**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**




WASHINGTON,
      D.C. 20549




**FORM
      10-QSB**








(MARK
                  ONE)**x**
              **QUARTERLY
                  REPORT PURSUANT -TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30,
                  2007**OR**o**
              **TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934 FOR THE TRANSITION PERIOD FROM ________ TO
                  ________**


*COMMISSION
      FILE NUMBER 000-32045*




**DIOMED
      HOLDINGS, INC.**




(EXACT
      NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)







DELAWARE
              84-1480636(State
                  or other jurisdiction of
              (I.R.S.
                  Employer Identification No.)incorporation
                  or organization)1
                  DUNDEE PARKANDOVER,
                    MA
              01810(Address
                  of principal executive offices)
              (Zip
                  Code)(978)
                  475-7771(Registrant's
                    telephone number)





Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days.


Yes **x** No **o**





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


Yes **o** No **x**





**APPLICABLE
      ONLY TO ISSUERS INVOLVED IN BANKRUPTCY**


**PROCEEDINGS
      DURING THE PRECEDING FIVE YEARS**





Check
      whether the registrant filed all documents and reports required to be filed
      by
      Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities
      under a plan confirmed by a court.


Yes
**o** No
      **o**





**APPLICABLE
      ONLY TO CORPORATE ISSUERS**





State
      the
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of the latest practicable date:





**AS
      OF NOVEMBER 13, 2007, THERE WERE 30,318,331 SHARES OF COMMON STOCK, PAR VALUE
      $0.001, OUTSTANDING.**





____________________________________





Transitional
      Small Business Disclosure Format (Check one): Yes **o** No **x**










**DIOMED
      HOLDINGS, INC. AND SUBSIDIARIES**





**QUARTERLY
      REPORT ON FORM 10-QSB**


**FOR
      THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007**


TABLE
                    OF CONTENTSItem
                  Number
                
                Page
                  NumberPart
                    I -Financial Information1
                Unaudited
                    Condensed Consolidated Balance Sheets - September 30, 2007 and
                    December
                    31, 2006
                F-1Unaudited
                    Consolidated Statements of Operations -Three Months and Nine
                    Months Ended
                    September 30, 2007 and 2006
                F-2Unaudited
                    Consolidated Statements of Cash Flows - Months Ended September
                    30, 2007
                    and 2006
                F-3Notes
                    to Unaudited Consolidated Financial Statements
                F-42
                Management's
                    Discussion and Analysis or Plan of Operation
                13
                Controls
                    and Procedures
                15Part
                    II - Other Information
                161
                Legal
                    Proceedings
                166
                Exhibits
                18Signatures
                19


Diomed
      Holdings, Inc.


Unaudited
      Condensed Consolidated Balance Sheets


As
      of
      September 30, 2007 and December 31, 2006




September
                  30,2007
              
              December
                  31, 2006AssetsCurrent
                  assets:Cash
                  and cash equivalents
              
              $
              7,408,838
              
              $
              7,306,578Short
                  term investments
              
              
              -
              
              
              2,626,880Accounts
                  receivable, net
              
              
              3,114,743
              
              
              3,144,056Inventories
              
              
              5,182,050
              
              
              4,021,217Prepaid
                  expenses and other current assets
              
              
              766,231
              
              
              268,343Total
                  current assets
              
              
              16,471,862
              
              
              17,367,074Property,
                  plant and equipment, net
              
              
              1,225,901
              
              
              1,260,507Intangible
                  assets, net
              
              
              3,651,826
              
              
              4,006,927Investment
                  in Luminetx
              
              
              1,000,000
              
              
              1,000,000Other
                  assets
              
              
              791,783
              
              
              204,770Total
                  assets
              
              $
              23,141,372
              
              $
              23,839,278Liabilities
                  and stockholders' equityCurrent
                  liabilities:Accounts
                  payable
              
              $
              6,775,461
              
              $
              2,970,443Accrued
                  expenses
              
              
              3,417,293
              
              
              2,158,157Current
                  portion of deferred revenue
              
              
              390,032
              
              
              278,284Current
                  portion of note payable
              
              
              750,000
              
              
              -Warrant
                  liability
              
              
              52,874
              
              
              -Bank
                  loan
              
              
              279,065
              
              
              223,491Total
                  current liabilities
              
              
              11,664,725
              
              
              5,630,375Deferred
                  revenue, net of current portion
              
              
              144,677
              
              
              110,044Convertible
                  notes payable ($3,712,000 face value, net of $2,143,645 debt discount
                  at
                  September 30, 2007 and $3,712,000 face value, net of $2,671,285
                  debt
                  discount at December 31, 2006)
              
              
              1,568,355
              
              
              1,040,715Note
                  payable ($6,000,000 face value, net of $1,722,874 debt discount
                  at
                  September 30, 2007), net of current portion (Note 10)
              
              
              3,527,126
              
              
              -Deferred
                  interest
              
              
              570,000
              
              
              -Total
                  liabilities
              
              
              17,474,883
              
              
              6,781,134Commitments
                  and contingenciesStockholders'
                  equity
              
              
              5,666,489
              
              
              17,058,144Total
                  liabilities and stockholders' equity
              
              $
              23,141,372
              
              $
              23,839,278
  The
      accompanying notes are an integral part of these consolidated financial
      statements.




F-1




Diomed
      Holdings, Inc.


Unaudited
      Condensed Consolidated Statements of Operations for the Three Months and Nine
      Months Ended September 30, 2007 and 2006




Three
                  Months Ended September 30,
              
              Nine
                  Months Ended September 30,2007
              
              2006
              
              2007
              
              2006Revenues
              
              $
              6,355,423
              
              $
              5,321,080
              
              $
              18,766,712
              
              $
              15,972,476Cost
                  of revenues
              
              
              3,540,369
              
              
              3,042,223
              
              
              10,321,718
              
              
              8,786,487Gross
                  profit
              
              
              2,815,054
              
              
              2,278,857
              
              
              8,444,994
              
              
              7,185,989Operating
                  expenses:Research
                and development
              
              
              467,351
              
              
              422,596
              
              
              1,244,868
              
              
              1,140,170Selling
                  and marketing
              
              
              2,926,915
              
              
              2,687,000
              
              
              9,357,810
              
              
              8,490,263General
                  and administrative
              
              
              2,999,162
              
              
              1,906,886
              
              
              9,047,734
              
              
              5,865,439Total
                  operating expenses
              
              
              6,393,428
              
              
              5,016,482
              
              
              19,650,412
              
              
              15,495,872Loss
                  from operations
              
              
              (3,578,374
              )
              
              (2,737,625
              )
              
              (11,205,418
              )
              
              (8,309,883
              )Other
                  (income) expense, net:(Gain)
                  Loss on fair value adjustment on warrant liability
              
              
              --
              
              
              68,995
              
              
              --
              
              
              (971,442
              )Interest
                  expense, non-cash
              
              
              313,227
              
              
              96,078
              
              
              527,641
              
              
              288,229Interest
                  and other (income) expense, net
              
              
              115,963
              
              
              76,480
              
              
              222,098
              
              
              (958
              )Total
                  other (income) expense, net
              
              
              429,190
              
              
              241,553
              
              
              749,739
              
              
              (684,171
              )Net
                  loss
              
              
              (4,007,564
              )
              
              (2,979,178
              )
              
              (11,955,157
              )
              
              (7,625,712
              )Less
                  preferred stock cash dividends
              
              
              --
              
              
              (149,063
              )
              
              --
              
              
              (447,353
              )Less
                  preferred stock non-cash dividends
              
              
              --
              
              
              (167,480
              )
              
              --
              
              
              (483,586
              )Less
                  beneficial conversion feature on 2006 preferred
                  stock
              
              
              --
              
              
              (469,938)
              
              
              --
              
              
              (469,938)Less
                  deemed dividend on exchange of 2005 preferred stock
              
              
              --
              
              
              (2,980,439
              )
              
              --
              
              
              (2,980,439
              )Less
                  deemed dividend on 2006 preferred stock
              
              
              (4,739,890
              )
              
              --
              
              
              (4,739,890
              )
              
              --Net
                  loss applicable to common stockholders
              
              $
              (8,747,454
              )
              $
              (6,746,098
              )
              $
              (16,695,047
              )
              $
              (12,007,028
              )Basic
                  and diluted net loss per share applicable to common
                  stockholders
              
              $
              (0.29
              )
              $
              (0.35
              
              $
              )
                  (0.62
              )
              $
              (0.62
              )Basic
                  and diluted weighted average common shares outstanding
              
              
              30,067,031
              
              
              19,448,728
              
              
              27,029,974
              
              
              19,447,812




The
      accompanying notes are an integral part of these consolidated financial
      statements.


F-2


DIOMED
      HOLDINGS, INC.


Unaudited
      Consolidated Statements of Cash Flows




Nine
                  Months Ended September 30,2007
              
              2006Cash
                  Flows from Operating Activities:Net
                  loss
              
              $
              (11,955,157
              )
              $
              (7,625,712
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Depreciation
                  and amortization
              
              
              743,524
              
              
              690,166Amortization
                  of EVLT(R) discount
              
              
              --
              
              
              4,902Non-cash
                  interest expense
              
              
              527,641
              
              
              288,229Accretion
                  of discount on marketable securities
              
              
              (29,095
              )
              
              (105,157
              )Amortization
                  of deferred financing costs
              
              
              72,728
              
              
              72,727Fair
                  value of stock options
              
              
              591,326
              
              
              443,524Gain
                  on fair value adjustment on warrant liability
              
              
              --
              
              
              (971,442
              )Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              62,374
              
              
              194,794Inventories
              
              
              (1,039,840
              )
              
              (814,835
              )Prepaid
                  expenses and other current assets
              
              
              (482,773
              )
              
              (269,367
              )Deposits
              
              
              (2,027
              )
              
              (6,931
              )Accounts
                  payable
              
              
              3,561,187
              
              
              368,547Accrued
                  expenses and deferred revenue
              
              
              498,759
              
              
              (229,365
              )Net
                  cash used in operating activities
              
              
              (7,451,353
              
              
              )
                  (7,959,920
              )Cash
                  Flows from Investing Activities:Purchase
                  of property and equipment
              
              
              (294,271
              )
              
              (500,012
              )Purchase
                  of available for sale securities
              
              
              (429,987
              )
              
              (687,099
              )Proceeds
                  from maturities of available for sale securities
              
              
              3,086,000
              
              
              3,800,000Investment
                  in Luminetx
              
              
              --
              
              
              (250,000
              )Net
                  cash provided by investing activities
              
              
              2,361,742
              
              
              2,362,889Cash
                  Flows from Financing Activities:Net
                  proceeds from bank borrowings
              
              
              55,574
              
              
              366,595Payments
                  on EVLT(R) purchase obligation
              
              
              --
              
              
              (250,000
              )Dividend
                  payments
              
              
              --
              
              
              (447,353
              )Proceeds
                  from preferred stock financing, net
              
              
              
              
              
              9,349,400Proceeds
                  from debt financing, net
              
              
              5,142,286
              
              
              --Net
                  cash provided by financing activities
              
              
              5,197,860
              
              
              9,018,642Effect
                  of Exchange Rate Changes
              
              
              (5,989
              )
              
              (41,858
              )Net
                  Increase in Cash and Cash Equivalents
              
              
              102,260
              
              
              3,379,753Cash
                  and Cash Equivalents, beginning of period
              
              
              7,306,578
              
              
              9,562,087Cash
                  and Cash Equivalents, end of period
              
              $
              7,408,838
              
              $
              12,941,840Supplemental
                  Disclosure of Cash Flow Information:Cash
                  paid for interest
              
              $
              302,411
              
              $
              275,883Non-cash
                  Investing and Financing Activities:Fair
                  value of warrants exchanged for distribution rights
              
              
              --
              
              $
              137,403Value
                  ascribed to debt discount related to convertible debt
              
              $
              --
              
              $
              2,255,843Value
                  ascribed to debt discount related to Hercules debt
              
              $
              1,722,874
              
              $
              --Fair
                  value adjustment on preferred stock to bring preferred stock to
                  its
                  immediately exchangeable value
              
              $
              --
              
              $
              2,980,439Non-cash
                  note payable for Luminetx investment
              
              $
              -
              
              $
              250,000Deemed
                  dividend on 2006 preferred stock
              
              $
              4,739,890
              
              $
              --
  The
      accompanying notes are an integral part of these consolidated financial
      statements.





F-3


**DIOMED
        HOLDINGS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 SEPTEMBER
        30, 2007
 (UNAUDITED)


(1)
      OPERATIONS




Diomed
      Holdings, Inc. ("Diomed" or "the Company") develops and commercializes minimally
      invasive medical procedures that employ its laser technologies and associated
      disposable products. Using its proprietary technology, including its exclusive
      rights to U.S. Patent No. 6,398,777, the Company currently focuses on endovenous
      laser treatment (EVLT(R)) of varicose veins. The Company also develops and
      markets lasers and disposable products for photodynamic therapy (PDT) cancer
      procedures and products for other clinical applications, including dental and
      general surgical procedures.




In
      developing and marketing its clinical solutions, the Company uses proprietary
      technology and aims to secure strong commercial advantages over competitors
      by
      gaining governmental approvals in advance of others, by developing and offering
      innovative practice enhancement programs, including physician training and
      promotional materials, and by obtaining exclusive commercial arrangements.
      To
      optimize revenues, Diomed focuses on clinical procedures that generate revenues
      from both capital equipment and disposable products, such as procedure kits
      and
      optical fibers.




Diomed's
      high power semiconductor diode lasers combine clinical efficacy, operational
      efficiency and cost effectiveness in a versatile, compact, lightweight,
      easy-to-use and easy-to-maintain system. Along with lasers and single-use
      procedure kits for EVLT(R), the Company provides its customers with state of
      the
      art physician training and practice development support. The EVLT(R) procedure
      and the Company's related products were cleared by the United States FDA in
      January of 2002.




(2)
      BASIS
      OF PRESENTATION




In
      the
      opinion of management, these unaudited condensed consolidated financial
      statements contain all adjustments considered normal and recurring and necessary
      for their fair presentation. Interim results are not necessarily indicative
      of
      results to be expected for the year. These interim financial statements have
      been prepared in accordance with the instructions for Form 10-QSB and therefore
      do not include all information and footnotes necessary for a complete
      presentation of operations, financial position, and cash flows of the Company
      in
      conformity with accounting principles generally accepted in the United States.
      The Company filed with the Securities and Exchange Commission its 2006 annual
      report on Form 10-KSB on March 20, 2007, which included audited consolidated
      financial statements for the year ended December 31, 2006, and included
      information and footnotes necessary for such presentation. These unaudited
      condensed consolidated financial statements should be read in conjunction with
      the audited consolidated financial statements and the notes thereto included
      in
      the Company’s annual report on Form 10-KSB for the year ended December 31,
      2006.




(3)
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




The
      Company’s Annual Report on Form 10-KSB for the year ended December 31, 2006
      includes a comprehensive summary of the significant accounting policies and
      methods used in the preparation of our consolidated financial statements. The
      application of these policies has a significant impact on the Company’s reported
      results. In addition, the application of some of these policies depends on
      management's judgment, with financial reporting results relying on estimations
      and assumptions about the effect of matters that are inherently uncertain.
      For
      all of these policies, management cautions that future events rarely develop
      exactly as forecast and the best estimates routinely require
      adjustment.




F-4


**DIOMED
        HOLDINGS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 SEPTEMBER
        30, 2007
 (UNAUDITED)




(a)
      INVENTORIES




Inventories
      are valued at the lower of cost (first-in, first-out) or market.
      Work-in-progress and finished goods consist of materials, labor and
      manufacturing overhead. Inventories consist of the following:




September
                  30,
              
              December
                  31,2007
              
              2006Raw
                  Materials
              
              $
              1,442,263
              
              $
              1,571,135Work-in-Process
              
              
              1,493,272
              
              
              797,934Finished
                  Goods
              
              
              2,246,515
              
              
              1,652,148$
              5,182,050
              
              $
              4,021,217




(b)
      DEFERRED REVENUE




Deferred
      revenue at September 30, 2007 was as follows:


September
                  30,2007Beginning
                  balance
              
              $
              388,328Additions
              
              
              893,607Revenue/recognized
              
              
              (747,226
              )Ending
                  balance
              
              $
              534,709




(c)
      ACCOUNTING FOR STOCK-BASED COMPENSATION




The
      Company maintains stock-based incentive plans, providing stock incentives to
      employees and directors. The Company grants options to employees and directors
      to purchase common stock at an option price equal to the market value of the
      stock at the date of grant. Effective January 1, 2006, the Company accounts
      for
      share-based payments in accordance with SFAS 123(R). Prior to the effective
      date
      of SFAS 123(R), the Company applied APB 25 and related interpretations to stock
      option grants. APB 25 provided that the compensation expense relative to stock
      options was measured based on the intrinsic value of the stock option at date
      of
      grant.




Under
      the
      modified prospective approach, SFAS 123(R) applies to new awards and to awards
      that were outstanding on January 1, 2006 that are subsequently modified,
      repurchased or cancelled. Under the modified prospective approach, compensation
      cost includes all share-based payments granted prior to, but not yet vested
      on,
      January 1, 2006, based on the grant-date fair value estimated in accordance
      with
      the provisions of SFAS 123, and compensation cost for all share-based payments
      granted subsequent to January 1, 2006, based on the grant-date fair value
      estimated in accordance with the provisions of SFAS 123(R). Compensation cost
      is
      recognized as expense over the requisite service period, which is generally
      the
      vesting period. Prior periods were not restated to reflect the impact of
      adopting the new standard.




(d)
      COMPREHENSIVE INCOME




SFAS
      No.
      130, *Reporting
      Comprehensive Income* ,
      requires disclosure of all components of comprehensive income (loss).
      Comprehensive income is defined as the change in stockholders' equity of a
      business enterprise during a period from transactions and other events and
      circumstances from non-owner sources. For all periods presented, comprehensive
      loss consists of the Company's net loss, changes in the cumulative translation
      adjustment account, and unrealized gains (loss) on marketable securities.
      Comprehensive net loss for all periods presented is as follows:




F-5


**DIOMED
        HOLDINGS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 SEPTEMBER
        30, 2007
 (UNAUDITED)


Three
                  Months Ended
              
              Nine
                  Months EndedSeptember
                  30,
              
              September
                  30,2007
              
              2006
              
              2007
              
              2006Net
                  loss
              
              $
              (4,007,564
              )
              $
              (2,979,178
              )
              $
              (11,955,157
              )
              $
              (7,625,712
              )Unrealized
                  holding gain (loss)on
                  marketable securities
              
              
              -
              
              
              29
              
              
              -
              
              
              (202
              )Foreign
                  currency translation adjustment
              
              
              59,824
              
              
              37,559
              
              
              89,893
              
              
              164,378Comprehensive
                  loss
              
              $
              (3,947,740
              )
              $
              (2,941,590
              )
              $
              (11,865,264
              )
              $
              (7,461,536
              )


(e)
      SHORT
      TERM INVESTMENTS




Marketable
      securities with original maturities greater than three months are classified
      as
      short-term investments. Investments designated as short-term consist of U.S.
      Agency discount notes and corporate bonds, are classified as available-for-sale,
      and are reported at fair value using the specific identification method.
      Unrealized gains and losses, net of related tax effects, are reflected in other
      comprehensive income (loss) until realized.




Marketable
      securities included in cash and cash equivalents and short term investments
      at
      September 30, 2007, all of which mature within one year, consist of the
      following:


Unrealized
              
              UnrealizedAmortized
                  Cost
              
              Fair
                  Value
              
              Gains
              
              LossesMoney
                  Market Funds
              
              $
              594,238
              
              $
              594,238
              
              $
              --
              
              $
              --
 
 As
        Reported:
  Unrealized
              
              UnrealizedAmortized
                  Cost
              
              Fair
                  Value
              
              Gains
              
              LossesCash
                  and CashEquivalents
              
              $
              594,238
              
              $
              594,238
              
              $
              --
              
              $
              --




Marketable
      securities included in cash and cash equivalents and short term investments
      at
      December 31, 2006, all of which mature within one year, consist of the
      following:


Unrealized
              
              UnrealizedAmortized
                  Cost
              
              Fair
                  Value
              
              Gains
              
              LossesMoney
                  Market Funds
              
              $
              2,521,968
              
              $
              2,521,968
              
              $
              --
              
              $
              --Commercial
                  Paper
              
              
              6,063,871
              
              
              6,064,172
              
              
              301
              
              
              --$
              8,585,839
              
              $
              8,586,140
              
              $
              301
              
              $
              --
 As
          Reported:
 Unrealized
                
                UnrealizedAmortized
                    Cost
                
                Fair
                    Value
                
                Gains
                
                LossesCash
                    and CashEquivalents
                
                $
                5,958,921
                
                $
                5,959,260
                
                $
                339
                
                $
                --Short
                    term investments
                
                
                2,626,918
                
                
                2,626,880
                
                
                --
                
                
                38$
                8,585,839
                
                $
                8,586,140
                
                $
                339
                
                $
                38
  F-6
  **DIOMED
          HOLDINGS, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 SEPTEMBER
          30, 2007
 (UNAUDITED)
 (f)
          RECENT ACCOUNTING PRONOUNCEMENTS




In
      July
      2006, the FASB issued Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109.* This
      interpretation addresses the accounting for uncertainty in income taxes
      recognized in a company’s financial statements in accordance with FASB Statement
      No. 109, *Accounting
      for Income Taxes* .
      It
      prescribes a comprehensive model for recognizing, measuring, presenting and
      disclosing in the financial statements tax positions taken or expected to be
      taken in a tax return. It requires that only benefits from tax positions that
      are more-likely-than-not of being sustained upon examination should be
      recognized in the financial statements. These benefits would be recorded at
      amounts considered to be the maximum amounts more-likely-than-not of being
      sustained. At the time these positions become more-likely-than-not to be
      disallowed, their recognition would be reversed. This interpretation is
      effective for fiscal years beginning after December 15, 2006, with the
      cumulative effect of the change in accounting principle recorded as an
      adjustment to retained earnings. The Company adopted the provisions of FIN
      48
      effective January 1, 2007.  The
      Company’s practice is to recognize interest and/or penalties related to income
      tax matters in income tax expense. Upon adoption of FIN 48 on January 1, 2007,
      the Company did not record any interest or penalties.




The
      Company is subject to taxation in the UK, US and various state
      jurisdictions.  The Company’s tax years for 1998 and forward are subject to
      examination by the US tax authorities due to the carryforward of unutilized
      net
      operating losses. The Company’s tax years for 2004 and forward are subject to
      examination by the UK tax authorities.




The
      adoption of FIN 48 did not have a material impact on the financial condition,
      results of operations or cash flows.  At January 1, 2007, the Company had
      US net operating loss (“NOL”) carryforwards of approximately $46 million and
      foreign NOLs of approximately $20 million.   At January 1, 2007, the
      Company had a net deferred tax asset of approximately $25 million related to
      these NOLs. Due to uncertainties surrounding the Company’s ability to generate
      future taxable income to realize these assets, a full valuation has been
      established to offset the net deferred tax asset. Additionally, the future
      utilization of the US NOL carryforwards to offset future taxable income may
      be
      subject to a substantial annual limitation as a result of Section 382 ownership
      changes that may have occurred previously or that could occur in the
      future.  In general, an ownership change, as defined by Section 382,
      results from transactions increasing the ownership of certain shareholders
      or
      public groups in the stock of a corporation by more than 50 percentage points
      over a three year period. Since the Company’s formation, the Company has raised
      capital through the issuance of capital stock which, combined with the
      purchasing shareholders’ subsequent disposition of those shares, may have
      resulted in a change of control, as defined by Section 382, or could result
      in a
      change of control in the future upon subsequent disposition. If the Company
      has
      experienced a change in control at any time since the Company’s formation,
      utilization of the Company’s NOL carryforwards would be subject to an annual
      limitation under Section 382. Any limitation may result in expiration of a
      portion of the NOL carryforwards before utilization. Any carryforwards that
      will
      expire prior to utilization as a result of such limitations will be removed
      from
      deferred tax assets with a corresponding reduction of the valuation
      allowance.  Due to the existence of the valuation allowance,
      future changes in our unrecognized tax benefits related to NOLs will not
      impact the Company’s effective tax rate.




(4)
      NET
      LOSS PER SHARE




Net
      loss
      per share is computed based on the guidance of SFAS No. 128, *Earnings
      per Share* .
      SFAS
      No. 128 requires companies to report both basic loss per share, which is based
      on the weighted average number of common shares outstanding, and diluted loss
      per share, which is based on the weighted average number of common shares
      outstanding and the dilutive potential common shares outstanding using the
      treasury stock method. The calculation of net loss applicable to common
      stockholders for the three and nine month periods ended September 30, 2007
      includes $4,739,890 of deemed dividends for the value of additional shares
      issuable to the 2006 preferred stockholders upon conversion, in consideration
      of
      their consent and waiver of dividends in the recent Hercules Debt financing.
      (See Note 10).




F-7


**DIOMED
        HOLDINGS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 SEPTEMBER
        30, 2007
 (UNAUDITED)


The
      calculation of net loss applicable to common stockholders for the three and
      nine
      month periods ended September 30, 2006 includes $167,480 and $483,586,
      respectively, of non-cash preferred stock dividends accreted for future
      increasing rate dividends, $149,063 and $447,353, respectively, of preferred
      stock cash dividends earned during the period related to the September 30,
      2005
      private placement, and $2,980,439 of deemed dividends related to the 2006
      preferred stock financing. Upon completion of the 2006 preferred stock
      financing, the Company exchanged the 2005 preferred stock for new preferred
      stock which does not currently accrue dividends.




As
      a
      result of the losses incurred by the Company for the three and nine month
      periods ended September 30, 2007 and 2006, all potential common shares were
      antidilutive and were excluded from the diluted net loss per share calculations.
      The following table summarizes securities outstanding as of each of the periods,
      which were not included in the calculation of diluted net loss per share since
      their inclusion would be antidilutive.


Three
                  Months Ended
              
              Nine
                  Months EndedSeptember
                  30,
              
              September
                  30,2007
              
              2006
              
              2007
              
              2006Common
                  Stock Options
              
              
              3,676,199
              
              
              2,423,787
              
              
              3,676,199
              
              
              2,423,787Common
                  Stock Warrants
              
              
              6,492,110
              
              
              6,055,303
              
              
              6,492,110
              
              
              6,055,303Convertible
                  Debt
              
              
              5,302,857
              
              
              3,227,826
              
              
              5,302,857
              
              
              3,227,826Preferred
                  Stock
              
              
              11,066,358
              
              
              17,354,347
              
              
              11,066,358
              
              
              17,354,347




(5)
      LINE
      OF CREDIT ARRANGEMENTS




Diomed,
      Ltd., the Company's United Kingdom-based subsidiary, utilizes an overdraft
      facility as well as an accounts receivable line of credit with Barclays Bank,
      limited to the lesser of (GBP) 100,000 or 80% of eligible accounts receivable.
      As of September 30, 2007, Barclay’s had provided a temporary increase in the
      overdraft facility up to approximately $279,000. The credit line bears interest
      at a rate of 2.5% above Barclays' base rate (5.75% at September 30, 2007) and
      borrowings are due upon collection of receivables from customers. As security
      for the line of credit, Barclay's Bank has a lien on all of the assets of
      Diomed, Ltd., excluding certain intellectual property. As of September 30,
      2007,
      there was approximately $279,000 outstanding and at December 31, 2006, there
      was
      approximately $223,000 outstanding under this line of credit.




(6)
      STOCK
      OPTIONS




(a)
      In
      November 2003, the Company's stockholders approved the 2003 Omnibus Plan, under
      which the Company reserved 1,600,000 shares of common stock for future issuance.
      In May 2005, the Company's stockholders approved an increase of 1,500,000
      reserved shares providing for a total of 3,100,000 shares of common stock
      reserved for future issuance. In June 2007, the Company's stockholders approved
      an increase of 2,500,000 reserved shares providing for a total of 5,600,000
      shares of common stock reserved for future issuance. The 2003 Omnibus Plan
      provides for grants or awards of stock options, restricted stock awards,
      restricted stock units, performance grants, stock awards, and stock appreciation
      rights. Only present and future employees and outside directors and consultants
      are eligible to receive incentive awards under the 2003 Omnibus
      Plan.




The
      exercise price and vesting are determined by the Board of Directors at the
      date
      of grant. Options generally vest over two to three years and expire 10 years
      after the date of grant. Incentive stock options under the Plans are granted
      at
      not less than fair market value per share of common stock on the date of grant
      or 110% of fair market value for any stockholder who holds more than 10% of
      the
      total combined voting power of all classes of stock of the Company. The Company
      plans on settling any exercised employee stock options by issuing authorized
      but
      unissued shares.




F-8


**DIOMED
        HOLDINGS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 SEPTEMBER
        30, 2007
 (UNAUDITED)


As
      of
      September 30, 2007, 2,050,975 options and other incentive stock awards were
      available for future grants under the 2003 Omnibus Plan. In addition, 12,718
      options were available under the 2001 Plan and 1,123 options were available
      under the 1998 Plan as of September 30, 2007.




A
      summary
      of stock option activity for the 2003 Omnibus Plan, the 2001 Plan and the 1998
      Plan is as follows:


Range
                  of
              
              Number
              
              Weighted
                  Average
              
              Weighted
                  AverageExercise
                  Price
              
              of
                  Shares
              
              Exercise
                  Price
              
              Remaining
                  LifeOutstanding,
                  December 31, 2006
              
              $
              0.96
                  - $205.75
              
              
              2,478,376
              
              $
              4.63Granted
              
              
              0.78
                  - 1.41
              
              
              1,480,218
              
              
              0.86Forfeited
              
              
              0.81
                  - 179.60
              
              
              (282,379
              )
              
              4.18Expired
              
              
              205.75
              
              
              (16
              )
              
              205.75Outstanding,
                  September 30, 2007
              
              $
              0.78
                  - $205.75
              
              
              3,676,199
              
              $
              3.14
              
              
              8.08Exercisable,
                  September 30, 2007
              
              $
              0.78
                  - $205.75
              
              
              2,235,292
              
              $
              4.47
              
              
              7.26




During
      the nine months ended September 30, 2007 and 2006, the Company recorded $509,000
      and $444,000, respectively, in non-cash charges in accordance with of SFAS
      123R.
      As of September 30, 2007, there was approximately $1,079,000 of total
      unrecognized compensation cost related to unvested options. That cost is
      expected to be recognized over a weighted average period of 1.18 years. The
      Company plans on using authorized common stock for shares to be issued upon
      exercise of stock options. There were no stock options exercised during the
      nine
      months ended September 30, 2007.




The
      weighted-average grant date fair value of options granted for the nine-months
      ended 2007 and 2006 was $0.62 and $1.65, respectively. The intrinsic value
      of
      options outstanding and options exercisable at September 30, 2007 was $83,675
      and $15,447, respectively. The intrinsic value of options outstanding and
      options exercisable at September 30, 2006 was $1,588 and $698, respectively.
      To
      calculate the intrinsic value, the Company used the market price of $0.87 and
      $1.20 versus the exercise price at September 30, 2007 and 2006,
      respectively.




The
      fair
      value of each option grant was estimated on the date of grant using the
      Black-Scholes option pricing model with the following assumptions used for
      grants during the applicable period:


Nine
                  Months Ended
                September
                  30,2007
              
              2006Risk-free
                  interest rate
              
              
              4.66
              %
              
              4.37
              %Expected
                  dividend yield
              
              
              --
              %
              
              --
              %Expected
                  lives (in years)
              
              
              2.5
                  - 5.8 years
              
              
              2.5
                  - 5.9 yearsExpected
                  volatility
              
              
              66.4
                  - 88.5
              %
              
              71.2
                  - 89.3
              %




Expected
      volatility is based on a weighted average of the historical daily volatility
      of
      the Company's stock and peer company volatility commensurate with the expected
      life of the option. The average expected life used in 2007 and 2006 was
      calculated using the simplified method under Staff Accounting Bulletin No.
      107
      which averages the contractual term of the option with the vesting term. The
      risk-free rate is based on the rate of U.S. Treasury zero-coupon issues with
      a
      remaining term equal to the expected life of option grants. The Company uses
      historical data to estimate pre-vesting forfeiture rates of 5%.




The
      intrinsic value of options vested at September 30, 2007 was $15,447. The fair
      value of options vested during the nine months ended September 30, 2007 was
      approximately $509,000. At September 30, 2007, there were 1,443,907 unvested
      stock options outstanding with a weighted average grant date fair value of
      $0.78.


F-9


**DIOMED
      HOLDINGS, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


SEPTEMBER
      30, 2007


(UNAUDITED)




The
      following table summarizes outstanding and exercisable options as of September
      30, 2007.


OUTSTANDING
              
              EXERCISABLEWeighted
                  Average
              
              
              
              Weighted
                  AverageExercise
                  Price
              
              Shares
              
              Remaining
                  Life*
              
              Exercise
                  Price
              
              Shares
              
              Exercise
                  Price$
                  0.78 - 0.81
              
              
              1,278,000
              
              
              9.55
              
              $
              0.80
                  245,123
              
              $
              0.810.82
                  - 2.16
              
              
              365,232
              
              
              8.41
              
              
              1.37
              
              
              164,653
              
              
              1.582.17
                  - 4.00
              
              
              713,284
              
              
              8.00
              
              
              2.44
              
              
              505,833
              
              
              2.504.01
                  - 4.75
              
              
              664,979
              
              
              7.06
              
              
              4.25
              
              
              664,979
              
              
              4.254.76
                  - 5.00
              
              
              539,900
              
              
              6.41
              
              
              5.00
              
              
              539,900
              
              
              5.005.01
                  - 11.50
              
              
              94,211
              
              
              5.37
              
              
              8.71
              
              
              94,211
              
              
              8.7111.51
                  - 49.00
              
              
              6,260
              
              
              3.74
              
              
              31.15
              
              
              6,260
              
              
              31.1549.01
                  - 87.00
              
              
              4,700
              
              
              4.31
              
              
              51.06
              
              
              4,700
              
              
              51.0687.01
                  - 164.00
              
              
              3,329
              
              
              0.77
              
              
              118.27
              
              
              3,329
              
              
              118.27164.01
                  - 205.75
              
              
              6,304
              
              
              0.55
              
              
              174.21
              
              
              6,304
              
              
              174.213,676,199
              
              
              
              
              $
              3.14
              
              
              2,235,292
              
              $
              4.47


*
      Weighted average remaining contractual life (in years).




(b)
      A
      summary of warrant information is as follows:


Weighted
                  AverageRange
                  of
              
              Number
                  of
              
              Weighted
                  Average
              
              Remaining
                  ContractualExercise
                  Price
              
              Shares
              
              Exercise
                  Price
              
              Life
                  (In Years)Outstanding,
                  December 31, 2006(i, ii)
              
              $
              0.025
                  - $2.90
              
              
              6,055,303
              
              $
              1.63
                  3.36Granted
                  to 2005 PIPE Holders(iii)
              
              
              1.75
              
              
              300,855
              
              
              1.75
              
              
              3.00Granted
                  to Placement Agent 2006(iv)
              
              
              1.01
              
              
              48,995
              
              
              1.01
              
              
              4.00Granted
                  to Placement Agent 2007(v)
              
              
              0.70
              
              
              86,957
              
              
              0.70
              
              
              5.00Outstanding,
                  September 30, 2007
              
              $
              0.025
                  - $2.90
              
              
              6,492,110
              
              $
              1.35
              
              
              2.65Exercisable,
                  September 30, 2007
              
              $
              0.025
                  - $2.90
              
              
              6,492,110
              
              $
              1.35
              
              
              2.65




(i)
      In
      conjunction with the completion of the Hercules financing on September 28,
      2007,
      the exercise price of the warrants to purchase 2,657,461 shares of Common Stock
      issued to the investors in the Company's financing transaction completed October
      28, 2004 (the "2004 Warrants") was reduced from $1.15 to $0.70 per share of
      common stock;




(ii)
      In
      conjunction with the completion of the Hercules financing on September 28,
      2007,
      the exercise price of the warrants to purchase 85,578 shares of Common Stock
      issued to designees of the Company’s former placement agent, Sunrise Securities
      Corp. (“the Sunrise Warrants”), was reduced from $1.15 to $0.70 per
      share;




(iii)
      In
      conjunction with the completion of the Hercules financing on September 28,
      2007,
      the exercise price of the warrants to purchase 2,272,000 shares of Common Stock
      issued to the investors in the Company's financing transaction completed
      September 30, 2005 (the "2005 Warrants") was reduced from $1.98 to $1.75 per
      share, and the number of shares of common stock issuable upon exercise of the
      2005 Warrants was increased from 2,272,000 to 2,572,855;




(iv)
      In
      conjunction with the completion of the Hercules financing on September 28,
      2007,
      the exercise price of the warrants to purchase 370,000 shares of Common Stock
      issued to designees of the Company's former placement agent, Musket Research
      Associates, Inc., in the Company’s financing transaction completed September 29,
      2006 (the "MRA Warrants"), was reduced to $1.01 per share, and the number of
      shares of common stock issuable upon exercise of the MRA Warrants was increased
      from 370,000 to 418,995;




(v)
      In
      conjunction with the completion of the Hercules financing on September 28,
      2007,
      the Company granted the placement agent, Hercules Technology Growth Capital,
      Inc., 86,957 warrants at an exercise price of $0.70 per share of common stock.
      (See Note 10).


F-10


**DIOMED
      HOLDINGS, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


SEPTEMBER
      30, 2007


(UNAUDITED)




(7)
      SEGMENT REPORTING




The
      Company's reportable segments are determined by product type: laser systems;
      and
      fibers, accessories and service. The Executive Management Committee evaluates
      segment performance based on revenue. Accordingly, all expenses are considered
      corporate level activities and are not allocated to segments. Also, the
      Executive Management Committee does not assign assets to its
      segments.




This
      table presents revenues by reportable segment:


Three
                  Months Ended
              
              Nine
                  Months EndedSeptember
                  30,
              
              September
                  30,2007
              
              2006
              
              2007
              
              2006Laser
                  systems
              
              $
              1,877,753
              
              $
              1,980,183
              
              $
              6,054,334
              
              $
              6,125,422Fibers,
                  accessories, and service
              
              
              4,477,670
              
              
              3,340,897
              
              
              12,712,378
              
              
              9,847,054Total
              
              $
              6,355,423
              
              $
              5,321,080
              
              $
              18,766,712
              
              $
              15,972,476




The
      following table represents percentage of revenues and long-lived assets by
      geographic destination:


%
                  of Revenue
              
              Long-lived
                  AssetsNine
                  Months Ended September 30,September
                  30,
              
              December
                  31,2007
              
              2006
              
              2007
              
              2006United
                  States
              
              
              70
              %
              
              75
              %
              $
              6,209,961
              
              $
              5,994,202Asia/Pacific
              
              
              10
              %
              
              9
              %
              
              --
              
              
              --Europe
              
              
              14
              %
              
              12
              %
              
              446,888
              
              
              478,002Other
              
              
              6
              %
              
              4
              %
              
              12,661
              
              
              --Total
              
              
              100
              %
              
              100
              %
              $
              6,669,510
              
              $
              6,472,204




(8)
      COMMITMENTS AND CONTINGENCIES





(a)
      Litigation





**'777
      PATENT LITIGATION**




On
      January 6, 2004, the Company filed a lawsuit in the United States District
      Court
      for the District of Massachusetts against AngioDynamics, Inc. seeking injunctive
      relief and damages for infringement of the Company’s U.S. Patent Number
      6,398,777 (the "'777 patent") covering the endovascular laser treatment of
      varicose veins which the Company uses in the EVLT(R) product line, the exclusive
      rights to which the Company acquired on September 3, 2003. On March 4, 2004,
      the
      Company filed a second lawsuit against Vascular Solutions in the United States
      District Court for the District of Massachusetts seeking injunctive relief
      and
      damages for infringement of the '777 patent. At the parties' joint request,
      the
      Company’s patent cases involving AngioDynamics and Vascular Solutions were
      consolidated by the court.




Trial
      commenced on March 12, 2007 and on March 28, 2007, the jury found in favor
      of
      Diomed and against both defendants, both for inducing infringement and for
      contributory infringement of Diomed’s patent, and awarded nearly $12.5 million
      in damages. On June 20, 2007, the defendants filed for an appeal with the US
      Court of Appeals for the Federal Circuit. Therefore, the Company will not record
      this amount until final resolution of the appeal. In particular, the jury
      awarded $8.36 million against AngioDynamics and $4.1 million against VSI. On
      March 30, 2007 Diomed filed a motion for a permanent injunction against
      AngioDynamics and VSI. Defendants sought judgment as a matter of law and/or
      a
      new trial. Diomed sought prejudgment interest and additional post-judgment
      damages. On July 2, 2007, the Court granted Diomed’s motion for a permanent
      injunction and denied defendants’ motion for judgment as a matter of law or new
      trial. The parties reached a stipulation regarding the issues of prejudgment
      interest and additional post-judgment damages, which resulted in a stipulated
      increase in the judgment against AngioDynamics to $9.71 million and against
      VSI
      to $4.975 million. On July 11, 2007, Diomed filed a motion to find the
      defendants in contempt of the permanent injunction. Defendants filed their
      opposition on July 25, 2007. On October 3, 2007 Diomed filed supplemental papers
      regarding the contempt motion. Defendants filed their opposition on October
      5,
      2007. The contempt motion is pending.




F-11


**DIOMED
        HOLDINGS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 SEPTEMBER
        30, 2007
 (UNAUDITED)


On
      April
      2, 2004, the Company filed a lawsuit in the United States District Court for
      the
      District of Massachusetts against Total Vein Solutions, LLC, seeking injunctive
      relief and damages for infringement of the '777 patent. Total Vein Solutions
      answered the complaint, generally denying the Company’s allegations and
      counterclaiming for declaratory judgment of non-infringement and invalidity
      of
      the EVLT(R) patent. The Company is in the discovery phase of this litigation.
      This case is also pending before Judge Gorton. On July 13, 2007, Magistrate
      Judge Alexander granted the Company’s motion to compel Total Vein to respond to
      discovery requests and denied Total Vein’s motion to stay the litigation. The
      Company awaits a ruling on Diomed’s motion for preliminary
      injunction.




On
      October 14, 2004, the Company filed a lawsuit in the United States District
      Court for the District of Massachusetts against New Star Lasers, Inc., d/b/a
      Cooltouch, Inc., seeking injunctive relief and damages for infringement of
      the
      '777 patent. CoolTouch answered the complaint, generally denying the Company’s
      allegations and counterclaiming for declaratory judgment of non-infringement
      and
      invalidity of the '777 patent. The Company is now proceeding with the discovery
      phase of this litigation. This case is also pending before Judge
      Gorton.




On
      March
      29, 2007 the Company filed a lawsuit in United States District Court for the
      District of Massachusetts against Dornier Medtech America, Inc. seeking
      injunctive relief and damages for infringement of the '777 patent. This case
      is
      also pending before Judge Gorton.




If
      the
      Company does not prevail in the appeal and infringement actions and is not
      be
      able to exclude third parties from using the Company's EVLT(R) technology,
      the
      EVLT(R) patent may be determined to be impaired and the Company's EVLT(R)
      revenue stream may be adversely affected.





**VNUS
      TECHNOLOGIES LITIGATION**




On
      July
      21, 2005, a lawsuit was filed against the Company in the United States District
      Court for the Northern District of California by VNUS Medical Technologies,
      Inc., alleging infringement of U.S. patents Nos. 6,258,084, 6,638,273,
      6,752,803, and 6,769,433, seeking injunctive relief and damages in an
      unspecified amount. On September 15, 2005, the Company filed an answer denying
      the allegations of infringement, and counterclaiming against VNUS for a
      declaration that none of the patents are infringed and that they are all
      invalid.




On
      October 12, 2005, VNUS served an amended complaint adding two additional
      parties, AngioDynamics, Inc. and Vascular Solutions, Inc., as defendants. On
      October 31, 2005, the Company filed an answer to the First Amended Complaint,
      again denying the allegations of infringement, and counterclaiming against
      VNUS
      for a declaration that none of the patents are infringed, that they are all
      invalid and that two of VNUS' patents are unenforceable for inequitable conduct.
      The Court held a claim construction tutorial and a hearing on claim construction
      issues on October 30, 2006 and issued a ruling on claims construction on
      November 20, 2006. In a series of pretrial rulings, the Court denied summary
      judgment motions brought by VNUS (for a finding of infringement) and by the
      Company (for findings of patent invalidity and non-willfulness). In the pretrial
      conference held on October 16, 2007, the Court heard twelve motions in limine,
      eleven of which were resolved in favor of the Company and one in favor of VNUS.
      The Court further postponed the trial date originally scheduled for October
      29,
      2007. A further status conference has been scheduled for December 7, 2007.
      The
      Company intends to continue to defend against the allegations against the
      Company in this case and believes that the Company has meritorious
      defenses.




F-12


**DIOMED
        HOLDINGS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 SEPTEMBER
        30, 2007
 (UNAUDITED)




**OTHER**





Insofar
      as legal proceedings other than patent litigation are concerned, from time
      to
      time the Company is the defendant in legal and administrative proceedings and
      claims of various types. Although any such litigation contains an element of
      uncertainty, management, in consultation with the Company's general counsel,
      presently believes that the outcome of such proceedings or claims which are
      pending or known to be threatened, or all of them combined, will not have a
      material adverse effect on the Company.





(b)
      Commitments


On
      August
      5, 2005, the Company entered into a distribution agreement with Luminetx,
      pursuant to which Luminetx appointed the Company as a distributor and granted
      the Company the exclusive right to distribute and sell the Luminetx patented
      biomedical imaging system known as the VeinViewer(TM) Imaging System to
      physicians who perform sclerotherapy, phlebectomies or varicose vein treatments,
      initially in the United States and the United Kingdom, with additional
      territories to be negotiated as VeinViewer(TM) receives regulatory clearance
      in
      other countries, on terms to be agreed. Luminetx agreed to supply the Company
      with a certain minimum number of VeinViewer(TM) systems for distribution by
      the
      Company at specified prices during the term of the distribution agreement,
      initially three years. During May 2007, the Company and Luminetx amended the
      agreement and revised the targeted number of VeinViewer(TM) systems to be
      purchased through December 31, 2007 and through April 30, 2008 to better reflect
      current market development and positioning strategies. The agreement was also
      amended so that both companies may sell to dermatologists who are not performing
      EVLT®. If the Company fails to purchase the annual target number of
      VeinViewer(TM) systems prior to May 1, 2008, for any reason, Luminetx may
      terminate the distribution agreement with written notice.





(9)
      STOCKHOLDERS’ EQUITY





At
      December 31, 2006, the Company had 19,448,728 shares of common stock
      outstanding. During the nine month period ended September 30, 2007, the holders
      of 1,061.8303 shares of preferred stock exchanged their shares of preferred
      stock into 10,618,303 shares of common stock. At September 30, 2007, the Company
      had 30,067,031 shares of common stock outstanding. On October 2, 2007, a holder
      of the variable rate convertible debentures that we issued on October 25, 2004
      converted $175,910 of debt into 251,300 shares of common stock.





On
      September 29, 2006, the Company issued 1,735.4347 shares of preferred stock,
      each share of which has a stated value of $11,500 per share. The Company issued
      870.4348 of these shares to investors who purchased these shares for cash at
      a
      price of $11,500 per share, and the Company issued 864.9999 shares to investors
      who tendered 3,975,000 shares of preferred stock issued in 2005, all in
      accordance with the terms of a securities purchase agreement entered into with
      the investors in July 2006. Each share of preferred stock is exchangeable for
      10,000 shares of common stock. At December 31, 2006, the Company had 1,735.4347
      shares of preferred stock outstanding.





During
      the nine month period ended September 30, 2007, the holders of 1,061.8303 shares
      of preferred stock exchanged their shares of preferred stock for 10,618,303
      shares of common stock. At September 30, 2007, the Company had 673.6044 shares
      of preferred stock outstanding.




(10)
      2007
      DEBT FINANCING TRANSACTION





On
      September 28, 2007, the Company entered into a Loan and Security Agreement
      (the
“Loan Agreement”) with Hercules Technology Growth Capital, Inc. (“Hercules”).
      The Loan Agreement provides for a term loan (the “Loan”) of up to $10 million in
      two tranches, an initial $6 million tranche, which was funded on September
      28,
      2007, and an additional $4 million tranche available at the Company’s option at
      any time during the period from January 31, 2008 through March 31, 2008. The
      net
      proceeds of the Loan are for the Company’s working capital
      purposes.





F-13


**DIOMED
        HOLDINGS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 SEPTEMBER
        30, 2007
 (UNAUDITED)


The
      Loan
      is secured by the assets of the Company, including the $14.7 million judgment
      awarded to Diomed, Inc. against AngioDynamics, Inc. and Vascular
      Solutions ,
      Inc. in
      the Company’s lawsuit in which AngioDynamics and Vascular Solutions were found
      to have infringed the Company’s EVLT® patent. The Company also granted Hercules
      a pledge of the shares of Diomed, Inc., and a pledge of its wholly-owned United
      States subsidiaries and a share pledge of 65% of the outstanding shares of
      its
      wholly-owned United Kingdom subsidiary, Diomed Limited.





The
      Loan
      bears interest at the prime rate plus 3.20%, will be repayable on an
      interest-only basis through June 30, 2008 and will thereafter become payable
      in
      24 equal monthly installments of principal and interest, with the final
      installment due on July 1, 2010, at which time a deferred interest charge of
      9.5% of the funds borrowed will also be payable. When the Company borrowed
      $6
      million on September 28, 2007, the Company recorded the deferred interest charge
      based on the 9.5% of $6 million borrowed, or $570,000, in other long-term
      liabilities on its balance sheet and included the amount as a debt discount.
      Upon borrowing the additional $4 million, the Company will record the additional
      deferred interest charge of 9.5% on $4 million, or $380,000 and include that
      amount as an additional debt discount. The Loan may be prepaid at the Company’s
      option, subject to a prepayment fee of 3% of the funds borrowed (if prepaid
      during the first 12 months), 2% of the funds borrowed (if prepaid during after
      twelve months but before 24 months) or 1% (if prepaid at 24 months or
      thereafter).





The
      Company agreed to pay $320,000 of legal fees and investment expenses incurred
      by
      Hercules in connection with negotiating the Loan Agreement. The Company also
      accrued other related legal costs and listing fees of approximately $338,000,
      and therefore recorded $658,000 as debt financing costs on its balance sheet.
      This amount will be amortized to interest expense using the effective interest
      method in the statement of operations over the period through the estimated
      call
      date of the loan, October 25, 2008.





As
      additional consideration, the Company also issued to Hercules warrants to
      purchase up to 86,957 shares of the Company’s common stock at an exercise price
      of $0.70 per share, with a term of five years (the “the Lender Warrants”). The
      Company valued the warrants at $52,874 using the Black-Scholes Option Pricing
      Model and classifed this amount as a discount to the Loan. The Company reviewed
      the terms of the warrant agreement and since a net cash settlement possibility
      exists until the Company receives listing approval from the AMEX, the Company
      determined that liability treatment was appropriate in accordance with EITF
      00-19. The Company recorded a warrant liability in current liabilities for
      $52,874. This amount will be marked to market each reporting period until the
      Company receives listing approval from the AMEX at which time the amount will
      be
      reclassified to equity and no longer marked to market.





The
      Company paid Hercules a $200,000 commitment fee in connection with the Loan
      at
      closing and has agreed to pay a success fee of $900,000 on June 30, 2008 and
      1%
      of the gross consideration paid for the acquisition of the Company, should
      a
      change of control occur. The Company recorded the $900,000 success fee in
      accrued liabilities as it is payable on June 30, 2008.





Based
      on
      the above, the Company recorded a discount against the Loan of $1,722,874
      representing the commitment fee of $200,000, the success fee of $900,000, the
      fair value of the 86,957 warrants of $52,874, and the deferred interest of
      $570,000. This amount will be accreted back to the Loan through charges against
      non-cash interest expense using the effective interest method in the statement
      of operations over the period through October 25, 2008.





**Consent
      by Holders of Variable Rate Convertible Debentures**




The
      terms
      of the outstanding Variable Rate Convertible Debentures due October 2008 (the
      “2004 Debentures”), issued by the Company on October 25, 2004, provide that the
      Company may not incur indebtedness that is senior to or pari passu with the
      indebtedness represented by the 2004 Debentures or grant a security interest
      in
      the Company’s assets. To enable the Company to enter into the Loan Agreement, on
      September 28, 2007, the Company negotiated for and obtained the consent of
      each
      of the four holders of 2004 Debentures (the “Debenture Holders”) pursuant to an
      Agreement and Consent (the “Debenture Holder Consent”).




F-14


**DIOMED
        HOLDINGS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 SEPTEMBER
        30, 2007
 (UNAUDITED)


Pursuant
      to the Debenture Holder Consent, the Company amended and restated the 2004
      Debentures in the form of an Amended and Restated Variable Rate Secured
      Subordinated Convertible Debenture due October 2008 (the “Secured 2004
      Debenture”) by (i) increasing the rate of interest from 400 basis points over
      six-month LIBOR to the greater of 10% and 500 basis points over six-month LIBOR,
      (ii) reflecting the adjusted conversion price of the Secured 2004 Debentures
      of
      $0.70 per share, which adjustment results from the anti-dilution adjustment
      of
      the 2004 Debentures caused by the issuance of the Lender Warrants (discussed
      under “Impact on Outstanding Securities,” below) and (iii) granting a security
      interest in all of the Company’s assets (and, as set forth in a guaranty by
      Diomed, Inc. of the Company’s obligations under the Secured 2004 Debenture and a
      separate security agreement, the assets of Diomed, Inc.), subordinated to the
      security interest granted to Hercules. The Company made certain representations,
      warranties and other agreements with the Debenture Holders, including
      reimbursement of their legal fees, but paid no remuneration for obtaining the
      Debenture Holder Consents.





The
      Debenture Holders and Hercules entered into an Intercreditor Agreement, dated
      September 28, 2007, acknowledged by the Company, pertaining to the creditors’
respective rights to the collateral comprising their respective security
      interests in the Company’s assets. The Intercreditor Agreement enables Hercules
      to block the Company from repaying the Secured 2004 Debentures when they become
      payable (October 25, 2008), in which case, under the Debenture Holder Consent,
      the Company agreed to repay Hercules with the proceeds of the judgment in the
      EVLT® patent litigation case, so long as the Company has received at least $10
      million from that $14.7 million judgment by that time. The Company expects
      to
      prevail in the ‘777 patent litigation appeal and receive an award in excess of
      $10 million. Therefore, the Company considers this a possible call option and
      since the event will cause the Hercules Loan to be repaid before its scheduled
      maturity date for a fixed settlement amount, the Company determined that the
      debt discount amortization should occur over the period to the earliest call
      date so that the carrying amount of the debt at that date is equal to the
      settlement amount. The Company will use the effective interest rate method
      to
      recognize interest expense over the period until first possible call. Therefore,
      the discount and the debt issuance costs will be amortized through October
      25,
      2008. If during the period, the Company determines that the possible repayment
      will differ from October 25, 2008, the Company will treat that as a change
      in
      estimate and recognize the remaining unamortized discount over the revised
      period.





Pursuant
      to the anti-dilution rights under the 2004 Debenture agreements, as a result
      of
      the Lender Warrants, the Company was required to reduce the conversion prices
      for the 2004 Debentures from $1.15 to $0.70 and exercise prices for warrants
      issued under prior financing transactions.





The
      Company determined that the conversion and exercise price changes were not
      modifications to the terms of their respective agreements, but were executions
      of certain rights within those agreements. Under EITF 00-27 “Application of
      Issue No. 98-5 to Certain Convertible Instruments” (“EITF 00-27”), Issue #7,
      t he
      Task
      Force reached a consensus that if the terms of a contingent conversion option
      do
      not permit an issuer to compute the number of shares that the holder would
      receive if the contingent event occurs and the conversion price is adjusted,
      an
      issuer should wait until the contingent event occurs and then compute the
      resulting number of shares that would be received pursuant to the new conversion
      price.





The
      Hercules Loan transaction was the second time that the anti-dilution rights
      of
      the 2004 Debentures were triggered. Prior to the 2006 preferred stock financing,
      the 2004 Debentures were convertible into 1,620,961 shares, and after the 2006
      preferred stock financing the 2004 Debentures were convertible into 3,227,826
      shares, as the conversion price was reduced from $2.29 per share to $1.15 per
      share as a result of the 2006 preferred stock financing.  After the
      Hercules Loan the 2004 Debentures became convertible into 5,302,857 shares,
      as
      the conversion price was reduced from $1.15 per share to $0.70 per share as
      a
      result of the issuance of the Lender Warrants.  The resulting incremental
      intrinsic value from triggering the contingent feature is calculated as the
      difference of 2,075,031 shares provided to the Debenture Holders due to their
      anti-dilution rights multiplied by the market price of the common stock on
      the
      date of the original debt commitment of $2.26, totaling $4,689,570.





F-15


**DIOMED
        HOLDINGS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 SEPTEMBER
        30, 2007
 (UNAUDITED)


However,
      as a result of the 2006 preferred stock financing, the Company had previously
      increased the discount on the 2004 debentures up to the original proceeds
      allocated to the debt and therefore, the discount cannot be increased further.
      The debt discount will continue to be accreted back to debt over the remaining
      term of the 2004 Debentures through charges against non-cash interest expense
      in
      the Company’s Statements of Operations. The balance of the 2004 Debentures at
      September 30, 2007 was $1,568,355, net of unamortized discount of $2,143,645.





**Consent
      by Holders of Preferred Stock**




The
      terms
      of the outstanding shares of Preferred Stock issued by the Company on September
      29, 2006 also prohibit the Company’s incurrence of debt and the issuance of
      Common Stock equivalents, such as the Lender Warrants, at a price lower than
      $1.15 per share exchange rate of the Preferred Stock (a “Dilutive Issuance”),
      and provide that dividends must begin to accrue and be payable in the event
      of a
      Dilutive Issuance.





To
      enable
      the Company to enter into the Loan and the transactions contemplated thereby
      (including the amended terms of the 2004 Debentures) and to avoid being required
      to pay dividends, the Company negotiated for and obtained the consent of the
      requisite holders of Preferred Stock (the “Preferred Stockholders”), which
      consent was provided under an Agreement and Consent (the “Preferred Stockholder
      Consent”).





Pursuant
      to the Preferred Stockholder Consent, the Company agreed that upon exchange
      of
      the Preferred Stock in accordance with its terms, the Company will issue to
      the
      holders of the Preferred Stock that provided their consents to the Loan, in
      addition to those shares of Common Stock issuable upon such exchange, additional
      shares of Common Stock such that the holders of Preferred Stock that provided
      their consents to the Loan will receive in total the number of shares of Common
      Stock as if the exchange rate of the Preferred Stock were $0.70 per share.





Under
      the
      Preferred Stockholder Consents, among other things, the Preferred Stockholders
      that provided their consents to the Loan (i) permitted the Company’s incurrence
      of indebtedness under the Loan and the amendments to the 2004 Debentures, (ii)
      agreed that they had no rights to participate in the Loan, (iii) agreed to
      limit
      voting of their Preferred Stock to the number of underlying shares of Common
      Stock at the exchange rate of $1.15 (without giving effect to the additional
      shares the Company agreed to issue upon conversion), (iv) agreed to permit
      the
      issuance of the Lender Warrant, even though it is a dilutive issuance and (v)
      agreed that, notwithstanding the issuance the Lender Warrant or the adjustments
      to the 2004 Debentures, (1) no anti-dilution adjustment to the Preferred Stock
      would occur and (2) dividends would not begin to accrue or be payable on the
      Preferred Stock as a result of the Dilutive Issuance.





Under
      EITF 00-27, t he
      Task
      Force reached a consensus that if the terms of a contingent conversion option
      do
      not permit an issuer to compute the number of shares that the holder would
      receive if the contingent event occurs and the conversion price is adjusted,
      an
      issuer should wait until the contingent event occurs and then compute the
      resulting number of shares that would be received pursuant to the new conversion
      price.





As
      discussed above, the Preferred Stockholders had the contractual anti-dilution
      right to receive both an increase in the number of shares and a decrease in
      the
      conversion price of their shares. However, for anti-dilution rights and for
      consideration of their consents and waivers of dividends, the Company provided
      the Preferred Stockholders with a separate conversion price adjustment which
      in
      effect allows the preferred stockholders to convert their preferred shares
      into
      common shares as if their conversion price was lowered to $0.70. Consequently,
      the Preferred Stockholders are entitled to an additional 4,330,314 shares upon
      conversion.





The
      Company calculated the result of the anti-dilution formula as defined under
      the
      2006 Preferred Stockholder agreement and determined that the anti-dilution
      adjustment would have resulted in a decrease to the conversion price from $1.15
      to $0.80 and an increase in the number of shares issuable upon conversion of
      2,947,019 shares. In accordance with EITF 00-27, the Company multiplied the
      additional 2,947,019 shares by the original market price on the closing date
      of
      $1.20, for a result of $3,536,423.





F-16


**DIOMED
        HOLDINGS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 SEPTEMBER
        30, 2007
 (UNAUDITED)


The
      residual 1,383,295 shares were deemed to be issued for consideration of the
      consent and waiver of dividend rights and were therefore valued using the
      closing price of the common stock on the day of closing the current transaction,
      $0.87, for a value of $1,203,466. The sum of these two values, $4,739,890 is
      analogous to a dividend and recognized as a return to shareholders and has
      been
      included as a dividend on the 2006 Preferred Stock in the Company’s calculation
      of Net Loss Applicable to Common Stockholders and Basic and Diluted Net Loss
      per
      Share.





**Impact
      on Outstanding Securities**




As
      stated
      above, as consideration for the Preferred Stockholder Consents, the Company
      agreed to issue additional shares of common stock upon exchange of the Preferred
      Stock. There were 673.6044 shares of Preferred Stock issued and outstanding,
      exchangeable for a total of 6,736,044 shares of common stock, at an exchange
      rate of $1.15 per share of common at $11,500 per share of Preferred Stock prior
      to the transaction. All of the holders of Preferred Stock provided their
      consents. As a result, the Company was required to issue up to an additional
      4,330,314 shares of its common stock at such time as the Preferred Stock is
      tendered for exchange, for a total of 11,066,358 shares.





Additionally,
      the terms of certain of the Company’s currently outstanding securities (the
“Anti-dilution Securities”) provide for adjustments to the effective price
      payable for shares of common stock upon conversion or exercise of those
      Anti-dilution Securities when the Company completes certain future transactions
      and the effective price per share of the common stock or common stock
      equivalents that are issued in the future transaction is less than the effective
      price per share under the terms of the Anti-dilution Security.





Accordingly,
      the Company’s issuance of the Lender Warrant caused the following adjustments to
      Anti-dilution Securities:




·
            the
                conversion price of the 2004 Debentures ($3.712 million principal
                amount
                outstanding at September 28, 2007) was reduced from $1.15 per share
                of
                common stock to $0.70 per share, which, when converted, will increase
                the
                number of shares of common stock to be issued from to 3,227,826 to
                5,302,857, or, 2,075,031 shares;




·
            the
                exercise price of the warrants to purchase 2,657,461 shares of common
                stock issued to the investors in the Company’s financing transaction
                completed October 28, 2004 (the “2004 Warrants”) was reduced from $1.15 to
                $0.70 per share of common stock;




·
            the
                exercise price of the warrants to purchase 2,272,000 shares of common
                stock issued to the investors in the Company’s financing transaction
                completed September 30, 2005 (the “2005 Warrants”) was reduced from $1.98
                to $1.75 per share, and the number of shares of common stock issuable
                upon
                exercise of the 2005 Warrants will increase from 2,272,000 to 2,572,855,
                an increase of 300,855 shares;




·
            the
                exercise price of the warrants to purchase 370,000 shares of common
                stock
                issued to the designees of the Registrant’s former placement agent, Musket
                Research Associates, Inc., in the Registrant’s financing transaction
                completed September 29, 2006 (the “MRA Warrants”) was reduced to $1.01 per
                share, and the number of shares of the common stock issuable upon
                exercise
                of the MRA Warrants will increase from 370,000 to 418,995, an increase
                of
                48,995 shares;




·
            the
                exercise price of warrants to purchase 73,539 shares of the common
                stock
                issued to designees of the Company’s former placement agent, Sunrise
                Securities Corp. (the “Sunrise Warrants”), will be reduced from $1.15 to
                $0.70 per share.


F-17


**DIOMED
        HOLDINGS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 SEPTEMBER
        30, 2007
 (UNAUDITED)


The
      following table sets forth the numbers of shares of Common Stock underlying
      the
      Preferred Stock and the Anti-dilution Securities prior to the Loan and related
      Debenture Holder Consents and Preferred Stockholder Consents, and the numbers
      of
      shares that will underlie the Lender Warrant, the Preferred Stock and the
      Anti-dilution Securities giving effect to the Company’s entering into the Loan
      Agreement, the Preferred Stockholder Consents and the adjustment to
      Anti-dilution Securities:





Description
                of Security
            
            Current
                Number of Underlying Common Shares
            
            Number
                of Underlying Shares following Transaction
            
            Net
                Increase in Underlying Common SharesLender
                Warrants
            
            
            0
            
            
            86,957
            
            
            86,957Preferred
                Stock
            
            
            6,736,044
            
            
            11,066,358
            
            
            4,330,3142004
                Debentures
            
            
            3,227,826
            
            
            5,302,857
            
            
            2,075,0312004
                Warrants
            
            
            2,657,461
            
            
            2,657,461
            
            
            02005
                Warrants
            
            
            2,272,000
            
            
            2,572,855
            
            
            300,855MRA
                Warrants
            
            
            370,000
            
            
            418,995
            
            
            48,995Sunrise
                Warrants
            
            
            73,539
            
            
            73,539
            
            
            0TOTAL
            
            
            
            
            
            
            
            
            6,842,152




11)
      SUBSEQUENT EVENTS





On
      October 2, 2007, a holder of the 2004 Debentures converted $175,910 of debt
      into
      251,300 shares of common stock.




F-18


**ITEM
        2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
        OPERATION**
  In
        this
        Quarterly Report, the terms "Company" and "Diomed Holdings" both refer to
        Diomed
        Holdings, Inc. The term "Diomed" refers to the Company's principal subsidiary,
        Diomed, Inc. and its consolidated subsidiaries. We use the terms "we,", "our"
        and "us" when we do not need to distinguish among these entities or their
        predecessors, or when any distinction is clear from the context.
  This
        section contains forward-looking statements, which involve known and unknown
        risks and uncertainties. These statements relate to our future plans,
        objectives, expectations and intentions. These statements may be identified
        by
        the use of words such as "may," "will," "should," "potential," "expects,"
        "anticipates," "intends," "plans," "believes" and similar expressions. These
        statements are based on our current beliefs, expectations and assumptions
        and
        are subject to a number of risks and uncertainties. Our actual results could
        differ materially from those discussed in these statements. Our 2006 Annual
        Report on Form SEC 10-KSB (the "Annual Report") contains a discussion of
        certain
        of the risks and uncertainties that affect our business. We refer you to
        the
        "Risk Factors" on pages 19 through 34 of the Annual Report for a discussion
        of
        certain risks, including those relating to our business as a medical device
        company without a significant operating record and with operating losses,
        our
        risks relating to the commercialization of our current and future products
        and
        applications, and risks relating to our common stock and its market
        value.
  In
        view
        of our relatively limited operating history, we have limited experience
        forecasting our revenues and operating costs. Therefore, we believe that
        period-to-period comparisons of financial results are not necessarily meaningful
        and should not be relied upon as an indication of future performance. To
        date,
        we have incurred substantial costs to create or acquire our products. As
        of
        September 30, 2007, we had an accumulated deficit of approximately $103 million
        including $18.4 million in non-cash interest expense, a $1,129,000 gain related
        to the adjustment of the market value of a warrant liability, and $1,080,000
        in
        SFAS 123R compensation expense. We may continue to incur operating losses
        due to
        spending on research and development programs, clinical trials, regulatory
        activities, sales, marketing, litigation, and administrative activities.
        This
        spending may not correspond with any meaningful increases in revenues in
        the
        near term, if at all. As of September 30, 2007, the Company had a cash and
        short
        term investment balance of $7.4 million.
  The
        following discussion should be read in conjunction with the Unaudited Condensed
        Consolidated Financial Statements and Notes set forth above in this Quarterly
        Report and the audited consolidated financial statements and notes in the
        Annual
        Report.
  (1)
        OVERVIEW
  We
        develop and commercialize minimally invasive medical procedures that employ
        our
        laser technologies and associated disposable products. Using our proprietary
        technology, including our exclusive rights to U.S. Patent No. 6,398,777,
        we
        currently focus on endovenous laser treatment (EVLT(R)) of varicose veins.
        We
        also develop and market lasers and disposable products for photodynamic therapy
        (PDT) cancer procedures and products for other clinical applications, including
        dental and general surgical procedures.
  In
        developing and marketing our clinical solutions, we use proprietary technology
        and aim to secure strong commercial advantages over competitors by obtaining
        exclusive commercial arrangements, gaining governmental approvals in advance
        of
        others and developing and offering innovative practice enhancement programs,
        including physician training and promotional materials. To optimize revenues,
        we
        focus on clinical procedures that generate revenues from both capital equipment
        and disposable products, such as procedure kits and optical fibers.
  Our
        high
        power semiconductor diode lasers combine clinical efficacy, operational
        efficiency and cost effectiveness in a versatile, compact, lightweight,
        easy-to-use and easy-to-maintain system. Along with lasers and single-use
        procedure kits for EVLT(R), we provide our customers with state-of-the-art
        physician training and practice development support.
  1
  In
        2001,
        we pioneered the commercialization of endovenous laser treatment (EVLT(R)),
        an
        innovative minimally invasive laser procedure for the treatment of varicose
        veins caused by greater saphenous vein reflux. In September 2001, we were
        the
        first company to receive the CE mark of the European Economic Union for approval
        for endovenous laser treatment with respect to marketing EVLT(R) in Europe.
        In
        January 2002, we were the first company to receive FDA clearance for endovenous
        laser treatment of the greater saphenous vein. In December 2004, we received
        FDA
        clearance to expand the application of EVLT(R) to other superficial veins
        in the
        lower extremities.
  EVLT(R)
        was the primary source of revenue for the nine months of 2007, and will continue
        to be our primary source of revenue through the remainder of the year. We
        believe that EVLT(R) will achieve a high level of commercial acceptance due
        to
        its relatively short recovery period, immediate return to the patient's normal
        routine barring vigorous physical activities, reduced pain and minimal scarring,
        and reduced costs compared to other treatments for varicose veins. We developed
        our EVLT(R) product line as a complete clinical solution and marketing model;
        including a laser, disposable kit, clinical training and customized marketing
        programs; to assist office-based and hospital-based physicians in responding
        to
        the growing demand for treatment of varicose veins in a minimally invasive
        manner. We have also published a health insurance reimbursement guide to
        assist
        physicians in the reimbursement submission process. We believe that these
        attributes, in addition to EVLT(R)'s superior clinical trial results, provide
        EVLT(R) with a competitive advantage over competing traditional and minimally
        invasive varicose vein treatment products.
  We
        expect
        that as the number of EVLT(R) procedures increases, so will our sales of
        associated disposable items. We believe that the U.S. represents the single
        largest market for EVLT(R). We target our sales and marketing efforts at
        private
        physician practices, hospitals, and clinics and focus on specialists in vascular
        surgery, interventional radiology, general surgery, interventional cardiology,
        phlebology, gynecology and dermatology.
  We
        primarily use a direct sales force to market our products in the United States
        and in select markets internationally, we also utilize a network of more
        than 30
        distributors to market our products abroad. In August 2005, we entered into
        a
        three year agreement with Luminetx, Inc. to acquire exclusive distribution
        rights to the VeinViewer(TM) Imaging System for the sclerotherapy, phlebectomy
        and varicose vein treatment markets in the United States and United Kingdom.
        The
        VeinViewer(TM) became commercially available in April 2006.
  We
        have
        developed and maintain a website - www.EVLT.com - to assist both patients
        and
        physicians. EVLT.com provides patients with education about treatment options
        and benefits of EVLT(R) and provides physicians with education about the
        EVLT(R)
        procedure. At www.EVLT.com, patients can also locate the nearest physician
        performing EVLT(R) by inputting their city and state. We also maintain a
        corporate website - www.diomedinc.com - which includes information about
        the
        Company and our physician support initiatives, among other things.
  Our
        management team focuses on developing and marketing solutions that address
        serious medical problems with significant market potential. Our determinations
        are based upon the number of procedures that may be conducted in a market
        and
        projections of the associated revenue. Currently, EVLT(R) applications fall
        within this guideline, and we believe that photodynamic therapy may have
        the
        potential to do so at some time in the future. However, EVLT(R), and not
        PDT, is
        the emphasis of our current business plan. Although we have continued to
        focus
        on the development and growth of EVLT(R) sales both domestically and
        internationally, we will continue to support the development and approval
        of new
        applications for PDT products and the development of enhancements to our
        products in order to further improve their quality, effectiveness and
        manufacturability.
  2
  (2)
        RESULTS OF OPERATIONS
  **THREE
        MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO THE THREE MONTHS ENDED** **SEPTEMBER
        30, 2006**
  **REVENUE**
  Diomed
        delivered revenue for the three months ended September 30, 2007 of $6,355,000,
        increasing approximately $1,034,000, or 19%, from $5,321,000 for the same
        period
        in 2006. Revenue from the EVLT(R) product line increased 24% over the same
        period last year, including growth of 41% in disposable procedure product
        revenue, demonstrating the continued and growing acceptance of EVLT(R) by
        the
        medical community and patients alike.
  For
        the
        three months ended September 30, 2007, approximately $1,878,000, or 30%,
        of our
        total revenue was derived from laser sales, as compared to approximately
        $1,980,000, or 37%, in the same period in 2006. For the three months ended
        September 30, 2007, approximately $4,478,000, or 70%, of our total revenues
        were
        from sales of disposable fibers and kits, accessories, service and
        VeinViewer(TM), as compared to approximately $3,341,000, or 63%, in the same
        period in 2006. We expect the proportion of revenue derived from disposables
        to
        continue to increase as we establish a larger base of installed lasers and
        the
        number of EVLT(R) procedures performed grows.
  The
        increase in revenue is attributable primarily to:
  -
        increased penetration in the EVLT(R) market,
  -
        the
        compounding impact of the recurring revenue stream from disposable sales
        to both
        new and existing customers, and
  -
        the
        impact of increased acceptance of the EVLT(R) procedure and expanded
        reimbursement coverage by health care insurers.
  **COST
        OF REVENUE AND GROSS PROFIT**
  Cost
        of
        revenue for the three months ended September 30, 2007 was $3,540,000, increasing
        approximately $498,000, or 16%, from $3,042,000 for the three months ended
        September 30, 2006. The increase in cost of revenue in 2007 was primarily
        a
        result of increased revenues and increased indirect overhead costs.
  Gross
        profit for the three months ended September 30, 2007 was $2,815,000, increasing
        approximately $536,000, or 24%, over the three months ended September 30,
        2006.
        Gross profit for the three months ended September 30, 2007 of 44.3% increased
        1.5% over the three months ended September 30, 2006 primarily as a result
        of
        incremental sales volume. In the future, we have targeted gross profit as
        a
        percentage of sales of 60%, or more, consistent with other proprietary medical
        device companies, as the EVLT® product line grows.
  **OPERATING
        EXPENSES**
  RESEARCH
        AND DEVELOPMENT EXPENSES for the three months ended September 30, 2007 of
        $467,000, increased approximately $45,000, or 11%, from the three months
        ended
        September 30, 2006. We expect R&D expenditures to remain relatively stable,
        as we continue to drive product functionality, cost improvements, and other
        enhancements.
  SELLING
        AND MARKETING EXPENSES for the three months ended September 30, 2007 of
        $2,927,000, increased approximately $240,000, or 9%, from $2,687,000 over
        the
        three months ended September 30, 2006. The increase was driven by higher
        sales
        commissions resulting from the increased sales volume and expansion into
        new
        markets, including Latin America. We anticipate continued increased expenses
        resulting from increased commissions from expected increases in
        volume.
  3
  GENERAL
        AND ADMINISTRATIVE EXPENSES for the three months ended September 30, 2007
        of
        $2,999,000, increased approximately $1,092,000, or 57%, from $1,907,000 from
        the
        three months ended September 30, 2006. The increase was primarily attributable
        to increased legal costs. Total third quarter 2007 patent litigation costs
        of
        approximately $1,653,000 increased $456,000 from the second quarter of 2007,
        with a reduction in the continuing cost of litigation against our primary
        laser
        competitors offset by the cost of litigation in the VNUS case, as the trial
        was
        originally scheduled to begin on October 29, 2007. For the three months ended
        September 30, 2007, general legal and patent related costs of $1,679,000
        increased $984,000 compared to the three months ended September 30, 2006
        and
        included $1,457,000 of VNUS Medical Technologies, Inc. (“VNUS”) litigation
        related costs and approximately $196,000 in follow-on costs from the first
        quarter 2007 ‘777 patent trial.
  **LOSS
        FROM OPERATIONS**
  As
        a
        result of the factors outlined above, the loss from operations for the three
        months ended September 30, 2007 was $3,578,000, increasing $840,000 from
        $2,738,000 for the three months ended September 30, 2006, as the expansion
        of
        our sales and marketing efforts during the quarter drove incremental revenue,
        which was offset primarily by increases in selling and legal costs.
  **OTHER
        EXPENSE, NET**
  Other
        expense, net for the three months ended September 30, 2007 was $429,000,
        compared to $242,000 for the three months ended September 30, 2006. Other
        expense, net for the three months ended September 30, 2007 includes $313,000
        in
        non-cash interest expense related to debt discount amortization, compared
        to
        $96,000 in the third quarter of 2006.
  **NET
        LOSS**
  Net
        loss
        for the three months ended September 30, 2007 was $4,008,000 compared to
        $2,979,000 for three months ended September 30, 2006. In addition to the
        additional $984,000 in legal costs, net loss for the third quarter of 2007
        includes $313,000 in non-cash interest expense related to debt discount
        amortization, compared to $96,000 in the third quarter of 2006..
  **NET
        LOSS APPLICABLE TO COMMON STOCKHOLDERS**
  Net
        loss
        applicable to common stockholders for the three months ended September 30,
        2007
        was $8,747,000, or $0.29 per share, compared to $6,746,000, or $0.35 per
        share,
        for the three months ended September 30, 2006. Net loss applicable to common
        stockholders includes weighted average shares outstanding of 30,067,031 and
        19,448,728 for the three months ended September 30, 2007 and 2006,
        respectively.
  Net
        loss
        applicable to common stockholders for the three months ended September 30,
        2007
        included a non-cash, non-operating deemed dividend of $4,740,000 for the
        value
        of additional shares issuable to the 2006 preferred stockholders upon conversion
        in consideration of the anti-dilution rights and consent and waiver of dividends
        in the recent Hercules Debt transaction.
  Net
        loss
        applicable to common stockholders for the three months ended September 30,
        2006
        included a $2,980,000 deemed dividend on the exchange of the 2005 Preferred
        Stock. During 2006, we were required to pay cash dividends to holders of
        the
        2005 Preferred Stock. These cash dividends amounted to $149,000 during the
        three
        months ended September 30, 2006. In addition, because the dividend percentage
        was considered below market for accounting purposes, we recorded an incremental
        non-cash dividend of $167,000 to reflect an effective interest rate of 16.5%.
        As
        a result of the preferred stock financing closed on September 29, 2006, the
        2005
        Preferred Stock was exchanged for the 2006 Preferred Stock which does not
        accrue
        dividends unless a future dilutive financing is completed within certain
        terms.
        Therefore, we ceased paying or accreting these dividends on a prospective
        basis
        subject to the terms of the 2006 Preferred Stock. Upon completion of the
        2006
        preferred stock financing, we recorded a one-time, non-cash, non-operating
        beneficial conversion feature charge of $469,938, since the market price
        of our
        common stock on September 29, 2006 of $1.20 was above the $1.15 effective
        conversion price of the immediately convertible preferred stock.
  4
 
 **NINE
        MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO THE NINE MONTHS ENDED**
 **SEPTEMBER
        30, 2006**
 
 **REVENUE**
 
 Diomed
        delivered revenue for the nine months ended September 30, 2007 of $18,767,000,
        increasing approximately $2,794,000, or 17%, from $15,972,000 for the nine
        months ended September 30, 2006. Revenue from the EVLT(R) product line increased
        20% over the nine months ended September 30, 2006.
 
 For
        the
        nine months ended September 30, 2007, approximately $6,054,000, or 32%, of
        our
        total revenue was derived from laser sales, as compared to approximately
        $6,125,000 or 38%, in the nine months ended September 30, 2006. For the nine
        months ended September 30, 2007, approximately $12,712,000, or 68%, of our
        total
        revenues were derived from sales of disposable fibers and kits, accessories,
        service and VeinViewerTM, as compared to approximately $9,847,000, or 62%, in the
        nine months ended September 30, 2006. We expect the proportion of revenue
        derived from disposables to continue to increase as we establish a larger
        base
        of installed lasers and the number of EVLT(R) procedures performed grows.
 
 The
        increase in revenue is attributable primarily to:
 
 -
              increased
                  penetration in the EVLT(R) market,
 
 -
              the
                  compounding impact of the recurring revenue stream from disposable
                  sales
                  to both new and existing customers,
                  and
 
 -
              the
                  impact of increased acceptance of the EVLT(R) procedure and expanded
                  reimbursement coverage by health care insurers.
 
 **COST
        OF REVENUE AND GROSS PROFIT**
  Cost
        of
        revenue for the nine months ended September 30, 2007 was $10,322,000, increasing
        approximately $1,536,000, or 17%, from $8,786,000 for the same period in
        2006.
        The increase in cost of revenue in 2007 was primarily a result of increased
        revenues and increased indirect overhead costs.
 
 Gross
        profit for the nine months ended September 30, 2007 of $8,445,000, increased
        approximately $1,259,000 from the same period in 2006. Gross profit as a
        percentage of sales of 45% was equivalent to the same period in 2006. In
        the
        future, we have targeted gross profit as a percentage of sales of 60%,
        consistent with other proprietary medical device companies, as the EVLT® product
        line grows.
 
 **OPERATING
        EXPENSES**
 
 RESEARCH
        AND DEVELOPMENT EXPENSES for the nine months ended September 30, 2007 were
        $1,245,000, an increase of $105,000, or 9%, from the same period in 2006.
        We
        expect R&D expenditures to remain relatively stable, as we continue to drive
        product functionality, cost improvements, and other enhancements.
  SELLING
        AND MARKETING EXPENSES for the nine months ended September 30, 2007 were
        $9,358,000, an increase of $868,000, or 10%, over 2006. The increase resulted
        from higher sales commissions from the increased sales volume and expansion
        into
        new markets, including Latin America. We anticipate continued increased expenses
        resulting from increased commissions from expected increases in
        volume.
  5
  GENERAL
        AND ADMINISTRATIVE EXPENSES for the nine months ended September 30, 2007
        were
        $9,048,000, an increase of $3,182,000, or 54%, from the same period in 2006.
        The
        increase was primarily attributable to incremental legal fees of $2,499,000.
        For
        the nine months ended September 30, 2007, legal and patent related costs
        of
        $4,711,000 included $2,150,000 of ‘777 patent litigation costs and $2,269,000 of
        VNUS patent litigation costs.
 
 **LOSS
        FROM OPERATIONS**
 
 Loss
        from
        operations for the nine months ended September 30, 2007 was $11,205,000,
        an
        increase of approximately $2,895,000 from the same period in 2006, as
        incremental gains from incremental revenue were offset primarily by increased
        selling and legal costs.
 
 **OTHER
        (INCOME) EXPENSE, NET**
  Other
        expense, net for the nine months ended September 30, 2007 was $750,000, compared
        to other income, net of $684,000 for the same period in 2006. Other expense
        for
        the nine months ended September 30, 2007 includes a $406,000 reduction of
        interest expense to adjust the amortization of the debt discount for the
        three
        months ended December 31, 2006 and the three months ended March 31, 2007
        to
        reflect the effective interest rate method as it was previously amortized
        on a
        straight line basis.
  Other
        income in the nine months ended September 30, 2006 includes a $971,000 non-cash,
        non-operating gain, which represents the change in market value of the warrants
        issued in the private placement financing completed on September 30, 2005.
        Non-cash interest expense increased $239,000 compared to the same period
        of
        2006, as a result of an increase in the amortization of the debt discount
        on the
        2004 debentures. The 2004 debenture debt discount was increased as part of
        the
        anti-dilution impact of the private placement equity financing completed
        in
        2006. Other income in 2006 also includes the non-operating impact of the
        theft
        of trade secrets settlement with Vascular Solutions, Inc.
 
 **NET
        LOSS**
 
 Net
        loss
        for the nine months ended September 30, 2007 was $11,955,000 compared to
        $7,626,000 for the same period 2006. The increased legal costs offset the
        expansion of Diomed's sales and marketing efforts during the year which drove
        incremental revenue, as well as a $971,000 non-cash, non-operating gain recorded
        in the nine months of 2006 for the decrease in the fair value of the warrant
        obligation entered into on September 30, 2005.
 
 **NET
        LOSS APPLICABLE TO COMMON STOCKHOLDERS**
  Net
        loss
        applicable to common stockholders for the nine months ended September 30,
        2007
        was $16,695,000, or $0.62 per share, compared to $12,007,000, or $0.62 per
        share, for the same period 2006. Net loss applicable to common stockholders
        includes weighted average shares outstanding of 27,029,974 and 19,447,812
        for
        the nine months ended September 30, 2007 and 2006, respectively.
  Net
        loss
        applicable to common stockholders for the nine months ended September 30,
        2007
        included a non-cash, non-operating deemed dividend of $4,740,000 for the
        value
        of additional shares issuable to the 2006 preferred stockholders upon conversion
        in consideration of the anti-dilution rights and consent and waiver of dividends
        in the recent Hercules loan transaction.
  Net
        loss
        applicable to common stockholders for the nine months ended September 30,
        2006
        included a $2,980,000 deemed dividend on the exchange of the 2005 Preferred
        Stock. During 2006, we agreed to pay cash dividends to holders of the preferred
        stock. These cash dividends amounted to $447,000 during the nine months ended
        September 30, 2006. In addition, because the dividend percentage was considered
        below market for accounting purposes, we recorded an incremental non-cash
        dividend as an increase to the carrying value of the preferred stock to reflect
        an effective interest rate of 16.5%. As a result, in the nine months ended
        September 30, 2006, we recorded $484,000 of non-cash preferred stock dividend.
        As a result of the preferred stock financing closed on September 29, 2006,
        the
        2005 Preferred Stock was exchanged for 2006 Preferred Stock, which does not
        accrue dividends unless a future dilutive financing is completed within certain
        terms. Therefore, we ceased paying or accreting these dividends on a prospective
        basis subject to the terms of the 2006 Preferred Stock. Upon completion of
        the
        2006 preferred stock financing, we recorded a one-time, non-cash, non-operating
        beneficial conversion feature charge of $469,938, since the market price
        of our
        common stock on September 29, 2006 of $1.20 was above the $1.15 effective
        conversion price of the immediately convertible preferred stock.
 
 6
  (3)
        LIQUIDITY, CAPITAL RESOURCES AND CAPITAL TRANSACTIONS
  **CASH
        POSITION AND CASH FLOW**
  We
        have
        financed our operations primarily through private placements of common stock
        and
        preferred stock and private placements of convertible notes and short-term
        notes
        and credit arrangements. We had cash and short-term investment balances of
        approximately $7,409,000 and $9,933,000 at September 30, 2007 and December
        31,
        2006, respectively.
  **CASH
        USED IN OPERATIONS**
  Cash
        used
        in operations for the nine months ended September 30, 2007 was $7,451,000.
        Cash
        used in operations reflects the net loss of $11,955,000, which includes
        $4,711,000 in legal and patent fees incurred in asserting our EVLT(R) patent,
        and was partially offset by non-cash charges such as $528,000 of non-cash
        interest and $591,000 for stock based compensation. The cash flow impact
        of the
        net loss was offset by changes in working capital items totaling approximately
        $2,598,000 primarily attributed to increased accounts payable for patent
        litigation fees.
  **CASH
        PROVIDED BY INVESTING**
  Cash
        provided by investing activities for the nine months ended September 30,
        2007
        was approximately $2,362,000, including proceeds from maturities of marketable
        securities of $3,086,000, as we limited reinvestment as a result of cash
        requirements, offset by purchases of computer and demonstration equipment
        of
        $294,000.
  **CASH
        PROVIDED BY FINANCING**
  Cash
        provided by financing activities for the nine months ended September 30,
        2007
        includes $5,142,000 in net proceeds borrowed under the Hercules Debt
        transaction.
  **BANK
        LINES OF CREDIT**
  Diomed,
        Ltd., our United Kingdom-based subsidiary, utilizes an overdraft facility
        as
        well as an accounts receivable line of credit with Barclays Bank, limited
        to the
        lesser of (GBP)100,000 or 80% of eligible accounts receivable. As of September
        30, 2007, Barclay’s had provided a temporary increase in the overdraft facility
        up to approximately $279,000. At September 30, 2007, there were no additional
        amounts available under this line. The credit line bears interest at a rate
        of
        2.5% above Barclays' base rate (5.75% at September 30, 2007) and borrowings
        are
        due upon collection of receivables from customers. As security for the line
        of
        credit, Barclay's Bank has a lien on all of the assets of Diomed Ltd., excluding
        certain intellectual property. As of September 30, 2007, there was approximately
        $279,000 outstanding and at December 31, 2006, there was approximately $223,000
        outstanding under this line of credit.
  **FUTURE
        AVAILABILITY OF CREDIT**
  Prior
        to
        entering into the Hercules term loan (as discussed below), other than the
        security under the Barclays Bank line of credit, our assets were not subject
        to
        any liens or encumbrances. Therefore, these unencumbered assets were available
        as security for credit facilities we might seek in the future. However, under
        the terms of the convertible debentures that we issued on October 25, 2004,
        we
        agreed that, so long as at least 10% of the original principal amount of
        any
        debenture was outstanding, we would not incur indebtedness or create a lien
        that
        is senior to or having an equal priority with our obligations under the
        debentures, except for purchase money security interests and otherwise to
        the
        extent that we do so in the ordinary course of our business. As of September
        30,
        2007, two of the three investors who purchased debentures in 2004 continued
        to
        hold debentures of at least 10% of the original principal amount. Also, under
        the terms of the September 29, 2006 financing transaction, we agreed that
        so
        long as any investor owned at least 25% of the shares of preferred stock
        initially purchased, we would not incur indebtedness (other than ordinary
        course
        trade payables and installment loans) in excess of $1 million (including
        the
        Barclays Bank line of credit) without prior approval of the holders of the
        65%
        of the outstanding 2006 preferred stock.
  7
  During
        the third quarter of 2007, we obtained waivers from both the 2004 Debenture
        holders and the 2006 preferred stockholders to incur senior secured indebtedness
        under the Hercules term loan. We closed the Hercules term loan on September
        28,
        2007, in effect monetizing the $14.7 million damages award arising out of
        our
‘777 patent litigation following the jury trial during the first quarter of
        2007. We borrowed $6 million on September 28, 2007, before deduction of fees
        and
        expenses incurred in the transaction. We have the right, at our option, subject
        to the terms and conditions of the term loan agreement, to borrow an additional
        $4 million between January 31, 2008 and March 31, 2008.  As
        a
        result of the terms of this financing transaction, we agreed that, subject
        to
        certain permitted exceptions, we would not incur indebtedness, prepay or
        repay
        the convertible debentures or any other indebtedness.
  We
          plan
          on using our available cash, the proceeds from the ‘777 patent judgment and our
          operating revenue to fund our operations. If these resources are insufficient
          to
          fund our operations (for example, due to a delay in receiving the proceeds
          of
          the patent judgment), then we may need to obtain additional financing.
          We would
          intend to obtain any such needed financing by way of further equity investment,
          as our access to debt financing is restricted. Because
          of the indebtedness that we incurred under the Hercules loan and the security
          interests that we granted to Hercules and the 2004 debenture holders in
          connection with the Hercules loan, our debt outstanding and our limited
          ability
          to offer collateral to a prospective lender, coupled with the agreements
          that we
          made with Hercules and the 2004 debenture holders and the 2006 preferred
          stockholders, make it unlikely that additional debt financing would be
          available
          to us on acceptable terms.
 **2007
        DEBT FINANCING TRANSACTION**
 
 On
        September 28, 2007, we entered into a Loan and Security Agreement (the
“ Loan
        Agreement ”)
        with
        Hercules Technology Growth Capital, Inc. (“ Hercules ”).
        The
        Loan Agreement provides for a term loan (the “ Loan ”)
        of up
        to $10 million in two tranches, an initial $6 million tranche, which was
        funded
        on September 28, 2007, and an additional $4 million tranche available at
        our
        option at any time during the period from January 31, 2008 through March
        31,
        2008. The net proceeds of the Loan are for our working capital
        purposes.
 
 The
        Loan
        is secured by our assets, including the $14.7 million judgment awarded to
        Diomed, Inc. against AngioDynamics, Inc. and Vascular Solutions, Inc. in
        our
        lawsuit in which AngioDynamics and Vascular Solutions were found to have
        infringed our EVLT® patent. We also granted Hercules a pledge of the shares of
        Diomed, Inc., and a pledge of our wholly-owned United States subsidiaries
        and a
        share pledge of 65% of the outstanding shares of our wholly-owned United
        Kingdom
        subsidiary, Diomed Limited.
 
 The
        Loan
        bears interest at the prime rate plus 3.20%, will be repayable on an
        interest-only basis through June 30, 2008 and will thereafter become payable
        in
        24 equal monthly installments of principal and interest, with the final
        installment due on July 1, 2010, at which time a deferred interest charge
        of
        9.5% of the funds borrowed will also be payable. When we borrowed $6 million
        on
        September 28, 2007, we recorded the deferred interest charge based on 9.5%
        of
        the $6 million, or $570,000, in other long-term liabilities on our balance
        sheet
        and included the amount in debt discount. Upon borrowing the additional $4
        million, we will record the additional deferred interest charge of 9.5% on
        $4
        million, or $380,000 and include that amount as an additional debt discount.
        The
        Loan may be prepaid at our option, subject to a prepayment fee of 3% of the
        funds borrowed (if prepaid during the first 12 months), 2% of the funds borrowed
        (if prepaid during after twelve months but before 24 months) or 1% (if prepaid
        at 24 months or thereafter).
 
 We
        agreed
        to pay $320,000 of legal fees and investment expenses incurred by Hercules
        in
        connection with negotiating the Loan Agreement. We also accrued other related
        legal costs and listing fees of approximately $338,000, and therefore recorded
        $658,000 as debt financing costs on its balance sheet. This amount will be
        amortized to interest expense using the effective interest method in the
        statement of operations over the period through the estimated call date of
        the
        loan, October 25, 2008.
 
 8
  As
        additional consideration, we also issued to Hercules warrants to purchase
        up to
        86,957 shares of our common stock at an exercise price of $0.70 per share,
        with
        a term of five years (the “ Lender
        Warrants ”).
        We
        valued the warrants at $52,874 using the Black-Scholes Option Pricing Model
        and
        classified this amount as a discount to the Loan. We reviewed the terms of
        the
        warrant agreement and since a net cash settlement possibility exists until
        we
        receive listing approval from the AMEX, we determined that liability treatment
        was appropriate in accordance with EITF 00-19. We recorded a warrant liability
        in current liabilities for $52,874. This amount will be marked to market
        each
        reporting period until we receive listing approval from the AMEX at which
        time
        the amount will be reclassified to equity and no longer marked to
        market.
 
 We
        paid
        Hercules a $200,000 commitment fee in connection with the Loan at closing,
        and
        have agreed to pay a success fee of $900,000 on June 30, 2008 and 1% of the
        gross consideration paid for our acquisition should a change of control occur.
        We recorded the $900,000 success fee in accrued liabilities as it is payable
        on
        June 30, 2008.
 
 Based
        on
        the above, we recorded a discount against the Loan of $1,722,874 representing
        the commitment fee of $200,000, the success fee of $900,000, the fair value
        of
        the 86,957 warrants of $52,874, and the deferred interest of $570,000. This
        amount will be accreted back to the Loan through charges against non-cash
        interest expense using the effective interest method in the statement of
        operations over the period through October 25, 2008.
 
 Consent
        by Holders of Variable Rate Convertible Debentures
 
 The
        terms
        of the outstanding Variable Rate Convertible Debentures due October 2008
        (the
“ 2004
        Debentures ”),
        issued by us on October 25, 2004, provide that we may not incur indebtedness
        that is senior to or *pari*  *passu* with the
        indebtedness represented by the 2004 Debentures or grant a security interest
        in
        our assets. To enable us to enter into the Loan Agreement, on September 28,
        2007, we negotiated for and obtained the consent of each of the four holders
        of
        2004 Debentures (the “ Debenture
        Holders ”)
        pursuant to an Agreement and Consent (the “ Debenture
        Holder Consent ”).
 
 Pursuant
        to the Debenture Holder Consent, we amended and restated the 2004 Debentures
        in
        the form of an Amended and Restated Variable Rate Secured Subordinated
        Convertible Debenture due October 2008 (the “ Secured
        2004 Debenture ”)
        by (i)
        increasing the rate of interest from 400 basis points over six-month LIBOR
        to
        the greater of 10% and 500 basis points over six-month LIBOR, (ii) reflecting
        the adjusted conversion price of the Secured 2004 Debentures of $0.70 per
        share,
        which adjustment results from the antidilution adjustment of the 2004 Debentures
        caused by the issuance of the Lender Warrants (discussed under “Impact on
        Outstanding Securities,” below) and (iii) granting a security interest in all of
        our assets (and, as set forth in a guaranty by Diomed, Inc. of our obligations
        under the Secured 2004 Debenture and a separate security agreement, the assets
        of Diomed, Inc.), subordinated to the security interest granted to Hercules.
        We
        made certain representations, warranties and other agreements with the Debenture
        Holders, including reimbursement of their legal fees, but paid no remuneration
        for obtaining the Debenture Holder Consents.
 
 The
        Debenture Holders and Hercules entered into an Intercreditor Agreement, dated
        September 28, 2007, acknowledged by us, pertaining to the creditors’ respective
        rights to the collateral comprising their respective security interests in
        our
        assets. The Intercreditor Agreement enables Hercules to block us from repaying
        the Secured 2004 Debentures when they become payable (October 25, 2008),
        in
        which case, under the Debenture Holder Consent, we agreed to repay Hercules
        with
        the proceeds of the judgment in the EVLT® patent litigation case, so long as we
        have received at least $10 million from that $14.7 million judgment by that
        time. We expect to prevail in the ‘777 patent litigation appeal and receive an
        award in excess of $10 million. Therefore, we consider this a possible call
        option and since the event will cause the Hercules Loan to be repaid before
        its scheduled maturity date for a fixed settlement amount. Therefore, we
        determined that the debt discount amortization should occur over the period
        to
        the earliest call date so that the carrying amount of the debt at that date
        is
        equal to the settlement amount, using the effective interest rate method.
        Therefore, the discount and the debt issuance costs will be amortized through
        October 25, 2008.
  9
  We
        will
        use the effective interest rate method to recognize interest expense over
        the
        period until first possible call. If during the period, we determine that
        the
        possible repayment will differ from October 25, 2008, we will treat that
        as a
        change in estimate and recognize the remaining unamortized discount over
        the
        revised period.
 
 Pursuant
        to the anti-dilution rights under the 2004 Debenture agreements, as a result
        of
        the Lender Warants we were required to reduce the conversion prices for the
        2004
        variable rate convertible debentures from $1.15 to $0.70 and exercise prices
        for
        warrants issued under prior financing transactions.
 
 We
        determined that the conversion and exercise price changes were not modifications
        to the terms of their respective agreements, but were executions of certain
        rights within those agreements. Under EITF 00-27 “Application of Issue No. 98-5
        to Certain Convertible Instruments” (“EITF 00-27”), Issue #7, t he
        Task
        Force reached a consensus that if the terms of a contingent conversion option
        do
        not permit an issuer to compute the number of shares that the holder would
        receive if the contingent event occurs and the conversion price is adjusted,
        an
        issuer should wait until the contingent event occurs and then compute the
        resulting number of shares that would be received pursuant to the new conversion
        price.
 
 The
        Hercules Loan transaction was the second time that the anti-dilution rights
        of
        the 2004 Debentures were triggered. Prior to the 2006 preferred stock financing,
        the 2004 Debentures were convertible into 1,620,961 shares, and after the
        2006
        preferred stock financing the 2004 Debentures were convertible into 3,227,826
        shares, as the conversion price was reduced from $2.29 per share to $1.15
        per
        share as a result of the 2006 preferred stock financing.  After the
        Hercules Loan the 2004 Debentures became convertible into 5,302,857 shares,
        as
        the conversion price was reduced from $1.15 per share to $0.70 per share
        as a
        result of the issuance of the Lender Warrants.  The resulting incremental
        intrinsic value from triggering the contingent feature is calculated as the
        difference of 2,075,031 shares provided to the Debenture Holders due to their
        anti-dilution rights multiplied by the market price of the common stock on
        the
        date of the original debt commitment of $2.26, totaling $4,689,570.
 
 However,
        as a result of the 2006 preferred stock financing, we had previously increased
        the discount on the 2004 debentures up to the original proceeds allocated
        to the
        debt and therefore, can not increase the debt discount further. The debt
        discount will continue to be accreted back to debt over the remaining term
        of
        the 2004 Debentures through charges against non-cash interest expense in
        our
        Statements of Operations. The balance of the debentures at September 30,
        2007
        was $1,568,355, net of unamortized discount of $2,143,645.
 
 Consent
        by Holders of Preferred Stock
 
 The
        terms
        of the outstanding shares of Preferred Stock issued by us on September 29,
        2006
        also prohibit our incurrence of debt and the issuance of Common Stock
        equivalents, such as the Lender Warrants, at a price lower than $1.15 per
        share
        exchange rate of the Preferred Stock (a “ Dilutive
        Issuance ”),
        and
        provide that dividends must begin to accrue and be payable in the event of
        a
        Dilutive Issuance.
 
 To
        enable
        us to enter into the Loan and the transactions contemplated thereby (including
        the amended terms of the 2004 Debentures) and to avoid being required to
        pay
        dividends, we negotiated for and obtained the consent of the requisite holders
        of Preferred Stock (the “ Preferred
        Stockholders ”),
        which
        consent was provided under an Agreement and Consent (the “ Preferred
        Stockholder Consent ”).
 
 Pursuant
        to the Preferred Stockholder Consent, we agreed that upon exchange of the
        Preferred Stock in accordance with its terms, we will issue to the holders
        of
        the Preferred Stock that provided their consents to the Loan, in addition
        to
        those shares of Common Stock issuable upon such exchange, additional shares
        of
        Common Stock such that the holders of Preferred Stock that provided their
        consents to the Loan will receive in total the number of shares of Common
        Stock
        as if the exchange rate of the Preferred Stock were $0.70 per share.
 
 Under
        the
        Preferred Stockholder Consents, among other things, the Preferred Stockholders
        that provided their consents to the Loan (i) permitted our incurrence of
        indebtedness under the Loan and the amendments to the 2004 Debentures, (ii)
        agreed that they had no rights to participate in the Loan, (iii) agreed to
        limit
        voting of their Preferred Stock to the number of underlying shares of Common
        Stock at the exchange rate of $1.15 (without giving effect to the additional
        shares we agreed to issue upon conversion), (iv) agreed to permit the issuance
        of the Lender Warrant even though it is a dilutive issuance and (v) agreed
        that,
        notwithstanding the issuance the Lender Warrant or the adjustments to the
        2004
        Debentures, (1) no anti-dilution adjustment to the Preferred Stock would
        occur
        and (2) dividends would not begin to accrue or be payable on the Preferred
        Stock
        as a result of the Dilutive Issuance.
  10
  Under
        EITF 00-27, t he
        Task
        Force reached a consensus that if the terms of a contingent conversion option
        do
        not permit an issuer to compute the number of shares that the holder would
        receive if the contingent event occurs and the conversion price is adjusted,
        an
        issuer should wait until the contingent event occurs and then compute the
        resulting number of shares that would be received pursuant to the new conversion
        price.
 
 As
        discussed above, the Preferred Stockholders had the contractual anti-dilution
        right to receive both an increase in the number of shares and a decrease
        in the
        conversion price of their shares. However, for anti-dilution rights and for
        consideration of their consents and waivers of dividends, we provided the
        Preferred Stockholders with a separate conversion price adjustment which
        in
        effect allows the preferred stockholders to convert their preferred shares
        into
        common shares as if their conversion price was lowered to $0.70. Consequently,
        the Preferred Stockholders are entitled to an additional 4,330,314 shares
        upon
        conversion.
 
 We
        calculated the result of the anti-dilution formula as defined under the 2006
        Preferred Stockholder agreement and determined that the anti-dilution adjustment
        would have resulted in a decrease to the conversion price from $1.15 to $0.80
        and an increase in the number of shares issuable upon conversion of 2,947,019
        shares. In accordance with EITF 00-27, we multiplied the additional 2,947,019
        shares by the original market price on the closing date of $1.20, for a result
        of $3,536,423.
 
 The
        residual 1,383,295 shares were deemed to be issued for consideration of the
        consent and waiver and were therefore valued using the closing price of the
        common stock on the day of closing the current transaction, $0.87, for a
        value
        of $1,203,466. The sum of these two values, $4,739,890 is analogous to a
        dividend and recognized as a return to shareholders and has been included
        as a
        dividend on the 2006 Preferred Stock in our calculation of Net Loss Applicable
        to Common Stockholders and Basic and Diluted Net Loss per Share.
 
 Impact
        on Outstanding Securities
 
 As
        stated
        above, as consideration for the Preferred Stockholder Consents, we agreed
        to
        issue additional shares of common stock upon exchange of the Preferred Stock.
        There were 673.6044 shares of Preferred Stock issued and outstanding,
        exchangeable for a total of 6,736,044 shares of common stock, at an exchange
        rate of $1.15 per share of common at $11,500 per share of Preferred Stock
        prior
        to the transaction. All of the holders of Preferred Stock provided their
        consents. As a result, we were required to issue up to an additional 4,330,314
        shares of its common stock at such time as the Preferred Stock is tendered
        for
        exchange, for a total of 11,066,358 shares.
 
 Additionally,
        the terms of certain of our currently outstanding securities (the “ Anti-dilution
        Securities ”)
        provide for adjustments to the effective price payable for shares of common
        stock upon conversion or exercise of those Anti-dilution Securities when
        we
        complete certain future transactions and the effective price per share of
        the
        common stock or common stock equivalents that are issued in the future
        transaction is less than the effective price per share under the terms of
        the
        Anti-dilution Security.
 
 Accordingly,
        our issuance of the Lender Warrant caused the following adjustments to
        Anti-dilution Securities:
  ·
              the
                  conversion price of the 2004 Debentures ($3.712 million principal
                  amount
                  outstanding at September 28, 2007) was reduced from $1.15 per share
                  of
                  common stock to $0.70 per share, which, when converted, will increase
                  the
                  number of shares of common stock to be issued from to 3,227,826
                  to
                  5,302,857, or, 2,075,031 shares;
  11
  ·
              the
                  exercise price of the warrants to purchase 2,657,461 shares of
                  common
                  stock issued to the investors in our financing transaction completed
                  October 28, 2004 (the “2004
                  Warrants”)
                  was reduced from $1.15 to $0.70 per share of common stock;
  ·
              the
                  exercise price of the warrants to purchase 2,272,000 shares of
                  common
                  stock issued to the investors in our financing transaction completed
                  September 30, 2005 (the “2005
                  Warrants”)
                  was reduced from $1.98 to $1.75 per share, and the number of shares
                  of
                  common stock issuable upon exercise of the 2005 Warrants will increase
                  from 2,272,000 to 2,572,855, an increase of 300,855 shares;
  ·
              the
                  exercise price of the warrants to purchase 370,000 shares of common
                  stock
                  issued to the designees of our former placement agent, Musket Research
                  Associates, Inc., in our financing transaction completed September
                  29,
                  2006 (the “MRA
                  Warrants”)
                  was reduced to $1.01 per share, and the number of shares of the
                  common
                  stock issuable upon exercise of the MRA Warrants will increase
                  from
                  370,000 to 418,995, an increase of 48,995 shares;
  ·
              the
                  exercise price of warrants to purchase 73,539 shares of the common
                  stock
                  issued to designees of our former placement agent, Sunrise Securities
                  Corp. (the “Sunrise
                  Warrants”),
                  will be reduced from $1.15 to $0.70 per
                  share.
 
 The
        following table sets forth the numbers of shares of common stock underlying
        the
        Preferred Stock and the Anti-dilution Securities prior to the Loan and related
        Debenture Holder Consents and Preferred Stockholder Consents, and the numbers
        of
        shares that will underlie the Lender Warrant, the Preferred Stock and the
        Anti-dilution Securities giving effect to our entering into the Loan Agreement,
        the Preferred Stockholder Consents and the adjustment to Anti-dilution
        Securities:
 
 **Description
                  of Security**
              
              **Current
                  Number of Underlying Common Shares**
              
              **Number
                  of Underlying Shares following Transaction**
              
              **Net
                  Increase in Underlying Common Shares**Lender
                  Warrants
              
              
              0
              
              
              86,957
              
              
              86,957Preferred
                  Stock
              
              
              6,736,044
              
              
              11,066,358
              
              
              4,330,3142004
                  Debentures
              
              
              3,227,826
              
              
              5,302,857
              
              
              2,075,0312004
                  Warrants
              
              
              2,657,461
              
              
              2,657,461
              
              
              02005
                  Warrants
              
              
              2,272,000
              
              
              2,572,855
              
              
              300,855MRA
                  Warrants
              
              
              370,000
              
              
              418,995
              
              
              48,995Sunrise
                  Warrants
              
              
              73,539
              
              
              73,539
              
              
              0TOTAL
              
              
              
              
              
              
              
              
              6,842,152
 
 **EQUITY
        TRANSACTIONS**
 
 During
        the nine month period ended September 30, 2007, the holders of 1,061.8303
        shares
        of preferred stock exchanged their shares of preferred stock into 10,618,303
        shares of common stock. At September 30, 2007, 673.6044 shares of preferred
        stock, convertible into 11,066,358 shares of common stock, were
        outstanding.
 
 At
        December 31, 2006, we had 19,448,728 shares of common stock outstanding and
        as a
        result of the conversions of preferred stock during the nine months at September
        30, 2007 the Company had 30,067,031 shares of common stock
        outstanding.
  **COMMITMENT
        FOR LUMINETX DISTRIBUTION AGREEMENT**
 
 On
        August
        5, 2005, we entered into a distribution agreement with Luminetx, pursuant
        to
        which Luminetx appointed us as a distributor and granted us the exclusive
        right
        to distribute and sell the Luminetx patented biomedical imaging system known
        as
        the VeinViewer(TM) Imaging System. The Agreement is limited to physicians
        who
        perform sclerotherapy, phlebectomies or varicose vein treatments, initially
        in
        the United States and the United Kingdom, with additional territories to
        be
        negotiated as VeinViewer(TM) receives regulatory clearance in other countries,
        on terms to be agreed. Luminetx agreed to supply us with a certain minimum
        number of VeinViewer(TM) systems for distribution by us at specified prices
        during the term of the distribution agreement, initially three years. In
        May
        2007, we and Luminetx amended the agreement and revised the targeted number
        of
        VeinViewer(TM) systems to be purchased through December 31, 2007 and through
        April 30, 2008 to better reflect current market development and positioning
        strategies. The agreement was also amended so that both companies may sell
        to
        dermatologists who are not performing EVLT®. If we fail to purchase the annual
        target number of VeinViewer(TM) systems prior to May 1, 2008, for any reason,
        Luminetx may terminate the distribution agreement with written
        notice.
  12
  (4)
        CRITICAL ACCOUNTING POLICIES
  In
        the
        opinion of management, these unaudited condensed consolidated financial
        statements contain all adjustments considered normal and recurring and necessary
        for their fair presentation. Interim results are not necessarily indicative
        of
        results to be expected for the year. These interim financial statements have
        been prepared in accordance with the instructions for Form 10-QSB, and
        therefore, do not include all information and footnotes necessary for a complete
        presentation of operations, financial position, and our cash flows in conformity
        with accounting principles generally accepted in the United States. We filed
        our
        2006 Annual Report on Form 10-KSB with the Securities and Exchange Commission
        on
        March 20, 2007, which included audited consolidated financial statements
        for the
        year ended December 31, 2006, and included information and footnotes necessary
        for such presentation. These unaudited consolidated financial statements
        should
        be read in conjunction with the audited consolidated financial statements
        and
        the notes thereto included in our annual report on Form 10-KSB for the year
        ended December 31, 2006.
  Our
        discussion and analysis of our financial condition, results of operations,
        and
        cash flows are based on our consolidated financial statements. The preparation
        of these financial statements requires us to make estimates and judgments
        that
        affect the reported amounts of assets, liabilities, revenues and expenses,
        and
        related disclosure of contingent assets and liabilities. We have chosen
        accounting policies we believe are appropriate to report accurately and fairly
        our operating results and financial position, and we apply those accounting
        policies in a consistent manner. As discussed in Item 6, "Management's
        Discussion and Analysis of Financial Condition or Plan of Operation" of our
        Annual Report on Form 10-KSB for the fiscal year ended December 31, 2006,
        we
        consider certain policies to be the most critical in the preparation of our
        consolidated financial statements because they involve the most difficult,
        or
        subjective judgments about the effect of matters that are inherently uncertain.
        We base our estimates on historical experience and on various other assumptions
        that we believe to be reasonable under the circumstances, the results of
        which
        form the basis for making judgments about the carrying values of assets and
        liabilities that are not readily apparent from other sources. Actual results
        may
        differ from these estimates under different assumptions or
        conditions.
  During
        the first quarter 2007, we adopted the provisions of FASB Interpretation
        No. 48, *Accounting
        for Uncertainty in Income Taxes - An Interpretation of FASB Statement No.
        109.* This
        interpretation addresses the accounting for uncertainty in income taxes
        recognized in a company’s financial statements in accordance with FASB Statement
        No. 109, *Accounting
        for Income Taxes* .
        It
        prescribes a comprehensive model for recognizing, measuring, presenting and
        disclosing in the financial statements tax positions taken or expected to
        be
        taken in a tax return. It requires that only benefits from tax positions
        that
        are more-likely-than-not of being sustained upon examination should be
        recognized in the financial statements. These benefits would be recorded
        at
        amounts considered to be the maximum amounts more-likely-than-not of being
        sustained. At the time these positions become more-likely-than-not to be
        disallowed, their recognition would be reversed. This interpretation is
        effective for fiscal years beginning after December 15, 2006, with the
        cumulative effect of the change in accounting principle recorded as an
        adjustment to retained earnings. We adopted the provisions of FIN 48 effective
        January 1, 2007.  Our
        practice is to recognize interest and/or penalties related to income tax
        matters
        in income tax expense. Upon adoption of FIN 48 on January 1, 2007, we did
        not
        record any interest or penalties.
  We
        are
        subject to taxation in the UK, US and various state jurisdictions.  Our tax
        years for 1998 and forward are subject to examination by the US tax authorities
        due to the carryforward of unutilized net operating losses.
  13
  The
        adoption of FIN 48 did not have a material impact on our financial condition,
        results of operations or cash flows.  At January 1, 2007, we had US net
        operating loss (“NOL”) carryforwards of approximately $46 million and foreign
        NOLs of approximately $20 million.   At January 1, 2007, we had a net
        deferred tax asset of approximately $25 million related to these NOLs. Due
        to
        uncertainties surrounding our ability to generate future taxable income to
        realize these assets, a full valuation has been established to offset our
        net
        deferred tax asset. Additionally, the future utilization of our US NOL
        carryforwards to offset future taxable income may be subject to a substantial
        annual limitation as a result of Section 382 ownership changes that may have
        occurred previously or that could occur in the future.  In general, an
        ownership change, as defined by Section 382, results from transactions
        increasing the ownership of certain shareholders or public groups in the
        stock
        of a corporation by more than 50 percentage points over a three year period.
        Since our formation, we have raised capital through the issuance of capital
        stock which, combined with the purchasing shareholders’ subsequent disposition
        of those shares, may have resulted in a change of control, as defined by
        Section
        382, or could result in a change of control in the future upon subsequent
        disposition. If we have experienced a change in control at any time since
        our
        formation, utilization of the NOL carryforwards would be subject to an annual
        limitation under Section 382. Any limitation may result in expiration of
        a
        portion of the NOL carryforwards before utilization. Any carryforwards that
        will
        expire prior to utilization as a result of such limitations will be removed
        from
        deferred tax assets with a corresponding reduction of the valuation
        allowance.  Due to the existence of the valuation allowance,
        future changes in our unrecognized tax benefits related to NOLs will not
        impact our effective tax rate.
  14
   **ITEM
        3. CONTROLS AND PROCEDURES**
  (a)
        Evaluation of disclosure controls and procedures.
  The
        Company's principal executive officer and its principal financial officer
        have
        carried out an evaluation of the effectiveness of our disclosure controls
        and
        procedures (as defined in Rules 13a -15(e) and 15d-15(e) under the Securities
        Exchange Act of 1934) as of September 30, 2007 and have concluded that, as
        of
        such date, the Company's disclosure controls and procedures in place are
        effective in ensuring that material information and other information requiring
        disclosure is identified and communicated on a timely basis.
  (b)
        Changes in internal control over financial reporting.
  During
        the period covered by this report, there have been no changes in our internal
        control over financial reporting that have materially affected or are reasonably
        likely to materially affect our internal control over financial
        reporting.
  15
  **PART
        II. OTHER INFORMATION**
  **ITEM
        1. LEGAL PROCEEDINGS**
  **'777
        PATENT LITIGATION**
  On
        January 6, 2004, we filed a lawsuit in the United States District Court for
        the
        District of Massachusetts against AngioDynamics, Inc. seeking injunctive
        relief
        and damages for infringement of our U.S. Patent Number 6,398,777 (the "'777
        patent") covering the endovascular laser treatment of varicose veins which
        we
        use in the EVLT(R) product line, the exclusive rights to which we acquired
        on
        September 3, 2003. On March 4, 2004, we filed a second lawsuit against Vascular
        Solutions in the United States District Court for the District of Massachusetts
        seeking injunctive relief and damages for infringement of the '777 patent.
        At
        the parties' joint request, our patent cases involving AngioDynamics and
        Vascular Solutions were consolidated by the court.
  Trial
        commenced on March 12, 2007 and on March 28, 2007, the jury found in our
        favor
        and against both defendants, both for inducing infringement and for contributory
        infringement of our patent, and awarded nearly $12.5 million in damages.
        On June
        20, 2007, the defendants filed for an appeal with the US Court of Appeals
        for
        the Federal Circuit. Therefore, we will not record this amount until final
        resolution of the appeal. In particular, the jury awarded $8.36 million against
        AngioDynamics and $4.1 million against VSI. On March 30, 2007 we filed a
        motion
        for a permanent injunction against AngioDynamics and VSI. Defendants sought
        judgment as a matter of law and/or a new trial. We sought prejudgment interest
        and additional post-judgment damages. On July 2, 2007, the Court granted
        our
        motion for a permanent injunction and denied defendants’ motion for judgment as
        a matter of law or new trial. The parties reached a stipulation regarding
        the
        issues of prejudgment interest and additional post-judgment damages, which
        resulted in a stipulated increase in the judgment against AngioDynamics to
        $9.71
        million and against VSI to $4.975 million. On July 11, 2007, we filed a motion
        to find the defendants in contempt of the permanent injunction. Defendants
        filed
        their opposition on July 25, 2007. On October 3, 2007 we filed supplemental
        papers regarding the contempt motion. Defendants filed their opposition on
        October 5, 2007. The contempt motion is pending.
  On
        April
        2, 2004, the we filed a lawsuit in the United States District Court for the
        District of Massachusetts against Total Vein Solutions, LLC, seeking injunctive
        relief and damages for infringement of the '777 patent. Total Vein Solutions
        answered the complaint, generally denying our allegations and counterclaiming
        for declaratory judgment of non-infringement and invalidity of the EVLT(R)
        patent. We are in the discovery phase of this litigation. This case is also
        pending before Judge Gorton. On July 13, 2007, Magistrate Judge Alexander
        granted our motion to compel Total Vein to respond to discovery requests
        and
        denied Total Vein’s motion to stay the litigation. We await a ruling on our
        motion for preliminary injunction.
  On
        October 14, 2004, we filed a lawsuit in the United States District Court
        for the
        District of Massachusetts against New Star Lasers, Inc., d/b/a Cooltouch,
        Inc.,
        seeking injunctive relief and damages for infringement of the '777 patent.
        CoolTouch answered the complaint, generally denying our allegations and
        counterclaiming for declaratory judgment of non-infringement and invalidity
        of
        the '777 patent. We are now proceeding with the discovery phase of this
        litigation. This case is also pending before Judge Gorton.
  On
        March
        29, 2007 we filed a lawsuit in United States District Court for the District
        of
        Massachusetts against Dornier Medtech America, Inc. seeking injunctive relief
        and damages for infringement of the '777 patent. This case is also pending
        before Judge Gorton.
  If
        we do
        not prevail in the appeal and infringement actions and are not be able to
        exclude third parties from using the Company's EVLT(R) technology, the EVLT(R)
        patent may be determined to be impaired and the Company's EVLT(R) revenue
        stream
        may be adversely affected.
 
 16
  **VNUS
        TECHNOLOGIES LITIGATION**
  On
        July
        21, 2005, a lawsuit was filed against us in the United States District Court
        for
        the Northern District of California by VNUS Medical Technologies, Inc., alleging
        infringement of U.S. patents Nos. 6,258,084, 6,638,273, 6,752,803, and
        6,769,433, seeking injunctive relief and damages in an unspecified amount.
        On
        September 15, 2005, we filed an answer denying the allegations of infringement,
        and counterclaiming against VNUS for a declaration that none of the patents
        are
        infringed and that they are all invalid.
  On
        October 12, 2005, VNUS served an amended complaint adding two additional
        parties, AngioDynamics, Inc. and Vascular Solutions, Inc., as defendants.
        On
        October 31, 2005, we filed an answer to the First Amended Complaint, again
        denying the allegations of infringement, and counterclaiming against VNUS
        for a
        declaration that none of the patents are infringed, that they are all invalid
        and that two of VNUS' patents are unenforceable for inequitable conduct.
        The
        Court held a claim construction tutorial and a hearing on claim construction
        issues on October 30, 2006 and issued a ruling on claims construction on
        November 20, 2006. In a series of pretrial rulings, the Court denied summary
        judgment motions brought by VNUS (for a finding of infringement) and us Company
        (for findings of patent invalidity and non-willfulness). In the pretrial
        conference held on October 16, 2007, the Court heard twelve motions in limine,
        eleven of which were resolved in our favor and one in favor of VNUS. The
        Court
        further postponed the trial date originally scheduled for October 29, 2007.
        A
        further status conference has been scheduled for December 7, 2007. We intend
        to
        continue to defend against the allegations against us in this case and believes
        that we have meritorious defenses.
  **OTHER**
 
 Insofar
        as legal proceedings other than patent litigation are concerned, from time
        to
        time we are the defendant in legal and administrative proceedings and claims
        of
        various types. Although any such litigation contains an element of uncertainty,
        management, in consultation with the our general counsel, we presently believe
        that the outcome of such proceedings or claims which are pending or known
        to be
        threatened, or all of them combined, will not have a material adverse
        effect.
  17
   **ITEM
        6. EXHIBITS**
 
 31.1
                
                Certification
                    by the Chief Executive Officer pursuant to Section 302 of the
                    Sarbanes-Oxley Act of 2002
  31.2
                
                Certification
                    by the Chief Financial Officer pursuant to Section 302 of the
                    Sarbanes-Oxley Act of 2002
  32.1
                
                Certification
                    of Principal Executive Officer pursuant to Section 906 of the
                    Sarbanes-Oxley Act of 2002
  32.2
                
                Certification
                        of Principal Financial Officer pursuant to
                        Section 906 of the
                        Sarbanes-Oxley Act of
                        2002
 18
 
  **SIGNATURES**
  In
        accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
        duly
        caused this report to be signed on its behalf by the undersigned hereunto
        duly
        authorized.
    **DIOMED
                  HOLDINGS, INC.**(REGISTRANT)By:
                /s/
                    JAMES A. WYLIE, JR.Name:
                    James A. Wylie, Jr.Title:
                    President and Chief ExecutiveOfficer,
                    DirectorDate:
                    November 14, 2007By:
                    /s/ DAVID B. SWANKName:
                    David B. SwankTitle:
                    Chief Financial Officer,DirectorDate:
                    November 14, 2007
  19