1261482--3/13/2007--DISTRIBUTED_ENERGY_SYSTEMS

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RISKS RELATING TO OUR COMPANY We may require funding in order to continue to operate. Our independent registered public accountants have modified their report for our fiscal year ended December 31, 2006 with respect to our ability to continue as a going concern. Our joint venture relationship with Morgan Stanley Wind LLC may not produce the benefits we hope for and could result in uncertain accounting consequences. The warrant we issued to MSW allows them to purchase up to 10% of our common stock outstanding from time to time; accordingly, any dilution resulting from future issuances of our common stock, options, warrants or other convertible securities will be increased by the effect of this warrant. Our revenue and results of operations may fluctuate significantly as a result of factors outside of our control, which could cause the market price of our common stock to decline. We have incurred, and expect to continue to incur, substantial losses, and we may never become profitable. Our future success is uncertain because of our limited commercial history selling many of our products. Our distributed generation business is characterized by a long sales cycle and a relatively small number of projects each year, which can lead to variability and unpredictability in this business from period to period and financial losses on individual projects. Our distributed generation business is dependent on a small number of customers, and termination of a project by one or more of these customers could harm our business. In the past, we have experienced performance problems with our hydrogen generators. We may not be able to grow our business if we do not achieve widespread commercial acceptance of our hydrogen generators in the market for delivered hydrogen. We expect to incur significant expenses as we continue to expand our manufacturing production, and we may not be successful in these efforts. We may not be able to increase revenues in the future if we do not complete the development of new products and technologies. We rely on third party suppliers and subcontractors for certain components and services, and we could suffer losses if these suppliers and subcontractors fail to fulfill our needs. Market factors affect our costs and availability of materials. We may be unable to sell our systems and products and generate revenue if we fail to establish development, engineering, distribution or other strategic relationships. We cannot guarantee that we will be successful in our efforts to increase our business in the operations and maintenance of distributed generation equipment, and we may incur additional risk and liability which could harm our business. We may not recognize revenue in the full amount of our backlog, which could harm our business. We depend on government contracts for a portion of our revenue and profits and to fund a portion of our research and development relating to new products. We currently face and will continue to face significant competition, which could cause us to lose sales or render our products and services uncompetitive or obsolete. We depend on our intellectual property, and our failure to protect it could enable competitors to market products with similar features that may reduce demand for our products. We could incur substantial costs defending against claims that our products infringe on the proprietary rights of others. International intellectual property protection is particularly uncertain and costly, and we have not obtained or sought patent or trademark protection in many foreign countries where our products and services may be developed, manufactured, marketed or sold. We may be exposed to lawsuits and other claims if our products or systems malfunction or fail or we fail to deliver services, which could increase our expenses, harm our reputation and prevent us from growing our business. We conduct business in many countries that are politically and economically unstable. Our current or planned international operations subject our business to additional risks, which could cause revenues to decline. If we undertake additional acquisitions, they may be disruptive to our business and could have an adverse effect on our future operations and the market price of our common stock. RISKS RELATING TO OUR INDUSTRY We may not be able to grow our revenues in the future if a sustainable market for our distributed energy and hydrogen generation products and services does not develop. If we fail to retain key personnel and attract and retain additional qualified personnel, we may be unable to develop our products and generate revenue. We may be affected by skilled labor shortages and labor disputes. Declines in the price of utility-delivered electricity or our inability to continue to reduce the cost of our distributed generation systems could reduce demand for our services and products. Utility companies could place barriers to our entry into the market, and we may not be able to effectively sell our products and systems. Decreases in the price of oil and gas could reduce demand for our distributed generation systems, which would harm our ability to grow our business. Continued uncertainty in domestic and world economies and energy markets may limit our growth. Because sales of our distributed generation systems are reliant in part on federal and state subsidies and incentives, any reduction in federal or state subsidy programs could harm our business. Government regulations may impair our ability to market and sell our products. Compliance with environmental regulations can be expensive, and noncompliance with these regulations may result in adverse publicity and potentially significant monetary damages and fines. Our stock price is likely to be highly volatile and may result in substantial losses for investors purchasing shares. Our executive officers, directors and their affiliates hold a large percentage of our stock and their interests may differ from other stockholders. Provisions of our certificate of incorporation and bylaws and Delaware law could inhibit a takeover that stockholders may consider favorable and diminish the voting rights of the holders of our common stock. Because we do not intend to pay dividends, stockholders will benefit from an investment in our common stock only if it appreciates in value.

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1261482--3/13/2007--DISTRIBUTED_ENERGY_SYSTEMS_CORP