EXHIBIT 10.5

                             [LETTERHEAD OF DIOMED]

                              EMPLOYMENT AGREEMENT

       EMPLOYMENT  AGREEMENT  dated  as of the 1st  day of  July,  2001  between
Diomed,  Inc.,  a Delaware  corporation  (the  "Company"),  and Peter Klein (the
"Employee").

       WHEREAS,  the Company  desires to employ the  Employee  and the  Employee
desires to be employed by the Company;

       NOW,  THEREFORE,  in  consideration  of the mutual covenants and promises
hereinafter stated, the parties hereto agree as follows:

       1.  EMPLOYMENT AND TERM.  The Company agrees to employ the Employee,  and
the Employee hereby agrees to work for the Company,  as a full-time employee for
the term set forth in  Section 3  hereof.  The  Employee  shall be  employed  as
President and chief  executive  officer of the Company.  The Employee  agrees to
serve the Company  faithfully and to the best of his ability and to perform such
services  and duties of an executive  nature in  connection  with the  business,
affairs and  operations  of the Company as may be assigned or  delegated  to him
from time to time by or under the  authority  of the Board of  Directors  of the
Company,  and to use his best efforts in the  promotion and  advancement  of the
Company  and its  welfare  and  business.  Employee  agrees  to  take no  action
prejudicial  to  the  interests  of the  Company  during  Employee's  employment
hereunder.

       2. SALARY AND OTHER COMPENSATION.

       (a) The Employee's base salary from the Effective Date (as defined below)
until it is first  adjusted as provided in clause (b) below will be  $250,000.00
per annum.

       (b) The Board will  complete a  performance  review  with  respect to the
Employee on at least an annual  basis,  and the  Employee's  annual  performance
review will include a review of Employee's  base salary.  Employee's base salary
will be subject to  adjustment  (as to  increase  only) from time to time by the
Board of  Directors  in its  discretion.  The Employee is eligible for an annual
cash bonus which shall be determined  annually and at the sole discretion of the
Board of Directors.  The Employee will also be eligible for long term  incentive
compensation  in the form of employee  stock  options  which may be granted from
time to time and at the sole discretion of the Board of Directors.

       (c) The Employee  will be entitled to vacation at the rate of 20 days per
year.  During the term of employment and subject to any  contribution  therefore
generally  required of employees of the Company,  the Employee shall be entitled
to participate in any and all employee benefit plans from time to time in effect
for employees of the Company generally, but the Company shall not be required to
establish any such program or plan.

                                       1

<PAGE>

Such  participation  shall be  subject to (i) the terms of the  applicable  plan
documents,  (ii) generally  applicable Company policies and (iii) the discretion
of the Board of Directors or any  administrative or other committee provided for
in or contemplated by such plan. The Company may alter, modify, add to or delete
its employee  benefit plans at any time as it, in its sole judgment,  determines
to be appropriate, without recourse by the Employee.

       (d) Payment of all  compensation to the Employee  hereunder shall be made
in accordance  with the relevant  Company  policies in effect from time to time,
including  normal  payroll  practices,  and shall be subject  to all  applicable
employment and withholding taxes. The Employee understands and acknowledges that
the  compensation  specified in this  Sections 2 shall be in lieu of any and all
other compensation, benefits and plans.

3. TERM AND TERMINATION.

       (a) This  Agreement  shall be effective  from and as of July 1, 2001 (the
"Effective  Date") and shall continue until it is terminated in accordance  with
the provisions of this Section 3.

       (b)  This  Agreement  and  the  Employee's  employment  hereunder  may be
terminated at any time and on such terms as the parties may mutually agree to in
writing.

       (c) The Company may terminate  the  Employee's  employment  hereunder for
cause at any time upon notice to the Employee setting forth in reasonable detail
the nature of such cause. The following, as determined by the Board of Directors
of  the  Company  in its  reasonable  judgment,  shall  constitute  "cause'  for
termination:  (i) the repeated refusal of the Employee to comply with reasonable
directives of the Board of Directors of the Company, or (ii) gross negligence or
willful  misconduct by the Employee in the performance of duties assigned to him
by the  Board  of  Directors,  or  (iii)  intentional  conduct  by the  Employee
materially harmful to the Company's business and affairs,  or (iv) conviction of
any crime involving moral turpitude or fraud or any felony. Upon termination for
cause as  provided  in this  Section  3(c),  the  Employee  shall be entitled to
receive any salary accrued under the terms of this Agreement that remains unpaid
as of the  date  of  termination,  but all  other  benefits  (including  without
limitation  all  vested or  unvested  stock  option  rights)  shall  immediately
terminate.

       (d) The Company may terminate the Employee's  employment  hereunder other
than for cause at any time upon twelve (12) months prior  written  notice to the
Employee.  In the event of such  termination  by the Company  under this Section
3(d),  the  Company  may elect to waive the  period of  notice,  or any  portion
thereof,  and, if the Company so elects,  the Company  will pay the Employee his
base salary at the rate in effect

                                       2

<PAGE>


on the date of termination  for the notice period (or for any remaining  portion
of such period) (such period, as the case may be, the "Payment  Period"),  which
payments  shall be made in  accordance  with  the  employment  practices  of the
Company  generally,  and the Employee's  participation  in the Company's  health
insurance  plan will continue for such Payment  Period,  with the Company paying
its share of the premiums as it previously has for the Employee. Notwithstanding
the  Company's  election  to waive the  required  notice and make the  foregoing
payments,  further vesting of unvested shares under the Employee's  stock option
grants  will  immediately  cease as of the  date of  termination  of  Employee's
employment.

       (e) The Employee may terminate his employment hereunder for good cause at
any time upon  notice to the  Company  setting  forth in  reasonable  detail the
nature of such good cause.  The  following  shall  constitute  "good  cause" for
termination  (unless cured in all material respects by the Company within thirty
(30) days  following  written  notice by the Employee to the  Company):  (i) any
material  reduction in the nature or scope of the Employee's  position,  duties,
responsibilities or authority with the Company, (ii) any material adverse change
in the  conditions of his employment  with the Company,  or (iii) failure of the
Company to remit or execute any  compensation  provided for under this Agreement
which in any such case is not consented to by the Employee. In the event of such
termination  by the Employee for good cause,  the Company shall  continue to pay
the  Employee  his base salary at the rate in effect on the date of  termination
for a period of twelve  (12) months  following  the date of  termination,  which
payments  shall be made in   accordance  with the  employment  practices  of the
Company  generally,  and the Employee's  participation  in the Company's  health
insurance plan will continue for such period,  with the Company paying its share
of the premiums as it previously has for the Employee.  Notwithstanding payments
under this  Section,  further  vesting of unvested  shares under the  Employee's
stock option grants shall  immediately  cease as of the date of  termination  of
Employee's employment.

       (f) The Employee may  terminate his  employment  hereunder for other than
good cause at any time upon six (6) months prior written  notice to the Company.
In the event of such  termination  by the Employee  under this Section 3(f), the
Company may elect to waive the period of notice, or any portion thereof, and, if
the Company so elects,  the Company will pay the Employee his base salary at the
rate in effect on the date of  termination  for the  notice  period  (or for any
remaining  portion of such  period),  and the  Employee's  participation  in the
Company's health insurance plan will continue for such period,  with the Company
paying its share of the premiums as it previously  has for the Employee.  Unless
otherwise  mutually  agreed in writing,  if the  Employee  fails to give six (6)
months  notice as required  under this  Section 3(f) or after giving such notice
breachs his responsibilities  under this agreement at any time during suchnotice
period,  the Board of  Directors  on a majority  vote may  terminate  all of the
Employee's  rights in all or any part of the vested and unvested  stock  options
previously granted by the Company to the Employee.

                                       3


<PAGE>



       (g) The  Employee's  employment  under this Agreement will terminate upon
his death, in which event any accrued but unpaid base salary will be prorated as
of the date of his death.

       (h) The Company may terminate the Employee's employment  hereunder,  upon
notice to the Employee,  in the event that the Employee  becomes disabled during
his employment hereunder through any illness,  injury,  accident or condition of
either a physical or psychological nature and, as a result, is unable to perform
substantially all of his duties and  responsibilities  hereunder for ninety (90)
days during any period of six (6) consecutive months. The Board of Directors may
designate  another  person to act in the  Employee's  place during any period of
disability.  Designation  of a person to act in place of the  disabled  employee
shall not be "good cause" under Section 3(e). Upon termination for disability as
provided in this Section  3(h),  the  Employee  shall be entitled to receive any
salary  accrued under the terms of this  Agreement that remains unpaid as of the
date of  termination  plus 6  month  severance  payment  net of the  before  tax
equivalent of any company paid long term disability insurance benefits.

       (i)  Notwithstanding  the  foregoing,  the Employee's  obligations  under
Sections  4 and 5 of  this  Agreement  shall  survive  the  termination  of  his
employment  under this  Agreement for any reason.  Upon any  termination  of the
Employee's  employment,  the Employee  shall be deemed to have resigned from the
Board of Directors of the Employer if he is a director as well as from all other
offices he then holds with the Company.

4. INVENTIONS; TRADE SECRETS.

       (a) The Employee  understands  and agrees that his  employment  creates a
relationship of confidence and trust between him and the Company with respect to
(i) all Proprietary  Information,  as defined below,  and (ii) the  confidential
information  of others with which the Company has a business  relationship.  The
Employee  agrees  that  during  his  employment  by the  Company  and  after its
termination,   the  Employee  will  keep  in  confidence   and  trust  all  such
information,  and will not use or  disclose  any such  information  without  the
written  consent of the  Company,  except as may be  necessary  in the  ordinary
course of performing  his duties to the Company  while  employed by the Company.
"Proprietary  Information"  means  information that the Company possesses or has
rights to which  has  commercial  value in the  Company's  business,  including,
without limitation, trade secrets, product ideas, processes,  formulas, designs,
software, improvements,  inventions, data and know-how, copyrightable materials,
marketing  plans and strategies,  sales and financial  reports and forecasts and
customer lists,  provided that "Proprietary  Information"  shall not include any
such  information  which is generally known to the public or in the trade unless
such knowledge results from a breach of this Agreement by the Employee.

                                       4
<PAGE>


       (b) The Employee further agrees that:

              (i) All Proprietary  Information shall be the sole property of the
       Company and its  assigns,  and the  Company and its assigns  shall be the
       sole owner of all trade secrets, patents, copyrights, and other rights in
       connection  therewith.  The  Employee  hereby  assigns to the Company any
       rights he may have or acquire in such Proprietary Information.

              (ii)  All  documents,  records,  apparatus,  equipment  and  other
       physical property,  whether or not pertaining to Proprietary Information,
       furnished  to the Employee by the Company or produced by him or others in
       connection  with his employment  shall be and remain the sole property of
       the Company.  The Employee shall return to the Company all such materials
       and property as and when  requested  by the Company.  Even if the Company
       does not so request,  the Employee  shall return all such  materials  and
       property upon termination of his employment for any reason,  and will not
       take with him any such material or property or any  reproduction  thereof
       upon such termination.

              (iii) The Employee will promptly  disclose to the Company,  or any
       persons  designated  by  it,  all  improvements,   inventions,  works  of
       authorship,  formulas, ideas, processes,  techniques,  know-how and data,
       whether  or  not  patentable   (collectively,   "Inventions"),   made  or
       conceived, reduced to practice or learned by him, either alone or jointly
       with  others,  in the  course  of his  employment  or which is  otherwise
       subject to Section 4(b)(iv).

              (iv) All Inventions which the Employee conceives,  develops or has
       developed  (in whole or in part,  either  alone or jointly  with  others)
       during the term of his employment  which relate at the time of conception
       or  reduction  to  practice   thereof  to  the  actual  or   demonstrably
       anticipated  business  of the  Company or to its  actual or  demonstrably
       anticipated  research  and  development,  or which  result  from any work
       performed  by the  Employee  for the  Company or which are  developed  on
       Company time or through the use of the Company's Proprietary  Information
       or other  resources,  shall be the sole  property  of the Company and its
       assigns (and to the fullest extent permitted by law shall be deemed works
       made for hire),  and the Company and its assigns  shall be the sole owner
       of all patents,  copyrights and other rights in connection therewith. The
       Employee  hereby assigns to the Company any rights he may have or acquire
       in such Inventions.

              (v) With respect to Inventions described in subsection (iv) above,
       the  Employee  will  assist the  Company in every  proper way (but at the
       Company's  expense)  to  obtain  and from time to time  enforce  patents,
       copyrights or other rights

                                       5
<PAGE>

       on said  Inventions  in any and  all  countries,  and  will  execute  all
       documents  reasonably  necessary or  appropriate  for this  purpose.  The
       Employee agrees that this obligation shall survive the termination of his
       employment,  but the Company shall  compensate  him at a reasonable  rate
       after such  termination  for time actually  spent by him at the Company's
       request on such  assistance.  In the event that the Company is unable for
       any reason  whatsoever  to secure the  signature  of the  Employee to any
       document  reasonably  necessary or  appropriate  for any of the foregoing
       purposes, (including renewals,  extensions,  continuations,  divisions or
       continuations  in part), the Employee hereby  irrevocably  designates and
       appoints the Company and its duly authorized  officers and agents, as his
       agents and  attorneys-in-fact to act for and on his behalf and instead of
       him, but only for the purpose of executing  and filing any such  document
       and doing all other  lawfully  permitted acts to accomplish the foregoing
       purposes  with the same  legal  force and  effect as if  executed  by the
       Employee.

              (d) The Employee  represents that his execution of this Agreement,
his employment  with the Company and his  performance of his proposed duties for
the Company in the  development of its business will not violate any obligations
he may have to any former  employer  or any other  third  party,  including  any
obligations to keep  confidential  any proprietary or confidential  information.
The Employee  represents  that he has not entered into, and will not enter into,
any agreement which conflicts with or would, if performed by the Employee, cause
him to breach this Agreement.

              (e) In the course of  performing  his duties to the  Company,  the
Employee  agrees  that he will  not  utilize  any  proprietary  or  confidential
information of any former employer or other third party in any manner that would
violate any obligation to which the Employee is subject.

       5.  NON-SOLICITATION   AGREEMENT.  During  the  term  of  the  Employee's
employment  by the  Company,  and for a period of twelve (12)  months  after the
termination of such employment for any reason, the Employee agrees and covenants
that he will not directly or indirectly,  either for himself or on behalf of any
other person or enterprise,  without the express written consent of the Company,
(a) solicit or attempt to solicit or entice away or interfere with the Company's
contractual  relationships any of the Company's  customers,  business  partners,
suppliers  or  shareholders  in  existence  at the time of  termination  of such
employment,  or (b)  recruit,  solicit or hire,   seek or  attempt  to  recruit,
solicit or hire or assist in  recruiting,  soliciting  or hiring any employee or
agent  of the  Company,  or take  action  that  results  in the  termination  of
employment or other arrangements between the Company and any of its employees or
agents or otherwise interferes with such employment or arrangements.

                                       6
<PAGE>


       6.  EQUITABLE  RELIEF.  The  Employee  recognizes  and  agrees  that  the
Company's  remedy at law for any  breach of the  provisions  of  Sections 4 or 5
hereof  would be  inadequate,  and the  Employee  agrees that for breach of such
provisions,  the Company  shall,  in  addition to such other  remedies as may be
available  to it at law or in  equity  or as  provided  in  this  Agreement,  be
entitled  to  injunctive  relief  and to  enforce  its  rights by an action  for
specific performance.

       7. REMEDIES.

       (a) Subject to Section 7(b), any claim or  controversy  arising out of or
relating  to this  Agreement,  including  without  limitation  any  claim by the
Company that the Employee has violated any one or more of the  restrictions  set
forth in  Sections  4 or 5,  shall be  settled  by  arbitration  before a single
arbitrator (who shall be a lawyer) in Boston,  Massachusetts  in accordance with
the Commercial Arbitration Rules of the American Arbitration Association. If the
arbitrator  finds that a violation of the  foregoing  restrictions  exists or is
threatened,  he shall  prescribe  appropriate  relief which may include an award
that the Employee desist from such violation, whether or not such an order would
issue, in the circumstances,  under the equity powers of a court.  Judgment upon
the award  rendered by the  arbitrator  may be entered in any court of competent
jurisdiction.

       (b) The Company  shall have the right,  which may be exercised in lieu of
or in addition to the  procedure  set forth in Section 7(a), to submit a   claim
that the Employee has violated any one or more of the  restrictions set forth in
Sections 4 or 5 to any court of competent  jurisdiction  and the Company will be
entitled,  in addition to any other remedies available to it from such court, to
obtain injunctive relief from such court to enforce the terms of this Agreement.
The Employee,  upon receipt of written notice of the  institution of proceedings
in such court, hereby agrees to submit to the jurisdiction of such court.

       8. MISCELLANEOUS.

       (a) The  failure of any of the parties to this  Agreement  to require the
performance  of a term  or  obligation  or to  exercise  any  right  under  this
Agreement  or the waiver by any of the parties to this  Agreement  of any breach
hereunder shall not prevent subsequent enforcement of such term or obligation or
exercise  of such  right  or the  enforcement  at any  time of any  other  right
hereunder  or be deemed a waiver of any  subsequent  breach of the  provision so
breached, or of any other breach, hereunder.

       (b) This Agreement  shall be governed by and construed  under the laws of
The  Commonwealth of  Massachusetts,  and shall not be modified or discharged in
whole or in part except by an agreement in writing signed by the parties hereto.
In case any one or more of the  provisions or parts of a provision  contained in
this Agreement shall for any



                                       7
<PAGE>




reason be held to be invalid,  illegal or  unenforceable  in any  respect,  such
invalidity,  illegality or unenforceability shall not affect any other provision
or part of a provision of this Agreement,  but this Agreement shall be construed
as if such invalid or illegal or unenforceable  provision or part of a provision
had been limited or modified  (consistent with its general intent) to the extent
necessary so that it shall be valid,  legal and enforceable,  or if it shall not
be  possible  to so limit or modify  such  invalid or  illegal or  unenforceable
provision or part of a provision,  this Agreement  shall be construed as if such
invalid or illegal or  unenforceable  provision or part of a provision had never
been contained herein.

       IN WITNESS  WHEREOF,  the parties have executed this Agreement under seal
as of the date first set forth above.


                                          DIOMED, INC.


                                          BY: /s/ James M. Arkoosh
                                             ----------------------------------
                                              On Direction of the Board.
                                              Chairman of Board of Directors


                                             /s/ Peter Klein
                                             ----------------------------------
                                              Peter Klein


                                       8