SENIOR SECURED CONVERTIBLE PROMISSORY NOTE DATED AUGUST 24, 2007

Exhibit 10.1

EXECUTION COPY

SENIOR SECURED CONVERTIBLE 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.

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 convertible 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 Convertible 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, other than a transaction expressly contemplated and permitted by Section 5.16 of the Purchase Agreement;

(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, other than a transaction expressly contemplated and permitted by Section 5.16 of the Purchase Agreement;

(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 prior to such time that a Perseus Director has been appointed or elected to the Board, unless such removal has been approved by holders of a majority of the outstanding principal amount of the Note and the Additional Secured Convertible Notes(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.

(c) “ Closing Price ” means the closing price of the Common Shares as reported on the Nasdaq Global Market.

(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 November 30, 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;

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(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;

(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.

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(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 Convertible Notes issued or any notes issued in replacement of the foregoing.

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

(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 30, December 31, March 31 and June 30 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 convertible 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 Convertible Note ”).

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

(c) Interest shall be calculated based on the weighted average principal outstanding for such period and for certainty shall exclude any interest converted pursuant to Section 8 of this Note. The first payment of interest shall be on September 30 , 2007 and shall be calculated from the Date of Issuance to September 30, 2007.

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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 Guaranty 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 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;

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(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 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; or

(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