrant the institution of suspension or debarment Proceedings or a finding of nonresponsibility or ineligibility with respect to the Company, any Subsidiary or Owned Entity or any of their respective directors, officers or managers, in any such case, for purposes of doing business with any Governmental Entity.

(c) Neither the Company nor any Subsidiary or Owned Entity has received notice of any (i) outstanding claims (including claims relating to bid or award protest Proceedings (or, in the case of Contracts governed by laws other than the state or federal laws of the United States, the functional equivalents thereof, if any)) against the

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Company, any Subsidiary or Owned Entity, either by any Governmental Entity or by any prime contractor, subcontractor, vendor or other Person, arising under or relating to any Company Government Contract or Company Government Subcontract, and (ii) outstanding claims or requests for equitable adjustment (or, in the case of Contracts governed by laws other than the state or federal laws of the United States, the functional equivalents thereof, if any) or disputes (including claims, requests and formal disputes relating to bid or award protest Proceedings) between the Company, any Subsidiary or Owned Entity, on the one hand, and the United States government, on the other hand, under the United States Contract Disputes Act, as amended, or any other law or between the Company, any Subsidiary or Owned Entity, on the one hand, and any prime contractor, subcontractor, vendor or other Person, on the other hand, arising under or relating to any Company Government Contract or Company Government Subcontract. Neither the Company nor any Subsidiary or Owned Entity has received any adverse or negative past performance evaluations or ratings in connection with any Company Government Contract, Company Government Subcontract or other contract with a Governmental Entity within the past three years. Neither the Company nor any of its Subsidiaries has (i) any interest in any pending or potential claim against any Governmental Entity or (ii) any interest in any pending claim against any prime contractor, subcontractor, vendor or other Person arising under or relating to any Company Government Contract or Company Government Subcontract.

Section 3.37 Indebtedness. Section 3.37 of the Disclosure Schedule sets forth all Indebtedness of the Company and any Subsidiary or Owned Entity.

Section 3.38 Accounts Receivable. All accounts receivable, notes receivable and other receivables of the Company and any Subsidiary that are reflected on the Latest Balance Sheet represent or will represent, as applicable, bona fide receivables created in the ordinary and usual course of business in connection with bona fide transactions and consistent with past practice, and are valid and enforceable receivables, net of any reserves for doubtful accounts recorded on the Latest Balance Sheet.

Section 3.39 Full Disclosure. The statements by the Company contained in this Agreement, the exhibits to this Agreement, the certificates and documents required to be delivered by the Company and its Subsidiaries to the Purchaser under this Agreement and in the information delivered to the Purchaser and its representatives, taken together as a whole, do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements contained in this Agreement and any other Transaction Document not materially misleading in light of the circumstances under which such statements were made.

ARTICLE IV
REPRESENTATIONS AND WARRANTIES BY THE PURCHASER

The Purchaser represents and warrants to, and covenants with, the Company as follows:

Section 4.1 Investment Intent; Authority. The Purchaser is acquiring the Perseus Securities for investment for its own account, and not as a nominee or agent for investment

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and not with a view to or for resale in connection with any distribution or public offering thereof within the meaning of the Securities Act. The Purchaser is a limited partnership duly formed, validly existing and in good standing under the Laws of the State of Delaware. The Purchaser has the requisite legal right and power, as applicable, to enter into, execute, deliver and perform its obligations under this Agreement and the other Transaction Documents. Assuming due execution and delivery by the other parties hereto, this Agreement is, and upon their execution, the other Transaction Documents to which the Purchaser is a party will be, valid and binding obligations of the Purchaser, enforceable in accordance with their terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors’ rights and remedies generally.

Section 4.2 Securities Not Registered. The Purchaser understands and acknowledges that none of the Perseus Securities will be registered under the Securities Act or qualified under any state securities Laws (collectively, “Registered,” and the act of having securities registered means “Registration”), and that the Perseus Securities will be issued in reliance upon one or more exemptions from Registration, and that the Company’s reliance upon each such exemption is predicated upon the Purchaser’s representations contained in this Agreement. The Purchaser understands and acknowledges that resale of the Perseus Securities may be restricted indefinitely unless they are subsequently Registered.

Section 4.3 Noncontravention. None of the execution, delivery and performance of and compliance with this Agreement and the other Transaction Documents, nor the purchase of any of the Perseus Securities as contemplated hereby or in any other Transaction Document, will result in or constitute a material breach, default or violation of (i) the organizational documents of any Purchaser, as in effect at that time, (ii) any agreement, contract, lease, license, instrument or commitment (oral or written) to which the Purchaser is a party or is bound or (iii) any Law, rule, regulation, statute or order applicable to the Purchaser, or its respective properties.

Section 4.4 Anti-Money Laundering Laws.

(a) The Purchaser represents and warrants that (i) neither it nor, to Purchaser’s knowledge, any of its officers, partners, shareholders, owners, members, employees, or agents are Blocked Persons, or controlled by, owned by, or otherwise acting on behalf of, any Blocked Person, or otherwise prohibited from engaging in financial transactions with U.S. persons and (ii) the funds comprising the Investment are lawfully derived, held, and invested in accordance with applicable laws and regulations, including without limitation the Bank Secrecy Act, Money Laundering Control Act of 1986, and the International Money Laundering and Anti-Terrorist Financing Act of 2001.

(b) The Purchaser represents, warrants, and covenants that it (i) has an anti-money laundering policy reasonably designed to ensure compliance with the Bank Secrecy Act and applicable federal laws and regulations with respect to money laundering, (ii) is and shall remain in compliance with all applicable foreign assets control regulations as may be promulgated from time to time by the U.S. Department of the Treasury and (iii) is and shall remain in compliance with applicable money laundering laws and regulation, including without limitation those listed in paragraph (a)(ii) of this Section; except in each

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case where any non-compliance with any of sub-clauses (i)-(iii) above would not reasonably be expected to be material.

(c) The Purchaser covenants that it shall report to the Company within twenty-four hours of becoming aware of the fact, if the Purchaser, or any of its officers, partners, shareholders, owners, members, employees, or agents are designated as Blocked Persons or otherwise become prohibited from acquiring and/or holding a financial interest in a U.S. person or entity.

Section 4.5 No Transfer. The Purchaser will not dispose of any of the Perseus Securities, other than in conjunction with an effective registration statement or applicable exemption from Registration under the Securities Act and other than in compliance with the applicable state securities Laws.

Section 4.6 Accredited Investor. The Purchaser is an “accredited investor” within the meaning of Rule 501(a) of Regulation D under the Securities Act, as presently in effect.

ARTICLE V
COVENANTS

Section 5.1 Access. To the extent permitted by Law and not in contravention of the rights of third parties, the Company shall permit representatives of the Purchaser reasonable access to examine the corporate books and make copies or extracts from such corporate books and to discuss the affairs, finances and accounts of the Company and its Subsidiaries with the principal officers and employees of the Company upon request, all during regular business hours, as often as the Purchaser may reasonably request; provided, however, that the Purchaser or its representatives, as the case may be, shall hold all information so received in strict confidence, shall not trade in the Common Shares while in possession of material non-public information, and shall use such information only for the purpose of enforcement of this Agreement or the Transaction Documents and for the valuation of its investment in the Company.

Section 5.2 Communication with Accountants. The Company authorizes the Perseus Directors to communicate with its independent public accountants and tax advisors to the same degree afforded to any other member of the Company’s Board. Notwithstanding the foregoing, the Company shall facilitate discussions between such accountants and the Purchaser’s representatives in the event the Purchaser reasonably desire to speak with such accountants, and shall authorize those accountants to disclose to the Purchaser any and all reasonably requested financial statements and other supporting financial documents and schedules (excluding their internal working papers) including copies of any management letter with respect to the business, financial condition and other affairs of the Company and any Subsidiary. Any such information provided to the Purchaser may additionally be provided to the Company’s directors at their request or at the Company’s own determination. At or before the Initial Investment Closing Date, the Company shall deliver a letter addressed to such accountants and tax advisors instructing them to comply with the provisions of this Section 5.2.

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Section 5.3 Tax Law Compliance. The Company shall pay all transfer, excise, withholding and similar Taxes (not including income or franchise Taxes) that it is obligated by applicable Law to so pay in connection with the issuance, sale, delivery or transfer by the Company to the Purchaser of the Perseus Securities. The Company shall not be responsible for any Taxes in connection with the transfer by the Purchaser of any Promissory Note, Warrant or other Perseus Securities or any other Taxes which it is not obligated by applicable Law to pay in its capacity as borrower.

Section 5.4 Security and Pledge Agreements. The Company and each Material Subsidiary shall grant to the Purchaser a perfected lien on and security interest, subject to Permitted Liens, in all of its assets and properties, whether now or hereafter existing, owned or acquired, all in accordance with the terms of the Security and Pledge Agreement and the Subsidiary Security and Pledge Agreements, as applicable. The Company shall assist the Purchaser with any and all filings necessary or appropriate and reasonably requested by the Purchaser for the perfection of the security interests granted under this Agreement provided that such security interests shall be subordinate to the security interests of the holders of the Permitted Existing Secured Indebtedness pursuant to the Intercreditor Agreement.

Section 5.5 Stockholder Approval. In consultation with the Purchaser, the Company shall use its best efforts to obtain the Stockholder Approval as promptly as practicable after the date hereof. Without limiting the generality of the foregoing, (i) the Company shall promptly file preliminary proxy solicitation materials with the SEC, promptly respond to any comments from the staff of the SEC in connection therewith and take all other actions to release such materials for delivery to the Company’s stockholders as promptly as practicable, (ii) the Company shall call a meeting of the Company’s stockholders to be held as promptly as practicable after the release of such proxy solicitation materials and (iii) unless the Board determines in good faith that doing so would be inconsistent with its fiduciary duties under applicable Law, the Board shall recommend to the Company’s stockholders that they grant the Stockholder Approval (and shall not revoke or rescind its recommendation) and the Company shall include the Board’s recommendation in such proxy solicitation materials. The Company shall provide the Purchaser and its counsel with drafts of all proxy solicitation materials sufficiently in advance of their filing to permit the Purchaser and its counsel to review and comment thereon, shall promptly advise the Purchaser of any communications from the staff of the SEC regarding such proxy solicitation materials and promptly provide the Purchaser and its counsel with copies of any written comments or other communications from the SEC’s staff regarding such proxy solicitation materials. The Company shall use reasonable efforts in good faith to incorporate any comments provided by the Purchaser regarding such proxy solicitation materials. If advisable, the Company shall retain a proxy solicitation firm to assist in the solicitation of proxies in connection with the Stockholder Approval. The Purchaser shall reasonably cooperate with the Company in connection with its efforts to obtain the Stockholder Approval, including by providing any information regarding the Purchaser that may be required to be included in any proxy solicitation materials, provided that neither Purchaser shall be required to agree to any change in the terms of the Perseus Securities or any modification or amendment to this Agreement or any other Transaction Document.

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Section 5.6 Board Representation.

(a) Effective as of the Initial Investment Closing Date, the Purchaser shall be allowed one representative (the “Perseus Observer”) of its choice, who shall be John Fox, Michael Miller or another person reasonably acceptable to the Board, to attend all meetings of the Board in a nonvoting capacity. In connection therewith, the Company shall provide the Perseus Observer with copies of all notices, minutes, consents and other materials, financial or otherwise, which the Company provides to its Board. Notwithstanding the foregoing, the Purchaser shall not be entitled to exercise the Perseus Observer rights set forth herein at any time that a Perseus Director is then serving on the Board; provided, however, that the Company reserves the right to exclude such Perseus Observer from access to any material or meeting or portion thereof if the Company in good faith believes that such exclusion is necessary to preserve the attorney-client privilege or for other similar reasons. This right shall expire at such time that the Company has repaid the Senior Secured Note in full and the Perseus Ownership Percentage falls below 5%.

(b) Effective as of the Subsequent Investment Closing, the Company shall take all actions within its control to provide the Purchaser with the representation on the Board contemplated by this Section 5.6, including without limitation appointing the Requisite Number of representatives identified by the Purchaser to the Board, granting one Perseus Director the rights contemplated by clause (ii) of this Section 5.6(b), and, unless the Board determines in good faith that doing so would be inconsistent with its fiduciary duties under applicable Law, nominating representatives identified by the Purchaser for election as directors of the Company at any meeting of the Company’s stockholders at which such directors will be elected, recommending their election to the Board, and soliciting and voting proxies in favor of their election.

(i) The “Requisite Number” of Perseus Directors shall be the number of directors, rounded up to the next whole number, necessary for the Purchaser’s percentage representation on the Board to be at least equal to the percentage of the Company’s then outstanding Common Shares the Purchaser and its Affiliates hold assuming the conversion of the Senior Secured Convertible Note and the exercise of all Warrants (the “Perseus Ownership Percentage”). The Purchaser shall promptly notify the Company in writing when the Requisite Number of Perseus Directors increases or decreases following the Subsequent Investment Closing, along with information about its holdings reasonably sufficient for the Company to verify the Perseus Ownership Percentage, and the Requisite Number shall not be deemed to have changed until Perseus shall have given that notice. Notwithstanding this provision, the Requisite Number shall become zero at such time as the Perseus Ownership Percentage falls below 5%. In the event (i) the Requisite Number of Perseus Directors constitutes a majority of the members of the Board and (ii) it is necessary for one of such Perseus Directors to be “independent” within the definition of such term contained in Nasdaq Rule 4200(a)(15) (or any successor rule) for the Company to be in compliance with applicable Nasdaq Rules, Perseus shall select one Perseus Director who is “independent” under such rule.

(ii) At least one Perseus Director shall have the right to attend and participate fully in a non-voting capacity in all meetings of each of the Board’s Nominating

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and Corporate Governance and Compensation Committees, or any equivalent committees, including receipt of all information provided to Committee members; provided, however, that the Company reserves the right to exclude such Perseus Director from access to any material or meeting or portion thereof if the Company in good faith believes, upon advice of counsel, that such exclusion is necessary to preserve the attorney-client privilege or for other similar reasons.

(iii) The Purchaser shall timely notify the Company in writing of any Person designated by it pursuant to this Section 5.6 to stand as a nominee for election to the Board, and shall promptly furnish all information necessary for all required filings with the SEC. In the absence of any notice from the Purchaser, the Perseus Directors then serving and previously designated by the Purchaser shall be renominated.

(iv) Any vacancy on the Board created by the resignation, removal, incapacity or death of any Perseus Director shall be filled by another Perseus Director in accordance with the terms of this Section 5.6 and Article II, Section 8 of the Company’s Bylaws.

(c) Each Perseus Director shall be entitled to (i) the same compensation paid to other non-management directors of the Company, (ii) reimbursement for reasonable out-of-pocket expenses (including but not limited to travel and lodging) incurred in connection with the performance of his or her duties as a director (including attendance at meetings of the Board or any committees), (iii) directors’ liability insurance and (iv) indemnification in accordance with the Company’s Certificate of Incorporation, Bylaws and policies established by the Board for all directors generally. The Perseus Observer shall be entitled to reimbursement for reasonable out-of-pocket expenses (including but not limited to travel and lodging) incurred in connection with attendance at meetings of the Board. The Company shall pay all compensation and reimbursement for expenses provided for under this Section 5.6(c) to Perseus, L.L.C. at the address listed in Section 8.7 unless otherwise notified by the Purchaser.

(d) The Company shall take all actions within its control so that, as of the Initial Investment Closing, the size of the Board is five After the Initial Investment Closing, the Company shall not permit the size of the Board to be increased without the prior written consent of the Purchaser.

(e) The obligations of the Company under this Section 5.6 (other than under clause (c) of this Section 5.6) shall terminate at such time as the Purchaser and its Affiliates hold Common Shares or other securities convertible into or exercisable for Common Shares that upon such conversion or exercise, in the aggregate, would represent less than 5% of the Company’s outstanding Common Shares on a fully-diluted basis.

Section 5.7 Stop-Orders. The Company will advise the Purchaser promptly after it receives any notice of issuance by the SEC, any state securities commission or any other regulatory authority of any cease trade order, stop order or of any Order preventing or suspending any offering of or trading in any securities of the Company, or of the suspension of the

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qualification of the Common Shares for offering or sale in any jurisdiction, or the initiation of any Proceeding for any such purpose.

Section 5.8 Listing. The Company will use its commercially reasonable efforts to maintain the listing of its Common Shares on Nasdaq or another national securities exchange, and will comply in all material respects with the Company’s reporting, filing and other obligations under the by-laws and rules of such exchanges, as applicable.

Section 5.9 Market Regulations. The Company shall notify Nasdaq of, and make all necessary filings with federal or state securities regulators in accordance with their requirements in connection with, the transactions contemplated by this Agreement and the other Transaction Documents, and shall take all other necessary action and Proceedings as may be required and permitted by applicable Law, for the legal and valid issuance of the Perseus Securities to the Purchaser, and promptly provide copies of all such notices and filings to the Purchaser.

Section 5.10 Reporting Requirements. The Company will timely make all filings required to be filed with the SEC or any state securities regulator, including (i) all periodic reports required under the Exchange Act; (ii) definitive proxy statements, (iii) reports on Form 8-K report and (iv) such other reports as the Company may be required to file from time to time pursuant to applicable securities Laws, taking into account any and all extensions granted or permitted by the applicable securities regulator, and refrain from terminating its status as a reporting issuer.

Section 5.11 Information.

(a) The Company shall deliver to the Purchaser, within a reasonable period of time following the completion of the relevant period, which shall not be later than the date on which such information is required to be delivered or otherwise made available to any other Person, (i) projections for the Company’s and its Subsidiaries’ performance for the following fiscal year, (ii) projections for the Company’s and its Subsidiaries’ performance for the following two fiscal quarters and (iii) projections for the Company’s and its Subsidiaries’ performance for the following three calendar months. This right shall expire at such time as there is no Promissory Note outstanding.

(b) All material non-public information and data, in whatever form, obtained by the Purchaser in respect of the Company and the subject-matter of this Agreement (the “Confidential Information”) shall be held by the Purchaser in the strictest confidence and shall not be disclosed to any third party; provided, that such Confidential Information may be disclosed if the disclosure (i) is made with the consent of the Company, (ii) is made to an Affiliate (including any general partner, manager, director, officer or employee) of any Purchaser or of any Affiliate, and such Affiliate agrees to be subject to such confidentiality provisions, (iii) is required by Law or by a Governmental Entity, (iv) is in respect of information or data that is in the public domain at the time of the disclosure through no fault of the Purchaser or any party to which it has disclosed the information, (v) is made to the Purchaser’s advisors or representatives, which agree to maintain the confidentiality of the Confidential Information or (vi) is received from a third party not

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subject to confidentiality obligations with respect to such information. Perseus shall use commercially reasonably efforts to cause its Affiliates, employees, members, agents, representatives, advisors and other related parties, including the Perseus Observer, to observe the restrictions set forth this Section 5.11(a) as if they were the Purchaser, and Perseus shall be responsible to the Company for any breach of the provisions of this Section 5.11(a) by any of such parties.

Section 5.12 Insurance.

(a) The Company shall and shall cause each Subsidiary to maintain insurance (i) covering, without limitation, fire, theft, burglary, public liability, property damage, product liability and workers’ compensation and (ii) on all property and assets material to the operation of the business, all in amounts customary for the Company’s industry. The Company shall, and shall cause each of its Subsidiaries to, pay all insurance premiums payable by them.

(b) Effective upon the first appointment of a Perseus Director, the Company shall obtain and at all times thereafter maintain directors’ and officers’ insurance (“D&O Insurance”), in an amount not less than $5,000,000, if available on commercially reasonable terms, as determined by the Board. In any event, the Company shall obtain and at all times thereafter maintain D&O Insurance in an amount not less than $3,000,000.

Section 5.13 Properties. The Company will keep its properties in good repair, working order and condition, reasonable wear and tear excepted, and from time to time make all necessary repairs, renewals, replacements, additions and improvements thereto. The Company will at all times comply in all material respects with each provision of all leases to which it is a party or under which it occupies property.

Section 5.14 Protective Provisions.

(a) For so long as the Perseus Ownership Percentage is at least five percent of the Company’s outstanding Common Shares, the prior written consent of the Purchaser shall be required for the Company or any Subsidiary (as applicable) to take any of the following actions:

(i) the authorization, creation or issuance of any shares of any class or series of capital stock of the Company;

(ii) the incurrence by the Company or any Subsidiary of any indebtedness or the issuance of any debt securities by the Company or any of its Subsidiaries in excess of $1,000,000, except pursuant to this Agreement;

(iii) any recapitalization or reorganization of the Company or any of its Subsidiaries;

(iv) the authorization, declaration or payment of any dividends on any class of the Company’s stock;

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(v) the redemption or repurchase of any shares of capital stock by the Company (other than repurchases of Common Shares from employees upon the termination of their employment pursuant to the terms of their employment agreements or on other terms approved by the Board); or

(vi) any material change in the principal line of business of the Company or its Subsidiaries.

(b) For so long as the Perseus Ownership Percentage is at least five percent of the Company’s outstanding Common Shares, the prior written consent of the Purchaser shall be required for the Company or any of its Subsidiaries (as applicable) to take any of the following actions (unless such action has been approved by Perseus Directors then in office):

(i) (x) acquisition of any assets (including the capital stock of another Person and including by way of merger or consolidation with another Person) or (y) capital expenditures, in the case of either (x) or (y) in one or more related transactions with a value of $1,500,000 per calendar year; or

(ii) the institution or settlement of any material litigation or claims (other than in connection with the Company’s enforcement of its rights, or defense of claims, under this Agreement or the Transaction Documents vis-à-vis the Purchaser or any assignee of the Purchaser).

(c) For so long as the Perseus Ownership Percentage is at least five percent of the Company’s outstanding Common Shares, each of (i) the Company’s annual budget (and any material expenditures that deviate from such budget) for all fiscal years beginning with fiscal year 2008 and (ii) the hiring of a Chief Executive Officer for the Company, must receive the unanimous approval of the Board.

Section 5.15 Right of First Refusal.

(a) Effective after the Initial Investment Closing and for so long as the Perseus Ownership Percentage shall equal at least 10% of the Company’s outstanding Common Shares, the Purchaser shall have the right of first refusal with respect to the following types of transaction (each a “Covered Financing Transaction”):

(i) any financing, whether through issuance of Common Shares, preferred stock or other debt or equity security of the Company or any security convertible into or exercisable for (including a warrant or option), with or without consideration, any Common Share, preferred stock or other debt or equity security of the Company (including any option to purchase such a convertible security) (each a “ROFR Security” and collectively, the “ROFR Securities”), the proceeds of which are intended to be used primarily to fund the Company’s design, development or manufacture of megawatt wind turbines or large scale hydrogen production units (the “Wind and Hydrogen Projects”); and

(ii) any other financing until the Company has, in the aggregate, raised $20,000,000 in net investment proceeds from financings (excluding the proceeds from

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(x) the issuance of the Promissory Notes and (y) any financing of Wind and Hydrogen Projects described in clause (a)(i) above).

For the avoidance of doubt, a financing by the Company to fund general corporate purposes shall not qualify as a Covered Financing Transaction, even in the event that some of the proceeds from such financing are intended to be used to fund the Wind and Hydrogen Projects described under clause (a)(i) above.

(b) In the event that the Company or any Subsidiary of the Company desires to engage in a Covered Financing Transaction, the Company shall deliver a written notice (the “ROFR Notice”) of such intention to the Purchaser. The ROFR Notice shall include the name of the proposed purchaser or Purchaser of the ROFR Securities (the “ROFR Buyers”), the proposed type of security and purchase price, the terms of payment of such purchase price and all other matters relating to such Covered Financing Transaction. Such ROFR Notice shall be accompanied by either (i) a copy of a detailed term sheet or letter of intent relating to the purchase of such ROFR Securities that has been approved by the Company and the ROFR Buyers (or in the case of a Bought Deal prior to approval by the Company or the ROFR Buyers) (an “LOI”) or (ii) a copy of a binding written agreement (or agreements) relating to the purchase of such ROFR Securities (collectively, a “Definitive Agreement”). In the event of any Bought Deal, the Company shall provide copies of any offers or other correspondence relating to such proposed sale as promptly as possible upon receipt thereof.

(c) During the 10 Business Day period commencing on the date the Purchaser receive the ROFR Notice (5 Business Days in the case of a Bought Deal) (the “ROFR Exercise Period”), the Purchaser shall have the right, but not the obligation, to purchase all or a portion of the ROFR Securities described in such ROFR Notice on the terms and subject to the conditions specified in this Agreement and in any accompanying LOI or Definitive Agreement, by delivering to the Company a written notice (the “Perseus ROFR Notice”) reflecting such exercise and in the case of a partial exercise, specifying the number of ROFR Securities the Purchaser, or any one of the Purchaser, desire to purchase. If one of the Purchaser delivers the Perseus ROFR Notice to the Company, and (x) in the event the ROFR Notice was accompanied by a Definitive Agreement, such purchase shall be made on substantially the same or equivalent terms as set forth in this Agreement, or (y) in the event the ROFR Notice was accompanied by an LOI, such purchase shall be subject to the approval by the Company and the participating Purchaser(s) of definitive agreements reflecting such purchase containing representations, warranties, covenants, indemnities and other provisions that are customary for a transaction of such type and magnitude, which each party shall negotiate in good faith. If neither Purchaser delivers the Perseus ROFR Notice to the Company within the respective ROFR Exercise Period, or the closing referenced in the next paragraph does not occur within the time frame set forth in such paragraph (and such failure is principally caused by the Purchaser), the Company shall have 60 days in which to consummate the transaction contemplated in the ROFR Notice before having to re-offer such ROFR Securities to the Purchaser pursuant to this Section 5.15.

(d) The closing of any purchase of the ROFR Securities by the participating Purchaser(s) or its designee shall take place by the later of (i) 20 Business Days

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after the end of the ROFR Exercise Period and (ii) 15 Business Days after approval of such definitive agreements. For purposes of this Section 5.15, “Bought Deal” means an offering of securities to the public where, prior to filing a preliminary prospectus in connection with such offering, the Company will enter into an enforceable agreement with one or more underwriters who agree to purchase all of the securities in the offering.

Section 5.16 Sale of Proton Business. The Company shall take all commercially reasonably actions to consummate the sale of Proton Energy Systems, Inc. (“Proton”) as promptly as practicable on terms and conditions reasonably satisfactory to the Purchaser. Without limiting the generality of the foregoing, within 20 days after the Initial Investment Closing, the Company shall engage a nationally recognized investment banking firm reasonably satisfactory to the Purchaser to solicit offers to purchase the business of Proton. The ultimate decision whether to accept or reject any offer shall be made by the Board in its sole discretion, acting in the exercise of its fiduciary duties, provided, however, that the failure to accept a commercially reasonably offer shall be deemed to be a breach of the applicable covenant contained in this Section 5.16 for purposes of determining whether an Event of Default has occurred or exists under any of the Promissory Notes.

Section 5.17 Compliance with Law. The Company shall, and shall cause each of its Subsidiaries to, comply with all Laws, including Environmental Laws and federal and state securities Laws, applicable to any of them, except non-compliance being contested in good faith through appropriate Proceedings so long as the Company shall have set up and funded sufficient reserves, if any, required under GAAP with respect to such items.

Section 5.18 Affiliate and Related Party Transactions. Without the prior approval of the Purchaser, neither the Company nor any of its Subsidiaries shall permit any Affiliate or other related party to enter into a transaction with the Company or any of its Subsidiaries except for (i) transactions in the ordinary course, and pursuant to the reasonable requirements, of the Company’s business and upon fair and reasonable terms that are fully disclosed to the Purchaser prior to consummation thereof and are no less favorable to the Company or applicable Subsidiary than would be obtained in a comparable arm’s-length transaction with a Person not an Affiliate of the Company or any of its Subsidiaries and (ii) payment of reasonable compensation to employees and directors’ fees, in each case consistent with past practice.

Section 5.19 Termination of Covenants. Other than as provided for by their terms, the covenants set forth in this Article V shall continue in effect until all Obligations, including the full principal amount, all accrued but unpaid interest outstanding and any other amounts owed on the Promissory Notes are repaid in full.

ARTICLE VI
LEGENDS

Section 6.1 Legends. Each certificate representing any of the Perseus Securities shall bear legends substantially in the following form:

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“THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED BY THE HOLDER FOR ITS OWN ACCOUNT, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO THE DISTRIBUTION OF SUCH SECURITIES. THE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”) AND ANY APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND IN COMPLIANCE WITH SUCH STATE SECURITIES LAWS, IN COMPLIANCE WITH RULE 144 UNDER THE SECURITIES ACT, OR AN OPINION OF COUNSEL OR OTHER EVIDENCE REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION AND/OR COMPLIANCE IS NOT REQUIRED.”

The Company may instruct its transfer agent not to register the transfer of the Perseus Securities, unless the conditions specified in the foregoing legend are satisfied.

Section 6.2 Removal of Legends. Any legend endorsed on a certificate pursuant to Section 6.1 and the stop transfer instructions with respect to such Perseus Securities as it applies to Section 6.1 shall be removed and the Company shall issue a certificate without such legend to the holder of such Perseus Securities (i) if such Perseus Securities are Registered for resale and sold under the Securities Act and a prospectus meeting the requirements of Section 10 of the Securities Act is available, (ii) if such legend may be properly removed under the terms of Rule 144 promulgated under the Securities Act or (iii) if such holder provides the Company with an opinion of counsel for such holder, reasonably satisfactory to legal counsel for the Company, to the effect that a sale, transfer or assignment of such Perseus Securities may be made without Registration.

ARTICLE VII
INDEMNIFICATION

Section 7.1 Indemnity. The Company agrees to indemnify and defend and hold harmless the Purchaser, its Affiliates, successors and assigns and each of their respective officers, directors, members, partners, employees and agents (each, a “Indemnified Party,” and collectively, the “Indemnified Parties”) from and against, and agrees to pay or cause to be paid to the Indemnified Parties all amounts equal to the sum of, any and all claims, demands, costs, expenses, losses and other liabilities of any kind (“Losses”) that the Indemnified Parties may incur or suffer (including without limitation all reasonable legal fees and expenses) which arise or result from any breach of any of its representations or warranties, or failure by the Company to perform any of its covenants or agreements, in this Agreement or in any other Transaction Document or in any certificate or document delivered pursuant to this Agreement or any other Transaction Document, including but not limited to any third party claims arising or resulting from such breach or failure, except to the extent such Losses arise out of the gross negligence or willful misconduct of the Purchaser, its Affiliates, successors and assigns and their respective officers, directors, members, partners, employees and agents. The rights of the Purchaser hereunder shall be in addition to, and not

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in lieu of, any other rights and remedies which may be available to it by Law or under the Certificate of Incorporation and Bylaws of the Company or the Transaction Documents.

Section 7.2 Procedures. If a third party shall notify an Indemnified Party with respect to any matter that may give rise to a claim for indemnification under the indemnity set forth above in Section 7.1, the procedures set forth below shall be followed.

(a) Notice. The respective Indemnified Party shall give to the Company (the “Indemnifying Party”) written notice of any claim, suit, judgment or matter for which indemnity may be sought (a “Claim”) under Section 7.1 promptly but in any event within 30 days after the Indemnified Party receives notice thereof, provided, however, that failure by the Indemnified Party to give such notice shall not relieve the Indemnifying Party from any liability it shall otherwise have pursuant to this Agreement except to the extent that the Indemnifying Party is actually prejudiced by such failure. Such notice shall set forth in reasonable detail (x) the basis for such potential claim and (y) the dollar amount, or an estimated dollar amount, as applicable, of such claim. The Indemnifying Party shall have a period of 30 days within which to respond thereto. If the Indemnifying Party does not respond within such 30-day period, the Indemnifying Party shall be deemed to have accepted responsibility for such indemnity.

(b) Defense of Claim. With respect to a claim by a third party against an Indemnified Party for which indemnification may be sought under this Agreement, the Indemnifying Party shall have the right, at its option and subject to the remainder of this Section 7.2, to be represented by counsel of its choice and to assume the defense or otherwise control the handling of any Claim, which is set forth in the notice sent by the Indemnified Party, by notifying the Indemnified Party in writing to such effect within 30 days of receipt of such notice; provided, however, that the Indemnified Party shall have the right to employ counsel to represent it if, in the Indemnified Party’s reasonable judgment based upon the advice of counsel, it is advisable in light of the separate interests of the Indemnified Party, to be represented by separate counsel (including, as applicable, local counsel), and in that event the reasonable fees and expenses of one such separate counsel shall be paid by the Indemnifying Party plus appropriate local counsel, if applicable, for all Indemnified Parties; and, provided further, that the Indemnifying Party shall not have the right to assume the defense of such Claim unless (i) the Indemnifying Party acknowledges fully the rights of the Indemnified Party (and does not contest, as a whole or in part) the Indemnified Party’s indemnification rights for the Claim, (ii) the counsel selected by the Indemnifying Party is reasonably satisfactory to the Indemnified Party, (iii) the Indemnified Party is kept informed of all material developments and is furnished copies of all material papers filed or sent to or from the opposing party or parties and (iv) the Indemnifying Party prosecutes the defense of such Claim with commercially reasonable diligence in a manner which does not materially prejudice the defense of such Claim. If the Indemnifying Party does not give timely notice in accordance with the preceding sentence, the Indemnifying Party shall be deemed to have given notice that it does not wish to control the handling of such Claim. In the event the Indemnifying Party elects (by notice in writing within such 30-day period) to assume the defense of or otherwise control the handling of any such Claim for which indemnity is sought, the Indemnifying Party shall indemnify and hold harmless the Indemnified Party from and against any and all reasonable professional fees (including attorneys’ fees,

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accountants, consultants and engineering fees) and investigation expenses incurred by the Indemnified Party after it provides notice under clause (a) and prior to such election, notwithstanding the fact that the Indemnifying Party may not have been so liable to the Indemnified Party had the Indemnifying Party not elected to assume the defense of or to otherwise control the handling of such Claim. In the event that the Indemnifying Party does not assume the defense or otherwise control the handling of such matter, the Indemnified Party may retain counsel, as an indemnification expense, to defend such Claim.

(c) Final Authority. The Parties shall cooperate in the defense of any such Claim and each shall make available all books and records which are relevant in connection with such claim or litigation. In connection with any Claim with respect to which the Indemnifying Party has assumed the defense or control, the Indemnifying Party will not consent to the entry of any judgment or enter into any settlement with respect to any matter which does not include a provision whereby the plaintiff or claimant in the matter releases the Indemnified Party from all liability with respect thereto, without the written consent of the Indemnified Party, which shall not be unreasonably withheld. In connection with any Claim with respect to which the Indemnifying Party has not assumed the defense or control, the Indemnified Party may not compromise or settle such Claim without the consent of the Indemnifying Party, which shall not be unreasonably withheld or delayed.

(d) Claims Between the Indemnifying Party and the Indemnified Party. Any Claim for indemnification under this Agreement which does not result from the assertion of a Claim by a third party shall be asserted by written notice given by the Indemnified Party to the Indemnifying Party. The Indemnifying Party shall have a period of 30 days within which to respond thereto.

ARTICLE VIII
MISCELLANEOUS

Section 8.1 Waivers and Amendments. Unless otherwise provided, any provision of this Agreement may be amended, waived or modified upon the written consent of the Company and the Purchaser.

Section 8.2 Governing Law. This Agreement and all actions arising out of or in connection with this Agreement shall be governed by and construed in accordance with the Laws of the State of New York, without regard to the conflict of laws provisions thereof.

Section 8.3 Exclusive Jurisdiction. In the event of any action or Proceeding brought by a Party arising out of or in connection with this Agreement or any other Transaction Document, the Parties consent to the exclusive jurisdiction of the federal and state courts located in the State of New York for resolutions of such dispute, and agree not to contest such exclusive jurisdiction or seek to transfer any action relating to such dispute to any other jurisdiction. Each of the Parties hereby submits to personal jurisdiction and waives any objection to venue in the County of New York. Service of process on the Parties in any action arising out of or relating to this Agreement shall be effective if mailed to the Parties in accordance with Section 8.7 of this Agreement.

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Section 8.4 Jury Waiver. THE PARTIES HERETO WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS AGREEMENT.

Section 8.5 Entire Agreement. This Agreement and the other Transaction Documents constitute the full and entire understanding and agreement among the Parties with regard to the subjects of this Agreement and the other Transaction Documents.

Section 8.6 Fees and Expenses.

(a) Reimbursement of Expenses. The Company shall pay all reasonable out-of-pocket expenses and fees and disbursements, including attorneys’ and accountants’ fees, incurred by the Purchaser and its representatives in connection with (i) the negotiation and consummation of the transactions contemplated hereunder, including any due diligence or other review conducted prior to the negotiation of this Agreement, up to an aggregate amount of $650,000 and (ii) any amendment, modification or waiver, or consent with respect to, any of the Transaction Documents or any documentation or agreements in connection therewith requested by the Company (“Transaction Expenses”).

(b) Other Expenses. The Company shall pay all reasonable out-of-pocket expenses and fees and disbursements, including attorneys’ fees, incurred by the Purchaser or on behalf of the Purchaser in connection with any attempt to enforce any right of the Purchaser against the Company, any Subsidiary, or any Person that may be obligated to the Purchaser by virtue of any of the Transaction Documents, to the extent a court of competent jurisdiction determines that the Purchaser are entitled to enforce such right.

Section 8.7 Notices. All notices, requests and other communications hereunder shall be in writing and shall be deemed to have been duly given at the time of receipt if delivered by hand, or at the time the sender receives confirmation of the facsimile transaction if transmitted by facsimile, or three days after being mailed, registered or certified mail, return receipt requested, with postage prepaid, or one day after being mailed via overnight courier service, to the applicable Parties at the address or facsimile number, as applicable, stated below or if any Party shall have designated a different address or facsimile number by notice to the other Parties given as provided above, then to the last address or facsimile number so designated.

If to the Company:

Distributed Energy Systems Corp.
10 Technology Drive
Wallingford, CT 06492

Attention: Ambrose L. Schwallie
Facsimile: (203) 678-2000

with a copy to:

Wilmer Cutler Pickering Hale and Dorr LLP

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1875 Pennsylvania Avenue, NW
Washington, DC 20006

Attention: Brent Siler
Facsimile: (202) 663-6363

If to the Purchaser:

c/o Perseus, L.L.C.
2099 Pennsylvania Ave., N.W.
Suite 900
Washington, DC 20006-1813

Attention: John C. Fox, Senior Managing Director
Teresa Bernstein, Vice President for Legal Affairs
Facsimile: (202) 429-0588

with a copy to:

Arnold & Porter LLP
1600 Tysons Boulevard, Suite 900
McLean, VA 22102-4865

Attention: Robert B. Ott, Esq.
Facsimile: (703) 720-7399

Section 8.8 Validity. If any provision of this Agreement or any of the Transaction Documents shall be judicially determined to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions of this Agreement shall not in any way be affected or impaired thereby.

Section 8.9 Counterparts. This Agreement may be executed in any number of counterparts. Signatures on this Agreement may be communicated by facsimile or electronic transmission and shall be binding upon the parties so transmitting their signatures. Counterparts with original signatures shall be provided to the other parties following the applicable facsimile or electronic transmission, provided that the failure to provide the original counterpart shall have no effect on the validity or the binding nature of this Agreement. No Party shall raise facsimile or electronic delivery of a signature or the fact that any signature or agreement or instrument was transmitted or communicated by a facsimile or e-mail as a defense to the formation or enforceability of a contract and each such Party forever waives any such defense.

Section 8.10 Publicity.

(a) Neither of the Purchaser nor the Company shall issue any press release or make any public disclosure regarding the transactions contemplated hereby unless such press release or public disclosure is approved by those parties mentioned in such press

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release or public disclosure in advance. Notwithstanding the foregoing, each of the Parties may, if required by the SEC, Nasdaq or other regulatory bodies, make such public disclosures with respect to the transactions contemplated hereby as each may be advised by counsel is legally necessary or advisable; provided, however, that the disclosing Party shall give the other Party prior written notice of such requirement and a copy of the proposed public disclosure, in all cases with sufficient time for such other Parties to seek a protective order or other limit on the proposed public disclosure (unless the disclosing party would suffer penalties or sanctions for failure to immediately disclose such information).

(b) The Parties hereto acknowledge that (i) immediately following the execution of this Agreement, the Company intends to file its quarterly report on Form 10-Q for the quarter ended March 31, 2007, which report will include disclosure regarding this Agreement and the transactions contemplated hereby and thereby, (ii) immediately following the execution of this Agreement, the Company intends to issue a press release announcing the execution of this Agreement and (iii) within four Business Days of the date of this Agreement, the Company intends to file with the SEC a current report on Form 8-K regarding the transactions contemplated hereby, which report will include certain of the Transaction Documents attached as exhibits thereto. The Purchaser hereby agrees that it shall not seek a protective order or other limit on the proposed public disclosure of the Transaction Documents as exhibits to such report. The Company hereby agrees that it shall provide the Purchaser with a copy of any such current report on Form 8-K at least two Business Days prior to the intended date of such filing and shall not file such report unless approved in advance by the Purchaser, which approval shall not be unreasonably withheld or delayed.

Section 8.11 Succession and Assignment. Except as otherwise expressly provided in this Agreement and subject to the other Transaction Documents and applicable Law, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the successors, assigns, permitted transferees, heirs, executors and administrators of the Parties. This Agreement may not be assigned by any Party without the prior written consent of the other Parties; provided, however, that either of the Purchaser may assign its rights hereunder to an Affiliate of the Purchaser without the prior written consent of the Company, so long as the Purchaser provides prompt written notice to the Company of such assignment. Such assignee shall have no additional rights of assignment except to other Affiliates of the Purchaser.

Section 8.12 Termination. The obligations of the Purchaser to be performed at the Subsequent Investment Closing shall terminate, at the option of the Purchaser, if the Stockholder Approval has not been obtained by the maturity date of the Senior Secured Note. The Purchaser may exercise this termination right by providing the Company with a written notice of termination. All other provisions of this Agreement and the other Transaction Documents that have been executed and delivered prior to or at the Initial Investment Closing shall continue in effect notwithstanding any such termination.

Section 8.13 Further Assurances. Each of the Parties shall promptly do, make, execute, deliver, or cause to be done, made, executed or delivered, all such further acts, documents and things as the other Parties may require, acting reasonably, from time to time,

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for the purpose of giving effect to this Agreement and shall take such steps as may be reasonably within its power to implement the full extent of this Agreement.

Section 8.14 No Strict Construction. The Parties have participated jointly in the negotiation and drafting of this Agreement and each other Transaction Document. In the event an ambiguity or question of intent or interpretation arises, this Agreement and each other Transaction Document shall be construed as if drafted jointly by the Parties, and no presumption or burden of proof shall arise favoring or disfavoring any Party by virtue of the authorship of any of the provisions of this Agreement or any other Transaction Document.

[signatures appear on following page]

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IN WITNESS WHEREOF, the Parties have executed and delivered this Agreement as of the day and year first written above.


DISTRIBUTED ENERGY SYSTEMS CORP.

	By:	/s/ Ambrose Schwallie

		Name: Ambrose Schwallie
		Title: Chief Executive Officer

PERSEUS PARTNERS VII, L.P.

By:	Perseus Partners VII GP, L.P.,
	its general partner

By:	Perseus Partners VII GP, L.L.C.,
	its general partner

By:	/s/ John C. Fox

	John C. Fox
	Senior Managing Director

Signature Page
Securities Purchase Agreement

SCHEDULE I

“Additional Secured Notes” has the meaning set forth in the Senior Secured Note.

“Affiliate” means with respect to any Person, any other Person that directly or indirectly controls, is controlled by or is under common control with such Person.

“Agreement” has the meaning set forth in the preamble to this Agreement.

“Anti-Bribery Laws” has the meaning set forth in Section 3.32.

“Bid” has the meaning set forth in Section 3.36(a).

“Blocked Person” means any Person: (i) listed in the annex to, or otherwise subject to the provisions of, Executive Order No. 13224; (ii) a Person owned or controlled by, or acting for or on behalf of, any Person that is listed in the annex to, or is otherwise subject to the provisions of, Executive Order No. 13224; (iii) a Person with which any Purchaser is prohibited from dealing or otherwise engaging in any transaction by any Anti-Terrorism Law; (iv) a Person that commits, threatens or conspires to commit or supports “terrorism” as defined in Executive Order No. 13224; or (v) a Person that is named a “specially designated national” or “blocked person” on the most current list published by OFAC or other similar list.

“Board” has the meaning set forth in the recitals of this Agreement.

“Bought Deal” has the meaning set forth in Section 5.15(d).

“Business Day” means any day other than a Saturday, Sunday or other day on which the national or state banks located in the State of New York, the State of Connecticut or the District of Columbia are authorized to be closed.

“Business Plan” means the business plan as prepared each year by the Company, as amended and restated from time to time during that year, and with regard to the business plan for the current year, as delivered to the Purchaser prior to the Effective Date.

“CERCLA” means the Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C. § 9601, et seq.), as amended, and all rules, regulations and standards issued thereunder.

“Claim” has the meaning set forth in Section 7.2(a).

“Closing Dates” has the meaning set forth in Section 1.3.

“Closings” has the meaning set forth in Section 1.3.

“COBRA” means the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended.

Schedule I-1

“Code” means the Internal Revenue Code of 1986, as amended from time to time, and the regulations promulgated thereunder.

“Common Shares” has the meaning set forth in the recitals of this Agreement.

“Company” has the meaning set forth in the preamble to this Agreement.

“Company Government Contract” has the meaning set forth in Section 3.36(a).

“Company Government Subcontract” has the meaning set forth in Section 3.36(a).

“Condition” means any condition that results in or otherwise relates to an Environmental Liability.

“Covered Financing Transaction” has the meaning set forth in Section 5.15.

“D&O Insurance” has the meaning set forth in Section 5.12(b).

“Definitive Agreement” has the meaning set forth in Section 5.15(b).

“Disclosure Schedule” has the meaning set forth in the introductory paragraph to Article III of this Agreement.

“Draft Form 10-Q” means the Company’s draft report on Form 10-Q for the first quarter of 2007 delivered to the Purchaser on May 3, 2007.

“Effective Date” means the date that this Agreement is executed by the Parties.

“Environmental Laws” means all current and future Laws which address, are related to, or are otherwise concerned with environmental, health or safety issues (including occupational safety and health).

“Environmental Liabilities” means any obligations or liabilities (whether asserted or unasserted, known or unknown, including any notices, claims, complaints, suits or other assertions of obligation or liability) that are (a) related to any environmental, health or safety issues, and (b) based upon or related to any provision of Environmental Law. The term “Environmental Liabilities” includes (without limitation) (i) fines, penalties, judgments, awards, settlements, Losses, damages (including foreseeable and unforeseeable consequential damages), costs, fees (including attorneys’ and consultants’ fees), expenses and disbursements; (ii) defense and other response to an administrative or judicial action (including notices, claims, complaints, Orders, suits and other assertions of liability); and (iii) financial responsibility for (x) cleanup costs and injunctive relief, including any Removal, Remedial or Response actions, and natural resource damages, and (y) any other compliance or remedial measures.

“Environmental Permit” means any Permit that is authorized pursuant to an Environmental Law.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

Schedule I-2

“ERISA Affiliate” means any entity which is a member of a “controlled group of corporations” with, under “common control” with, or a member of an “affiliated service group” with, or otherwise required to be aggregated with, the Company or any Subsidiary or Owned Entity as set forth in section 414(b), (c), (m) or (o) of the Code.

“Exchange Act” has the meaning set forth in Section 3.8.

“GAAP” has the meaning set forth in Section 3.8.

“Governmental Entity” means any U.S. or non-U.S. federal, state, provincial, regional, local or municipal legislative, executive or judicial department, commission, board, bureau, agency, office, tribunal, court or other instrumentality, governmental or quasi-governmental, public international organization and any applicable stock exchange or securities regulatory authority.

“Guaranty” and “Guaranties” mean the guaranty entered into by each of the Company’s Material Subsidiaries, substantially in the form of Exhibit E to this Agreement.

“Indebtedness” means (a) all obligations for borrowed money (including all notes payable and drafts accepted representing extensions of credit and all obligations evidenced by bonds, debentures, notes or other similar instruments on which interest charges are customarily paid, (b) all obligations, contingent or otherwise, relative to the face amount of all letters of credit, whether or not drawn, and banker’s acceptance issued for the account of the Company, any Subsidiary or any Owned Entity, (c) all capitalized lease obligations, (d) all purchase money indebtedness, (e) all obligations to pay the deferred purchase price of property or services (excluding trade accounts payable arising in the ordinary course of business) and Indebtedness secured by a Lien on property owned or being purchased (including Indebtedness arising under conditional sales or other title retention agreements), whether or not such Indebtedness shall have been assumed by the Company, any Subsidiary or any Owned Entity or is limited in recourse and (f) all obligations in respect of, and obligations (continent or otherwise) to purchase or otherwise acquire, or otherwise assure a creditor against loss in respect of, Indebtedness of another Person of the type described in clauses (a), (b), (c), (d) or (e) above.

“Indemnified Party” and “Indemnified Parties” have the meanings set forth in Section 7.1.

“Indemnifying Party” has the meaning set forth in 7.2.

“Initial Investment Closing” means the closing at which the Senior Secured Note and the Initial Investment Warrant are sold to the Purchaser.

“Initial Investment Closing Date” means the third Business Day after which all conditions for Closing have been satisfied or are capable of being satisfied, or such other date as agreed to by the Parties.

“Initial Investment Warrant” has the meaning set forth in Section 1.2(a).

Schedule I-3

“Intercreditor Agreement” means any intercreditor agreement entered into among the Purchaser, the Company, any Subsidiary, as applicable, and the Company’s creditors under the Permitted Existing Secured Indebtedness, substantially in the form of the intercreditor agreement attached as Exhibit F to this Agreement.

“Investment” has the meaning set forth in Section 1.1(c).

“Jefferies” has the meaning set forth in Section 2.2(j).

“Knowledge” when used to refer to the Company, means the actual knowledge of Ambrose L. Schwallie, Peter J. Tallian, Walter W. Schroeder, Betsey Anderson, Rob Friedland, Mark Murray, Bob Nieszczeaewski, Erika Schramm, Laurie Bird or Dave Christensen after reasonable inquiry of appropriate subordinate personnel or books and records of the Company with respect to the matter in question.

“Latest Balance Sheet” means the balance sheet as part of the Draft Form 10-Q.

“Law” means all United States and non-U.S. federal, state and local laws, statutes, rules, regulations, standards, requirements, rules and principles of common law, ordinances and codes, now or hereafter in effect, including any judicial and administrative interpretations thereof, and all Orders.

“Leased Improvements” means all leasehold improvements and fixtures located on the Leased Premises.

“Leased Premises” has the meaning set forth in Section 3.34(a).

“Lien” means any security interest, pledge, bailment, mortgage, hypothecation, deed of trust, conditional sales and title retention agreement (including any lease in the nature thereof), charge, encumbrance or other similar arrangement or interest in real or personal property, whether now or hereafter owned, operated or leased, and includes conditional sales contracts, title retention agreements, capital trusts and capital leases.

“LOI” has the meaning set forth in Section 5.16.

“Losses” has the meaning set forth in Section 7.1.

“Manage” and “Management” mean generation, production, handling, distribution, processing, use, storage, treatment, operation, transportation, recycling, reuse and/or disposal, as those terms are defined, construed or otherwise used in Environmental Laws.

“Management Rights Letter” means that certain management rights letter among the Company and the Purchaser, substantially in the form of Exhibit G to this Agreement.

“March 31, 2007 Financial Statements” has the meaning set forth in Section 3.8.

“Material Adverse Effect” means an effect on the business, financial condition, results of operations, prospects, properties or other assets of the Company or the ability of the Company to

Schedule I-4

perform its material obligations under this Agreement or any Ancillary Document, which effect, either individually or in the aggregate with other such effects is adverse and material.

“Material Contracts” means (i) all of the Company’s and its Subsidiaries’ contracts, agreements, leases or other instruments to which the Company or any of its Subsidiaries is a party or by which the Company, its Subsidiaries or its properties are bound, which involve prospective fixed and/or contingent payments or expenditures by or to the Company or its Subsidiaries of more than $100,000, or in excess of the normal ordinary and usual requirements of its business, (ii) all of the Company’s and its Subsidiaries’ loans or advances to any Person, and all loan agreements, bank lines of credit agreements, indentures, mortgages, deeds of trust, pledge and security agreements, factoring agreements, conditional sales contracts, letters of credit or other debt instruments to which the Company or any of its Subsidiaries is a party, (iii) any guarantees by the Company or any of its Subsidiaries, other than the Guaranties (iv) all operating or capital leases for equipment in an amount greater than $100,000 to which the Company or any of its Subsidiaries is a party, (v) all non-competition and similar agreements to which the Company is a party, (vi) all contracts for the employment of any officer or employee, (vii) all distributor and sales agency agreements, (viii) any collective bargaining or union agreements, contracts or commitments and (ix) any of (i) through (viii) for any Owned Entity, if such contract would be material to the Company, its Subsidiaries and its Owned Entities, taken together as a whole.

“Material Subsidiary” means each Subsidiary of the Company that now or hereafter owns or has an interest in assets that are material to the business of the Company and its Subsidiaries, on an aggregate basis.

“Nasdaq” means the Nasdaq Global Market.

“Nasdaq Rules” means the listing standards, rules, corporate governance standards and regulations that must be met by companies listed on Nasdaq.

“Note Shares” has the meaning set forth in Section 3.3(b).

“Obligations” has the meaning set forth in the recitals to this Agreement.

“OFAC” means the U.S. Department of Treasury Office of Foreign Assets Control.

“OFAC Lists” means, collectively, the Specially Designated Nationals and Blocked Persons List maintained by OFAC pursuant to Executive Order No. 13224, 66 Fed Reg. 49079 (September 25, 2001) and/or any other list of terrorists or other restricted Persons maintained pursuant to any of the rules and regulations of OFAC or pursuant to any other applicable Executive Orders.

“Order” means any order, injunction, judgment, decree, ruling, writ, arbitration decision or award, Permit, license or assessment of a Governmental Entity.

“Other Property” means any property, other than the Property, which property was, at or prior to the Initial Investment Closing Date, (a) owned, operated or leased by (i) the Company, (ii) any Affiliate or Subsidiary of the Company, or (iii) any predecessor or successor

Schedule I-5

organization of those identified in (i) or (ii); or (b) engaged in any contract manufacturing or processing, or other similar activities for, with, or on behalf of the Company or any of its Subsidiaries.

“Owned Entity” means any corporation, partnership or other similar entity that the Company owns an interest of more than 25% but not more than 50% of the voting securities or voting interests therein.

“Party” and “Parties” have the meanings set forth in the preamble to this Agreement.

“Permit” means any permit, license, review, certification, approval, registration, consent or other authorization issued pursuant to any Law.

“Permitted Existing Secured Indebtedness” means the existing outstanding secured indebtedness set forth in the Disclosure Schedule in an aggregate amount of $4,300,000.

“Permitted Liens” shall have the meaning ascribed to such term in the Promissory Notes.

“Perseus Director” and “Perseus Directors” mean the representative(s) of the Purchaser appointed or elected to the Board pursuant to this Agreement.

“Perseus Observer” has the meaning set forth in Section 5.6(a).

“Perseus Ownership Percentage” has the meaning set forth in Section 5.6(b)(i).

“Perseus ROFR Notice” has the meaning set forth in Section 5.15(c).

“Perseus Securities” has the meaning set forth in Section 3.3(b).

“Person” means any individual, sole proprietorship, partnership, corporation, limited liability company, joint venture, unincorporated society or association, trust or other legal entity or any Governmental Entity.

“Plan” has the meaning set forth in Section 3.28(a).

“Pollutant” includes any substance, material, article or product that is defined or otherwise regulated under any Environmental Law as a “toxic” or “hazardous” substance, material or waste, a “pollutant,” or a “contaminant,” and including without limitation any petroleum product or byproduct, solvent, flammable or explosive material, radioactive material, asbestos, polychlorinated biphenyls (“PCBs”), dioxins, dibenzofurans, heavy metals, radon gas, mold, mold spores and mycotoxins.

“Proceeding” means any action, suit, proceeding, claim, arbitration, mediation or investigation before any Governmental Entity or before any arbitrator or mediator or similar party, or any investigation or review by any Governmental Entity or similar party.

Schedule I-6

“Promissory Note” and “Promissory Notes” means the Senior Secured Note and any Additional Secured Notes thereunder and the Senior Secured Convertible Note and any promissory notes issued thereunder as paid in kind interest.

“Property” means the Wallingford Property; the former Bombardier Mass Transit Corporation site in Barre, VT; 182 Mad River Park and 185 Mad River Canoe Road facilities in Waitsfield, VT; leased space in Anaheim and San Leandro, CA; leased space in Houston, Texas; and any other owned or leased space.

“Proprietary Assets” means: (A) any patent, patent application, trademark (whether registered or unregistered), trademark application, trade name, fictitious business name, logo, service mark (whether registered or unregistered), service mark application, copyright (whether registered or unregistered), copyright application, maskwork, maskwork application, trade secret, know-how, customer list, database, data compilation and collection, technical data, franchise, system, computer software, computer program, source code, executable code, domain name, web address and site, invention (whether or not patentable), discovery, improvement, design, blueprint, engineering drawing, proprietary product, technology, proprietary right or other intellectual property right; and (B) any right to use or exploit any of the foregoing.

“Proton” has the meaning set forth in Section 5.16.

“Purchaser” has the meaning set forth in the preamble to this Agreement.

“RCRA” means the Resource Conservation and Recovery Act (42 U.S.C. § 6901 et seq.), as amended, and all rules, regulations and standards issued thereunder.

“Registered” has the meaning set forth in Section 4.2.

“Registration” has the meaning set forth in Section 4.2.

“Registration Rights Agreement” means the Registration Rights Agreement entered into among the Company and the Purchaser, substantially in the form of Exhibit H to this Agreement.

“Release” means any releasing, spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping, placing, discarding, abandonment, or disposing into the environment (including the placing, discarding or abandonment of any barrel, container or other receptacle containing any Pollutant or other material).

“Removal,” “Remedial” and Response” actions include the types of activities covered by CERCLA, RCRA, and other comparable Environmental Laws, and whether the activities are (a) those that might be taken by a Governmental Entity or (b) those that a Governmental Entity or any other Person might seek to be taken by a third party who is or has been engaged in the Management of Pollutants.

“Replacement Financing” has the meaning set forth in Section 5.16 of the Agreement.

“Requisite Number” has the meaning set forth in Section 5.6.

Schedule I-7

“ROFR Buyer” has the meaning set forth in Section 5.15.

“ROFR Exercise Period” has the meaning set forth in Section 5.15.

“ROFR Notice” has the meaning set forth in Section 5.15.

“ROFR Security” or “ROFR Securities” has the meaning set forth in Section 5.15.

“SEC” means the United States Securities and Exchange Commission.

“Securities Act” has the meaning set forth in Section 3.8.

“Security Documents” means the Security and Pledge Agreement, the Subsidiary Security and Pledge Agreement, the Guaranty, any UCC-1 financing statements, mortgages, deposit control agreements and such other documents necessary or appropriate for the perfection of the security interests granted by this Agreement or any other Transaction Document and by the Material Subsidiaries as may be reasonably requested by the Purchaser.

“Security and Pledge Agreement” means that certain security and pledge agreement among the Company and the Purchaser, substantially in the form of Exhibit I to this Agreement.

“Senior Secured Convertible Note” has the meaning set forth in the Recitals.

“Senior Secured Note” has the meaning set forth in the Recitals.

“Stockholder Approval” means the approval by the Company’s stockholders, in accordance with the Nasdaq Rules and other governing Laws, of (i) all of the transactions contemplated by this Agreement and each other Transaction Document that require such approval under such rules, regulations or Law, including without limitation the issuance and delivery by the Company of the Senior Secured Convertible Note and the Subsequent Investment Warrant, the performance by the Company of its obligations under Section 5.6 hereof, and the issuance of additional promissory notes in payment of interest on any Promissory Note, (ii) the amendment of the Company’s Amended and Restated Certificate of Incorporation to increase the number of Common Shares authorized for issuance and (iii) any change in control of the Company that may be deemed to occur as a result of the Subsequent Investment.

“Subsequent Investment Closing” means the closing at which the Senior Secured Convertible Note and the Subsequent Investment Warrant are sold to the Purchaser.

“Subsequent Investment Closing Date” means the twelfth Business Day after the date on which the Company has obtained the Shareholder Approval, or such other date as the Parties may agree.

“Subsequent Investment Warrant” has the meaning set forth in Section 1.2(c).

“Subsidiary” means any entity in which the Company, directly or indirectly, owns greater than 50% of the voting securities or interests, and the Company’s subsidiaries, when referred to together, are referred to in this Agreement as “Subsidiaries.”

Schedule I-8

“Subsidiary Security and Pledge Agreement” means that certain security and pledge agreement entered into among each of the Company’s Material Subsidiaries and the Purchaser, substantially in the form set forth in Exhibit J to this Agreement.

“Tax” and “Taxes” mean any federal, state, local or foreign income, alternative or add-on minimum tax, gross income, gross receipts, sales, use, ad valorem, value-added (or similar), transfer, franchise, profits, license, withholding, payroll, employment, unemployment, social security, disability, estimated, excise, severance, stamp, occupation, premium, property, environmental or windfall profit tax, custom, duty or other tax of any kind whatsoever (including any interest, penalty, or addition thereto.

“Tax Return” means any return, declaration, report or information return or statement required to be filed with any Governmental Entity in connection with Taxes, including any schedule of attachment thereto and any amendment thereof.

“Transaction Documents” means this Agreement, the Promissory Notes, the Warrants, the Security and Pledge Agreement, the Subsidiary Security and Pledge Agreements, the Guaranties, the Registration Rights Agreement, the Intercreditor Agreement, the Management Rights Letter and any other instrument or agreement at any time delivered in connection with the foregoing or to secure the Obligations.

“Transaction Expenses” has the meaning set forth in Section 8.6(a).

“Wallingford Property” means 8 Technology Drive, Wallingford, Connecticut.

“WARN Act” means the Worker Adjustment and Retraining Notification Act, as the same may be amended from time to time.

“Warrant Shares” has the meaning set forth in Section 3.3(b).

“Warrants” means the warrants identified in the recitals to this Agreement.

“Wind and Hydrogen Projects” has the meaning set forth in Section 5.15.

“UST” means an underground storage tank, including as that term is defined, construed and otherwise used in RCRA and in rules, regulations and standards issued pursuant to RCRA and comparable state and local Laws.

“409A Arrangement” has the meaning set forth in Section 3.28(l).

Schedule I-9

Schedule 1.3

Wire Transfer Account

REMIT TO:
BIC:
CHIPS:
FEDWIRE:
PAYMENT TYPE

Schedule 1.3-1

Schedule 2.2(h)

Third Party Consents

1. Approval of the Company’s shareholders.

2. Landlords under various Leases.

3. Merchants Bank

4. Vermont Economic Development Agency

Schedule 2.2(n)-1

EX-3 4 w35316exv3.htm EXHIBIT 3 exv3

Exhibit 3

EXECUTION VERSION

REGISTRATION RIGHTS AGREEMENT

REGISTRATION RIGHTS AGREEMENT (this “Agreement”), dated as of June 1, 2007, by and among Distributed Energy Systems Corp., a Delaware corporation (the “Company”) and Perseus Partners VII, L.P., a Delaware limited partnership (the “Investor”).

R E C I T A L S

A. The Company and the Investor are parties to a Securities Purchase Agreement dated as of May 10, 2007 (the “Purchase Agreement”). Pursuant to the Purchase Agreement, the Investor has made an investment in the Company by acquiring senior secured convertible promissory notes of the Company (the “Notes”) that are convertible into shares of the Company’s common stock, par value $0.01 per share (the “Common Stock”), and warrants to acquire shares of Common Stock (the “Warrants,” and together with the Notes, the “Securities”).

B. In connection with such purchase of the Securities, and to induce the Investor to consummate such purchase of the Securities, the Company has agreed to enter into this Agreement and to grant to the Investor the rights set forth in this Agreement.

AGREEMENT

NOW, THEREFORE, in consideration of the foregoing and of the mutual promises and covenants contained in this Agreement, the Investor and the Company (each, a “Party,” and collectively, the “Parties”) agree as follows:

1. Definitions. For purposes of this Agreement:

“Exchange Act” means the Securities Exchange Act of 1934, as amended, or any successor statute, and any rules and regulations promulgated thereunder.

“Holder” means (i) the Investor, (ii) any partner of, or direct or indirect investor in, the Investor to which the Investor directly or indirectly distributes Registrable Securities in accordance with the terms of its governing documents and the governing documents of its direct or indirect investors (collectively, “Fund Investors”); (iii) any person or entity to whom the Investor and/or Fund Investors sells, transfers or assigns in the aggregate 10% or more of the shares of Common Stock that qualify as Registrable Securities at the time of such sale, transfer or assignment, other than in a sale pursuant to Rule 144 under the Securities Act or a registration effected pursuant to this Agreement. Although Fund Investors shall constitute Holders hereunder and be granted all rights granted to Holders hereunder, the Fund Investors of the Investor shall act through the Investor in exercising or enforcing such rights.

“prospectus” means any preliminary prospectus, final prospectus or summary prospectus prepared in connection with an offering of any Registrable Securities.

“register,” “registered,” and “registration” refer to an underwritten registration effected by preparing and filing with the U.S. Securities and Exchange Commission (the “Commission”) a registration statement or similar document in compliance with the Securities Act, and the declaration or ordering by the Commission of effectiveness of such registration statement or document.

“Registration Expenses” means all expenses in connection with the Company’s performance of or compliance with its obligations under this Agreement, including, without limitation, all (i) registration, qualification and filing fees; (ii) fees, costs and expenses of compliance with securities or blue sky laws (including reasonable fees, expenses and disbursements of counsel in connection with blue sky qualifications of the Registrable Securities under the laws of such jurisdictions as the managing underwriter or underwriters in a registration may designate); (iii) printing expenses; (iv) messenger, telephone and delivery (including delivery by mail or courier services) expenses; (v) fees, expenses and disbursements of counsel for the Company and of all independent certified public accountants retained by the Company (including the expenses of any special audit and “cold comfort” letters required by or incident to such performance); (vi) Securities Act liability insurance if the Company so desires; (vii) fees, expenses and disbursements of any other individuals or entities retained by the Company in connection with the registration of the Registrable Securities; (viii) fees, costs and expenses incurred in connection with the listing of the Registrable Securities on each national securities exchange on which the Company has made application for the listing of its Common Stock; (ix) internal expenses of the Company (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties and expenses of any annual audit) and (x) fees and expenses of one counsel selected by Holders of a majority of the Registrable Securities. Registration Expenses shall not include selling commissions, discounts or other compensation paid to underwriters or other agents or brokers to effect the sale of Registrable Securities, or counsel fees in addition to those provided for in clause (x) above and any other expenses incurred by Holders in connection with any registration that are not specified in the immediately preceding sentence.

“Registrable Securities” means any shares of Common Stock of the Company owned by any Holder or that may be acquired by any Holder upon the conversion of any convertible security or the exercise of any warrant, option or other right owned by any Holder, but only to the extent such shares constitute “restricted securities” under Rule 144 under the Securities Act or the Holder thereof is deemed to be an “affiliate” of the Company under Rule 144.

“Requestor” means the Investor until such time as the Investor (nor any of its Fund Investors) hold no Registrable Securities, and thereafter any Holder.

“Securities Act” means the Securities Act of 1933, as amended, or any successor statute, and any rules and regulations promulgated thereunder.

2. Demand Registrations.

(a) Request for Registration. At any time after the date of this Agreement, a Requestor may submit a written request (a “Demand Notice”) to the Company

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that the Company register Registrable Securities under and in accordance with the Securities Act (a “Demand Registration”). Such Demand Notice shall specify the number and description of Registrable Securities to be sold. Upon receipt of the Demand Notice, the Company shall:

(i) within five Business Days after receipt of such Demand Notice, give written notice of the proposed registration to all other Holders; and

(ii) as soon as practicable, use diligent efforts to effect such registration as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any Holders joining in such request as are specified in written requests received by the Company within 20 Business Days after the date the Company mails the written notice referred to in clause (i) above.

Notwithstanding the foregoing, if the Company shall furnish to the Holders a certificate signed by the chief executive officer of the Company stating that in the good faith judgment of the board of directors of the Company, it would be materially and adversely detrimental to the Company and its stockholders for a registration statement to be filed on or before the date filing would be required in connection with any Demand Registration and it is therefore essential to defer the filing of such registration statement, the Company shall have the right to defer such filing or delay its effectiveness for a reasonable period not to exceed 45 Business Days; provided, that such right shall not be exercised more than once with respect to a request for registration hereunder during any period of twelve consecutive months. The Company will pay all Registration Expenses in connection with such withdrawn request for registration.

(b) Shelf Registration. If at the time the Company registers Registrable Securities under the Securities Act pursuant to this Section 2, the sale or other disposition of such Registrable Securities by the Holders may be made on a delayed or continuous basis pursuant to a registration statement on Form S-3 (or any successor form that permits the incorporation by reference of future filings by the Company under the Exchange Act), then such registration statement, unless otherwise directed by the Requestor, shall be filed as a “shelf” registration statement pursuant to Rule 415 under the Securities Act (or any successor rule). Any such shelf registration shall cover the disposition of all Registrable Securities in one or more underwritten offerings, block transactions, broker transactions, at-market transactions and in such other manner or manners as may be specified by the Requestor. Except as provided in Section 5(b) hereof, the Company shall use its diligent efforts to keep such “shelf” registration continuously effective as long as the delivery of a prospectus is required under the Securities Act in connection with the disposition of the Registrable Securities registered thereby and in furtherance of such obligation, shall supplement or amend such registration statement if, as and when required by the rules, regulations and instructions applicable to the form used by the Company for such registration or by the Securities Act or by any other rules and regulations thereunder applicable to shelf registrations. Upon their receipt of a certificate signed by the chief executive officer of the Company stating that, in the judgment of the Company, it is advisable to suspend use of a prospectus included in a registration statement due to pending material developments or other events that have not yet been publicly disclosed and as to which the Company believes public disclosure would be detrimental to the Company, in accordance with

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the procedure set forth in the last paragraph of Section 2(a) hereof, the Holders will refrain from making any sales of Registrable Securities under the shelf registration statement for a period of up to 45 Business Days; provided, that this right to cause the Holders to refrain from making sales shall not be exercised by the Company more than once in any twelve-month period (counting as a permitted exercise any exercise by the Company of its right to defer the filing or delay its effectiveness of a registration statement under the last paragraph of Section 2(a)).

(c) Underwriting. In connection with any registration under this Section 2, if the Requestors intend to distribute the Registrable Securities covered by any registration under this Section 2 by means of an underwriting, they shall so advise the Company in writing. In such event, the right of any Holder to include its Registrable Securities in such distribution shall be conditioned upon such Holder’s participation in such underwriting and the inclusion of such Holder’s Registrable Securities in the underwriting to the extent provided in this Agreement. The Holders proposing to distribute their securities through such underwriting shall enter into an underwriting agreement with one or more underwriters selected by the Requestors having terms and conditions customary for such agreements (which underwriter or underwriters shall be reasonably acceptable to the Company). Notwithstanding any other provision of this Section 2, if the managing underwriter determines that marketing factors require a limitation of the number of shares to be underwritten, the managing underwriter may limit the number of Registrable Securities to be included in such distribution. The Company shall so advise all Holders distributing Registrable Securities through such underwriting, and the number of Registrable Securities that may be included in such underwriting shall be allocated among the Holders in such manner as may be determined by the Requestors.

(d) Limitations. The Company shall not be obligated to (i) effect more than two registrations under Section 2(b) in any twelve month period, (ii) effect any registration where the aggregate estimated sales price for the Registrable Securities to be included therein is less than $500,000, or (iii) effect more than two registrations on Form S-1 or any other long-form registration statement; provided, that a registration pursuant to this Section 2 shall not be counted unless the registration statement pursuant to which such Registrable Securities are being registered is declared effective by the Securities and Exchange Commission (the “Commission”).

3. Piggy-back Registration.

(a) Notice of Registration. If at any time or from time to time, the Company shall determine to register any of its capital stock, whether or not for its own account, other than a registration relating to employee benefit plans or a registration effected on Form S-4, the Company shall:

(i) provide to each Holder written notice thereof at least 15 Business Days prior to the filing of the registration statement by the Company in connection with such registration; and

(ii) include in such registration, and in any underwriting involved therein, all those Registrable Securities specified in a written request by each Holder received by the Company within ten Business Days after the Company mails the written notice referred to above, subject to the provisions of Section 3(b) below.

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(b) Underwriting. The right of any Holder to registration pursuant to this Section 3 shall be conditioned upon the participation by such Holder in the underwriting arrangements specified by the Company in connection with such registration and the inclusion of the Registrable Securities of such Holder in such underwriting to the extent provided in this Agreement. All Holders proposing to distribute their Registrable Securities through such underwriting shall (together with the Company) enter into an underwriting agreement in customary form with the managing underwriter selected for such underwriting by the Company and take all other actions, and deliver such opinions and certifications, as may be reasonably requested by such managing underwriter. Notwithstanding any other provision of this Section 3, if the managing underwriter determines that marketing factors require a limitation of the number of shares to be underwritten, the managing underwriter may limit the number of Registrable Securities to be included in such registration. The Company shall so advise all Holders distributing Registrable Securities through such underwriting, and in the event that Registrable Securities in a registration would exceed 20% of all shares included in such registration, the Company may limit the number of Registrable Securities included in such registration to not less than 20% of the number of shares included in such registration.

(c) Right to Terminate Registration. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section 3 whether or not any Holder has elected to include Registrable Securities in such registration.

4. Expense of Registration. All Registration Expenses incurred in connection with the registration and other obligations of the Company pursuant to Sections 2, 3 and 5 shall be borne by the Company, and all underwriting discounts and selling commissions incurred in connection with any such registrations shall be borne by the Holders of the securities so registered pro rata on the basis of the number of shares so registered. The Company shall not, however, be required to pay for expenses of any registration proceeding begun pursuant to Sections 2, 3 or 5, the request of which has been subsequently withdrawn by the Holders unless (i) the withdrawal is based upon material adverse information concerning the Company of which the Holders were not aware at the time of such request or (ii) the Holders of a majority of the Registrable Securities agree to forfeit their right to one registration pursuant to Section 2(a) or Section 2(b), as the case may be.

5. Registration Procedures. If and whenever the Company is required by the provisions of this Agreement to effect the registration of Registrable Securities, the Company shall:

(a) promptly prepare and file with the Commission a registration statement with respect to such Registrable Securities on any form that may be utilized by the Company and that shall permit the disposition of the Registrable Securities in accordance with the intended method or methods of disposition thereof, and use its diligent efforts to cause such registration statement to become effective as promptly as practicable and remain effective thereafter as provided in this Agreement, provided, that if the Investor’s Registrable Securities are covered by such registration statement, then prior to filing a registration statement or prospectus or any amendments or supplements thereto, including documents incorporated by reference after the initial filing of any registration statement, the Company will furnish to the Investor, its counsel and the underwriters copies of all such documents proposed to be filed sufficiently in advance of filing to provide them with a reasonable opportunity to review such documents and comment thereon;

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(b) prepare and file with the Commission such amendments (including post-effective amendments) and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to keep such registration statement effective and current and to comply with the provisions of the Securities Act with respect to the sale or other disposition of all Registrable Securities covered by such registration statement, including such amendments (including post-effective amendments) and supplements as may be necessary to reflect the intended method of disposition by the prospective seller or sellers of such Registrable Securities, provided, that except in the case of a shelf registration under Section 2(b) such registration statement need not be kept effective and current for longer than 120 days subsequent to the effective date of such registration statement;

(c) subject to receiving reasonable assurances of confidentiality, for a reasonable period after the filing of such registration statement, and throughout each period during which the Company is required to keep a registration effective, make available for inspection by the selling holders of Registrable Securities being offered, and any underwriters, and their respective counsel, such financial and other information and books and records of the Company, and cause the officers, directors, employees, counsel and independent certified public accountants of the Company to respond to such inquiries as shall be reasonably necessary, in the judgment of such counsel, to conduct a reasonable investigation within the meaning of Section 11 of the Securities Act;

(d) promptly notify the selling holders of Registrable Securities and any underwriters and confirm such advice in writing, (i) when such registration statement or the prospectus included in such registration statement or any prospectus amendment or supplement or post-effective amendment has been filed, and, with respect to such registration statement or any post-effective amendment, when the same has become effective, (ii) of any comments by the Commission, by the National Association of Securities Dealers Inc. (“NASD”), and by the blue sky or securities commissioner or regulator of any state with respect thereto or any request by any such entity for amendments or supplements to such registration statement or prospectus or for additional information, (iii) of the issuance by the Commission of any stop order suspending the effectiveness of such registration statement or the initiation or threatening of any proceedings for that purpose, (iv) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose, or (v) at any time when a prospectus is required to be delivered under the Securities Act, that such registration statement, prospectus, prospectus amendment or supplement or post-effective amendment, or any document incorporated by reference in any of the foregoing, contains an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they are made, not misleading, and at the request of any Holder, the Company will prepare a supplement or amendment to such prospectus, so that, as thereafter delivered to purchasers of such shares, prospectus will not contain any untrue statements of a material fact or omit to state any fact necessary to make the statements therein not misleading;

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(e) furnish to each Holder of Registrable Securities being offered, a signed counterpart, addressed to such Holder (and, if applicable, any of its Affiliates), of (i) any opinion of counsel to the Company delivered to any underwriter and (ii) any comfort letter from the Company’s independent public accountants delivered to any underwriter;

(f) furnish to each Holder of Registrable Securities being offered, and any underwriters, prospectuses or amendments or supplements thereto, in such quantities as they may reasonably request and as soon as practicable, that update previous prospectuses or amendments or supplements thereto;

(g) use its diligent efforts to (i) register or qualify the Registrable Securities to be included in a registration statement under this Agreement under such other securities laws or blue sky laws of such jurisdictions within the United States of America as any selling Holder of such Registrable Securities or any underwriter of the securities being sold shall reasonably request, (ii) keep such registrations or qualifications in effect for so long as the registration statement remains in effect and (iii) take any and all such actions as may be reasonably necessary or advisable to enable such Holder or underwriter to consummate the disposition in such jurisdictions of such Registrable Securities owned by such Holder; provided, however, that the Company shall not be required for any such purpose to (x) qualify generally to do business as a foreign corporation in any jurisdiction wherein it would not otherwise be required to qualify but for the requirements of this Section 5(g) or (y) consent to general service of process in any such jurisdiction;

(h) cause all such Registrable Securities to be listed or accepted for quotation on each securities exchange on which the Company’s Common Stock then trades;

(i) provide a transfer agent and registrar for all such Registrable Securities not later than the effective date of such registration statement;

(j) upon the sale of any Registrable Securities pursuant to such registration statement, remove all restrictive legends from all certificates or other instruments evidencing the Registrable Securities; and

(k) otherwise use its diligent efforts to comply with all applicable provisions of the Securities Act, and rules and regulations of the Commission, and make available to the Holders, as soon as reasonably practicable, an earnings statement covering a period of at least twelve months beginning not later than the first day of the Company’s fiscal quarter next following the effective date of the related registration statement, which shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder.

6. Indemnification. In the event any of the Registrable Securities are included in a registration statement under this Agreement:

(a) to the extent permitted by law, the Company agrees to indemnify and hold harmless the Investor, and each of its respective officers, employees, affiliates, directors, partners, members, attorneys and agents, and each person, if any, who controls the Investor within the meaning of the Securities Act (each, an “Investor Indemnified Party”), from and against any expenses, losses, judgments, claims, damages, liabilities, charges, actions,

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proceedings, demands, settlement costs and expenses of any nature whatsoever (including, without limitation, attorneys’ fees and expenses) (“Losses”), whether joint or several, arising out of or based upon (i) any untrue statement (or allegedly untrue statement) of a material fact contained in any registration statement under which the sale of such Registrable Securities was registered under the Securities Act, any prospectus contained in the registration statement, or any amendment or supplement to such registration statement, offering circular or other document incident to any such registration or compliance, (ii) any omission (or alleged omission) to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or (iii) any violation by the Company of the Securities Act or any rule or regulation promulgated thereunder applicable to the Company, or of any blue sky or other state securities law or any rule or regulation promulgated thereunder applicable to the Company, in each case, relating to action or inaction required of the Company in connection with any such registration; and the Company shall promptly reimburse any Investor Indemnified Party for any legal and any other expenses reasonably incurred by such Investor Indemnified Party in connection with investigating and defending any such Losses; provided, however, that the Company will not be liable in any such case to the extent that any such Losses arises out of or is based upon any untrue statement or allegedly untrue statement or omission or alleged omission made in such registration statement, prospectus, or any such amendment or supplement, in reliance upon and in conformity with information furnished to the Company, in writing, by the Investor expressly for use therein. The Company also shall indemnify any underwriter (as defined in the Securities Act) of the Registrable Securities, their officers, affiliates, directors, partners, members and agents and each person who controls such underwriter on substantially the same basis as that of the indemnification provided above in this Section 6(a).

(b) Each Holder of Registrable Securities being offered will, in the event that any registration is being effected under the Securities Act pursuant to this Agreement of any Registrable Securities held by such Holder, indemnify and hold harmless the Company, each of its directors and officers and each underwriter (if any), and each other selling Holder and each other person, if any, who controls the Company, another selling Holder or such underwriter within the meaning of the Securities Act, against any Losses, whether joint or several, insofar as such Losses (or actions in respect thereof) arise out of or are based upon (i) any untrue statement or allegedly untrue statement of a material fact contained in any registration statement under which the sale of such Registrable Securities was registered under the Securities Act, any prospectus contained in the registration statement, or any amendment or supplement to the registration statement, offering circular or other document incident to any such registration or compliance or (ii) any omission or the alleged omission to state a material fact required to be stated therein or necessary to make the statement therein not misleading, if the statement or omission was made in reliance upon and in conformity with information furnished in writing to the Company by such selling Holder expressly for use therein, and shall reimburse the Company, its directors and officers, and each other selling Holder or controlling person for any legal or other expenses reasonably incurred by any of them in connection with investigation or defending any such Losses. Each selling Holder’s indemnification obligations hereunder shall be several and not joint and shall be limited to the amount of any net proceeds actually received by such Holder.

(c) Each party entitled to indemnification under this Section 6 (the “Indemnified Party”) shall give notice to the party required to provide indemnification (the

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“Indemnifying Party”) promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought; provided, that failure to give such prompt notice shall not relieve the Indemnifying Party of its obligations under this Agreement unless it is materially prejudiced thereby, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom if it is a claim brought by a third party, provided, that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld). Such Indemnified Party shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such counsel shall be that of such Indemnified Party unless (i) the Indemnifying Party has agreed to pay such fees and expenses, (ii) the Indemnifying Party shall have failed to assume the defense of such action or proceeding and employ counsel reasonably satisfactory to such Indemnified Party in any such action or proceeding or (iii) the named parties to any such action or proceeding (including any impleaded parties) include both such Indemnified Party and the Indemnifying Party and such Indemnified Party shall have been advised by counsel that there may be one or more legal defenses available to such Indemnified Party which are different from or additional to those available to the Indemnifying Party (in which case, if such Indemnified Party notifies the Indemnifying Party in writing of an election to employ separate counsel at the expense of the Indemnifying Party, the Indemnifying Party shall not have the right to assume the defense of such action or proceeding on behalf of such Indemnified Party, it being understood, however, that the Indemnifying Party then shall have the right to employ separate counsel at its own expense and to participate in the defense thereof, and shall not, in connection with any one such action or proceeding or separate but substantially similar or related actions or proceedings in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of more than one separate firm of attorneys at any time for all Indemnified Parties, which firm shall be designated in writing by a majority of the Indemnified Parties who are eligible to select such counsel). No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. No Indemnified Party may consent to entry of any judgment or enter into any settlement without the prior written consent of the Indemnifying Party.

(d) If the indemnification provided for in this Section 6 is held by a court of competent jurisdiction to be unavailable to an Indemnified Party with respect to any loss, liability, claim, damage or expense referred to in this Agreement, then the Indemnifying Party, in lieu of indemnifying the Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party with respect to such loss, liability, claim, damage or expenses in the proportion that is appropriate to reflect the relative fault of the Indemnifying Party and the Indemnified Party in connection with the statements or omissions that resulted in such loss, liability, claim, damage, or expense, as well as any other relevant equitable considerations. The relative fault of the Indemnifying Party and the Indemnified Party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of material fact or the omission to state a material fact relates to information supplied by the Indemnifying Party or by the Indemnified Party, and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.

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7. Rule 144 Reporting. With a view to making available the benefits of certain rules and regulations of the Commission which may at any time permit the sale of the Registrable Securities to the public without registration, after such time as a public market exists for the Common Stock, the Company shall use its diligent efforts to:

(a) make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act;

(b) file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements); and

(c) furnish to any Holder promptly upon request a written statement as to its compliance with the reporting requirements of Rule 144, and of the Securities Act and the Exchange Act, and a copy of the most recent annual or quarterly report of the Company.

The provisions of this Section 7 shall terminate on the date on which there are no Holders of Registrable Securities.

8. Termination of Registration Rights. With the exception of Section 7, no Holder shall be entitled to exercise any right provided for in this Agreement after the date all Registrable Securities held by such Holder may be sold in a single three-month period under Rule 144 under the Securities Act.

9. Information To Be Provided by the Holders. Each Holder whose Registrable Securities are included in any registration pursuant to this Agreement shall furnish the Company such information regarding such Holder and the distribution proposed by such Holder as may be reasonably requested in writing by the Company and as shall be required in connection with such registration or the registration or qualification of such securities under any applicable state securities law.

10. “Stand-Off” Agreement. Each Holder, if requested by the managing underwriter of a registered public offering of securities by the Company, shall agree not to sell or otherwise transfer or dispose of any Registrable Securities or other securities of the Company then held by such Holder for a specified period of time that is customary under the circumstances (not to exceed 180 days) following the effective date of the registration statement for such offering, provided, that (a) no such agreement shall be required unless each stockholder of the Company owning at least 1% of the issued and outstanding Common Stock enters into a similar agreement covering the same period of time and (b) such agreement shall contain terms customary for such agreements; provided, that if the managing underwriter of a registered public offering of securities of the Company releases any of the foregoing stockholders from such restrictions prior to the expiration of the 180-day period, then each Holder shall also be released from such restrictions for its pro rata share of securities so released. The Company may impose stop transfer instructions to enforce any required agreement of the Holders under this Section 10.

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11. Miscellaneous.

(a) No Inconsistent Agreements. The Company represents and warrants to the Holders that it has not entered into, and covenants with the Holder that it will not enter into, any agreement with respect to its Common Stock which is inconsistent with or violates the rights granted to the Holder under this Agreement.

(b) Transfer of Rights. Each Holder shall be entitled to transfer or assign at any time any of its rights or obligations under this Agreement to any of the following: (i) any partner (including a general or limited partner) or retired partner of any Holder that is a partnership, (ii) any stockholder of any Holder that is a corporation, (iii) any member of any Holder that is a limited liability company and (iv) any transferee that acquires at least 10% of the Common Shares issuable under the Notes; provided, that in each such case, the Company receives written notice of any transfer and the transferee agrees to be bound by the terms of this Agreement.

(c) Notices. All notices, requests and other communications hereunder shall be in writing and shall be deemed to have been duly given at the time of receipt if delivered by hand, or at the time the sender receives confirmation of the facsimile transaction if transmitted by facsimile, or three days after being mailed, registered or certified mail, return receipt requested, with postage prepaid, or one day after being mailed via overnight courier service, to the applicable Parties at the address or facsimile number, as applicable, stated below or if any Party shall have designated a different address or facsimile number by notice to the other Parties given as provided above, then to the last address or facsimile number so designated.

(d) Severability. In the event one or more of the provisions of this Agreement should, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Agreement, and this Agreement shall be construed and interpreted in such manner as to be effective and valid under applicable law.

(e) Waiver or Modification. Any amendment or modification of this Agreement shall be effective only if evidenced by a written instrument executed by the Company and by investors that hold a majority of the total Registrable Securities.

(f) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to the principles of conflicts of laws of the State of New York or any other state, and the Parties by this Agreement irrevocably submit to the non-exclusive jurisdiction of the federal and state courts located in the State of New York for all matters arising out of or in connection with this Agreement or any of the transactions contemplated by this Agreement.

(g) WAIVER OF TRIAL BY JURY. THE PARTIES TO THIS AGREEMENT WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS AGREEMENT.

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(h) Attorneys’ Fees. In the event of any dispute involving the terms hereof, the prevailing parties shall be entitled to collect legal fees and expenses from the other party to the dispute.

(i) Further Assurances. Each Party agrees to act in accordance with the provisions of this Agreement and not to take any action that is designed to avoid the intention hereof.

(j) Successors and Assigns. This Agreement and the rights and obligations of the Parties hereunder shall inure to the benefit of, and be binding upon, their respective successors, assigns and legal representatives.

[remainder of page intentionally left blank]

[signatures appear on following pages]

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[Company Signature Page]

IN WITNESS WHEREOF, the undersigned Party has executed this Agreement as of the day and year first above written.


		DISTRIBUTED ENERGY SYSTEMS CORP.


		By:		/s/ Ambrose L. Schwallie

				Name: Ambrose L. Schwallie
				Title: CEO


		Address for Notice:

		Distributed Energy Systems Corp.
		10 Technology Drive
		Wallingford, CT 06492
		Attention:
		Facsimile: (203) -

		with a copy to:

		Wilmer Cutler Pickering Hale and Dorr LLP
		1875 Pennsylvania Avenue, NW
		Washington, DC 20006
		Attention: Brent Siler
		Facsimile: (202) 663-6363

[Investor Signature page]

IN WITNESS WHEREOF, the undersigned Investor has executed this Agreement as of the day and year first above written.


		PERSEUS PARTNERS VII, L.P.


		By:		Perseus Partners VII GP, L.P., its general partner

		By:		Perseus Partners VII GP, L.L.C., its general partner

		By:		/s/ John C. Fox

				John C. Fox
				Senior Managing Director


		Address for Notice:

		c/o Perseus, L.L.C.
		2099 Pennsylvania Ave., N.W.
		Suite 900
		Washington, DC 20006-1813
		Attention: John C. Fox
		Teresa Bernstein
		Facsimile: (202) 463-6215

		with a copy to:

		Arnold & Porter llp
		1600 Tysons Boulevard, Suite 900
		McLean, VA 22102-4865
		Attention: Robert B. Ott, Esq.
		Facsimile: (703) 720-7399

EX-4 5 w35316exv4.htm EXHIBIT 4 exv4

Exhibit 4

EXECUTION COPY

SENIOR SECURED PROMISSORY NOTE

THE SECURITIES REPRESENTED BY THIS NOTE HAVE BEEN ACQUIRED BY THE HOLDER FOR ITS OWN ACCOUNT, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO THE DISTRIBUTION OF SUCH SECURITIES. THE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND COMPLIANCE WITH SUCH STATE SECURITIES LAWS, IN COMPLIANCE WITH RULE 144 UNDER THE SECURITIES ACT, OR AN OPINION OF COUNSEL OR OTHER EVIDENCE REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION AND/OR COMPLIANCE IS NOT REQUIRED.


$12,500,000 (the “Principal Amount”)		June 1, 2007
		Wallingford, Connecticut

FOR VALUE RECEIVED, DISTRIBUTED ENERGY SYSTEMS CORP., a corporation incorporated under the Laws of the State of Delaware (the “Company”), promises to pay to the order of Perseus Partners VII, L.P., or its registered assigns (the “Holder”), the Principal Amount, or such lesser amount as shall then equal the outstanding Principal Amount, together with interest thereon at a rate equal to 12.5% per annum, and computed on the basis of a year consisting of 365 days in accordance with the terms set forth in Section 2 of this senior secured promissory note (this “Note”).

This Note is issued pursuant to the Securities Purchase Agreement (the “Purchase Agreement”) dated as of May 10, 2007 by and between Perseus Partners VII, L.P. and the Company.

The following is a statement of the rights of the Holder and the conditions to which this Note is subject, and to which the Holder hereof, by the acceptance of this Note, agrees:

1. Definitions. Capitalized terms defined in the Purchase Agreement and used herein without definition have the same meaning herein as in the Purchase Agreement. In addition, as used in this Note, the following capitalized terms have the following meanings.

(a) “Additional Secured Note” shall have the meaning set forth in Section 2(a).

(b) “Change of Control” means any of the following:

(i) any merger, consolidation, reorganization, recapitalization, or other business combination involving the Company or any Material Subsidiary, in which the shareholders of the Company immediately prior thereto do not own, directly or indirectly, outstanding voting securities representing more than 50% of the combined outstanding voting power of the surviving entity in such merger, consolidation, reorganization, recapitalization or other business combination;

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(ii) the sale of all, or substantially all, of the assets of the Company or any Material Subsidiary to a third party not wholly owned, directly or indirectly, by the Company;

(iii) the sale of voting securities of the Company in a transaction or a series of related transactions to any Person (or group of Persons acting in concert), other than any Affiliates of the Holder or any Person who is or has been a Holder, that results in such Person (or group of Persons) (together with their Affiliates) owning more than 50% of the outstanding voting securities of the Company or any Material Subsidiary; or

(iv) the termination or removal of either Ambrose L. Schwallie from his position as Chief Executive Officer or Peter Tallian from his position as Chief Financial Officer with the Company without cause, unless approved by holders of a majority of the outstanding principal amount of the Senior Secured Note(s). For purposes of clause 1(b)(iv), "cause" shall mean any (i) willful failure, which failure is not cured within 30 days of written notice to Ambrose L. Schwallie or Peter Tallian, as applicable, to perform his material responsibilities to the Company or (ii) willful misconduct which materially and adversely affects the business reputation of the Company.

(d) “Common Shares” means shares of the common stock, par value $0.01 per share, of the Company.

(e) “Date of Issuance” means the date of issuance of this Note by the Company under the Purchase Agreement.

(f) “Default Interest Rate” means the lesser of 20% or the maximum rate allowed by applicable Law.

(g) “Lien” means any lien, security interest, mortgage, pledge, charge, license, adverse claim, reversion or encumbrance of any kind, and includes conditional sales contracts, title retention agreements and capital leases.

(h) “Maturity Date” means March 1, 2008.

(i) “Normal Course Liens” means:

(i) any builder’s, mechanic’s, materialman’s, worker’s, repairman’s or other similar statutory Lien incurred in the ordinary course of business, that has not at the time been filed pursuant to applicable Laws and any such Lien that, although filed, relates solely to an obligation not overdue or, if overdue, is being contested in good faith or is bonded or in respect of which the appropriate amount has been withheld in accordance with applicable Laws;

(ii) any right reserved to, or vested in, any applicable Governmental Entity by the terms of any applicable Laws, any applicable authorization by a Governmental Entity, or any property interest, easement, right-of-way or servitude issued or granted by applicable Laws or by any applicable authorization by a Governmental Entity, to terminate any such authorization, easement, right-of-way or servitude or to purchase, expropriate, appropriate or recapture or designate a purchaser of any property;

(iii) any Lien for Taxes, assessment, water or sewer, or other rents or charges not at the time overdue or, if overdue, being contested in good faith;

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(iv) any Lien arising in connection with workers’ compensation, unemployment or employment insurance or other social benefits required by applicable Laws not at the time overdue or, if overdue, being contested in good faith;

(v) Liens, deposits or pledges to secure statutory obligations or performance of bids, tenders, contracts (other than for the repayment of money) or leases, in an aggregate amount not to exceed $50,000;

(vi) involuntary Liens (including the Lien of an attachment, judgment or execution) in an aggregate amount not to exceed $10,000 and not at the time overdue or, if overdue, contested in good faith;

(vii) Purchase Money Liens;

(viii) Liens granted or created by the Transaction Documents; and

(ix) any other Liens consented to by the Holder or approved pursuant to Section 6(b);

provided that in each case where it is in good faith contesting any obligations, Taxes or assessments as contemplated herein, (A) it shall have established to the satisfaction of the Holder (acting reasonably) a reserve in accordance with GAAP unless there is a reasonable likelihood that the amount will be required to be paid, in which case it shall establish sufficient reserve for or deposit with a court of competent jurisdiction or the assessing authority, or to such other Person as is acceptable to the Holder, acting reasonably, sufficient funds or a surety bond, for the total amount claimed to be secured by such Liens, where the application of such reserve, funds or bond would result in their discharge, and (B) such Lien shall only be a Permitted Lien for so long as such contestation effectively postpones or stays the enforcement of the rights of the holder thereof.

(j) “Obligations” means the principal, interest and other amounts payable under this Note.

(k) “Permitted Indebtedness” means (i) the amount permitted by (A) the Permitted Existing Secured Indebtedness and (ii) indebtedness permitted to be incurred under the terms of the Purchase Agreement.

(l) “Permitted Liens” means Liens granted pursuant to the Permitted Existing Secured Indebtedness or a Normal Course Lien.

(m) “Purchase Money Lien” means a Lien incurred in the ordinary course of business only to secure the purchase price of an asset, or to secure debt used only to finance or refinance the purchase of an asset, in the aggregate amount not to exceed $50,000.

(n) “Secured Note” means this Note, any Additional Secured Notes issued or any notes issued in replacement of the foregoing.

(o) “Trading Day” means any day on which Nasdaq is open for trading.

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(p) “Transaction Documents” shall mean each of the Promissory Notes, the Purchase Agreement, the Warrants, the Security and Pledge Agreement, the Subsidiary Security and Pledge Agreements, the Guaranties, the Registration Rights Agreement, the Intercreditor Agreement, the Management Rights Letter and any other instrument or agreement at any time delivered in connection with the foregoing to secure the Obligations.

(q) “Warrants” shall mean warrants to purchase Common Shares issued pursuant to the Purchase Agreement.

2. Interest.

(a) All unpaid principal, together with any accrued but unpaid interest and other amounts payable under this Note, shall be due and payable on (i) the Maturity Date, or (ii) when such amounts are declared due and payable by the Holder or made automatically due and payable upon or after (A) the occurrence of an Event of Default (as defined below), (B) the liquidation or dissolution of the Company, or (C) any Change of Control. Interest on this Note shall be payable (and if not paid when due, shall be compounded) quarterly in arrears on each September 1, December 1, March 1 and June 1 after the date of issuance of this Note and shall be payable at the option of the Company either (i) in lawful money of the United States of America, or (ii) by the issuance of an additional senior secured promissory note identical in all respects to this Note except that it shall have a principal amount equal to such interest payment and a different date of issuance (each, an “Additional Secured Note”).

(b) If the Company elects to pay interest by issuing an Additional Secured Note, it shall give notice to the Holder on the day such payment is due and deliver such Additional Secured Note to the Holder within five Business Days.

(c) Interest shall be calculated based on the weighted average principal outstanding for such period. The first payment of interest shall be on September 1, 2007 and shall be calculated from the Date of Issuance to August 31, 2007.

3. Secured Obligations; Collateral. In order to secure the Company’s payment and performance of the Obligations and to secure the Company’s prompt, full and faithful performance and observance of all of the provisions under this Note and the other Transaction Documents, the Company has delivered to the Holder, the Security and Pledge Agreement, pursuant to which the Company has granted to the Holder as security and collateral for the payment and performance of the Obligations, a security interest in all of the property and assets of the Company, whether now existing or hereafter arising, and all as more specifically described, and on the terms and conditions set forth in, the Security and Pledge Agreement. The Company’s Material Subsidiaries have also entered into and delivered to the Holder, as further protection, the Guaranties and the Subsidiary Security and Pledge Agreements. The security interest granted by the Company under the Security and Pledge Agreement, and by the Company’s Material Subsidiaries under the Subsidiary Security and Pledge Agreement, securing the indebtedness evidenced by this Note, including all Obligations, is senior to all other liens, security interests or encumbrances securing any other indebtedness of each of the Company and

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its Material Subsidiaries other than the Permitted Existing Secured Indebtedness (pursuant to the Intercreditor Agreement).

4. Events of Default. The occurrence of any of the following shall constitute an “Event of Default” under this Note:

(a) Failure to Pay. The Company shall fail to pay when due any principal payment on this Note, or any interest or other payment required under the terms of this Note, and such failure continues for three Business Days thereafter;

(b) Breaches of Representations and Warranties. Any representation or warranty made by the Company in this Note or in any of the other Transaction Documents shall not have been true in any material respect when made; provided, that if the facts or events making such representation or warranty untrue are capable of correction or cure, then the Company shall have ten Business Days after notice of the breach is delivered to the Company to correct or cure such breach;

(c) Breaches of Other Covenants. The Company shall fail to observe or to perform any other covenant, obligation, condition or agreement in any material respect contained in this Note or the other Transaction Documents, other than those specified in Section 4(a) of this Note, and such failure continues for ten Business Days after notice of the breach is delivered to the Company;

(d) Cross-Default. (i) The Company shall default under (A) any Secured Note, or (B) its payment obligations pursuant to any Transaction Document, and such failure continues for five Business Days thereafter, or (ii) the Company or any of its Subsidiaries shall default under any other agreement, bond, debenture, note or other evidence of indebtedness for money borrowed, under any guaranty or under any mortgage, or indenture pursuant to which there shall be issued or by which there shall be secured or evidenced any indebtedness for money borrowed by the Company or any of its Subsidiaries, whether such indebtedness now exists or shall hereafter be created, including but not limited to, default under the Permitted Existing Secured Indebtedness, which default (other than a default under a Secured Note) pursuant to clause (ii) shall have resulted in indebtedness of at least $250,000 being due and payable prior to the date on which it would otherwise become due and payable;

(e) Undischarged Judgment. One or more judgments for the payment of money in an amount in excess of $250,000 in the aggregate shall be rendered against the Company or any of its Material Subsidiaries (or any combination thereof) and shall remain undischarged for a period of ten consecutive Business Days during which execution shall not be effectively stayed, or any action is legally taken by a judgment creditor to levy upon any such judgment;

(f) Voluntary Bankruptcy or Insolvency Proceedings. The Company (or any Subsidiary thereof) shall (i) apply for or consent to the appointment of a receiver, trustee, liquidator or custodian of itself or of all or a substantial part of its property, (ii) be unable, or admit in writing its inability, to pay its debts generally as they mature, (iii) make a general assignment for the benefit of its or any of its creditors, (iv) be dissolved or liquidated in full or in

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part, (v) become insolvent (as such term may be defined or interpreted under any applicable statute), (vi) commence a voluntary case or other Proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar Law now or hereafter in effect or consent to any such relief or to the appointment of or taking possession of its property by any official in an involuntary case or other Proceeding commenced against it or (vii) take any action for the purpose of effecting any of the foregoing;

(g) Involuntary Bankruptcy or Insolvency Proceedings. Proceedings for the appointment of a receiver, trustee, liquidator or custodian of the Company (or any Subsidiary thereof) or of all or a substantial part of the property thereof, or an involuntary case or other Proceeding seeking liquidation, reorganization or other relief with respect to the Company (or any Subsidiary thereof) or the debts thereof under any bankruptcy, insolvency or other similar Law now or hereafter in effect shall be commenced and an order for relief entered, or such case or Proceeding shall not be dismissed or discharged within 30 days of commencement;

(h) Board Observer; Protective Provisions. Any of the following conditions exist: (i) the Company shall have failed to allow the Perseus Observer to attend and observe any meeting of the Board, pursuant to and subject to the limitations set forth in Section 5.6(a) of the Purchase Agreement or (ii) the Company breaches any of its obligations under Section 5.6 or 5.14 of the Purchase Agreement; and, in the case of any such breach described in this clause (ii) that is reasonably susceptible to cure, such breach continues uncured for ten Business Days after notice of such breach is delivered to such Company; or

(i) Stockholder Approval. The Board shall fail to recommend to the Company’s stockholders that they grant the Stockholder Approval (or shall revoke or rescind its recommendation), the Board shall otherwise advise the Company’s stockholders not to grant the Stockholder Approval or the Company shall fail to include the Board’s recommendation in its proxy solicitation materials delivered to the Company’s stockholders.

5. Rights of Holder upon Default.

(a) Upon the occurrence or existence of any Event of Default (other than an Event of Default referred to in Section 4(f) or 4(g) of this Note) and at any time thereafter during the continuance of such Event of Default, holders of a majority of the outstanding principal amount of the Senior Secured Note(s) may declare all outstanding Obligations payable by the Company under this Note to be immediately due and payable without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived, anything contained in this Note or in the other Transaction Documents to the contrary notwithstanding. Upon the occurrence or existence of any Event of Default described in Sections 4(f) or 4(g) of this Note, immediately and without notice, all outstanding Obligations payable by the Company hereunder shall automatically become immediately due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived, anything contained in this Note or in the other Transaction Documents to the contrary notwithstanding. In addition to the foregoing remedies, upon the occurrence or existence of any Event of Default, the Holder may exercise any other right, power or remedy granted to it by the Transaction Documents or otherwise permitted to it by Law, either by suit in equity or by action at Law, or both.

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(b) Notwithstanding anything to the contrary contained in this Note, in addition to the rights of the Holder specified in subsection (a) of this Section 5, on the date an Event of Default under this Note occurs, the interest rate on this Note shall increase, from that date forward, to the Default Interest Rate, which interest shall be compounded quarterly and payable solely in lawful money of the United States of America.

6. Covenants.

(a) Affirmative Covenants. The Company covenants that, so long as any Obligations remain outstanding, the Company shall:

(i) Security and Pledge Agreement. Grant to the Holder, and maintain for the benefit of the Holder, a lien on and security interest in all of its assets and properties, whether now or hereafter existing, owned or acquired, which the Company shall perfect by filing UCC-1 financing statements in the appropriate jurisdictions and taking other actions to perfect the security interest as the Holder may reasonably request, all in accordance with the terms of the Security and Pledge Agreement, and cause its Material Subsidiaries to do the same.

(ii) Preservation of Corporate Existence. Preserve and maintain its and its Material Subsidiaries’ corporate existence, rights, franchises and privileges in the jurisdiction of its incorporation, and qualify and remain qualified as a foreign corporation in each jurisdiction in which such qualification is required, unless the failure to so preserve, maintain or qualify does not and will not have a Material Adverse Effect, and preserve and maintain all of its Proprietary Assets that are material to it and its Subsidiaries’ business.

(iii) Compliance with Laws. Comply with all applicable Laws of any Governmental Entity, except non-compliance being contested in good faith through appropriate Proceedings so long as the Company shall have set up and funded sufficient reserves, if any, required under GAAP with respect to such items.

(iv) Performance Under the Note. Pay, observe or perform any other covenant, obligation, condition or agreement contained in this Note.

(v) Payment Defaults on Other Indebtedness. If the Company defaults on a payment required under any indebtedness (other than any indebtedness owed to the Holder) and, pursuant to a binding agreement, the Company is or would be precluded from making a payment in cash to the Holder during the continuance of such default (a “Payment Default”), or the Company believes that a Payment Default may occur, (A) consult with the Holder prior to the occurrence of such Payment Default and (B) during the continuance of such Payment Default pay interest on this Note only in the form of Additional Secured Notes.

(b) Negative Covenants. The Company covenants that so long as any Obligations remain outstanding, neither the Company nor any Subsidiary shall directly or indirectly take any of the following actions without the prior written consent of the Holder:

(i) Create, incur, assume, guarantee or be or remain liable for, contingently or otherwise, or suffer to exist any indebtedness for borrowed money, except Indebtedness incurred pursuant to the Transaction Documents or Permitted Indebtedness;

(ii) Create, incur, assume or suffer to exist any Lien of any kind on any of its assets, except for Liens created in connection with the Transaction Documents or Permitted Liens;

(iii) Enter into any transaction, or a series of related transactions, which would result in a Change of Control;

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(iv) Amend the Permitted Existing Secured Indebtedness, except as otherwise permitted pursuant to the terms of this Note; or

(v) Alter the Business Plan in a manner that is material and adverse to the Company.

7. Prepayment. The Company shall have no right to prepay this Note or any interest or fees accruing or incurred with respect to this Note, without the prior written consent of the Holder.

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8. Waiver and Amendment. Any provision of this Note may be amended, waived or modified upon the written consent of both the Company and the holders of a majority of the outstanding principal amount of the Senior Secured Note(s). Additionally, the holders of a majority of the outstanding principal amount of the Secured Note(s) shall be deemed to have waived any breach of any covenant set forth in Section 6(b) hereof in the event that each Perseus Director votes in favor of the action that causes such breach, provided that all material terms related to the cause thereof were disclosed to such Board members.

9. Transfer of this Note or Payment Hereunder. This Note may not be transferred in violation of any restrictive legend set forth hereon. Each new Note issued upon transfer of this Note shall bear a legend as to the applicable restrictions on transferability in order to ensure compliance with the Securities Act, unless in the opinion of counsel for the Company such legend is not required in order to ensure compliance with the Securities Act. The Company may issue stop transfer instructions to its transfer agent in connection with such restrictions. Subject to the foregoing, transfers of this Note shall be registered upon registration books maintained for such purpose by or on behalf of the Company. Prior to presentation of this Note for registration of transfer, the Company shall treat the registered holder hereof as the owner and holder of this Note for the purpose of receiving all payments of principal and interest hereon and for all other purposes whatsoever, whether or not this Note shall be overdue and the Company shall not be affected by notice to the contrary.

10. Assignment. Neither this Note nor any of the rights, interests or obligations hereunder may be assigned, by operation of law or otherwise, as a whole or in part, by the Company without the prior written consent of the Holder. The Holder may assign the rights, interests or obligations under this Note, as a whole or in part, at any time, subject to compliance with Section 9 of this Note, upon written notice to the Company of such assignment. Notwithstanding the foregoing, until the Company receives notice in accordance with this Section 10, the Company shall treat the registered holder hereof as the owner and holder of this Note for the purpose of receiving all payments of principal and interest on this Note and for all other purposes whatsoever, whether or not this Note shall be overdue.

11. Treatment of Note. To the extent permitted by GAAP, the Company will treat, account and report the Note as debt and not equity for accounting purposes and with respect to any returns filed with federal, state or local tax authorities.

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12. Notices. Any notice, request or other communication required or permitted hereunder shall be in writing and shall be deemed to have been duly given if personally delivered or mailed by registered or certified mail, postage prepaid, or by recognized overnight courier, personal delivery or facsimile transmission at the respective addresses or facsimile number of the parties as set forth in or otherwise designated by either party pursuant to the Purchase Agreement or on the register maintained by the Company. Any party hereto may by notice so given change its address or facsimile number for future notice hereunder. Notice shall conclusively be deemed to have been given when received if received prior to 4:00 p.m. (local time) otherwise it shall be deemed to have been received the following Business Day.

13. Interaction with other Secured Notes. The Company and the Holder agree that all Secured Notes shall rank pari passu notwithstanding date of issue.

14. Expenses; Waivers. If action is instituted to collect this Note, the Company shall pay all costs and expenses, including, without limitation, reasonable attorneys’ fees and costs, incurred in connection with such action. The Company hereby waives notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor and all other notices or demands relative to this instrument.

15. Successors and Assigns. Subject to the restrictions on transfer described in Sections 9 and 10 of this Note, the rights and obligations of the Company and the Holder of this Note shall be binding upon and benefit the successors, assigns, heirs, administrators and transferees of the parties.

16. Governing Law; Jury Waiver. This Note and all actions arising out of or in connection with this Note shall be governed by and construed in accordance with the Laws of the State of New York, without regard to conflict of laws provisions of the State of New York or of any other state. IN THE EVENT OF ANY DISPUTE AMONG OR BETWEEN ANY OF THE PARTIES TO THIS NOTE ARISING OUT OF THE TERMS OF THIS NOTE, THE PARTIES HEREBY CONSENT TO THE EXCLUSIVE JURISDICTION OF THE COURTS LOCATED IN THE COUNTY OF NEW YORK, STATE OF NEW YORK, OR THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK FOR RESOLUTION OF SUCH DISPUTE, AND AGREE NOT TO CONTEST SUCH EXCLUSIVE JURISDICTION OR SEEK TO TRANSFER ANY ACTION RELATING TO SUCH DISPUTE TO ANY OTHER JURISDICTION. THE COMPANY AND THE HOLDER AGREE TO ACCEPT SERVICE OF PROCESS PURSUANT TO THE PROCEDURES SET FORTH IN SECTION 14. THE PARTIES HERETO WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS NOTE.

[signatures appear on following page]

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IN WITNESS WHEREOF, the Company has caused this Note to be issued as of the date first written above.


	DISTRIBUTED ENERGY SYSTEMS CORP.
	By:	/s/ Ambrose L. Schwallie
		Name: Ambrose L. Schwallie
		Title: Chief Executive Officer

Signature Page for Senior Secured Convertible Promissory Note

EX-5 6 w35316exv5.htm EXHIBIT 5 exv5

Exhibit 5

EXECUTION VERSION

INITIAL INVESTMENT WARRANT

THE SECURITIES REPRESENTED BY THIS WARRANT HAVE BEEN ACQUIRED BY THE HOLDER FOR ITS OWN ACCOUNT, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO THE DISTRIBUTION OF SUCH SECURITIES. NEITHER THE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”) AND ANY APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND COMPLIANCE WITH SUCH STATE SECURITIES LAWS, IN COMPLIANCE WITH RULE 144 UNDER THE SECURITIES ACT, OR OTHERWISE DISPOSED OF WITHOUT AN OPINION OF COUNSEL OR OTHER EVIDENCE REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION AND/OR COMPLIANCE IS NOT REQUIRED.


No.: 1		June 1, 2007

WARRANT
TO PURCHASE COMMON SHARES
OF
DISTRIBUTED ENERGY SYSTEMS CORP.

1. Issuance of Warrant. FOR VALUE RECEIVED, on and after the date of issuance of this Warrant, and on the terms and subject to the conditions herein set forth, the Holder (as defined below) is entitled to purchase from Distributed Energy Systems Corp., a corporation incorporated under the laws of the State of Delaware (the “Company”), at any time before 5:00 p.m. New York time on June 1, 2012 (the “Termination Date”), at a price per share equal to the Warrant Price (as defined below and subject to adjustment as described below), the Warrant Stock (as defined below and subject to adjustment as described below) upon exercise of this warrant (this “Warrant”) pursuant to Section 6 hereof or conversion of this Warrant pursuant to Section 7 hereof.

2. Definitions. As used in this Warrant, the following terms have the definitions ascribed to them below:

(a) “Business Day” means any day other than a Saturday, Sunday or other day on which the national or state banks located in the State of New York, the State of Connecticut or the District of Columbia are authorized to be closed.

(b) “Commencement Date” means June 1, 2007.

(d) “Holder” means Perseus Partners VII, L.P., or its successors or assigns.

(e) “Purchase Agreement” means the Securities Purchase Agreement by and between the Company and Perseus Partners VII, L.P., dated May 10, 2007.

(f) “Warrant Price” means $0.80 per share, subject to adjustment as described in Section 3 hereof.

(g) “Warrant Stock” means 7,954,536 Common Shares, subject to adjustment as described in Section 3 hereof or in accordance with Section 7 hereof.

Any other capitalized terms used but not otherwise defined herein shall have the meanings ascribed to such terms in the Purchase Agreement.

3. Adjustments and Notices. The Warrant Price and the number of shares of Warrant Stock shall be subject to adjustment from time to time in accordance with this Section 3.

(a) Adjustment for Splits and Combinations. If the Company shall at any time or from time to time after the Commencement Date effect a stock split of the outstanding Common Shares, the Warrant Price in effect immediately before that stock split shall be proportionately decreased, and, conversely, if the Company shall at any time combine the outstanding Common Shares into a smaller number of shares, the Warrant Price in effect immediately before that combination shall be proportionately increased. Any adjustment under this Section 3(a) shall become effective at the close of business on the date the stock split or combination becomes effective.

(b) Adjustment for Common Shares Dividends and Distributions. If the Company at any time or from time to time after the Commencement Date issues, or fixes a record date for the determination of holders of Common Shares entitled to receive, a dividend or other distribution payable solely in additional Common Shares, in each such event the Warrant Price that is then in effect shall be decreased as of the time of such issuance or, in the event such record date is fixed, as of the close of business on such record date, by multiplying the Warrant Price then in effect by a fraction (i) the numerator of which is the total number of Common Shares issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and (ii) the denominator of which is the sum of the total number of Common Shares issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of Common Shares issuable in payment of such dividend or distribution; provided, however, that if such record date is fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefore, the

Warrant Price shall be recomputed accordingly as of the close of business on such record date and thereafter the Warrant Price shall be adjusted pursuant to this Section 3(b) to reflect the actual payment of such dividend or distribution.

(c) Adjustments for Other Dividends and Distributions. If the Company at any time or from time to time after the Commencement Date issues, or fixes a record date for the determination of holders of Common Shares entitled to receive, a dividend or other distribution payable in securities of the Company other than Common Shares or other property, in each such event provision shall be made so that the Holder shall receive upon exercise or conversion of this Warrant, in addition to the number of Common Shares receivable hereupon, the amount of securities of the Company or other property which such Holder would have received had this Warrant been exercised for or converted into Common Shares on the date of such event and had they thereafter, during the period from the date of such event to and including the exercise or conversion date, retained such securities or other property receivable by them as aforesaid during such period, subject to all other adjustments called for during such period under this Section 3 with respect to the rights of the Holders of this Warrant or with respect to such other securities or other property by their terms. As used herein, the term “other property” does not include cash.

(d) Adjustment for Reclassification, Exchange and Substitution. If at any time or from time to time after the Commencement Date, the Common Shares issuable upon the exercise or conversion of this Warrant is changed into the same or a different number of shares of any class or series of stock, whether by recapitalization, reclassification or otherwise (other than a subdivision or combination of shares or stock dividend or a reorganization, merger, consolidation or sale of assets provided for elsewhere in this Section 3), then in any such event the Holder shall have the right upon the exercise or conversion of this Warrant to receive the kind and amount of stock and other securities and property receivable upon such recapitalization, reclassification or other change by holders of the number of Common Shares which the Holder of this Warrant could have received had such Warrant been exercised or converted immediately prior to such recapitalization, reclassification or change, all subject to further adjustment as provided in this Warrant or with respect to such other securities or property by the terms thereof.

(e) Reorganizations. If at any time or from time to time after the Commencement Date, there is a capital reorganization of the Common Shares (other than a recapitalization, subdivision, combination, reclassification, exchange or substitution of shares provided for elsewhere in this Section 3), as a part of such capital reorganization provision shall be made so that the Holder shall thereafter be entitled to receive upon exercise or conversion of this Warrant the number of shares or other securities or property of the Company to which a holder of the number of Common Shares deliverable upon such exercise or conversion would have been entitled on such capital reorganization, subject to adjustment in respect of such securities by their terms. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 3 with respect to the rights of the Holder after such capital reorganization to the end that the provisions of this Section 3 (including adjustment of the Warrant Price then in effect and the number of shares issuable upon exercise or conversion of this Warrant) shall be applicable after that event and be as nearly equivalent as practicable.

(f) Certificate of Adjustment. In each case of an adjustment or readjustment of the Warrant Price for the number of common Shares or other securities issuable upon exercise

or conversion of this Warrant, the Company, at its own expense, shall cause its Chief Financial Officer to compute such adjustment or readjustment in accordance with the provisions of this Warrant and prepare a certificate showing such adjustment or readjustment, and shall mail such certificate, by first class mail, postage prepaid, to the Holder at the Holder’s address as shown in the Company’s books. The certificate shall set forth such adjustment or readjustment, showing in detail the facts upon which such adjustment or readjustment is based. No adjustment in the Warrant Price shall be required to be made unless it would result in an increase or decrease of at least one cent, but any adjustments not made because of this sentence shall be carried forward and taken into account in any subsequent adjustment otherwise required hereunder.

(g) Adjustment to Number of Shares of Warrant Stock. In the event the Warrant Price is adjusted under any provision of this Section 3, the number of shares of Warrant Stock shall be simultaneously adjusted by multiplying the number of shares of Warrant Stock by a fraction, the numerator of which is the Warrant Price in effect immediately prior to such adjustment and the denominator of which is the Warrant Price in effect immediately after such adjustment.

(h) Notices of Record Date. Upon (i) the establishment by the Company of a record of the holders of any class of securities for the purpose of determining the holders of such securities who are entitled to receive any dividend or other distribution, or (ii) any capital reorganization of the Company, any reclassification or recapitalization of the shares of the Company, any merger or consolidation of the Company with or into any other Company, or any transfer of all or substantially all the assets of the Company to any other Person or any voluntary or involuntary dissolution, liquidation or winding up of the Company, the Company shall mail to the Holder at least twenty Business Days prior to the record date specified therein a notice specifying (A) the date on which any such record is to be taken for the purpose of such dividend or distribution and a description of such dividend or distribution, (B) the date on which any such reorganization, reclassification, transfer, consolidation, merger, dissolution, liquidation or winding up is expected to become effective, and (C) the date, if any, that is to be fixed as to when the holders of record of Common Shares (or other securities) shall be entitled to exchange their Common Shares (or other securities) for securities or other property deliverable upon such reorganization, reclassification, transfer, consolidation, merger, dissolution, liquidation or winding up.

(i) No Impairment. The Company shall not amend its Certificate of Incorporation or Bylaws or participate in any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action for the purpose of avoiding or seeking to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but shall at all times in good faith assist in carrying out all such action as may be reasonably necessary or appropriate in order to protect the rights of the Holder of this Warrant against dilution or other impairment as provided herein. If the Company takes any action in breach of this Warrant, the Holder shall be entitled to any and all remedies available at law or in equity.

(j) Fractional Share. No fractional share shall be issuable upon exercise or conversion of this Warrant and the number of shares to be issued shall be rounded down to the nearest whole share. If the exercise or conversion of this Warrant shall result in the issuance of

any fractional share, the Company shall eliminate such fractional share by paying the Holder an amount computed by multiplying such fraction by the fair market value of a full share.

(k) Other Adjustments. If and whenever the Company shall take any action affecting or relating to the Warrants, other than any action described in this Section 3, which in the opinion of the Board would prejudicially affect the rights of the Holder, the Warrant Price and, if required, the number of Common Shares to be issued upon exercise or conversion of the Warrant will be adjusted by the Board in such manner, if any, and at such time, as the Board may, in its sole discretion, subject to the approval of any stock exchange(s) on which the Common Shares are listed and posted for trading, reasonably determine to be equitable in the circumstances to such Holder.

4. No Shareholder Rights. This Warrant, by itself, as distinguished from any Common Shares purchased hereunder, shall not entitle its Holder to any of the rights of a shareholder of the Company.

5. Reservation of Stock. On and after the Commencement Date, the Company shall at all times reserve and keep available out of its authorized but unissued Common Shares, solely for the purpose of effecting the exercise or conversion of this Warrant and all other Warrants, such number of its Common Shares as shall from time to time be sufficient to effect the exercise or conversion of this Warrant and all other Warrants; and if at any time the number of authorized but unissued Common Shares shall not be sufficient to effect the exercise or conversion of this Warrant and all other Warrants, the Company will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued Common Shares to such number of shares as shall be sufficient for such purpose. Issuance of this Warrant shall constitute full authority to the Company’s officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of Warrant Stock issuable upon the exercise or conversion of this Warrant.

6. Exercise of Warrant.

(a) Voluntary Exercise. This Warrant may be exercised as a whole or in part by the Holder, at any time after the date of issuance of this Warrant and prior to the termination of this Warrant, by the surrender of this Warrant, together with the Notice of Exercise and Investment Representation Statement in the forms attached hereto as Attachments 1 and 2, respectively, duly completed and executed, and containing a form of signature guarantee reasonably acceptable to the Company, at the principal office of the Company, specifying the portion of the Warrant to be exercised and accompanied by payment in full of the Warrant Price in cash or by bank draft or wire transfer with respect to the shares of Warrant Stock being purchased. This Warrant shall be deemed to have been exercised immediately prior to the close of business on the date of its surrender for exercise as provided above, and the Person entitled to receive the shares of Warrant Stock issuable upon such exercise shall be treated for all purposes as the holder of such shares of record as of the close of business on such date. As promptly as practicable after such date, and in any event within three Business Days, the Company shall issue and deliver to the Person or persons entitled to receive the same a certificate or certificates for the number of full shares of Warrant Stock issuable upon such exercise. If this Warrant shall be exercised for less than the total number of shares of Warrant Stock then issuable upon exercise,

promptly after surrender of this Warrant upon such exercise, and in any event within three Business Days, the Company will execute and deliver a new warrant, dated the date hereof, evidencing the right of the Holder to the balance of this Warrant Stock purchasable hereunder upon the same terms and conditions set forth in this Warrant.

(b) Payment of Taxes. The Company will pay all transfer taxes or charges that may be imposed with respect to the issue or delivery of Common Shares upon exercise or conversion of this Warrant, except for any tax or other charge imposed in connection with any transfer involved in the issue and delivery of Common Shares in a name other than that in which this Warrant was registered.

7. Conversion. In lieu of exercising this Warrant or any portion of this Warrant, at any time the Holder of this Warrant shall have the right to convert this Warrant or any portion of this Warrant into Warrant Stock by the surrender of this Warrant, together with the written Notice of Conversion and Investment Representation Statement in the forms attached hereto as Attachments 3 and 2, respectively, duly completed and executed, and containing a form of signature guarantee reasonably acceptable to the Company, at the principal office of the Company, specifying the portion of the Warrant to be converted. The number of shares of Warrant Stock to be issued to the Holder upon such conversion shall be computed using the following formula:


X=(P)(Y)(A-B)/A

where	X =	the number of Common Shares to be issued to the Holder for the portion of the Warrant being converted.

	P =	the portion of the Warrant being converted expressed as a decimal fraction.

	Y =	the total number of Common Shares issuable upon exercise of the Warrant in full.

	A =	the fair market value of one share of Warrant Stock which means the fair market value of the Warrant Stock as of the last Business Day immediately prior to the date the Notice of Conversion is received by the Company, as reported in the principal market for such securities or, if no such market exists, as determined in good faith by the Company’s Board.

	B =	the Warrant Price on the date of conversion.

Any portion of this Warrant that is converted shall be immediately canceled. This Warrant or any portion of this Warrant shall be deemed to have been converted immediately prior to the close of business on the date of its surrender for conversion as provided above, and the Person entitled to receive the shares of Warrant Stock issuable upon such conversion shall be treated for all purposes as the holder of such shares of record as of the close of business on such date. As promptly as practicable after such date, and in any event within three Business Days of the conversion, the Company shall issue and deliver to the Person or Persons entitled to receive

the same a certificate or certificates for the number of full shares of Warrant Stock issuable upon such conversion. If the Warrant shall be converted for less than the total number of shares of Warrant Stock then issuable upon conversion, promptly after surrender of the Warrant upon such conversion, the Company will execute and deliver a new warrant, dated the date of this Warrant, evidencing the right of the Holder to the balance of the Warrant Stock purchasable hereunder upon the same terms and conditions set forth in this Warrant. If this Warrant is converted, as a whole or in part, after the occurrence of an event as to which Section 3(c) is applicable, the Holder shall receive the consideration contemplated by Section 3(c) in lieu of Common Shares.

8. Transfer of Warrant. This Warrant may be transferred or assigned by the Holder hereof as a whole or in part, provided that the transferor provides, at the Company’s request, an opinion of counsel or other evidence reasonably satisfactory to the Company that such transfer does not require registration under the Securities Act or any similar requirement under the securities law applicable with respect to any other applicable jurisdiction.

9. Termination. This Warrant shall terminate at 5:00 p.m. New York time on the Termination Date.

10. Governing Law; Jury Waiver. This Warrant and all actions arising out of or in connection with this Warrant shall be governed by and construed in accordance with the laws of the State of New York, without regard to conflict of laws provisions of the State of New York or of any other state. IN THE EVENT OF ANY DISPUTE AMONG OR BETWEEN ANY OF THE PARTIES TO THIS WARRANT ARISING OUT OF THE TERMS OF THIS WARRANT, THE PARTIES HEREBY CONSENT TO THE EXCLUSIVE JURISDICTION OF THE COURTS LOCATED IN THE COUNTY OF NEW YORK, STATE OF NEW YORK, OR THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK FOR RESOLUTION OF SUCH DISPUTE, AND AGREE NOT TO CONTEST SUCH EXCLUSIVE JURISDICTION OR SEEK TO TRANSFER ANY ACTION RELATING TO SUCH DISPUTE TO ANY OTHER JURISDICTION. THE COMPANY AND THE HOLDER AGREE TO ACCEPT SERVICE OF PROCESS PURSUANT TO THE PROCEDURES SET FORTH IN SECTION 11. THE PARTIES HERETO WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS WARRANT.

11. Miscellaneous; Notices. The headings in this Warrant are for purposes of convenience and reference only, and shall not be deemed to constitute a part hereof. Neither this Warrant nor any term of this Warrant may be changed or waived except by an instrument in writing signed by the Company and the Holder of this Warrant. All notices and other communications from the Company to the Holder of this Warrant shall be delivered personally, by facsimile or mailed via overnight courier, to the address, facsimile number furnished to the Company in writing by the last Holder of this Warrant who shall have furnished an address or facsimile number to the Company in writing. If such communication is delivered by facsimile, delivery shall be deemed given once the Holder receives a receipt confirmation, and if mailed via overnight courier delivery shall be deemed given on the next Business Day thereafter.

ISSUED: June 1, 2007


		DISTRIBUTED ENERGY SYSTEMS CORP.

		By:		/s/ Peter Tallian


		Name:		Peter Tallian


		Title:		CFO

[Signature Page to Initial Investment Warrant]

EXECUTION VERSION

Attachment 1

NOTICE OF EXERCISE

TO: Distributed Energy Systems Corp.

1. The undersigned hereby elects to purchase shares of the Warrant Stock of Distributed Energy Systems Corp. pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price in full.

2. Please issue a certificate or certificates representing said shares of Warrant Stock in the name of the undersigned or in such other name as is specified below:


		(Name)

		(Address)



(Date)		(Name of Warrant Holder)

		By:


		Title:

Attachment 1-1

EXECUTION VERSION

Attachment 2

INVESTMENT REPRESENTATION STATEMENT

Common Shares
(as defined in the attached Warrant) of
Distributed Energy Systems Corp.

In connection with the purchase of the above-listed securities, the undersigned hereby represents to Distributed Energy Systems Corp. (the “Company”) as follows:

(a) The securities to be received upon the exercise of the Warrant (the “Securities”) will be acquired for investment for its own account, not as a nominee or agent, and not with a view to the sale or distribution of any part thereof, and the undersigned has no present intention of selling, granting participation in or otherwise distributing the same, but subject, nevertheless, to any requirement of law that the disposition of its property shall at all times be within its control. By executing this statement, the undersigned further represents that it does not have any contract, undertaking, agreement or arrangement with any Person to sell, transfer, or grant participation to such Person or to any third person, with respect to any Securities issuable upon exercise of the Warrant.

(b) The undersigned understands that the Securities issuable upon exercise of the Warrant at the time of issuance may not be registered under the Securities Act of 1933, as amended (the “Securities Act”), and applicable state securities laws, on the ground that the issuance of such securities is exempt pursuant to Section 4(2) of the Securities Act and state law exemptions relating to offers and sales not by means of a public offering, and that the Company’s reliance on such exemptions is predicated on the undersigned’s representations set forth herein.

(c) The undersigned agrees that in no event will it make a disposition of any Securities acquired upon the exercise of the Warrant unless and until (i) it shall have notified the Company of the proposed disposition and shall have furnished the Company with a statement of the circumstances surrounding the proposed disposition and (ii) it shall have furnished the Company with an opinion of counsel or other evidence reasonably satisfactory to the Company and Company’s counsel to the effect that (A) appropriate action necessary for compliance with the Securities Act and any applicable state securities laws has been taken or an exemption from the registration requirements of the Securities Act and such laws is available and (B) the proposed transfer will not violate any of said laws.

(d) The undersigned acknowledges that an investment in the Company is highly speculative and represents that it is able to fend for itself in the transactions contemplated by this statement, has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of its investments, and has the ability to bear the economic risks (including the risk of a total loss) of its investment. The undersigned represents that it has had the opportunity to ask questions of the Company concerning the Company’s business and assets and to obtain any additional information which it considered necessary to verify the accuracy of or to amplify the Company’s disclosures, and has had all questions which have been

Attachment 2-1

EXECUTION VERSION

asked by it satisfactorily answered by the Company. The undersigned represents that it is an “accredited investor” within the meaning of Regulation D of the Securities Act.

(e) The undersigned acknowledges that the Securities issuable upon exercise or conversion of the Warrant must be held indefinitely unless subsequently registered under the Securities Act or an exemption from such registration is available. The undersigned is aware of the provisions of Rule 144 promulgated under the Securities Act which permit limited resale of shares purchased in a private placement subject to the satisfaction of certain conditions, including, among other things, the existence of a public market for the shares, the availability of certain current public information about the Company, the resale occurring not less than one year after a party has purchased and paid for the security to be sold from the Company or any affiliate of the Company, the sale being through a “broker’s transaction” or in transactions directly with a “market maker” (as provided by Rule 144(f)) and the number of shares being sold during any three month period not exceeding specified limitations.

Dated:



		(Typed or Printed Name)
		By:
				(Signature)


		(Title)

Attachment 2-2

EXECUTION VERSION

Attachment 3

NOTICE OF CONVERSION

TO: Distributed Energy Systems Corp.

1. The undersigned hereby elects to acquire Common Shares of Distributed Energy Systems Corp. pursuant to the terms of the attached Warrant, by conversion of percent ( %) of the Warrant.

2. Please issue a certificate or certificates representing said shares of Common Shares in the name of the undersigned or in such other name as is specified below:


		(Name)

		(Address)



(Date)	(Name of Warrant Holder)

	By:


	Title:
		(Title and signature of authorized person)

Attachment 3-1

EX-24 7 w35316exv24.htm EXHIBIT 24 exv24

Exhibit 24

POWER OF ATTORNEY

KNOW ALL BY THESE PRESENTS, that I, FRANK H. PEARL, hereby make, constitute and appoint each of Kenneth M. Socha and Rona Kennedy, each of them acting singly, as my agent and attorney-in-fact for the purpose of executing in my name, (a) in my personal capacity or (b) in my capacity as Chairman of, member of or in other capacities with Perseus, L.L.C. (“Perseus”) and each of its affiliates or entities advised by me or Perseus, all documents, certificates, instruments, statements, filings and agreements (“documents”) to be filed with or delivered to any foreign or domestic governmental or regulatory body or required or requested by any other person or entity pursuant to any legal or regulatory requirement relating to the acquisition, ownership, management or disposition of securities, futures contracts, or other investments, and any other documents relating or ancillary thereto, including, but not limited to, all documents relating to filings with the Commodities Futures Trading Commission and National Futures Association, the United States Securities and Exchange Commission (the “SEC”) pursuant to the Commodities Exchange Act and the Securities Act of 1933 or the Securities Exchange Act of 1934 (the “Act”) and the rules and regulations promulgated thereunder, including all documents relating to the beneficial ownership of securities required to be filed with the SEC pursuant to Section 13(d) or Section 16(a) of the Act and information statements on Form 13F required to be filed with the SEC pursuant to Section 13(f) of the Act.

All past acts of either attorney-in-fact in furtherance of the foregoing are hereby ratified and confirmed.

This power of attorney shall be valid from the date hereof until revoked by me.

The Power of Attorney dated as of April 9, 2003 is hereby revoked by me effective as of the date hereof.

IN WITNESS WHEREOF, I have executed this instrument as of the 9^th day of May, 2007.



	/s/ Frank H. Pearl
	FRANK H. PEARL

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