EXHIBIT 10.2


NEITHER THESE  SECURITIES  NOR THE  SECURITIES  INTO WHICH THESE  SECURITIES ARE
CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE  COMMISSION OR
THE  SECURITIES  COMMISSION  OF ANY STATE IN  RELIANCE  UPON AN  EXEMPTION  FROM
REGISTRATION  UNDER THE  SECURITIES  ACT OF 1933,  AS AMENDED  (THE  "SECURITIES
ACT"),  AND,  ACCORDINGLY,  MAY NOT BE OFFERED  OR SOLD  EXCEPT  PURSUANT  TO AN
EFFECTIVE  REGISTRATION  STATEMENT  UNDER THE  SECURITIES  ACT OR PURSUANT TO AN
AVAILABLE  EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE  REGISTRATION
REQUIREMENTS  OF THE  SECURITIES  ACT AND IN ACCORDANCE  WITH  APPLICABLE  STATE
SECURITIES  LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO
SUCH  EFFECT,  THE  SUBSTANCE  OF WHICH SHALL BE  REASONABLY  ACCEPTABLE  TO THE
COMPANY.  THESE SECURITIES AND THE SECURITIES  ISSUABLE UPON CONVERSION OF THESE
SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER
LOAN SECURED BY SUCH SECURITIES.

Original Issue Date: October ___, 2004
Original Conversion Price (subject to adjustment herein): $2.29

                                                                $_______________


                       VARIABLE RATE CONVERTIBLE DEBENTURE
                              DUE OCTOBER ___, 2008

            THIS  DEBENTURE  is one of a series of duly  authorized  and  issued
Variable Rate  Convertible  Debentures  of Diomed  Holdings,  Inc..,  a Delaware
corporation,     having     a     principal     place     of     business     at
_____________________________  (the "Company"),  designated as its Variable Rate
Convertible Debenture, due October ___, 2008 (the "Debentures").

         FOR   VALUE    RECEIVED,    the    Company    promises    to   pay   to
________________________ or its registered assigns (the "Holder"), the principal
sum of  $_______________  on  October  ___,  2008  or such  earlier  date as the
Debentures  are required or permitted  to be repaid as provided  hereunder  (the
"Maturity  Date"),  in  cash  or in  Common  Stock,  subject  to the  terms  and
conditions  herein,  and  to  pay  interest  to  the  Holder  on  the  aggregate
unconverted  and  then  outstanding   principal  amount  of  this  Debenture  in
accordance  with  the  provisions  hereof.  This  Debenture  is  subject  to the
following additional provisions:

         Section 1.  Definitions.  For the purposes  hereof,  in addition to the
terms defined  elsewhere in this Debenture:  (a) capitalized terms not otherwise
defined herein have the meanings given to such terms in the Purchase  Agreement,
and (b) the following terms shall have the following meanings:

                  "Alternate  Consideration" shall have the meaning set forth in
         Section 5(e)(ii).

<PAGE>

                  "Business Day" means any day except  Saturday,  Sunday and any
         day which shall be a federal  legal  holiday in the United  States or a
         day on  which  banking  institutions  in the  State  of  New  York  are
         authorized or required by law or other government action to close.

                  "Change of Control Transaction" means the occurrence after the
         date  hereof of any of (i) an  acquisition  after the date hereof by an
         individual or legal entity or "group" (as described in Rule 13d-5(b)(1)
         promulgated  under the  Exchange  Act) of  effective  control  (whether
         through legal or beneficial  ownership of capital stock of the Company,
         by contract or otherwise) of in excess of 33% of the voting  securities
         of the  Company,  or (ii) a  replacement  at one time or within a three
         year period of more than one-half of the members of the Company's board
         of directors  which is not approved by a majority of those  individuals
         who are  members of the board of  directors  on the date  hereof (or by
         those  individuals who are serving as members of the board of directors
         on any date whose  nomination to the board of directors was approved by
         a majority of the members of the board of directors  who are members on
         the date hereof), or (iii) the execution by the Company of an agreement
         to which the Company is a party or by which it is bound,  providing for
         any of the events set forth above in (i) or (ii).

                  "Closing Price" means,  for any date, the price  determined by
         the first of the  following  clauses  that  applies:  (a) if the Common
         Stock is then  listed or quoted on a Trading  Market,  the  closing bid
         price of the Common Stock for such date (or the nearest preceding date)
         on the  Trading  Market on which  the  Common  Stock is then  listed or
         quoted as reported by Bloomberg  Financial L.P. (based on a Trading Day
         from 9:30 a.m.  Eastern  Time to 4:02 p.m.  Eastern  Time);  (b) if the
         Common  Stock is not then  listed or quoted on a Trading  Market and if
         prices for the Common Stock are then quoted on the OTC Bulletin  Board,
         the closing bid price of the Common Stock for such date (or the nearest
         preceding date) on the OTC Bulletin  Board;  (c) if the Common Stock is
         not then listed or quoted on the OTC  Bulletin  Board and if prices for
         the Common Stock are then  reported in the "Pink  Sheets"  published by
         the National Quotation Bureau  Incorporated (or a similar  organization
         or agency  succeeding to its functions of reporting  prices),  the most
         recent bid price per share of the Common Stock so  reported;  or (d) in
         all other  cases,  the fair market  value of a share of Common Stock as
         determined by an  independent  appraiser  selected in good faith by the
         Purchasers and reasonably acceptable to the Company.

                  "Commission" means the Securities and Exchange Commission.

                  "Common  Stock" means the common  stock,  par value $0.001 per
         share,  of the  Company  and stock of any other  class  into which such
         shares may hereafter have been reclassified or changed.

                  "Conversion  Date" shall have the meaning set forth in Section
         4(a) hereof.

                  "Conversion Price" shall have the meaning set forth in Section
         4(b).


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<PAGE>

                  "Conversion  Shares" means the shares of Common Stock issuable
         upon  conversion  of Debentures or as payment of interest in accordance
         with the terms hereof.

                  "Dilutive  Issuance"  shall  have  the  meaning  set  forth in
         Section 5(b) hereof.

                  "Effectiveness  Period"  shall have the meaning  given to such
         term in the Registration Rights Agreement.

                  "Equity Conditions" shall mean, during the period in question,
         (i) the Company shall have duly honored all conversions and redemptions
         scheduled  to occur or  occurring  by virtue of one or more  Conversion
         Notices, if any, (ii) all liquidated damages and other amounts owing in
         respect  of the  Debentures  shall have been  paid;  (iii)  there is an
         effective  Registration  Statement  pursuant  to which  the  Holder  is
         permitted  to utilize the  prospectus  thereunder  to resell all of the
         shares issuable pursuant to the Transaction  Documents (and the Company
         believes,   in  good  faith,  that  such  effectiveness  will  continue
         uninterrupted  for the  foreseeable  future),  (iv) the Common Stock is
         trading on the Trading Market and all of the shares  issuable  pursuant
         to the Transaction Documents are listed for trading on a Trading Market
         (and the Company  believes,  in good faith,  that trading of the Common
         Stock  on  a  Trading  Market  will  continue   uninterrupted  for  the
         foreseeable future), (v) there is a sufficient number of authorized but
         unissued  and  otherwise  unreserved  shares  of  Common  Stock for the
         issuance  of all of the shares  issuable  pursuant  to the  Transaction
         Documents,  (vi)  there is then  existing  no Event of Default or event
         which,  with  the  passage  of  time or the  giving  of  notice,  would
         constitute  an Event of Default  and (vii) all of the shares  issued or
         issuable  pursuant to the transaction  documents in full,  ignoring for
         such purposes any conversion or exercise limitation therein,  would not
         violate  the  limitations  set forth in  Section  4(c)(ii)  and (ix) no
         public announcement of a pending or proposed  Fundamental  Transaction,
         Change of Control  Transaction or acquisition  transaction has occurred
         that has not been consummated.

                  "Event of Default" shall have the meaning set forth in Section
         8.

                   "Exchange Act" means the Securities  Exchange Act of 1934, as
         amended.

                           "Floor  Price"  shall have the  meaning  set forth in
         Section 5(b).

                       "Fundamental  Transaction"  shall  have the  meaning  set
         forth in Section 5(e)(iii) hereof.

                  "Forced  Conversion"  shall  have  the  meaning  set  forth in
         Section 6(d).

                      "Forced  Conversion  Notice"  shall have the  meaning  set
         forth in Section 6(d).

                      "Force  Conversion Notice Date" shall have the meaning set
         forth in Section 6(d).


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<PAGE>

                  "Interest Conversion Rate" means 100% of the lesser of (a) the
         average of the 5 Closing  Prices  immediately  prior to the  applicable
         Interest  Payment  Date  (b)  the  average  of  the  4  Closing  Prices
         immediately  prior to the  applicable  Interest  Payment Date,  (c) the
         average of the 3 Closing  Prices  immediately  prior to the  applicable
         Interest  Payment  Date,  (d)  the  average  of  the 2  Closing  Prices
         immediately  prior to the applicable  Interest Payment Date and (e) the
         Closing Price  immediately  prior to the  applicable  Interest  Payment
         Date; provided however, if Shareholder Approval has been obtained,  the
         discount shall be 10% off the above formula.

                  "Late  Fees"  shall have the  meaning  set forth in the second
         paragraph to this Debenture.

                  "Mandatory  Prepayment  Amount" for any Debentures shall equal
         the sum of (i) the  greater  of:  (A) 130% of the  principal  amount of
         Debentures to be prepaid, plus all accrued and unpaid interest thereon,
         or (B) the principal amount of Debentures to be prepaid, plus all other
         accrued and unpaid interest hereon,  divided by the Conversion Price on
         (x) the date the Mandatory  Prepayment  Amount is demanded or otherwise
         due or (y) the date the  Mandatory  Prepayment  Amount is paid in full,
         whichever is less,  multiplied by the Closing Price on (x) the date the
         Mandatory  Prepayment  Amount is demanded or  otherwise  due or (y) the
         date the  Mandatory  Prepayment  Amount is paid in full,  whichever  is
         greater,  and (ii) all other  amounts,  costs,  expenses and liquidated
         damages due in respect of such Debentures.

                  "Market  Price" shall mean $1.91,  subject to  adjustment  for
         reverse and forward stock splits,  stock dividends,  stock combinations
         and other similar transactions of the Common Stock that occur after the
         date of the Purchase Agreement.

                  "Maturity  Conversion"  shall  have the  meaning  set forth in
         Section 6(c)(iii).

                  "Maturity  Conversion Notice" shall have the meaning set forth
         in Section 6(c)(iii).

                  "Maturity  Conversion  Notice Date" shall have the meaning set
         forth in Section 6(c)(iii).

                  "Maturity  Conversion  Price" shall have the meaning set forth
         in Section 6(c)(iii).

                  "Optional  Redemption"  shall  have the  meaning  set forth in
         Section 6(a).

                  "Optional Redemption Amount" shall mean the sum of (i) 110% of
         the principal  amount of the Debenture then  outstanding,  (ii) accrued
         but unpaid interest and (iii) all liquidated  damages and other amounts
         due in respect of the Debenture.

                  "Optional  Redemption Notice" shall have the meaning set forth
         in Section 6(a).


                                       4
<PAGE>

                  "Optional  Redemption  Notice Date" shall have the meaning set
         forth in Section 6(a).

                  "Original  Issue  Date"  shall  mean  the  date  of the  first
         issuance of the Debentures regardless of the number of transfers of any
         Debenture  and  regardless  of the number of  instruments  which may be
         issued to evidence such Debenture.

                  "Person" means a corporation,  an association,  a partnership,
         organization,  a business,  an  individual,  a government  or political
         subdivision thereof or a governmental agency.

                  "Purchase  Agreement" means the Securities Purchase Agreement,
         dated as of September  __, 2004,  to which the Company and the original
         Holder are parties,  as amended,  modified or supplemented from time to
         time in accordance with its terms.

                  "Registration  Rights Agreement" means the Registration Rights
         Agreement, dated as of the date of the Purchase Agreement, to which the
         Company and the original  Holder are parties,  as amended,  modified or
         supplemented from time to time in accordance with its terms.

                  "Registration   Statement"  means  a  registration   statement
         meeting  the  requirements   set  forth  in  the  Registration   Rights
         Agreement,  covering  among other  things the resale of the  Conversion
         Shares and naming the Holder as a "selling stockholder" thereunder.

                  "Securities Act" means the Securities Act of 1933, as amended,
         and the rules and regulations promulgated thereunder.

      "Shareholder  Approval"  shall have the meaning  given to such term in the
         Purchase Agreement.

                           "Subsidiary"  shall  have the  meaning  given to such
         term in the Purchase Agreement.

                  "Threshold  Period"  shall have the meaning given to such term
         in Section 6(d).

                  "Trading  Day" means a day on which the Common Stock is traded
         on a Trading Market.

                   "Trading Market" means the following  markets or exchanges on
         which the Common  Stock is listed or quoted for  trading on the date in
         question:  the Nasdaq SmallCap Market, the American Stock Exchange, the
         New York Stock Exchange or the Nasdaq National Market.

                  "Transaction  Documents"  shall have the  meaning set forth in
         the Purchase Agreement.


                                       5
<PAGE>

                  "VWAP" means,  for any date, the price determined by the first
         of the following clauses that applies:  (a) if the Common Stock is then
         listed or quoted on a Trading Market, the daily volume weighted average
         price of the Common Stock for such date (or the nearest preceding date)
         on the  Trading  Market on which  the  Common  Stock is then  listed or
         quoted as reported by Bloomberg  Financial L.P. (based on a Trading Day
         from 9:30 a.m.  Eastern  Time to 4:02 p.m.  Eastern  Time);  (b) if the
         Common  Stock is not then  listed or quoted on a Trading  Market and if
         prices for the Common Stock are then quoted on the OTC Bulletin  Board,
         the volume weighted average price of the Common Stock for such date (or
         the  nearest  preceding  date) on the OTC  Bulletin  Board;  (c) if the
         Common Stock is not then listed or quoted on the OTC Bulletin Board and
         if prices for the Common Stock are then  reported in the "Pink  Sheets"
         published by the National  Quotation Bureau  Incorporated (or a similar
         organization  or  agency  succeeding  to  its  functions  of  reporting
         prices),  the most  recent bid price per share of the  Common  Stock so
         reported;  or (c) in all other cases,  the fair market value of a share
         of Common Stock as determined by an independent  appraiser  selected in
         good faith by the Holders and reasonably acceptable to the Company.

         Section 2.    Interest.

                  a) Payment of Interest in Cash or Kind.  The Company shall pay
         interest  to  the  Holder  on  the  aggregate   unconverted   and  then
         outstanding principal amount of this Debenture at the rate of 400 basis
         points plus the most recent  6-month  LIBOR (London  Interbank  Offered
         Rate),  payable  quarterly  on  March  31,  June 30,  September  30 and
         December 31,  beginning on the first such date after the Original Issue
         Date and on each  Conversion  Date (as to that  principal  amount  then
         being converted),  on each Forced Conversion Date (as to that principal
         amount then being converted),  on each Optional  Redemption Date and on
         the Maturity Date (except that, if any such date is not a Business Day,
         then such payment  shall be due on the next  succeeding  Business  Day)
         (each such date,  an  "Interest  Payment  Date"),  in cash or shares of
         Common Stock,  or a combination of cash and shares of Common Stock,  at
         the Interest  Conversion  Rate,  or a  combination  thereof;  provided,
         however, payment in shares of Common Stock may only occur if (i) during
         the 20  Trading  Days  immediately  prior  to the  applicable  Interest
         Payment Date all of the Equity Conditions have been met and (ii) unless
         Shareholder Approval shall have been obtained,  the applicable Interest
         Conversion Rate is equal to or exceeds $1.91.

                  b) Company's  Election to Pay Interest in Kind. Subject to the
         terms and  conditions  herein,  the  decision  whether to pay  interest
         hereunder in shares of Common Stock or cash shall be at the  discretion
         of the Company.  Not less than 20 Trading  Days prior to each  Interest
         Payment Date (the "Interest  Payment  Notice Date"),  the Company shall
         provide the Holder with written  notice of its election to pay interest
         hereunder  either in cash or shares of Common  Stock (the  Company  may
         indicate  in such  notice that the  election  contained  in such notice
         shall   continue  for  later  periods  until  revised)  and  the  exact
         combination  thereof.  Within  20  Trading  Days  prior to an  Interest
         Payment Date, the Company's  election  (whether specific to an Interest
         Payment Date or  continuous)  shall be  irrevocable as to such Interest
         Payment  Date.  Subject to the  aforementioned  conditions,  failure to


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<PAGE>

         timely  provide such written  notice shall be deemed an election by the
         Company to pay the interest on such Interest  Payment Date in cash. The
         Company's  determination  of whether to pay  interest in cash or shares
         shall be applied ratably to the Holders.

                  c) Interest Calculations.  Interest shall be calculated on the
         basis of a  360-day  year and  shall  accrue  daily  commencing  on the
         Original  Issue  Date  until  payment  in  full of the  principal  sum,
         together  with all accrued and unpaid  interest and other amounts which
         may become due hereunder,  has been made. Payment of interest in shares
         of Common Stock shall otherwise occur pursuant to Section  4(d)(ii) and
         only for  purposes of the payment of interest in shares,  the  Interest
         Payment Date shall be deemed the Conversion Date.  Interest shall cease
         to accrue with respect to any principal amount converted, provided that
         the Company in fact  delivers  the  Conversion  Shares  within the time
         period required by Section 4(d)(ii). Interest hereunder will be paid to
         the Person in whose name this Debenture is registered on the records of
         the Company  regarding  registration  and transfers of Debentures  (the
         "Debenture  Register").  Except as otherwise provided herein, if at any
         time the Company  pays  interest  partially  in cash and  partially  in
         shares of Common Stock, then such payment shall be distributed  ratably
         among the Holders based upon the principal amount of Debentures held by
         each Holder.

                  d) Late Fee.  All overdue  accrued  and unpaid  interest to be
         paid hereunder shall entail a late fee at the rate of 18% per annum (or
         such lower  maximum  amount of interest  permitted to be charged  under
         applicable  law) ("Late  Fee") which will accrue  daily,  from the date
         such  interest  is due  hereunder  through  and  including  the date of
         payment.  Notwithstanding anything to the contrary contained herein, if
         on any Interest Payment Date the Company has elected to pay interest in
         Common  Stock and is not able to pay  accrued  interest  in the form of
         Common  Stock  because  it does not then  satisfy  the  conditions  for
         payment  in the form of  Common  Stock set forth  above,  then,  at the
         option of the Holder, the Company,  in lieu of delivering either shares
         of Common  Stock  pursuant  to this  Section 2 or paying the  regularly
         scheduled cash interest  payment,  shall deliver,  within three Trading
         Days of each applicable  Interest Payment Date, an amount in cash equal
         to the  product  of the  number of shares  of  Common  Stock  otherwise
         deliverable  to the Holder in  connection  with the payment of interest
         due on such Interest  Payment Date and the highest Closing Price during
         the period  commencing  on the Interest  Payment Date and ending on the
         Trading Day prior to the date such payment is made.

                  e)   Prepayment.   Except  as  otherwise  set  forth  in  this
         Debenture,  the  Company  may not prepay any  portion of the  principal
         amount of this  Debenture  without  the prior  written  consent  of the
         Holder.

         Section 3.   Registration of Transfers and Exchanges.

                  a) Different Denominations. This Debenture is exchangeable for
         an  equal  aggregate   principal  amount  of  Debentures  of  different
         authorized  denominations,  as requested by the Holder surrendering the


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<PAGE>

         same. No service charge will be made for such  registration of transfer
         or exchange.

                  b) Investment Representations.  This Debenture has been issued
         subject to certain  investment  representations  of the original Holder
         set forth in the Purchase Agreement and may be transferred or exchanged
         only in compliance with the Purchase  Agreement and applicable  federal
         and state securities laws and regulations.

c)       Reliance on Debenture Register. Prior to due presentment to the Company
         for  transfer  of this  Debenture,  the  Company  and any  agent of the
         Company  may treat  the  Person in whose  name this  Debenture  is duly
         registered  on the  Debenture  Register  as the  owner  hereof  for the
         purpose  of  receiving  payment  as herein  provided  and for all other
         purposes,  whether or not this  Debenture  is overdue,  and neither the
         Company nor any such agent shall be affected by notice to the contrary.

         Section 4.    Conversion.

                  a) Voluntary Conversion.  At any time after the Original Issue
         Date until this  Debenture  is no longer  outstanding,  this  Debenture
         shall be  convertible  into shares of Common Stock at the option of the
         Holder,  in whole or in part at any time and from time to time (subject
         to the limitations on conversion set forth in Section 4(c) hereof). The
         Holder shall effect  conversions  by delivering to the Company the form
         of Notice  of  Conversion  attached  hereto  as Annex A (a  "Notice  of
         Conversion"),  specifying therein the principal amount of Debentures to
         be converted and the date on which such conversion is to be effected (a
         "Conversion  Date").  If no Conversion Date is specified in a Notice of
         Conversion,  the Conversion  Date shall be the date that such Notice of
         Conversion  is  received  by  the  Company  pursuant  to  Section  9(a)
         hereunder.  To effect  conversions  hereunder,  the Holder shall not be
         required to physically  surrender  Debentures to the Company unless the
         entire  principal  amount of this Debenture plus all accrued and unpaid
         interest  thereon has been so converted.  Conversions  hereunder  shall
         have the effect of lowering the  outstanding  principal  amount of this
         Debenture in an amount equal to the applicable  conversion.  The Holder
         and the Company shall  maintain  records  showing the principal  amount
         converted and the date of such  conversions.  The Company shall deliver
         any  objection to any Notice of  Conversion  within 2 Business  Days of
         receipt of such notice.  The Holder and any assignee,  by acceptance of
         this Debenture, acknowledge and agree that, by reason of the provisions
         of this paragraph, following conversion of a portion of this Debenture,
         the unpaid and  unconverted  principal  amount of this Debenture may be
         less than the amount stated on the face hereof.

                  b) Conversion  Price.  The  conversion  price in effect on any
         Conversion Date shall be equal to $2.29,  subject to adjustment  herein
         (the "Conversion Price").

                  c) Holder's Restriction on Conversion.

                           a. The Holder shall not have the right to convert any
                  portion  of  this  Debenture,  pursuant  to  Section  4(a)  or


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<PAGE>

                  otherwise,  to the  extent  that after  giving  effect to such
                  conversion,   the   Holder   (together   with   the   Holder's
                  affiliates),   as  set  forth  on  the  applicable  Notice  of
                  Conversion,  would  beneficially own in excess of 4.99% of the
                  number of shares of the Common Stock  outstanding  immediately
                  after giving  effect to such  conversion.  For purposes of the
                  foregoing  sentence,  the  number of  shares  of Common  Stock
                  beneficially  owned by the  Holder  and its  affiliates  shall
                  include  the number of shares of Common  Stock  issuable  upon
                  conversion  of  this  Debenture  with  respect  to  which  the
                  determination  of such  sentence  is  being  made,  but  shall
                  exclude  the number of shares of Common  Stock  which would be
                  issuable upon (A)  conversion of the  remaining,  nonconverted
                  portion of this Debenture  beneficially owned by the Holder or
                  any of its  affiliates  and (B) exercise or  conversion of the
                  unexercised or nonconverted portion of any other securities of
                  the  Company  (including,   without   limitation,   any  other
                  Debentures  or  the  Warrants)  subject  to  a  limitation  on
                  conversion or exercise  analogous to the limitation  contained
                  herein  beneficially  owned  by  the  Holder  or  any  of  its
                  affiliates. Except as set forth in the preceding sentence, for
                  purposes of this Section 4(c),  beneficial  ownership shall be
                  calculated  in  accordance  with Section 13(d) of the Exchange
                  Act.  To the  extent  that the  limitation  contained  in this
                  section applies,  the  determination of whether this Debenture
                  is convertible (in relation to other  securities  owned by the
                  Holder)  and  of  which  a  portion  of  this   Debenture   is
                  convertible shall be in the sole discretion of such Holder. To
                  ensure  compliance with this  restriction,  the Holder will be
                  deemed to  represent  to the  Company  each time it delivers a
                  Notice of Conversion  that such Notice of  Conversion  has not
                  violated the  restrictions set forth in this paragraph and the
                  Company  shall have no  obligation  to verify or  confirm  the
                  accuracy of such  determination.  For purposes of this Section
                  4(c),  in  determining  the  number of  outstanding  shares of
                  Common Stock, the Holder may rely on the number of outstanding
                  shares of Common Stock as reflected in (x) the Company's  most
                  recent Form 10-QSB or Form  10-KSB,  as the case may be, (y) a
                  more  recent  public  announcement  by the  Company or (z) any
                  other notice by the Company or the  Company's  Transfer  Agent
                  setting   forth  the   number   of  shares  of  Common   Stock
                  outstanding.  Upon the written or oral  request of the Holder,
                  the Company  shall within two Trading Days confirm  orally and
                  in writing to the Holder the number of shares of Common  Stock
                  then  outstanding.  In any case,  the  number  of  outstanding
                  shares of Common Stock shall be determined after giving effect
                  to the  conversion  or exercise of  securities of the Company,
                  including  this  Debenture,  by the  Holder or its  affiliates
                  since the date as of which such number of  outstanding  shares
                  of Common Stock was reported.

                           b. The  Company  shall not effect any  conversion  of
                  this Debenture  pursuant to Section 4(a) or otherwise,  to the
                  extent that after giving effect to such conversion, the Holder
                  (together with the Holder's  affiliates),  as set forth on the
                  applicable  Notice of Conversion,  would  beneficially  own in
                  excess of 9.99% of the  number of shares of the  Common  Stock
                  outstanding   immediately   after   giving   effect   to  such
                  conversion. For purposes of the foregoing sentence, the number
                  of shares of Common Stock beneficially owned by the Holder and
                  its  affiliates  shall  include the number of shares of Common
                  Stock issuable upon  conversion of this Debenture with respect


                                       9
<PAGE>

                  to which the determination of such sentence is being made, but
                  shall exclude the number of shares of Common Stock which would
                  be issuable upon (A) conversion of the remaining, nonconverted
                  portion of this Debenture  beneficially owned by the Holder or
                  any of its  affiliates  and (B) exercise or  conversion of the
                  unexercised or nonconverted portion of any other securities of
                  the  Company  (including,   without   limitation,   any  other
                  Debentures  or  the  Warrants)  subject  to  a  limitation  on
                  conversion or exercise  analogous to the limitation  contained
                  herein  beneficially  owned  by  the  Holder  or  any  of  its
                  affiliates. Except as set forth in the preceding sentence, for
                  purposes of this Section 4(c),  beneficial  ownership shall be
                  calculated  in  accordance  with Section 13(d) of the Exchange
                  Act.  To the  extent  that the  limitation  contained  in this
                  section applies,  the  determination of whether this Debenture
                  is convertible (in relation to other  securities  owned by the
                  Holder)  and  of  which  a  portion  of  this   Debenture   is
                  convertible shall be in the sole discretion of such Holder. To
                  ensure  compliance with this  restriction,  the Holder will be
                  deemed to  represent  to the  Company  each time it delivers a
                  Notice of Conversion  that such Notice of  Conversion  has not
                  violated the  restrictions set forth in this paragraph and the
                  Company  shall have no  obligation  to verify or  confirm  the
                  accuracy of such  determination.  For purposes of this Section
                  4(c),  in  determining  the  number of  outstanding  shares of
                  Common Stock, the Holder may rely on the number of outstanding
                  shares of Common Stock as reflected in (x) the Company's  most
                  recent Form 10-QSB or Form  10-KSB,  as the case may be, (y) a
                  more  recent  public  announcement  by the  Company or (z) any
                  other notice by the Company or the  Company's  Transfer  Agent
                  setting   forth  the   number   of  shares  of  Common   Stock
                  outstanding.  Upon the written or oral  request of the Holder,
                  the Company  shall within two Trading Days confirm  orally and
                  in writing to the Holder the number of shares of Common  Stock
                  then  outstanding.  In any case,  the  number  of  outstanding
                  shares of Common Stock shall be determined after giving effect
                  to the  conversion  or exercise of  securities of the Company,
                  including  this  Debenture,  by the  Holder or its  affiliates
                  since the date as of which such number of  outstanding  shares
                  of Common Stock was reported.

                  d)   Mechanics of Conversion.

                           i.  Conversion  Shares  Issuable  Upon  Conversion of
                  Principal  Amount.  The  number  of  shares  of  Common  Stock
                  issuable  upon a conversion  hereunder  shall be determined by
                  the  quotient   obtained  by  dividing  (x)  the   outstanding
                  principal  amount of this  Debenture  to be  converted  as set
                  forth  in the  applicable  Notice  of  Conversion  by (y)  the
                  Conversion Price. i.

                           ii.  Delivery of  Certificate  Upon  Conversion.  Not
                  later than three Trading Days after any  Conversion  Date, the
                  Company  will  deliver  to the  Holder  (A) a  certificate  or
                  certificates representing the Conversion Shares which shall be
                  free of restrictive  legends and trading  restrictions  (other
                  than those  required by the Purchase  Agreement)  representing
                  the number of shares of Common Stock being  acquired  upon the
                  conversion of Debentures  (including,  if so timely elected by


                                       10
<PAGE>

                  the Company,  shares of Common Stock  representing the payment
                  of  accrued  interest)  and (B) a bank  check in the amount of
                  accrued and unpaid interest (if the Company is required to pay
                  accrued interest in cash). The Company shall, if available and
                  if allowed  under  applicable  securities  laws,  use its best
                  efforts to deliver any certificate or certificates required to
                  be delivered by the Company under this Section  electronically
                  through   the   Depository   Trust   Corporation   or  another
                  established clearing corporation performing similar functions.

                           iii. Failure to Deliver Certificates.  If in the case
                  of any Notice of Conversion  such  certificate or certificates
                  are not delivered to or as directed by the  applicable  Holder
                  by the fifth Trading Day after a Conversion  Date,  the Holder
                  shall be entitled by written notice to the Company at any time
                  on or before its receipt of such  certificate or  certificates
                  thereafter,  to rescind  such  conversion,  in which event the
                  Company shall immediately return the certificates representing
                  the principal amount of Debentures tendered for conversion.

                           iv. Partial Liquidated  Damages. If the Company fails
                  for any reason to deliver to the Holder  such  certificate  or
                  certificates pursuant to Section 4(d)(ii) by the third Trading
                  Day after the  Conversion  Date, the Company shall pay to such
                  Holder,  in cash upon  demand of such  Holder,  as  liquidated
                  damages  and not as a  penalty,  for each  $1000 of  principal
                  amount being converted, $10 per Trading Day (increasing to $20
                  per Trading Day after 10 Trading Days after such damages begin
                  to accrue) for each  Trading Day after such third  Trading Day
                  until  such   certificates   are   delivered.   The  Company's
                  obligations  to issue and deliver the  Conversion  Shares upon
                  conversion  of this  Debenture  in  accordance  with the terms
                  hereof are absolute  and  unconditional,  irrespective  of any
                  action or  inaction  by the  Holder to enforce  the same,  any
                  waiver or consent with respect to any  provision  hereof,  the
                  recovery of any  judgment  against any Person or any action to
                  enforce  the same,  or any setoff,  counterclaim,  recoupment,
                  limitation or termination,  or any breach or alleged breach by
                  the  Holder  or any  other  Person  of any  obligation  to the
                  Company or any  violation  or alleged  violation of law by the
                  Holder  or any other  person,  and  irrespective  of any other
                  circumstance  which might  otherwise  limit such obligation of
                  the Company to the Holder in  connection  with the issuance of
                  such Conversion Shares; provided, however, such delivery shall
                  not  operate as a waiver by the Company of any such action the
                  Company may have against the Holder.  In the event a Holder of
                  this  Debenture  shall  elect  to  convert  any  or all of the
                  outstanding  principal  amount  hereof,  the  Company  may not
                  refuse  conversion  based on any claim  that the Holder or any
                  one  associated  or  affiliated  with the  Holder  of has been
                  engaged in any  violation  of law,  agreement or for any other
                  reason,  unless,  an  injunction  from  a  court,  on  notice,
                  restraining and or enjoining conversion of all or part of this
                  Debenture  shall have been sought and obtained and the Company
                  posts a  surety  bond for the  benefit  of the  Holder  in the
                  amount  of  150% of the  principal  amount  of this  Debenture
                  outstanding,  which is subject to the  injunction,  which bond
                  shall   remain   in   effect   until   the    completion    of
                  arbitration/litigation  of the  dispute  and the  proceeds  of


                                       11
<PAGE>

                  which shall be payable to such Holder to the extent it obtains
                  judgment. In the absence of an injunction precluding the same,
                  the Company shall issue  Conversion  Shares or, if applicable,
                  cash, upon a properly noticed conversion. Nothing herein shall
                  limit a Holder's  right to pursue actual damages or declare an
                  Event  of  Default  pursuant  to  Section  8  herein  for  the
                  Company's  failure to  deliver  Conversion  Shares  within the
                  period  specified  herein and such Holder shall have the right
                  to pursue  all  remedies  available  to it at law or in equity
                  including,   without   limitation,   a  decree   of   specific
                  performance and/or injunctive relief. The exercise of any such
                  rights  shall not prohibit the Holders from seeking to enforce
                  damages   pursuant  to  any  other  Section  hereof  or  under
                  applicable law.

                           v.  Failure  to  Timely  Deliver   Certificates  Upon
                  Conversion.  In addition to any other rights  available to the
                  Holder,  if the Company fails for any reason to deliver to the
                  Holder such  certificate or  certificates  pursuant to Section
                  4(d)(ii) by the third Trading Day after the  Conversion  Date,
                  and if after such third  Trading Day the Holder is required by
                  its brokerage firm to purchase (in an open market  transaction
                  or  otherwise)  Common Stock to deliver in  satisfaction  of a
                  sale by such Holder of the Conversion  Shares which the Holder
                  anticipated receiving upon such conversion (a "Buy-In"),  then
                  the Company  shall (A) pay in cash to the Holder (in  addition
                  to any  remedies  available  to or elected by the  Holder) the
                  amount  by  which  (x)  the  Holder's   total  purchase  price
                  (including brokerage commissions, if any) for the Common Stock
                  so  purchased  exceeds  (y) the  product of (1) the  aggregate
                  number of shares of Common Stock that such Holder  anticipated
                  receiving from the  conversion at issue  multiplied by (2) the
                  actual sale price of the Common  Stock at the time of the sale
                  (including brokerage commissions,  if any) giving rise to such
                  purchase  obligation  and  (B) at the  option  of the  Holder,
                  either  reissue  Debentures  in principal  amount equal to the
                  principal amount of the attempted conversion or deliver to the
                  Holder  the  number of shares of Common  Stock that would have
                  been issued had the Company timely  complied with its delivery
                  requirements  under  Section  4(d)(ii).  For  example,  if the
                  Holder purchases Common Stock having a total purchase price of
                  $11,000  to  cover  a  Buy-In  with  respect  to an  attempted
                  conversion of Debentures with respect to which the actual sale
                  price  of the  Conversion  Shares  at  the  time  of the  sale
                  (including brokerage commissions,  if any) giving rise to such
                  purchase obligation was a total of $10,000 under clause (A) of
                  the  immediately  preceding  sentence,  the  Company  shall be
                  required to pay the Holder  $1,000.  The Holder shall  provide
                  the Company  written notice  indicating the amounts payable to
                  the Holder in respect of the Buy-In.  Notwithstanding anything
                  contained  herein to the  contrary,  if a Holder  requires the
                  Company to make payment in respect of a Buy-In for the failure
                  to  timely  deliver  certificates  hereunder  and the  Company
                  timely pays in full such  payment,  the  Company  shall not be
                  required to pay such Holder  liquidated  damages under Section
                  4(d)(iv)  in respect  of the  certificates  resulting  in such
                  Buy-In.


                                       12
<PAGE>

                           vi.  Reservation of Shares Issuable Upon  Conversion.
                  The Company  covenants  that it will at all times  reserve and
                  keep available out of its  authorized  and unissued  shares of
                  Common  Stock   solely  for  the  purpose  of  issuance   upon
                  conversion  of the  Debentures  and payment of interest on the
                  Debenture,  each as  herein  provided,  free  from  preemptive
                  rights  or any  other  actual  contingent  purchase  rights of
                  persons  other than the Holders,  not less than such number of
                  shares of the Common Stock as shall (subject to any additional
                  requirements  of the Company as to  reservation of such shares
                  set forth in the Purchase  Agreement) be issuable (taking into
                  account the  adjustments  and  restrictions of Section 5) upon
                  the  conversion  of the  outstanding  principal  amount of the
                  Debentures  and  payment of  interest  hereunder.  The Company
                  covenants  that all  shares of Common  Stock  that shall be so
                  issuable shall,  upon issue,  be duly and validly  authorized,
                  issued and fully paid,  nonassessable and, if the Registration
                  Statement  is  then  effective   under  the  Securities   Act,
                  registered   for   public   sale  in   accordance   with  such
                  Registration Statement.

                           vii. Fractional Shares.  Upon a conversion  hereunder
                  the Company shall not be required to issue stock  certificates
                  representing  fractions of shares of the Common Stock, but may
                  if otherwise permitted,  make a cash payment in respect of any
                  final  fraction of a share based on the Closing  Price at such
                  time. If the Company elects not, or is unable,  to make such a
                  cash payment, the Holder shall be entitled to receive, in lieu
                  of the final  fraction  of a share,  one whole share of Common
                  Stock.

                           viii.  Transfer  Taxes.  The issuance of certificates
                  for shares of the Common Stock on conversion of the Debentures
                  shall be made  without  charge to the Holders  thereof for any
                  documentary  stamp or  similar  taxes  that may be  payable in
                  respect of the issue or delivery of such certificate, provided
                  that the Company shall not be required to pay any tax that may
                  be payable in respect of any transfer involved in the issuance
                  and delivery of any such certificate upon conversion in a name
                  other than that of the Holder of such  Debentures so converted
                  and the Company shall not be required to issue or deliver such
                  certificates  unless or until the person or persons requesting
                  the issuance thereof shall have paid to the Company the amount
                  of such tax or shall have  established to the  satisfaction of
                  the Company that such tax has been paid.

                           ix. Unless Shareholder Approval has been obtained and
                  deemed  effective in accordance with the rules and regulations
                  of the Trading Market, the Company shall not make any issuance
                  whatsoever of Common Stock or Common Stock  Equivalents to the
                  extent such issuance  would  otherwise  cause an adjustment of
                  the  Conversion  Price of the Debentures or the Exercise Price
                  of the  Warrants,  or the  exercise  price of any Common Stock
                  Equivalents  issued pursuant to the transactions  contemplated
                  by  Sections   2.3(a)(iii)   and  2.3(b)(v)  of  the  Purchase
                  Agreement,  below the  applicable  Floor  Prices  (as  defined
                  herein and in the  Warrants).  The Holder shall be entitled to
                  obtain  injunctive  relief against the Company to preclude any


                                       13
<PAGE>

                  such issuance,  which remedy shall be in addition to any right
                  to  collect  damages  and the  Company  expressly  waives  any
                  requirement that any court require the Holder to post any bond
                  in connection therewith.

         Section 5.   Certain Adjustments.

                  a) Stock  Dividends and Stock Splits.  If the Company,  at any
         time  while  the  Debentures  are  outstanding:  (A)  shall pay a stock
         dividend or otherwise make a distribution or distributions on shares of
         its Common  Stock or any other equity or equity  equivalent  securities
         payable in shares of Common Stock (which, for avoidance of doubt, shall
         not include any shares of Common Stock  issued by the Company  pursuant
         to this  Debenture,  including  as  interest  thereon),  (B)  subdivide
         outstanding  shares of Common Stock into a larger number of shares, (C)
         combine (including by way of reverse stock split) outstanding shares of
         Common  Stock  into  a  smaller  number  of  shares,  or (D)  issue  by
         reclassification  of shares of the  Common  Stock any shares of capital
         stock of the Company,  then the Conversion Price shall be multiplied by
         a  fraction  of which the  numerator  shall be the  number of shares of
         Common Stock  (excluding  treasury shares,  if any) outstanding  before
         such event and of which the  denominator  shall be the number of shares
         of Common  Stock  outstanding  after such event.  Any  adjustment  made
         pursuant to this Section shall become effective  immediately  after the
         record date for the  determination of stockholders  entitled to receive
         such dividend or distribution  and shall become  effective  immediately
         after the effective date in the case of a  subdivision,  combination or
         re-classification.

                  b) Subsequent  Equity Sales.  If the Company or any Subsidiary
         thereof,  as applicable,  at any time while Debentures are outstanding,
         shall offer, sell, grant any option to purchase or offer, sell or grant
         any right to reprice its securities,  or otherwise  dispose of or issue
         (or announce any offer,  sale, grant or any option to purchase or other
         disposition) any Common Stock or Common Stock Equivalents entitling any
         Person to acquire  shares of Common  Stock,  at an effective  price per
         share less than the then Conversion  Price  ("Dilutive  Issuance"),  as
         adjusted  hereunder  (if the holder of the Common Stock or Common Stock
         Equivalents  so  issued  shall at any time,  whether  by  operation  of
         purchase price  adjustments,  reset  provisions,  floating  conversion,
         exercise or exchange prices or otherwise,  or due to warrants,  options
         or rights per share which is issued in connection  with such  issuance,
         be entitled to receive shares of Common Stock at an effective price per
         share which is less than the Conversion  Price,  such issuance shall be
         deemed to have occurred for less than the Conversion  Price),  then the
         Conversion  Price shall be reduced to equal the  effective  conversion,
         exchange  or  purchase  price for such  Common  Stock or  Common  Stock
         Equivalents   (including  any  reset  provisions   thereof)  at  issue;
         provided,  however,  prior to the date the Company obtains  Shareholder
         Approval in accordance  with the rules and  regulations  of the Trading
         Market,  in no event shall the Conversion  Price be adjusted under this
         Section 5(b) to less than $2.20,  subject to adjustment for reverse and
         forward stock splits,  stock  dividends,  stock  combinations and other
         similar  transactions  of the Common Stock that occur after the date of
         this  Agreement  (the "Floor  Price").  Such  adjustment  shall be made
         whenever such Common Stock or Common Stock  Equivalents  are issued and


                                       14
<PAGE>

         this  provision  is  invoked.  The Company  shall  notify the Holder in
         writing,  no later than three  business days  following the issuance of
         any Common Stock or Common Stock  Equivalents  subject to this section,
         indicating  therein the  applicable  issuance  price,  or of applicable
         reset price, exchange price, conversion price and other pricing terms.

                  c) Pro Rata  Distributions.  If the Company, at any time while
         Debentures are  outstanding,  shall distribute to all holders of Common
         Stock (and not to Holders)  evidences of its  indebtedness or assets or
         rights or warrants to subscribe for or purchase any  security,  then in
         each such case the Conversion  Price shall be determined by multiplying
         such Conversion  Price in effect  immediately  prior to the record date
         fixed for  determination  of  stockholders  entitled  to  receive  such
         distribution  by a  fraction  of  which  the  denominator  shall be the
         Closing Price  determined as of the record date mentioned above, and of
         which the  numerator  shall be such  Closing  Price on such record date
         less the then fair  market  value at such record date of the portion of
         such assets or evidence of  indebtedness  so distributed  applicable to
         one outstanding share of the Common Stock as determined by the Board of
         Directors in good faith and considering the value to be received by the
         Company  for the  proceeds,  if any,  of the  exercise of the rights or
         issuance  of the  indebtedness  giving  rise to the  adjustment  of the
         Conversion  Price  hereunder.  In either case the adjustments  shall be
         described  in a  statement  provided  to the  Holders of the portion of
         assets or evidences of indebtedness so distributed or such subscription
         rights  applicable to one share of Common Stock.  Such adjustment shall
         be made  whenever  any  such  distribution  is made  and  shall  become
         effective immediately after the record date mentioned above.

                  d) Calculations.  All calculations  under this Section 5 shall
         be made to the nearest cent or the nearest  1/100th of a share,  as the
         case may be. For  purposes  of this  Section 5, the number of shares of
         Common  Stock  outstanding  as of a given  date shall be the sum of the
         number of shares of Common Stock (excluding  treasury  shares,  if any)
         outstanding.

                  e) Notice to Holders.

                           i.  Adjustment  to  Conversion  Price.  Whenever  the
                  Conversion  Price is adjusted  pursuant to any of this Section
                  5, the  Company  shall  promptly  mail to each Holder a notice
                  setting forth the Conversion  Price after such  adjustment and
                  setting forth a brief  statement of the facts  requiring  such
                  adjustment.  If the Company  issues a variable rate  security,
                  despite the prohibition thereon in the Purchase Agreement, the
                  Company  shall be deemed to have issued Common Stock or Common
                  Stock  Equivalents  at  the  lowest  possible   conversion  or
                  exercise  price at which such  securities  may be converted or
                  exercised  in the  case of a  Variable  Rate  Transaction  (as
                  defined in the  Purchase  Agreement),  or the lowest  possible
                  adjustment price in the case of an MFN Transaction (as defined
                  in the Purchase Agreement).


                                       15
<PAGE>

                           ii. Notice to Allow Conversion by Holder.  If (A) the
                  Company shall  declare a dividend (or any other  distribution)
                  on the Common  Stock;  (B) the Company shall declare a special
                  nonrecurring  cash  dividend on or a redemption  of the Common
                  Stock;  (C) the Company  shall  authorize  the granting to all
                  holders of the Common  Stock  rights or warrants to  subscribe
                  for or purchase any shares of capital stock of any class or of
                  any  rights;  (D)  the  approval  of any  stockholders  of the
                  Company   shall   be   required   in   connection   with   any
                  reclassification  of the Common Stock,  any  consolidation  or
                  merger to which the  Company is a party,  any sale or transfer
                  of all or substantially  all of the assets of the Company,  of
                  any  compulsory  share  exchange  whereby the Common  Stock is
                  converted  into other  securities,  cash or property;  (E) the
                  Company  shall   authorize   the   voluntary  or   involuntary
                  dissolution,  liquidation  or winding up of the affairs of the
                  Company;  then,  in each case,  the Company  shall cause to be
                  filed at each office or agency  maintained  for the purpose of
                  conversion of the Debentures,  and shall cause to be mailed to
                  the Holders at their last  addresses as they shall appear upon
                  the stock  books of the  Company,  at least 20  calendar  days
                  prior to the applicable  record or effective date  hereinafter
                  specified,  a notice stating (x) the date on which a record is
                  to be taken for the  purpose of such  dividend,  distribution,
                  redemption,  rights or  warrants,  or if a record is not to be
                  taken, the date as of which the holders of the Common Stock of
                  record  to  be  entitled  to  such  dividend,   distributions,
                  redemption, rights or warrants are to be determined or (y) the
                  date on which such  reclassification,  consolidation,  merger,
                  sale,  transfer  or  share  exchange  is  expected  to  become
                  effective  or close,  and the date as of which it is  expected
                  that  holders of the Common  Stock of record shall be entitled
                  to exchange  their shares of the Common Stock for  securities,
                  cash or other property deliverable upon such reclassification,
                  consolidation,  merger,  sale,  transfer  or  share  exchange;
                  provided,  that the  failure to mail such notice or any defect
                  therein  or in  the  mailing  thereof  shall  not  affect  the
                  validity of the corporate  action  required to be specified in
                  such notice. Holders are entitled to convert Debentures during
                  the 20-day  period  commencing  the date of such notice to the
                  effective date of the event triggering such notice.

                           iii. Fundamental  Transaction.  If, at any time while
                  this  Debenture is  outstanding,  (A) the Company  effects any
                  merger or  consolidation  of the Company  with or into another
                  Person,   (B)  the   Company   effects  any  sale  of  all  or
                  substantially  all of its assets in one or a series of related
                  transactions,  (C) any tender offer or exchange offer (whether
                  by the  Company or another  Person) is  completed  pursuant to
                  which  holders  of  Common  Stock are  permitted  to tender or
                  exchange their shares for other securities,  cash or property,
                  or (D) the Company effects any  reclassification of the Common
                  Stock or any compulsory  share exchange  pursuant to which the
                  Common Stock is  effectively  converted  into or exchanged for
                  other  securities,  cash or  property  (in any  such  case,  a
                  "Fundamental   Transaction"),   then   upon   any   subsequent
                  conversion of this Debenture,  the Holder shall have the right
                  to  receive,  for each  Conversion  Share that would have been
                  issuable  upon  such   conversion   absent  such   Fundamental


                                       16
<PAGE>

                  Transaction,  the same kind and amount of securities,  cash or
                  property as it would have been  entitled  to receive  upon the
                  occurrence  of such  Fundamental  Transaction  if it had been,
                  immediately prior to such Fundamental Transaction,  the holder
                  of one share of Common Stock (the "Alternate  Consideration").
                  For purposes of any such conversion,  the determination of the
                  Conversion Price shall be  appropriately  adjusted to apply to
                  such Alternate  Consideration based on the amount of Alternate
                  Consideration issuable in respect of one share of Common Stock
                  in  such  Fundamental  Transaction,   and  the  Company  shall
                  apportion   the   Conversion   Price   among   the   Alternate
                  Consideration in a reasonable  manner  reflecting the relative
                  value   of  any   different   components   of  the   Alternate
                  Consideration. If holders of Common Stock are given any choice
                  as to the  securities,  cash or  property  to be received in a
                  Fundamental  Transaction,  then the Holder  shall be given the
                  same choice as to the Alternate Consideration it receives upon
                  any  conversion of this Debenture  following such  Fundamental
                  Transaction.   To  the  extent  necessary  to  effectuate  the
                  foregoing   provisions,   any  successor  to  the  Company  or
                  surviving entity in such Fundamental  Transaction  shall issue
                  to the Holder a new  debenture  consistent  with the foregoing
                  provisions  and  evidencing the Holder's right to convert such
                  debenture  into  Alternate  Consideration.  The  terms  of any
                  agreement  pursuant  to  which a  Fundamental  Transaction  is
                  effected  shall include terms  requiring any such successor or
                  surviving  entity  to  comply  with  the  provisions  of  this
                  paragraph  (c) and insuring  that this  Debenture (or any such
                  replacement  security)  will be  similarly  adjusted  upon any
                  subsequent transaction analogous to a Fundamental Transaction.

                           iv. Exempt Issuance.  Notwithstanding  the foregoing,
                  no adjustment  will be made under this Section 5 in respect of
                  an Exempt Issuance.

         Section 6.  Redemption and Forced Conversion.

                  a) Optional Redemption at Election of Company.  Subject to the
         provisions  of  this  Section  6,  if at  any  time  after  the 1  year
         anniversary of the Effective Date each of the Closing Prices during any
         20  consecutive  Trading  Day  period is less than the then  Conversion
         Price (such period  commencing only after such  anniversary  date, such
         period the "Redemption  Threshold  Period"),  the Company may, within 1
         Trading Day of any Redemption Threshold Period, deliver a notice to the
         Holders (an  "Optional  Redemption  Notice" and the date such notice is
         deemed delivered  hereunder,  the "Optional Redemption Notice Date") of
         its  irrevocable  election to redeem on the 20th Trading Day  following
         the  Optional   Redemption   Notice  Date  (such  date,  the  "Optional
         Redemption Date" and such redemption, the "Optional Redemption") all of
         the then outstanding  Debentures,  for an amount, in cash, equal to the
         Optional  Redemption Amount.  The Optional  Redemption Amount is due in
         full on the Optional  Redemption  Date.  The Company may only effect an
         optional  redemption if during the Redemption  Threshold Period through
         to the Optional  Redemption  Date, each of the Equity  Conditions shall
         have  been  met.  If any of the  Equity  Conditions  shall  cease to be
         satisfied at any time during the required  period,  then the Holder may


                                       17
<PAGE>

         elect to  nullify  the  Optional  Redemption  Notice  by  notice to the
         Company  within 3  Trading  Days  after the first day on which any such
         Equity  Condition has not been met (provided that if, by a provision of
         the Transaction Documents the Company is obligated to notify the Holder
         of the non-existence of an Equity  Condition,  such notice period shall
         be  extended  to the third  Trading  Day after  proper  notice from the
         Company) in which case the Optional Redemption Notice shall be null and
         void,  ab initio.  Any election by the Company  under this Section 6(a)
         shall require the redemption of all Debentures.

                  b)  Redemption  Procedure.  The payment of cash pursuant to an
         Optional  Redemption shall be made on the Optional  Redemption Date. If
         any portion of the cash payment for an Optional Redemption shall not be
         paid by the Company by the respective  due date,  interest shall accrue
         thereon at the rate of 18% per annum (or the maximum rate  permitted by
         applicable  law,  whichever  is less)  until  the  Optional  Redemption
         Amount, plus all amounts owing thereon is paid in full.  Alternatively,
         if any portion of the Optional  Redemption  Amount remains unpaid after
         such date,  the  Holders  may elect,  by written  notice to the Company
         given at any time thereafter,  to invalidate ab initio such redemption,
         notwithstanding  anything herein  contained to the contrary,  and, with
         respect the failure to honor the Optional Redemption, the Company shall
         have no further right to exercise such Optional Redemption.  The Holder
         may elect to convert the outstanding  principal amount of the Debenture
         pursuant  to  Section  4  prior  to  actual  payment  in  cash  for any
         redemption  under  this  Section  6 by  fax  delivery  of a  Notice  of
         Conversion  to the Company.  The Company  covenants  and agrees that it
         will honor all Conversion Notices tendered from the time of delivery of
         the  Optional  Redemption  Notice  through the date all  amounts  owing
         thereon are due and paid in full.

                  c) Forced Conversion.

                           i.  Notwithstanding  anything herein to the contrary,
                  if after the 1 year  anniversary of the Effective Date each of
                  the Closing Prices for any 20  consecutive  Trading Days (such
                  period  commencing  only after  such  anniversary  date,  such
                  period the "Conversion  Threshold  Period")) equals or exceeds
                  175% of the then Conversion  Price,  the Company may, within 1
                  Trading  Day of the end of any  Conversion  Threshold  Period,
                  deliver a notice to the Holder (a "Forced  Conversion  Notice"
                  and the date  such  notice  is  received  by the  Holder,  the
                  "Forced  Conversion  Notice  Date")  to cause  the  Holder  to
                  immediately  convert  all  or  part  of the  then  outstanding
                  principal  amount of Debentures  pursuant to Sections 4(a) and
                  4(b). The Company may only effect a Forced  Conversion  Notice
                  if all of the Equity Conditions are met through the Conversion
                  Threshold  Period  until  the  date of the  applicable  Forced
                  Conversion.  Any Forced Conversion shall be applied ratably to
                  all Holders  based on their  initial  purchases of  Debentures
                  pursuant to the Purchase Agreement.

                           ii. Notwithstanding  anything herein to the contrary,
                  if (A)  the  Company  has  obtained  Shareholder  Approval  in
                  accordance  with the  rules  and  regulations  of the  Trading
                  Market and (B) during the period beginning on the 80th Trading


                                       18
<PAGE>

                  Day prior to the  Maturity  Date  until the 60th  Trading  Day
                  prior to the Maturity Date the average daily trading volume of
                  the  Common  Stock  equals  or  exceeds  65,000   (subject  to
                  adjustment  for  reverse  and  forward  stock  splits,   stock
                  dividends,  stock combinations and other similar  transactions
                  of the  Common  Stock  that  occur  after  the  date  of  this
                  Agreement) (such period the "Maturity Threshold Period"),  the
                  Company may, within 1 Trading Day of the end of such Threshold
                  Period, deliver a notice to the Holder (a "Maturity Conversion
                  Notice"  and the date such  notice is  received by the Holder,
                  the "Maturity  Conversion Notice Date") to cause the Holder to
                  immediately  convert  all of the  then  outstanding  principal
                  amount of Debentures  pursuant to Section 4(a) (the  "Maturity
                  Conversion"); provided, however, the conversion price for such
                  Maturity  Conversion  shall be equal to the  lesser of (x) the
                  then Conversion  Price and (y) 90% of the average of the VWAPs
                  for the 20 Trading Days immediately prior to the Maturity Date
                  (the "Maturity Conversion Price"). The Company may only effect
                  a Maturity  Conversion  Notice if all of the Equity Conditions
                  are met through  the  Threshold  Period  until the date of the
                  applicable Maturity Conversion.  Any Maturity Conversion shall
                  be  applied  ratably  to all  Holders  based on their  initial
                  purchases of Debentures pursuant to the Purchase Agreement.

         Section 7. Negative  Covenants.  So long as 10% of the principal amount
of this Debenture is  outstanding,  the Company will not and will not permit any
of its  Subsidiaries to directly or indirectly:

                  a) enter into,  create,  incur,  assume or suffer to exist any
         indebtedness  or liens of any kind,  on or with  respect  to any of its
         property  or assets now owned or  hereafter  acquired  or any  interest
         therein or any income or profits  therefrom  that is senior to, or pari
         passu  with,  in any  respect,  the  Company's  obligations  under  the
         Debentures,  excluding  purchase  money security  interests  granted to
         suppliers to the Company and any of the foregoing  that are made in the
         ordinary  course of business of the  Company and its  Subsidiaries;

                  b) amend its  certificate of  incorporation,  bylaws or to her
         charter documents so as to adversely affect any rights of the Holder;

                  c)  repay,   repurchase  or  offer  to  repay,  repurchase  or
         otherwise acquire more than a de minimis number of shares of its Common
         Stock or other equity securities other than as to the Conversion Shares
         to the extent permitted or required under the Transaction  Documents or
         as otherwise permitted by the Transaction Documents; or

                  d)  enter  into  any  agreement  with  respect  to  any of the
         foregoing.

         Section 8.   Events of Default.

                  a) "Event of Default," wherever used herein,  means any one of
         the  following  events  (whatever  the reason  and  whether it shall be
         voluntary or involuntary or effected by operation of law or pursuant to


                                       19
<PAGE>

         any  judgment,  decree or order of any  court,  or any  order,  rule or
         regulation of any administrative or governmental body):

                           i. any default in the payment of (A) the principal of
                  amount of any Debenture, or (B) interest (including Late Fees)
                  on, or  liquidated  damages in respect of, any  Debenture,  in
                  each case free of any claim of subordination,  as and when the
                  same shall  become due and payable  (whether  on a  Conversion
                  Date or the Maturity  Date or by  acceleration  or  otherwise)
                  which  default,  solely in the case of an interest  payment or
                  other default under clause (B) above,  is not cured,  within 3
                  Trading Days;

                           ii. the Company  shall fail to observe or perform any
                  other covenant or agreement contained in this Debenture or any
                  of the other Transaction Documents (other than a breach by the
                  Company of its  obligations  to deliver shares of Common Stock
                  to the Holder upon  conversion  which  breach is  addressed in
                  clause (xii) below) which failure is not cured, if possible to
                  cure,  within the earlier to occur of (A) 5 Trading Days after
                  notice  of such  default  sent by the  Holder  or by any other
                  Holder and (B)10  Trading Days after the Company  shall become
                  or should have, with the exercise of reasonable  care,  become
                  aware of such failure;

                           iii. a default or event of  default  (subject  to any
                  grace or cure period provided for in the applicable agreement,
                  document  or  instrument)  shall  occur  under  (A) any of the
                  Transaction  Documents other than the  Debentures,  or (B) any
                  other  material  agreement,  lease,  document or instrument to
                  which the Company or any  Subsidiary is bound and which is not
                  covered during the applicable cure period;

                           iv. any  representation  or warranty made herein,  in
                  any  other  Transaction  Document,  in any  written  statement
                  pursuant hereto or thereto, or in any other report,  financial
                  statement  or  certificate  made or delivered to the Holder or
                  any other holder of Debentures shall be untrue or incorrect in
                  any material respect as of the date when made or deemed made;

                           v. (i) the Company or any of its  Subsidiaries  shall
                  commence,  or there shall be commenced  against the Company or
                  any such Subsidiary, a case under any applicable bankruptcy or
                  insolvency laws as now or hereafter in effect or any successor
                  thereto, or the Company or any Subsidiary  commences any other
                  proceeding under any reorganization,  arrangement,  adjustment
                  of  debt,  relief  of  debtors,  dissolution,   insolvency  or
                  liquidation or similar law of any jurisdiction  whether now or
                  hereafter in effect  relating to the Company or any Subsidiary
                  thereof or (ii) there is commenced  against the Company or any
                  Subsidiary  thereof any such  bankruptcy,  insolvency or other
                  proceeding which remains  undismissed for a period of 60 days;
                  or (iii) the Company or any Subsidiary  thereof is adjudicated
                  by a court of competent jurisdiction insolvent or bankrupt; or
                  any order of relief or other order  approving any such case or
                  proceeding is entered;  or (iv) the Company or any  Subsidiary


                                       20
<PAGE>

                  thereof  suffers any  appointment of any custodian or the like
                  for it or any substantial part of its property which continues
                  undischarged  or unstayed for a period of 60 days;  or (v) the
                  Company or any Subsidiary  thereof makes a general  assignment
                  for the benefit of  creditors;  or (vi) the Company shall fail
                  to pay,  or shall  state that it is unable to pay, or shall be
                  unable to pay,  its debts  generally  as they  become  due; or
                  (vii) the  Company  or any  Subsidiary  thereof  shall  call a
                  meeting  of  its   creditors   with  a  view  to  arranging  a
                  composition,  adjustment  or  restructuring  of its debts;  or
                  (viii) the Company or any Subsidiary  thereof shall by any act
                  or failure to act expressly  indicate its consent to, approval
                  of or  acquiescence  in any  of the  foregoing;  or  (ix)  any
                  corporate  or other  action  is taken  by the  Company  or any
                  Subsidiary  thereof  for the purpose of  effecting  any of the
                  foregoing;

                           vi. the Company or any  Subsidiary  shall  default in
                  any of its obligations under any mortgage, credit agreement or
                  other facility,  indenture  agreement,  factoring agreement or
                  other instrument under which there may be issued,  or by which
                  there  may  be  secured  or  evidenced  any  indebtedness  for
                  borrowed  money or money due under  any long term  leasing  or
                  factoring  arrangement  of the Company in an amount  exceeding
                  $150,000,  whether  such  indebtedness  now  exists  or  shall
                  hereafter  be created and such  default  shall  result in such
                  indebtedness  becoming or being declared due and payable prior
                  to the  date  on  which  it  would  otherwise  become  due and
                  payable;

                           vii.  the  Common  Stock  shall not be  eligible  for
                  quotation  on or quoted for  trading  on a Trading  Market and
                  shall  not again be  eligible  for and  quoted  or listed  for
                  trading thereon within five Trading Days;

                           viii.  the Company  shall be a party to any Change of
                  Control Transaction or Fundamental Transaction, shall agree to
                  sell or  dispose  of all or in excess of 40% of its  assets in
                  one or more  transactions  (whether  or not  such  sale  would
                  constitute a Change of Control Transaction) or shall redeem or
                  repurchase  more than a de minimis  number of its  outstanding
                  shares  of  Common  Stock or other  equity  securities  of the
                  Company  (other  than  redemptions  of  Conversion  Shares and
                  repurchases   of  shares  of  Common  Stock  or  other  equity
                  securities of departing officers and directors of the Company;
                  provided such repurchases  shall not exceed  $100,000,  in the
                  aggregate,  for all officers and directors  during the term of
                  this  Debenture)  or the  Company  or any of its  Subsidiaries
                  shall sell,  pledge,  dispose of or otherwise  encumber any of
                  its  respective   Intellectual   Property  Rights;   provided,
                  however,  that nothing contained in this subsection 8(a)(viii)
                  shall be deemed to limit the Company's  ability to license its
                  Intellectual Property or abandon or discontinue prosecution of
                  any of its Intellectual Property in the ordinary course of its
                  business;


                                       21
<PAGE>

                           ix. a  Registration  Statement  shall  not have  been
                  declared  effective by the Commission on or prior to the 180th
                  calendar  day after the Closing Date or any other or any other
                  Event (as defined in the Registration Rights Agreement);

                           x. if, during the Effectiveness Period (as defined in
                  the Registration  Rights Agreement),  the effectiveness of the
                  Registration  Statement  lapses  for any  reason or the Holder
                  shall not be permitted to resell  Registrable  Securities  (as
                  defined  in  the  Registration  Rights  Agreement)  under  the
                  Registration  Statement,  in  either  case,  for more  than 30
                  consecutive  Trading Days or 60  non-consecutive  Trading Days
                  during any 12 month  period;  provided,  however,  that in the
                  event that the Company is negotiating a merger, consolidation,
                  acquisition or sale of all or substantially  all of its assets
                  or a similar transaction and in the written opinion of counsel
                  to the Company, the Registration Statement,  would be required
                  to  be  amended  to  include   information   concerning   such
                  transactions  or the parties  thereto that is not available or
                  may not be publicly  disclosed at the time,  the Company shall
                  be  permitted  an  additional  30  consecutive   Trading  Days
                  one-time during any 12 month period relating to such an event;

                           xi. an Event (as defined in the  Registration  Rights
                  Agreement)  shall not have been cured to the  satisfaction  of
                  the Holder  prior to the  expiration  of thirty  days from the
                  Event Date (as defined in the Registration  Rights  Agreement)
                  relating thereto (other than an Event resulting from a failure
                  of an Registration  Statement to be declared  effective by the
                  Commission on or prior to the  Effectiveness  Date (as defined
                  in the Registration Rights Agreement),  which shall be covered
                  by Section 8(a)(ix);

                           xii. the Company shall fail for any reason to deliver
                  certificates  to a Holder prior to the fifth Trading Day after
                  a Conversion  Date pursuant to and in accordance  with Section
                  4(d)  or the  Company  shall  provide  notice  to the  Holder,
                  including by way of public  announcement,  at any time, of its
                  intention not to comply with requests for  conversions  of any
                  Debentures in accordance with the terms hereof;

                           xiii. the Company shall fail for any reason to pay in
                  full the  amount  of cash due  pursuant  to a Buy-In  within 7
                  Trading Days after notice  therefor is delivered  hereunder or
                  shall fail to pay all  amounts  owed on account of an Event of
                  Default within five days of the date due;

                           xiv.  the  Company  shall  fail to have  available  a
                  sufficient  number  of  authorized  and  unreserved  shares of
                  Common  Stock  to  issue  to  such  Holder  upon a  conversion
                  hereunder; or

                           xv. any Person shall breach the agreements  delivered
                  to the initial  Holders  pursuant to Section  2.2(a)(v) of the
                  Purchase Agreement and the Company does not obtain Shareholder
                  Approval.


                                       22
<PAGE>

                  b)  Remedies  Upon Event of  Default.  If any Event of Default
         occurs,  the full  principal  amount of this  Debenture,  together with
         interest and other  amounts  owing in respect  thereof,  to the date of
         acceleration  shall become, at the Holder's  election,  immediately due
         and payable in cash.  The  aggregate  amount  payable  upon an Event of
         Default shall be equal to the Mandatory Prepayment Amount. Commencing 5
         days after the  occurrence  of any Event of Default that results in the
         eventual  acceleration  of this  Debenture,  the interest  rate on this
         Debenture  shall  accrue at the rate of 18% per  annum,  or such  lower
         maximum  amount of interest  permitted to be charged  under  applicable
         law. All  Debentures  for which the full  Mandatory  Prepayment  Amount
         hereunder shall have been paid in accordance herewith shall promptly be
         surrendered  to or as  directed  by the  Company.  The Holder  need not
         provide and the Company hereby waives any presentment,  demand, protest
         or other notice of any kind, and the Holder may immediately and without
         expiration  of any grace  period  enforce any and all of its rights and
         remedies  hereunder  and  all  other  remedies  available  to it  under
         applicable  law.  Such  declaration  may be  rescinded  and annulled by
         Holder at any time prior to payment hereunder and the Holder shall have
         all rights as a Debenture  holder until such time,  if any, as the full
         payment  under this  Section  shall have been  received  by it. No such
         rescission or annulment shall affect any subsequent Event of Default or
         impair any right consequent thereon.

         Section 9.   Miscellaneous.

                  a)  Notices.  Any and all notices or other  communications  or
         deliveries  to be provided by the Holders or by the Company  hereunder,
         including,  without limitation, any Notice of Conversion, shall be made
         in accordance with Section 5.4 of the Purchase Agreement.

                  b) Absolute  Obligation.  Except as expressly provided herein,
         no provision of this Debenture  shall alter or impair the obligation of
         the Company, which is absolute and unconditional,  to pay the principal
         of, interest and liquidated  damages (if any) on, this Debenture at the
         time, place, and rate, and in the coin or currency,  herein prescribed.
         This  Debenture  is a  direct  debt  obligation  of the  Company.  This
         Debenture  ranks pari passu with all other  Debentures now or hereafter
         issued under the terms set forth herein.

                  c) Lost or Mutilated  Debenture.  If this  Debenture  shall be
         mutilated,  lost,  stolen or  destroyed,  the Company shall execute and
         deliver,  in exchange and substitution  for and upon  cancellation of a
         mutilated  Debenture,  or in  lieu  of or in  substitution  for a lost,
         stolen or destroyed Debenture, a new Debenture for the principal amount
         of this Debenture so mutilated, lost, stolen or destroyed but only upon
         receipt  of  evidence  of  such  loss,  theft  or  destruction  of such
         Debenture,  and of the ownership hereof,  and indemnity,  if requested,
         all reasonably satisfactory to the Company.

                  d) Governing Law. All questions  concerning the  construction,
         validity,  enforcement  and  interpretation  of this Debenture shall be
         governed by and construed and enforced in accordance  with the internal


                                       23
<PAGE>

         laws of the State of New York,  without  regard  to the  principles  of
         conflicts of law thereof.  Each party agrees that all legal proceedings
         concerning  the   interpretations,   enforcement  and  defense  of  the
         transactions  contemplated by any of the Transaction Documents (whether
         brought against a party hereto or its respective affiliates, directors,
         officers, shareholders,  employees or agents) shall be commenced in the
         state and federal  courts  sitting in the City of New York,  Borough of
         Manhattan (the "New York Courts"). Each party hereto hereby irrevocably
         submits to the  exclusive  jurisdiction  of the New York Courts for the
         adjudication of any dispute hereunder or in connection herewith or with
         any transaction contemplated hereby or discussed herein (including with
         respect to the  enforcement of any of the Transaction  Documents),  and
         hereby irrevocably waives, and agrees not to assert in any suit, action
         or  proceeding,  any claim  that it is not  personally  subject  to the
         jurisdiction of any such court, or such New York Courts are improper or
         inconvenient  venue for such proceeding.  Each party hereby irrevocably
         waives personal service of process and consents to process being served
         in any such suit,  action or  proceeding  by mailing a copy thereof via
         registered or certified  mail or overnight  delivery  (with evidence of
         delivery)  to such party at the  address  in effect  for  notices to it
         under this Debenture and agrees that such service shall constitute good
         and sufficient service of process and notice thereof. Nothing contained
         herein  shall be deemed to limit in any way any right to serve  process
         in any manner  permitted by law. Each party hereto  hereby  irrevocably
         waives,  to the fullest extent permitted by applicable law, any and all
         right  to  trial  by jury in any  legal  proceeding  arising  out of or
         relating to this Debenture or the transactions  contemplated hereby. If
         either  party  shall  commence an action or  proceeding  to enforce any
         provisions of this Debenture,  then the prevailing party in such action
         or proceeding  shall be reimbursed by the other party for its attorneys
         fees and other  costs and  expenses  incurred  with the  investigation,
         preparation and prosecution of such action or proceeding.

                  e) Waiver. Any waiver by the Company or the Holder of a breach
         of any provision of this Debenture shall not operate as or be construed
         to be a waiver of any other  breach of such  provision or of any breach
         of any other provision of this Debenture. The failure of the Company or
         the  Holder  to  insist  upon  strict  adherence  to any  term  of this
         Debenture on one or more occasions  shall not be considered a waiver or
         deprive  that  party of the  right  thereafter  to insist  upon  strict
         adherence to that term or any other term of this Debenture.  Any waiver
         must be in writing.

                  f)  Severability.  If  any  provision  of  this  Debenture  is
         invalid, illegal or unenforceable,  the balance of this Debenture shall
         remain in effect, and if any provision is inapplicable to any person or
         circumstance,  it shall  nevertheless  remain  applicable  to all other
         persons and  circumstances.  If it shall be found that any  interest or
         other amount deemed  interest due hereunder  violates  applicable  laws
         governing  usury,  the applicable  rate of interest due hereunder shall
         automatically  be  lowered  to  equal  the  maximum  permitted  rate of
         interest.  The Company covenants (to the extent that it may lawfully do
         so) that it shall not at any time insist upon,  plead, or in any manner
         whatsoever  claim  or take the  benefit  or  advantage  of,  any  stay,
         extension or usury law or other law which would prohibit or forgive the
         Company from paying all or any portion of the  principal of or interest


                                       24
<PAGE>

         on this Debenture as contemplated  herein,  wherever enacted, now or at
         any time  hereafter in force,  or which may affect the covenants or the
         performance  of this  indenture,  and the Company (to the extent it may
         lawfully do so) hereby  expressly  waives all  benefits or advantage of
         any such law,  and  covenants  that it will not,  by resort to any such
         law, hinder, delay or impeded the execution of any power herein granted
         to the Holder,  but will suffer and permit the  execution of every such
         as though no such law has been enacted.

                  g) Next Business Day. Whenever any payment or other obligation
         hereunder shall be due on a day other than a Business Day, such payment
         shall be made on the next succeeding Business Day.

                  h) Headings. The headings contained herein are for convenience
         only,  do not  constitute  a part of this  Debenture  and  shall not be
         deemed to limit or affect any of the provisions hereof.

                              *********************


                            [SIGNATURE PAGE FOLLOWS]



                                       25
<PAGE>

         IN WITNESS WHEREOF,  the Company has caused this Convertible  Debenture
to be duly  executed  by a duly  authorized  officer as of the date first  above
indicated.


                                          DIOMED HOLDINGS, INC.


                                          By:
                                              --------------------------------
                                              Name:
                                              Title:




                                       26
<PAGE>

                                     ANNEX A

                              NOTICE OF CONVERSION


         The undersigned  hereby elects to convert  principal under the Variable
Rate  Convertible  Debenture of Diomed Holdings,  Inc.., a Delaware  corporation
(the  "Company"),  due on October ___,  2008,  into shares of common stock,  par
value $0.001 per share (the  "Common  Stock"),  of the Company  according to the
conditions  hereof,  as of the date written below. If shares are to be issued in
the name of a person other than the  undersigned,  the undersigned  will pay all
transfer  taxes  payable with respect  thereto and is  delivering  herewith such
certificates  and opinions as reasonably  requested by the Company in accordance
therewith.  No fee will be charged to the holder for any conversion,  except for
such transfer taxes, if any.

         By the delivery of this Notice of Conversion the undersigned represents
and warrants to the Company that its  ownership  of the  Company's  Common Stock
does not exceed the amounts  determined in accordance  with Section 13(d) of the
Exchange Act, as further specified under Section 4(c) of this Debenture.

         The  undersigned   agrees  to  comply  with  the  prospectus   delivery
requirements  under  the  applicable  securities  laws in  connection  with  any
transfer of the aforesaid shares of Common Stock.

Conversion calculations:

                               Date to Effect Conversion:

                               Principal Amount of Debentures to be Converted:

                               Payment of Interest in Common Stock __ yes  __ no
                                  If yes, $_____ of Interest Accrued on Account
                                  of Conversion at Issue.

                               Number of shares of Common Stock to be issued:


                               Signature:

                               Name:

                               Address:




                                       27
<PAGE>

                                   SCHEDULE 1

                               CONVERSION SCHEDULE

The  Variable  Rate  Convertible  Debentures  due on October ___,  2008,  in the
aggregate  principal  amount of $____________  issued by Diomed Holdings,  Inc..
This Conversion Schedule reflects  conversions made under Section 4 of the above
referenced Debenture.

                                              Dated:

--------------------------------------------------------------------------------
                                                Aggregate
                                                Principal
                                                 Amount
                                                Remaining
                                              Subsequent to
                                               Conversion
   Date of Conversion                         (or original
  (or for first entry,        Amount of         Principal
  Original Issue Date)       Conversion          Amount)        Company Attest
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                                       28