**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 JUNE 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
              incorporation
                or organization)
            
            (I.R.S.
                Employer Identification No.)1
                DUNDEE PARKANDOVER,
                MA
            
            01810(Address
                of principal executive offices)
            
            (Zip
                Code)





(978)
      475-7771


(Registrant's
      telephone number)




INDICATE
      BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO
      BE
      FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
      THE
      PRECEDING 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




**AS
      OF AUGUST 13, 2007, THERE WERE 30,067,031 SHARES OF COMMON STOCK, PAR VALUE
      $0.001, OUTSTANDING.**







**DIOMED
      HOLDINGS, INC. AND SUBSIDIARIES**




**QUARTERLY
      REPORT ON FORM 10-QSB**


**FOR
      THE THREE AND SIX MONTHS ENDED JUNE 30, 2007**





TABLE
      OF
      CONTENTS





Item
              Number
            
            
            Page
              NumberPart
                I - Financial Information1
            
            Condensed
                Consolidated Balance Sheets -June
                30, 2007 (unaudited) and December 31, 2006
            F-1Unaudited
                Consolidated Statements of Operations -Three
                Months and Six Months Ended June 30, 2007 and 2006
            F-2Unaudited
                Consolidated Statements of Cash Flows -Six
                Months Ended June 30, 2007 and 2006
            F-3Notes
                to Consolidated Financial Statements
            F-42
            
            Management's
                Discussion and Analysis or Plan of Operation
            13
            
            Controls
                and Procedures
            8Part
                II - Other Information
            91
            
            Legal
                Proceedings
            94
            
            Submission
                of Matters to a Vote of Security Holders
            106
            
            Exhibits
            12Signatures
            13




-i-


Diomed
      Holdings, Inc.


Condensed
      Consolidated Balance Sheets


As
      of
      June 30, 2007 (unaudited) and December 31, 2006





June
                30,
              2007
            
            December
                31,
              2006AssetsCurrent
                assets:Cash
                and cash equivalents
            
            $
            3,405,061
            
            $
            7,306,578Short
                term investments
            
            
            435,046
            
            
            2,626,880Accounts
                receivable, net
            
            
            3,207,501
            
            
            3,144,056Inventories
            
            
            5,009,749
            
            
            4,021,217Prepaid
                expenses and other current assets
            
            
            735,946
            
            
            268,343Total
                current assets
            
            
            12,793,303
            
            
            17,367,074Property,
                plant and equipment, net
            
            
            1,281,940
            
            
            1,260,507Intangible
                assets, net
            
            
            3,770,193
            
            
            4,006,927Investment
                in Luminetx
            
            
            1,000,000
            
            
            1,000,000Other
                assets
            
            
            158,311
            
            
            204,770Total
                assets
            
            $
            19,003,747
            
            $
            23,839,278Liabilities
                and stockholders' equityCurrent
                liabilities:Accounts
                payable
            
            $
            5,095,862
            
            $
            2,970,443Accrued
                expenses
            
            
            2,356,317
            
            
            2,158,157Current
                portion of deferred revenue
            
            
            334,642
            
            
            278,284Bank
                loan
            
            
            433,263
            
            
            223,491Total
                current liabilities
            
            
            8,220,084
            
            
            5,630,375Deferred
                revenue, net of current portion
            
            
            167,619
            
            
            110,044Convertible
                notes payable ($3,712,000 face value, net of $2,456,872 debt discount
                at
                June 30, 2007 and $3,712,000 face value, net of $2,671,285 debt discount
                at December 31, 2006)
            
            
            1,255,128
            
            
            1,040,715Total
                liabilities
            
            
            9,642,831
            
            
            6,781,134Commitments
                and contingenciesStockholders'
                equity
            
            
            9,360,916
            
            
            17,058,144Total
                liabilities and stockholders' equity
            
            $
            19,003,747
            
            $
            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 Six
      Months Ended June 30, 2007 and 2006





Three
                Months Ended June 30,
            
            Six
                Months Ended June 302007
            
            2006
            
            2007
            
            2006Revenues
            
            $
            6,506,017
            
            $
            6,075,244
            
            $
            12,411,288
            
            $
            10,651,396Cost
                of revenues
            
            
            3,555,919
            
            
            3,221,633
            
            
            6,781,349
            
            
            5,744,264Gross
                profit
            
            
            2,950,098
            
            
            2,853,611
            
            
            5,629,939
            
            
            4,907,132Operating
                expenses:Research
                and development
            
            
            362,171
            
            
            363,027
            
            
            777,517
            
            
            717,574Selling
                and marketing
            
            
            3,294,563
            
            
            3,010,196
            
            
            6,430,895
            
            
            5,803,263General
                and administrative
            
            
            2,975,982
            
            
            1,900,331
            
            
            6,048,572
            
            
            3,958,553Total
                operating expenses
            
            
            6,632,716
            
            
            5,273,554
            
            
            13,256,984
            
            
            10,479,390Loss
                from operations
            
            
            (3,682,618
            )
            
            (2,419,943
            )
            
            (7,627,045
            )
            
            (5,572,258
            )Other
                (income) expense, net:Gain
                  on fair value adjustment onwarrant liability
            
            
            --
            
            
            (1,810,858
            )
            
            --
            
            
            (1,040,437
            )Interest
                (income) expense, non-cash
            
            
            (163,643
            )
            
            96,075
            
            
            214,414
            
            
            192,151Interest
                expense, net and other
            
            
            76,812
            
            
            (94,353
            )
            
            106,135
            
            
            (77,438
            )Total
                other (income) expense, net
            
            
            (86,831
            )
            
            (1,809,136
            )
            
            320,549
            
            
            (925,724
            )Net
                loss
            
            
            (3,595,787
            )
            
            (610,807
            )
            
            (7,947,594
            )
            
            (4,646,534
            )Less
                preferred stock cash dividends
            
            
            --
            
            
            (149,102
            )
            
            --
            
            
            (298,290
            )Less
                preferred stock non-cash dividends
            
            
            --
            
            
            (161,116
            )
            
            --
            
            
            (316,107
            )Net
                loss applicable to common stockholders
            
            $
            (3,595,787
            )
            $
            (921,025
            )
            $
            (7,947,594
            )
            $
            (5,260,931
            )Basic
                and diluted net loss per share applicable to common
                stockholders
            
            $
            (0.12
            )
            $
            (0.05
            )
            $
            (0.31
            )
            $
            (0.27
            )Basic
                and diluted weighted average common shares outstanding
            
            
            29,517,045
            
            
            19,448,728
            
            
            25,486,276
            
            
            19,447,347




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


F-2


**DIOMED
      HOLDINGS, INC.**


**Unaudited
      Consolidated Statements of Cash Flows**





Six
                Months Ended June 30,2007
            
            2006Cash
                Flows from Operating Activities:Net
                loss
            
            $
            (7,947,594
            )
            $
            (4,646,534
            )Adjustments
                  to reconcile net lossto net cash used in operating
                  activities:Depreciation
                and amortization
            
            
            547,932
            
            
            442,511Amortization
                of EVLT(R) discount
            
            
            --
            
            
            4,902Non-cash
                interest expense
            
            
            214,414
            
            
            192,152Accretion
                of discount on marketable securities
            
            
            (28,180
            )
            
            (71,213
            )Amortization
                of deferred financing costs
            
            
            48,485
            
            
            48,486Fair
                value of stock options
            
            
            361,090
            
            
            317,667Gain
                on fair value adjustment on warrant liability
            
            
            --
            
            
            (1,040,437
            )Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (42,061
            )
            
            47,084Inventories
            
            
            (954,910
            )
            
            (405,382
            )Prepaid
                expenses and other current assets
            
            
            (458,265
            )
            
            (199,030
            )Accounts
                payable
            
            
            2,073,109
            
            
            319,683Accrued
                expenses and deferred revenue
            
            
            160,611
            
            
            (187,278
            )Net
                cash used in operating activities
            
            
            (6,025,369
            )
            
            (5,177,389
            )Cash
                Flows from Investing Activities:Purchase
                of property and equipment
            
            
            (298,105
            )
            
            (364,511
            )Purchase
                of available for sale securities
            
            
            (429,987
            )
            
            (539,142
            )Proceeds
                  from maturities of available for salesecurities
            
            
            2,650,000
            
            
            3,600,000Net
                cash provided by investing activities
            
            
            1,921,908
            
            
            2,696,347Cash
                Flows from Financing Activities:Net
                proceeds (payments) on bank borrowings
            
            
            209,772
            
            
            (53,924
            )Payments
                on EVLT(R) purchase obligation
            
            
            --
            
            
            (250,000
            )Dividend
                payments
            
            
            --
            
            
            (298,290
            )Net
                cash provided by(used in)financing activities
            
            
            209,772
            
            
            (602,214
            )Effect
                of Exchange Rate Changes
            
            
            (7,828
            )
            
            10,761Net
                Decrease in Cash and Cash Equivalents
            
            
            (3,901,517
            )
            
            (3,072,495
            )Cash
                and Cash Equivalents, beginning of period
            
            
            7,306,578
            
            
            9,562,087Cash
                and Cash Equivalents, end of period
            
            $
            3,405,061
            
            $
            6,489,592Supplemental
                Disclosure of Cash Flow Information:Cash
                paid for interest
            
            $
            191,575
            
            $
            170,778Non-cash
                Investing and Financing Activities:Issuance
                of common stock in exchange for preferred stock
            
            $
            12,988,595
            
            $
            54,250Non-cash
                increasing rate preferred stock dividend
            
            $
            -
            
            $
            316,107




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


F-3


**DIOMED
      HOLDINGS, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


JUNE
      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
      consolidated financial statements should be read in conjunction with the audited
      condensed 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.




(a)
      RECLASSIFICATIONS




Certain
      reclassifications have been made in the prior year consolidated financial
      statements to conform to the current year’s presentation.


F-4


**DIOMED
      HOLDINGS, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


JUNE
      30,
      2007


(UNAUDITED)







(b)
      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:





June
                30,
              2007
            
            December
                31,
              2006Raw
                Materials
            
            $
            1,474,329
            
            $
            1,571,135Work-in-Process
            
            
            998,353
            
            
            797,934Finished
                Goods
            
            
            2,537,067
            
            
            1,652,148$
            5,009,749
            
            $
            4,021,217







(c)
      DEFERRED REVENUE




Deferred
      revenue at June 30, 2007 was as follows:





June
                30, 2007Beginning
                balance
            
            $
            388,328Additions
            
            
            675,823Revenue/release
            
            
            (561,890
            )Ending
                balance
            
            $
            502,261







(d)
      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 123R, 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 123R 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 123R. 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.


F-5


**DIOMED
      HOLDINGS, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


JUNE
      30,
      2007


(UNAUDITED)







(e)
      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:




Three
                Months Ended June 30,
            
            Six
                Months Ended June 30,2007
            
            2006
            
            2007
            
            2006Net
                loss
            
            $
            (3,595,787
            )
            $
            (610,807
            )
            $
            (7,947,594
            )
            $
            (4,646,534
            )Unrealized
                holding gain (loss) on marketable securities
            
            
            (269
            )
            
            (31
            )
            
            (211
            )
            
            (231
            )Foreign
                currency translation adjustment
            
            
            70,456
            
            
            88,198
            
            
            30,070
            
            
            126,819Comprehensive
                loss
            
            $
            (3,525,600
            )
            $
            (522,640
            )
            $
            (7,917,735
            )
            $
            (4,519,946
            )




(f)
      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
      June 30, 2007, all of which mature within one year, consist of the
      following:





Amortized
                Cost
            
            Fair
                Value
            
            Unrealized
              Gains
            
            Unrealized
              LossesMoney
                Market Funds
            
            $
            2,086,334
            
            $
            2,086,334
            
            $
            --
            
            $
            --Commercial
                Paper
            
            
            734,736
            
            
            734,826
            
            
            90
            
            
            --$
            2,821,070
            
            $
            2,821,160
            
            $
            90
            
            $
            --




As
        Reported:




Amortized
                Cost
            
            Fair
                Value
            
            Unrealized
              Gains
            
            Unrealized
              LossesCash
                and CashEquivalents
            
            $
            2,386,073
            
            $
            2,386,114
            
            $
            41
            
            $
            --Marketable
                Securities
            
            
            434,997
            
            
            435,046
            
            
            49
            
            
            --$
            2,821,070
            
            $
            2,821,160
            
            $
            90
            
            $
            --










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:





Amortized
                Cost
            
            Fair
                Value
            
            Unrealized
                Gains
            
            Unrealized
                LossesMoney
                Market Funds
            
            $
            2,521,968
            
            $
            2,521,968
            
            $
            --
            
            $
            --Commercial
                Paper
            
            
            6,063,871
            
            
            6,064,172
            
            
            301
            
            
            --$
            8,585,839
            
            $
            8,586,139
            
            $
            301
            
            $
            --




As
        Reported:




Amortized
                Cost
            
            Fair
                Value
            
            Unrealized
                Gains
            
            Unrealized
                LossesCash
                and CashEquivalents
            
            $
            5,958,921
            
            $
            5,959,260
            
            $
            339
            
            $
            --Marketable
                Securities
            
            
            2,626,918
            
            
            2,626,880
            
            
            --
            
            
            38$
            8,585,839
            
            $
            8,586,139
            
            $
            339
            
            $
            38




F-6


**DIOMED
      HOLDINGS, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


JUNE
      30,
      2007


(UNAUDITED)




Net
      unrealized gain for the six month period ended June 30, 2007 totaled
      $90.




(g)
      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 six month periods ended June 30, 2006 includes
      $161,116 and $316,107, respectively, of non-cash preferred stock dividends
      accreted for future increasing rate dividends and $149,102 and $298,290,
      respectively, of preferred stock cash dividends earned during the period related
      to the September 30, 2005 private placement. 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. Therefore, there
      were no dividends recorded during the three and six month periods ended June
      30,
      2007.


F-7


**DIOMED
      HOLDINGS, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


JUNE
      30,
      2007


(UNAUDITED)







As
      a
      result of the losses incurred by the Company for the three and six month periods
      ended June 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 June 30,
            
            Six
                Months Ended June 30,2007
            
            2006
            
            2007
            
            2006Common
                Stock Options
            
            
            3,022,506
            
            
            2,423,787
            
            
            2,942,498
            
            
            2,423,787Common
                Stock Warrants
            
            
            6,055,304
            
            
            5,196,776
            
            
            6,055,304
            
            
            5,196,776Convertible
                Debt
            
            
            3,227,826
            
            
            1,620,961
            
            
            3,227,826
            
            
            1,620,961Preferred
                Stock
            
            
            6,736,044
            
            
            3,975,000
            
            
            6,736,044
            
            
            3,975,000




(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 June 30, 2007, Barclay’s had provided a temporary increase in the
      overdraft facility up to approximately $433,000. The credit line bears interest
      at a rate of 2.5% above Barclays' base rate (5.5% at June 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 June 30, 2007,
      there was approximately $433,000 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.




As
      of
      June 30, 2007, 2,682,795 options and other incentive stock awards were available
      for future grants under the 2003 Omnibus Plan. In addition, 12,338 options
      were
      available under the 2001 Plan and 1,123 options were available under the 1998
      Plan as of June 30, 2007.


F-8


**DIOMED
      HOLDINGS, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


JUNE
      30,
      2007


(UNAUDITED)




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





Range
                of
              Exercise
                Price
            
            Number
              ofShares
            
            Weighted
                Average Exercise Price
            
            Weighted
                Average Remaining LifeOutstanding,
                December 31, 2006
            
            
            $0.96
                  - $205.75
            
            
            2,478,376
            
            $
            4.63Granted
            
            
            0.81
                - 1.41
            
            
            785,000
            
            
            0.90Forfeited
            
            
            0.81
                - 98.78
            
            
            (240,870
            )
            
            4.38Outstanding,
                June 30, 2007
            
            
            $0.81
                  - $205.75
            
            
            3,022,506
            
            $
            3.68
            
            
            7.95Exercisable,
                June 30, 2007
            
            
            $0.81
                  - $205.75
            
            
            2,036,037
            
            $
            4.83
            
            
            7.33




During
      the six months ended June 30, 2007 and, 2006, the Company recorded $320,000
      and
      $295,000, respectively, in non-cash charges in accordance with of SFAS 123R.
      As
      of June 30, 2007, there was approximately $931,000 of total unrecognized
      compensation cost related to unvested options. That cost is expected to be
      recognized over a weighted average period of 1.14 years. The Company plans
      on
      obtaining shares to be issued upon exercise of stock options through authorized
      common stock. There have been no stock options exercised during the six months
      ended June 30, 2007.




The
      weighted-average grant date fair value of options granted in 2007 and 2006
      was
      $0.65 and $1.65, respectively. The intrinsic value of options outstanding and
      options exercisable at June 30, 2007 was $216,608 and $40,343, respectively.
      The
      intrinsic value of options outstanding and options exercisable at June 30,
      2006
      was $0 and $0, respectively. To calculate the intrinsic value, the Company
      used
      the market price of $1.14 and $1.11 versus the exercise price at June 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:







Six
                Months Ended
              June
                30,2007
            
            2006Risk-free
                interest rate
            
            
            3.01
                - 4.71%
            
            
            3.01
                - 4.37%Expected
                dividend yield
            
            
            --%
            
            
            --%Expected
                lives (in years)
            
            
            5.0
                - 5.8 years
            
            
            2.5
                - 5.9 yearsExpected
                volatility
            
            
            80.0
                - 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 June 30, 2007 was $40,343. The fair value
      of options vested during the six months ended June 30, 2007 was $293,915. At
      June 30, 2007, there were 986,469 unvested shares outstanding with a weighted
      average grant date fair value of $0.95.




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





OUTSTANDING
            
            EXERCISABLEWeighted
                Average
            
            
            
            Weighted
                AverageExercise
                Price
            
            Shares
            
            Remaining
                Life*
            
            Exercise
                Price
            
            Shares
            
            Exercise
                Price$
                0.81 - 2.15
            
            
            964,190
            
            
            9.24
            
            $
            1.02
            
            
            243,170
            
            $
            1.282.16
                - 2.29
            
            
            569,701
            
            
            8.54
            
            
            2.24
            
            
            330,501
            
            
            2.242.30
                - 4.00
            
            
            155,708
            
            
            7.18
            
            
            3.18
            
            
            129,459
            
            
            3.194.01
                - 4.75
            
            
            669,943
            
            
            7.31
            
            
            4.25
            
            
            669,943
            
            
            4.254.76
                - 5.00
            
            
            546,300
            
            
            6.66
            
            
            5.00
            
            
            546,300
            
            
            5.005.01
                - 11.50
            
            
            95,611
            
            
            5.62
            
            
            8.69
            
            
            95,611
            
            
            8.6911.51
                - 49.00
            
            
            6,640
            
            
            3.99
            
            
            31.16
            
            
            6,640
            
            
            31.6649.01
                - 87.00
            
            
            4,700
            
            
            4.56
            
            
            51.06
            
            
            4,700
            
            
            51.0687.01 - 164.00
            
            
            3,329
            
            
            0.86
            
            
            118.27
            
            
            3,329
            
            
            118.27164.01
                - 205.75
            
            
            6,384
            
            
            0.78
            
            
            174.47
            
            
            6,384
            
            
            174.473,022,506
            
            $
            3.68
            
            
            2,036,037
            
            $
            4.83




*
      Weighted average remaining contractual life (in years).


F-9


**DIOMED
      HOLDINGS, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


JUNE
      30,
      2007


(UNAUDITED)




(b)
      During the six months ended June 30, 2007, no warrants were granted or
      exercised. A summary of warrant information is as follows:





Range
                of
              Exercise
                Price
            
            Number
                of
              Shares
            
            Weighted
                Average Exercise Price
            
            Weighted
                Average Remaining Contractual
              Life
                (In Years)Outstanding,
                December 31, 2006
            
            
            $0.025
                  - $2.90
            
            
            6,055,303
            
            $
            1.63
            
            
            3.36Outstanding,
                June 30, 2007
            
            
            $0.025
                  - $2.90
            
            
            6,055,303
            
            $
            1.63
            
            
            2.86Exercisable,
                June 30, 2007
            
            
            $0.025
                  - $2.90
            
            
            6,055,303
            
            $
            1.63
            
            
            2.86




(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 June 30,
            
            Six
                Months Ended June 30,2007
            
            2006
            
            2007
            
            2006Laser
                systems
            
            $
            2,331,318
            
            $
            2,375,686
            
            $
            4,176,581
            
            $
            4,145,239Fibers,
                accessories, and service
            
            
            4,174,699
            
            
            3,699,558
            
            
            8,234,707
            
            
            6,506,157Total
            
            $
            6,506,017
            
            $
            6,075,244
            
            $
            12,411,288
            
            $
            10,651,396




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





%
                of Revenue Six Months Ended June 30,
            
            Long-lived
                Assets2007
            
            2006
            
            June
                30, 2007
            
            December
                31, 2006United
                States
            
            
            69
            %
            
            74
            %
            $
            5,738,289
            
            $
            5,994,202Asia/Pacific
            
            
            11
            %
            
            9
            %
            
            --
            
            
            --Europe
            
            
            14
            %
            
            13
            %
            
            458,722
            
            
            478,002Other
            
            
            6
            %
            
            4
            %
            
            13,433
            
            
            --Total
            
            
            100
            %
            
            100
            %
            $
            6,210,444
            
            $
            6,472,204




F-10


**DIOMED
      HOLDINGS, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


JUNE
      30,
      2007


(UNAUDITED)




(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. On August 20, 2006, Judge Nathaniel Gorton rejected
      all of the various challenges raised by the defendants to the validity or
      enforceability of the '777 patent, and granted the Company summary judgment
      of
      validity and enforceability of the patent. Judge Gorton further denied all
      parties' cross-motions for summary judgment on infringement.




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. That motion is pending.




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.




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.


F-11


**DIOMED
      HOLDINGS, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


JUNE
      30,
      2007


(UNAUDITED)





**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. The complaint was served on the Company on July 27, 2005.
      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. The case is in the expert discovery phase, with summary
      judgment motions due in August. The Court has currently set a trial date of
      October 29, 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.




**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 six month period ended June 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 June 30, 2007, the Company had
      30,067,031 shares of common stock outstanding.





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 six month period ended June 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 June 30, 2007, the Company had 673.6044 shares of preferred
      stock outstanding.


F-12


**DIOMED
      HOLDINGS, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


JUNE
      30,
      2007


(UNAUDITED)







(10)
      DEBT
      DISCOUNT AMORTIZATION




On
      June
      30, 2007, the Company recorded a $406,000 reduction of interest expense and
      increase to its debt discount to correct the amortization of the debt
      discount using the effective interest rate method as it was previously amortized
      on a straight-line basis. The effect on the previously reported periods was
      not
      material.




F-13


**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
      June
      30, 2007, we had an accumulated deficit of approximately $99 million including
      $18.1 million in non-cash interest expense, $1,129,000 gain related to the
      adjustment of the market value of a warrant liability, and $891,000 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 June 30, 2007, the Company had a cash and short
      term investment balance of $3.8 million. Historically, the Company has utilized
      $2.5 million to $3.5 million per quarter. The Company is currently exploring
      its
      financing options with the objective of maximizing the value of our jury award
      in the recent ‘777 patent litigation victory. As such, these costs may result in
      losses until such time as we generate sufficient revenue to offset such
      costs.




The
      following discussion should be read in conjunction with the Condensed
      Consolidated Financial Statements and Notes set forth above in this Quarterly
      Report and 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.




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.


1




EVLT(R)
      was the primary source of revenue in the first half of 2007, and will continue
      to be our primary source of revenue thru 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)
      RESULTS OF OPERATIONS




**THREE
      MONTHS ENDED JUNE 30, 2007 COMPARED TO THE THREE MONTHS ENDEDJUNE 30,
      2006**




**REVENUE**




Diomed
      delivered revenue for the three months ended June 30, 2007 of $6,506,000,
      increasing approximately $431,000, or 7%, from $6,075,000 for the same period
      in
      2006. Revenue from the EVLT(R) product line increased 13% over the same period
      last year, including growth of 24% 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 June 30, 2007, approximately $2,331,000, or 36%, of our
      total
      revenue was derived from laser sales, as compared to approximately $2,376,000,
      or 39%, in the same period in 2006. For the three months ended June 30, 2007,
      approximately $4,175,000, or 64%, of our total revenues were from sales of
      disposable fibers and kits, accessories, service and VeinViewer(TM), as compared
      to approximately $3,700,000, or 61%, 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,


2




-
      the
      compounding impact of the recurring revenue stream from disposable sales to
      both
      new and existing customers,




-
      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 June 30, 2007 was $3,556,000, increasing
      approximately $334,000, or 10%, from $3,222,000 for the three months ended
      June
      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 June 30, 2007 was $2,950,000, increasing
      approximately $96,000, or 3% over the three months ended June 30, 2006. The
      increase in gross profit in 2007 was primarily 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 June 30, 2007 of $362,000
      was comparable with the three months ended June 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 June 30, 2007 of $3,295,000,
      increased approximately $285,000, or 9% from $3,010,000 over the three months
      ended June 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 the larger sales organization and increased commissions from expected
      increases in volume.




GENERAL
      AND ADMINISTRATIVE EXPENSES for the three months ended June 30, 2007 of
      $2,976,000, increased approximately $1,076,000, or 57% from $1,900,000 from
      the
      three months ended June 30, 2006. The increase was primarily attributable to
      increased legal costs. For the three months ended June 30, 2007, legal and
      patent related costs of $1,390,000 included $768,000 of VNUS Medical
      Technologies, Inc. (“VNUS”) litigation related costs, and increased $680,000
      compared to the three months ended June 30, 2006.




**LOSS
      FROM OPERATIONS**




As
      a
      result of the factors outlined above, the loss from operations for the three
      months ended June 30, 2007 was $3,683,000, increasing $1,263,000 from $2,420,000
      for the three months ended June 30, 2006, as the expansion of our sales and
      marketing efforts during the quarter drove incremental revenue, which was offset
      by increases in selling and legal costs.




**OTHER
      (INCOME) EXPENSE, NET**




Other
      income, net for the three months ended June 30, 2007 was $87,000, compared
      to
      $1,809,000 for the three months ended June 30, 2006. Other income for the three
      months ended June 30, 2007 includes a $406,000 reduction of interest expense
      to correct 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, net for the three months ended June 30, 2006 includes
      $1,811,000 for the non-cash, non-operating charge for the effect of the change
      in market value of warrants issued in the private placement financing completed
      on September 30, 2005. Other income, net for the three months ended June 30,
      2006 also includes the non-operating impact of the theft of trade secrets
      settlement with Vascular Solutions, Inc.




**NET
      LOSS**




Net
      loss
      for the three months ended June 30, 2007 was $3,596,000 compared to $611,000
      for
      three months ended June 30, 2006. The decrease reflects the increased loss
      from
      operations in 2007 and a $1,811,000 non-operating, non-recurring gain recorded
      in the second quarter of 2006 for the decrease in the fair value of the warrant
      obligation entered into on September 30, 2005.


3




**NET
      LOSS APPLICABLE TO COMMON STOCKHOLDERS**




Net
      loss
      applicable to common stockholders for the three months ended June 30, 2007
      was
      $3,596,000, or $0.12 per share, compared to $921,000, or $0.05 per share, for
      the three months ended June 30, 2006. 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 June 30, 2006. In addition, because
      the dividend percentage was considered below market for accounting purposes,
      we
      recorded an incremental non-cash dividend of $161,000 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.




**SIX
      MONTHS ENDED JUNE 30, 2007 COMPARED TO THE SIX MONTHS ENDED**


**JUNE
      30, 2006**





**REVENUE**





Diomed
      delivered revenue for the six months ended June 30, 2007 of $12,411,000,
      increasing approximately $1,760,000, or 17%, from $10,651,000 for the six months
      ended June 30, 2006. Revenue from the EVLT(R) product line increased 17% over
      the six months ended June 30, 2006.





For
      the
      six months ended June 30, 2007, approximately $4,176,000, or 34%, of our total
      revenue was derived from laser sales, as compared to approximately $4,145,000
      or
      39%, in the six months ended June 30, 2006. For the six months ended June 30,
      2007, approximately $8,235,000, or 66%, of our total revenues were derived
      from
      sales of disposable fibers and kits, accessories, service and VeinViewerTM, as
      compared to approximately $6,506,000, or 61%, in the six months ended June
      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,





-
            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 six months ended June 30, 2007 was $6,781,000, increasing
      approximately $1,037,000, or 18%, from $5,744,000 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 six months ended June 30, 2007 was $5,630,000, or 45.4% of sales,
      increasing approximately $723,000 from 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 six months ended June 30, 2007 were $778,000,
      an increase of $60,000, or 8%, 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 six months ended June 30, 2007 were $6,431,000,
      an increase of $628,000, or 11%, 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 the larger sales organization and increased commissions from
      expected increases in volume.


4




GENERAL
      AND ADMINISTRATIVE EXPENSES for the six months ended June 30, 2007 were
      $6,049,000, an increase of $2,090,000, or 53%, from the same period in 2006.
      The
      increase was primarily attributable to incremental legal fees of $1,579,000.
      For
      the six months ended June 30, 2007, legal and patent related costs of $3,097,000
      included $1,954,000 of ‘777 patent litigation costs and $878,000 of VNUS Medical
      Technologies, Inc. (“VNUS”) litigation related costs.





**LOSS
      FROM OPERATIONS**





Loss
      from
      operations for the six months ended June 30, 2007 was $7,627,000, an increase
      of
      approximately $2,055,000 from the same period in 2006, as incremental gains
      from
      incremental revenue were offset by increased selling and legal costs.





**OTHER
      (INCOME) EXPENSE, NET**




Other
      expense, net for the six months ended June 30, 2007 was $321,000, compared
      to
      other income, net of $926,000 for the same period in 2006. Other income in
      the
      six months ended June 30, 2006 includes $1,040,000 for the non-cash,
      non-operating gain, after giving effect to the change in market value of the
      warrants issued in the private placement financing completed on September 30,
      2005. Other income also includes the non-operating impact of the theft of trade
      secrets settlement with Vascular Solutions, Inc. Other income for the six months
      ended June 30, 2007 includes a $406,000 reduction of interest expense
      to correct 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.





**NET
      LOSS**





Net
      loss
      for the six months ended June 30, 2007 was $7,948,000 compared to $4,647,000
      for
      the same period 2006. The expansion of Diomed's sales and marketing efforts
      during the year drove incremental revenue, which was offset by the increased
      legal costs as well as a $1,040,000 non-cash, non-operating gain recorded in
      the
      first half 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 was $7,948,000, or $0.31 per share, compared
      to $5,261,000, or $0.27 per share, for the same period 2006. During 2006, we
      agreed to pay cash dividends to holders of the preferred stock. These cash
      dividends amounted to $298,000 during the six months ended June 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 six months ended June 30, 2006, we recorded
      $316,000 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 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.




(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 $3,840,000 and $9,933,000 at June 30, 2007 and December 31, 2006,
      respectively.




**CASH
      USED IN OPERATIONS**




Cash
      used
      in operations for the six months ended June 30, 2007 was $6,025,000. The cash
      used in operations reflects the net loss of $7,948,000, which includes
      $1,954,000 in legal fees incurred in asserting our EVLT(R) patent, and was
      partially offset by non-cash charges such as $214,000 of non-cash interest
      and
      $361,000 for stock based compensation. The cash flow impact of the net loss
      was
      offset by changes in working capital items totaling approximately $778,000
      primarily attributed to increased accounts payable for patent litigation
      fees.


5




**CASH
      PROVIDED BY INVESTING**




Cash
      provided by investing activities for the six months ended June 30, 2007 was
      approximately $1,922,000, including proceeds from maturities of marketable
      securities of $2,650,000 as the Company limited reinvestment as a result of
      cash
      requirements, offset by purchases of computer and demonstration equipment of
      $298,000.




**CASH
      PROVIDED BY FINANCING**




Cash
      provided by financing activities for the six months ended June 30, 2007 was
      $210,000 of proceeds from our bank line of credit.




**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 June 30,
      2007, Barclay’s had provided a temporary increase in the overdraft facility up
      to approximately $433,000. At June 30, 2007, there were currently no additional
      amounts available under this line. The credit line bears interest at a rate
      of
      2.5% above Barclays' base rate (5.5% at June 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 June 30, 2007, there was approximately
      $433,000 outstanding and at December 31, 2006, there was approximately $223,000
      outstanding under this line of credit.




**FUTURE
      AVAILABILITY OF CREDIT**




As
      of
      June 30, 2007, 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 may be available as security for credit facilities we may
      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 June 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. As of June
      30, 2007, the Company had a cash and short term investment balance of $3.8
      million. Historically, the Company has utilized $2.5 million to $3.5 million
      per
      quarter. The Company is currently exploring its financing options with the
      objective of maximizing the value of its jury award in the recent ‘777 patent
      litigation victory.




**EQUITY
      TRANSACTIONS**





During
      the six month period ended June 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 June 30, 2007, 673.6044 shares of preferred stock,
      convertible into 673,604 shares of common stock, remain
      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 six months, at June
      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 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 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.




6




(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 cash flows of the Company
      in
      conformity with accounting principles generally accepted in the United States.
      The Company filed its 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 the Company's financial condition, results of
      operations, and cash flows are based on the Company's 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 the Company's 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.




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, the Company
      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.


7


**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 June 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.


8





**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 our 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 our '777 patent.
      At
      the parties' joint request, our patent cases involving AngioDynamics and
      Vascular Solutions were consolidated by the court. On August 20, 2006, Judge
      Nathaniel Gorton rejected all of the various challenges raised by the defendants
      to the validity or enforceability of our '777 patent, and granted us summary
      judgment of validity and enforceability of the patent. Judge Gorton further
      denied all parties' cross-motions for summary judgment on infringement.




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. That motion is pending.




On
      April
      2, 2004, 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 our '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.




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 our '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 our '777 patent. This case is also pending
      before Judge Gorton.




If
      we do
      not prevail in the appeal and infringement actions and we 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 our EVLT(R) revenue stream may
      be
      adversely affected.


9


**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.
      The
      complaint was served on us on July 27, 2005. 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. The case is in the expert discovery phase, with summary
      judgment motions due in August. The Court has currently set a trial date of
      October 29, 2007. We intend to continue to defend against the allegations
      against us in this case and believe that we have meritorious
      defenses.




**ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**





a)
      On May
      22, 2007, the Company held its 2007 Annual Meeting of Stockholders, pursuant
      to
      a proxy statement that it had filed with the Securities and Exchange Commission
      and had furnished to holders of record of the outstanding shares of its common
      stock and preferred stock as of April 11, 2007. A total of 36,803,075 votes
      were
      eligible to be cast at the meeting, consisting of 28,367,031 shares of common
      stock voting on a one vote per share basis and 843.6044 shares of preferred
      stock, voting on a 10,000 votes per share basis. Of the 36,803,075 eligible
      votes, stockholders representing 19,491,296 votes voted their shares, and a
      quorum was present.





The
      meeting included the election of all nine directors to serve until the next
      annual meeting or until their successors are duly elected and qualified. Those
      directors are:





Geoffrey
      Jenkins


Sidney
      Braginsky


Gary
      Brooks


A.
      Kim
      Campbell


Joseph
      Harris


Peter
      Klein


Edwin
      Snape, Ph.D.


David
      B.
      Swank


James
      A.
      Wylie, Jr.





b)
      The
      Company presented the following proposals to our stockholders at that meeting:





1.
      To
      elect nine directors to serve until the next annual meeting of stockholders,
      or
      until their successors are duly elected and qualified.





The
      results of which were as follows:





Director
                Nominee
            
            Votes
                For
            
            Votes
                WithheldGeoffrey
                Jenkins
            
            
            19,086,173
            
            
            405,123Sidney
                Braginsky
            
            
            19,186,073
            
            
            305,223Gary
                Brooks
            
            
            19,187,493
            
            
            303,803A.
                Kim Campbell
            
            
            19,108,573
            
            
            382,723Joseph
                Harris
            
            
            19,189,573
            
            
            301,723Peter
                Klein
            
            
            19,189,673
            
            
            301,623Edwin
                Snape, Ph.D.
            
            
            17,375,153
            
            
            2,116,143David
                B. Swank
            
            
            17,414,543
            
            
            2,076,753James
                A. Wylie, Jr.
            
            
            19,155,915
            
            
            335,381


10


Accordingly,
      each of the director nominees was elected to serve as a director.





2.
      To
      approve an amendment to the Company’s 2003 Omnibus Plan to increase the
      available number of shares thereunder from 3,100,000 to 5,600,000.





The
      results of which were as follows:





For
            
            
            Against
            
            
            Abstained
            
            
            Broker
                Non-Votes17,152,001
            
            
            2,250,754
            
            
            88,540
            
            
            None





Accordingly,
      the proposal was approved.





3.
      To
      ratify the selection of BDO Siedman, LLP as the Company’s independent registered
      public accounting firm for the 2007 fiscal year.





The
      results of which were as follows:





For
            
            
            Against
            
            
            Abstained
            
            
            Broker
                Non-Votes19,420,914
            
            
            40,757
            
            
            29,625
            
            
            None





Accordingly,
      the proposal was approved.





4.
      To
      vote on other business matters that may arise before the meeting.





The
      results of which were as follows:


For
            
            
            Against
            
            
            Abstained
            
            
            Broker
                Non-Votes15,888,159
            
            
            3,496,342
            
            
            106,794
            
            
            None





Accordingly,
      the proposal was approved.


11




**ITEM
      6. EXHIBITS AND CURRENT REPORTS ON FORM 8-K**





(a)
                Exhibits31.1
            
            Certification
                by the Chief Executive Officer pursuant to Section 302 of the
                Sarbanes-Oxley Act of 200231.2
            
            Certification
                by the Chief Financial Officer pursuant to Section 302 of the
                Sarbanes-Oxley Act of 200232.1
            
            Certification
                of Principal Executive Officer pursuant to Section 906 of the
                Sarbanes-Oxley Act of 200232.2
            
            Certification
                of Principal Financial Officer pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002(b)
                Current reports on Form 8-K.




During
      the fiscal quarter ended June 30, 2007, we filed with the Securities and
      Exchange Commission Current Reports on Form 8-K as follows:


On
      April
      26, 2007, the Company filed a Current Report regarding its financial results
      for
      the first quarter of 2007.





On
      May
      16, 2007, the Company filed a Current Report regarding an amendment to its
      distribution agreement with Luminetx.





On
      May
      17, 2007, the Company filed a Current Report regarding the annual increase
      in
      salary for Christopher J. Geberth, Vice President Finance and Corporate
      Controller.





On
      May
      23, 2007, the Company filed a Current Report regarding the results of
      stockholder voting at its annual meeting as well as the outcome of the
      post-trial hearing in the ‘777 patent litigation.


12


**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 Executive
              Officer,
                DirectorDate:
                August 14, 2007By:
            /s/
                DAVID B. SWANKName:
                David B. SwankTitle:
                Chief Financial Officer, DirectorDate:
                August 14, 2007


13