Document:

Exhibit 10.5

                            PATENT SECURITY AGREEMENT

                  THIS PATENT  SECURITY  AGREEMENT,  dated as of August 29, 2003
(this  "AGREEMENT"),   between  DIOMED,   INC.,  a  Delaware   corporation  (the
"GRANTOR"),  and GIBRALT US,  INC.,  a Colorado  corporation,  as agent (in such
capacity,  the  "DESIGNATED  NOTE  INVESTOR")  for  the  Secured  Parties  (such
capitalized term and all other capitalized terms not otherwise defined herein to
have the meanings provided for in the Security Agreement referred to below).

                              W I T N E S S E T H:

                  WHEREAS, pursuant to a Security Agreement dated as of the date
hereof (as such agreement may be amended, amended and restated,  supplemented or
otherwise  modified from time to time,  the "SECURITY  AGREEMENT"),  between the
Grantor and the  Designated  Note  Investor  and in order to obtain the benefits
referred to therein,  the Grantor has granted to the Designated  Note Investor a
security  interest in substantially  all of the Grantor's  property,  including,
without limitation, the Collateral referred to in SECTION 1 below; and

                  WHEREAS,  pursuant to the Security Agreement,  the Grantor has
agreed to execute this Agreement in respect of its Collateral for recording with
the U.S.  Patent and  Trademark  Office and any other office in which a security
interest  in  the  Collateral  may be  recorded  under  the  laws  of any  other
applicable jurisdiction;

                  NOW,  THEREFORE,  in  consideration  of the  premises  and the
mutual  covenants  and  agreements  hereinafter  set forth,  the Grantor and the
Designated Note Investor agree as follows:

         1.1 GRANT OF SECURITY. The Grantor hereby grants to the Designated Note
Investor  for the benefit of the Secured  Parties a security  interest in and to
all of such  Grantor's  right,  title and interest in and to the following  (the
"COLLATERAL"):

                  (a) the United  States,  international,  and foreign  patents,
patent  applications and patent licenses set forth in SCHEDULE A hereto opposite
the name of such Grantor, as SCHEDULE A may be supplemented from time to time by
supplements to the Security  Agreement and this Agreement  which may be executed
and  delivered  by such Grantor to the  Administrative  Agent from time to time,
together with all  reissues,  divisions,  continuations,  continuations-in-part,
extensions  and  reexaminations  thereof,  and all rights  therein  provided  by
international treaties or conventions (the "PATENTS");

                  (b) any and all  claims  for  damages  for past,  present  and
future  infringement,  misappropriation  or breach with  respect to the Patents,
with the right,  but not the  obligation,  to sue for and collect,  or otherwise
recover, such damages; and

                  (c) any and all Proceeds of the foregoing.

                                       1
<PAGE>

         1.2 SECURITY FOR OBLIGATIONS.  The pledge and collateral assignment of,
and the grant of a security  interest in, the  Collateral  by the Grantor  under
this Agreement secures the payment of all Secured Obligations of the Grantor now
or hereafter existing,  whether direct or indirect,  absolute or contingent, and
whether for principal, reimbursement obligations, interest, premiums, penalties,
fees, indemnifications, contract causes of action, costs, expenses or otherwise.

         1.3  RECORDATION.   The  Grantor   authorizes  and  requests  that  the
Commissioner  of Patents  and  Trademarks  and any other  applicable  government
officer record this Agreement.

         1.4 EXECUTION IN  COUNTERPARTS.  This  Agreement may be executed in any
number of counterparts,  each of which when so executed shall be deemed to be an
original  and all of which  taken  together  shall  constitute  one and the same
agreement.

         1.5 GRANTS,  RIGHTS AND REMEDIES.  This Agreement has been entered into
in conjunction with the provisions of the Security  Agreement.  The Grantor does
hereby acknowledge and confirm that the grant of the security interest hereunder
to, and the rights and remedies of, the Designated Note Investor with respect to
the Collateral are more fully set forth in the Security Agreement, the terms and
provisions of which are  incorporated  herein by reference as if fully set forth
herein.

         1.6 GOVERNING LAW. This  Agreement  shall be governed by, and construed
in accordance with, the laws of the State of New York.

                              [Signatures follow.]

                                       2
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         IN WITNESS WHEREOF,  the parties hereto have executed this Agreement by
their duly authorized officers as of the day and year first above written.

                                DIOMED, INC.
                                ("GRANTOR")

                                By: /s/ JAMES A. WYLIE, JR.
                                    --------------------------------------
                                    Name: James A. Wylie, Jr.
                                    Title: Chief Executive Officer

                                GIBRALT US, INC.,
                                as Designated Note Investor
                                ("DESIGNATED NOTE INVESTOR")

                                By: /s/ JOHNNY CIAMPI
                                    ---------------------------------------
                                    Name: Johnny Ciampi
                                    Title: Authorized Officer

<PAGE>

                                                                      SCHEDULE A

         Endovascular Laser Device and Treatment of Varicose Veins (EVLT)

         "A method for treating blood vessels using  endovascular  techniques to
deliver laser energy."

Assigned to Diomed,  Inc. by Robert J. Min, M.D.,  one of five named  inventors,
pursuant to Purchase Agreement dated July 23, 2003.

------------------------------- ----------------------------------------
           Country                              Number
------------------------------- ----------------------------------------
USA                             6,398,777
------------------------------- ----------------------------------------
WO                              200044296
------------------------------- ----------------------------------------
AU                              200029753
------------------------------- ----------------------------------------
EP                              1156751
------------------------------- ----------------------------------------
PCT                             US0002187 (applied 8/13/99)
------------------------------- ----------------------------------------
EP                              00908406 (applied 11/8/00)
------------------------------- ----------------------------------------
CA                              2361634 (applied 8/27/01)
------------------------------- ----------------------------------------Exhibit 10.6

                               SECURITY AGREEMENT

         THIS  SECURITY  AGREEMENT,  dated as of August  29,  2003 (as  amended,
restated, amended and restated,  supplemented or otherwise modified from time to
time, this "AGREEMENT"),  is made by DIOMED,  INC., a Delaware  corporation (the
"GRANTOR"),  in favor of  Gibralt  US,  Inc.,  a  Colorado  corporation  (in its
individual  capacity,   "GUS"),  as  agent  (in  such  capacity  as  agent,  the
"DESIGNATED  NOTE  INVESTOR") for the Secured Parties (as herein after defined).
Capitalized  terms used herein and not otherwise defined in ARTICLE I shall have
their respective  definitions specified under the Securities Purchase Agreement,
dated as of August 8, 2003 (the "SECURITIES PURCHASE  AGREEMENT"),  among Diomed
Holdings, Inc. ("HOLDINGS") and the Investors named therein.

                              W I T N E S S E T H:

         WHEREAS,  pursuant  to  the  Securities  Purchase  Agreement,  Holdings
proposes to issue and sell to the Investors  purchasing  Secured Bridge Notes at
the  Tranche I  Closing,  one or more  Secured  Bridge  Notes,  in an  aggregate
principal amount of $6,995,000.00;

         WHEREAS,  as a condition  precedent  to such  purchase  and sale of the
Secured  Bridge Notes at the Tranche I Closing,  Grantor is required to guaranty
such Secured  Bridge Notes pursuant to its Guarantees and to execute and deliver
this Agreement in order to secure such Guarantees and its obligations  under the
other Investor Documents to which it is a party; and

         WHEREAS, Grantor will derive substantial benefits from the transactions
contemplated  by the Securities  Purchase  Agreement and has duly authorized the
execution, delivery and performance of this Agreement;

         NOW  THEREFORE,  for good and valuable  consideration,  the receipt and
sufficiency of which are hereby acknowledged, and in order to induce the Secured
Parties to purchase the Secured Bridge Notes, Grantor agrees, for the benefit of
the Designated Note Investor and each other Secured Party, as follows:

                                   ARTICLE I
                                   DEFINITIONS

         1.1 DEFINITIONS.  The following terms (whether or not underscored) when
used in this  Agreement,  including  its preamble and  recitals,  shall have the
following  meanings (such  definitions to be equally  applicable to the singular
and plural forms thereof):

         "ACCOUNT" means a right to payment of a monetary obligation, whether or
not  earned by  performance  (and shall  include  invoices,  contracts,  rights,
accounts receivable, notes, refunds, indemnities,  interest, late charges, fees,
undertakings,  and all other  obligations  and amounts owing to Grantor from any
Person):

              (a) for property that has been or is to be sold, leased, licensed,
assigned or otherwise disposed of;

              (b) for services rendered or to be rendered;

<PAGE>

              (c) for a policy of insurance issued or to be issued;

              (d) for a secondary obligation incurred or to be incurred;

              (e) for energy provided or to be provided;

              (f)  for the use or hire of a  vessel  under a  charter  or  other
contract;

              (g)  arising  out of  the  use  of a  credit  or  charge  card  or
information contained on or for use with the card; or

              (h) as winnings  in a lottery or other game of chance  operated or
sponsored  by a state,  governmental  unit of a State,  or  person  licensed  or
authorized to operate the game by a State or governmental unit of a State.

         "ACCOUNT CONTROL  AGREEMENT" means an account control agreement in form
and substance  satisfactory to the Designated Note Investor,  entered into among
Grantor,  the Designated  Note Investor and the bank or Securities  Intermediary
where a Deposit  Account  or  Securities  Account,  respectively,  of Grantor is
maintained,  as such agreement may be amended,  restated,  amended and restated,
supplemented or otherwise modified from time to time.

         "AGREEMENT" is defined in the PREAMBLE.

         "ASSIGNED  AGREEMENT" means each agreement more particularly  described
on SCHEDULE VI hereto (as such  Schedule may be  supplemented  from time to time
pursuant  to SECTION  4.12  hereof),  in each  case,  as such  agreement  may be
amended, restated, amended and restated, supplemented or otherwise modified from
time to time.

         "AUTHENTICATE" means

              (a) to sign; or

              (b) to  execute  or  otherwise  adopt  a  symbol,  or  encrypt  or
similarly  process a record in whole or in part,  with the present intent of the
authenticating person to identify the person and adopt or accept a record.

         "AXCAN" means Axcan Pharma, Inc., a Canadian company.

         "AXCAN NOTE" means that certain  promissory note, dated as of September
24,  2001,  of Grantor in favor of Axcan,  in the original  principal  amount of
$936,000.

         "AXCAN LIEN" means the lien on Inventory of Grantor created in favor of
Axcan pursuant to the Axcan Note.

         "CHATTEL PAPER" means a record or records that evidence both a monetary
obligation and a security  interest in specific  goods,  a security  interest in
specific goods and software used in the goods,  a security  interest in specific
goods and license of software used in the goods, a lease of specific goods, or a
lease of specific goods and license of software used in the goods.

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<PAGE>

         "COLLATERAL" is defined in SECTION 2.1.

         "COLLATERAL  ACCOUNT" means, for Grantor, a deposit account in the name
of the Designated  Note Investor and subject to the sole dominion and control of
the Designated Note Investor.

         "COMMERCIAL  TORT CLAIM" means a claim  arising in tort with respect to
which:

              (a) the claimant is an organization; or

              (b) the claimant is an individual and the claim:

                  (i)      arose in the  course of the  claimant's  business  or
                           profession; and

                  (ii)     does not  include  damages  arising  out of  personal
                           injury to or the death of an individual.

         "COMMODITY   ACCOUNT"  means  an  account  maintained  by  a  Commodity
Intermediary  in which a  Commodity  Contract  is  carried  out for a  Commodity
Customer.

         "COMMODITY CONTRACT" means a commodity futures contract, an option on a
commodity  futures  contract,  a commodity option or any other contract that, in
each case, is

              (a) traded on or subject to the rules of a board of trade that has
been designated as a contract market for such a contract pursuant to the federal
commodities laws; or

              (b)  traded on a foreign  commodity  board of trade,  exchange  or
market, and is carried on the books of a Commodity  Intermediary for a Commodity
Customer.

         "COMMODITY  CUSTOMER" means a person for whom a Commodity  Intermediary
carries a Commodity Contract on its books.

         "COMMODITY INTERMEDIARY" means

              (a) a Person who is  registered as a futures  commission  merchant
under the federal commodities laws; or

              (b) a Person who in the ordinary  course of its business  provides
clearance or settlement  services for a board of trade that has been  designated
as a contract market pursuant to federal commodities laws.

         "COMPUTER HARDWARE AND SOFTWARE COLLATERAL" means:

              (a) all computer and other  electronic data  processing  hardware,
integrated  computer systems,  central processing units,  memory units,  display
terminals,  printers,  features,  computer elements,  card readers, tape drives,
hard and soft disk drives, cables, electrical supply hardware, generators, power
equalizers,  accessories and all peripheral  devices and other related  computer
hardware;

                                       3
<PAGE>

              (b) all software programs (including both source code, object code
and all related  applications  and data  files),  whether now owned or hereafter
acquired by Grantor,  designed  for use on the  computers  and  electronic  data
processing hardware described in CLAUSE (A) above;

              (c) all licenses and leases of software programs;

              (d) all firmware associated therewith;

              (e) all  documentation  (including  flow charts,  logic  diagrams,
manuals, guides and specifications) with respect to such hardware,  software and
firmware described in the preceding CLAUSES (A) through (D); and

              (f) all rights with respect to all of the foregoing, including any
and all copyrights,  licenses, options,  warranties,  service contracts, program
services, test rights,  maintenance rights, support rights,  improvement rights,
renewal  rights  and  indemnifications  and  any  substitutions,   replacements,
additions, modifications or model conversions of any of the foregoing.

         "CONTROL" means any appropriate method of gaining control of collateral
under the U.C.C.

         "COPYRIGHT COLLATERAL" means:

              (a) all  copyrights of Grantor,  whether  statutory or common law,
registered  or  unregistered,  now or  hereafter in force  throughout  the world
including all of Grantor's  right,  title and interest in and to all  copyrights
registered in the United States  Copyright  Office or anywhere else in the world
and also including the copyrights  referred to in ITEM A of SCHEDULE IV attached
hereto (as such  Schedule  may be  supplemented  from time to time  pursuant  to
SECTION 4.12 hereof),  and all applications for  registration  thereof,  whether
pending or in preparation;

              (b) all  copyright  licenses,  including  each  copyright  license
referred to in ITEM B of SCHEDULE IV attached  hereto (as such  Schedule  may be
supplemented from time to time pursuant to SECTION 4.12 hereof); and

              (c) the right to sue for past, present and future infringements of
any  thereof,  all  rights  corresponding  thereto  throughout  the  world,  all
extensions  and  renewals  of any thereof  and all  proceeds  of the  foregoing,
including licenses, royalties, income, payments, claims, damages and proceeds of
suit.

         "DEPOSIT ACCOUNT" means a demand, time, savings,  passbook,  or similar
account  (including all bank  accounts,  collection  accounts and  concentration
accounts,  together  with  all  funds  held  therein  and all  certificates  and
instruments, if any, from time to time representing or evidencing such accounts)
maintained with a bank.

         "DESIGNATED NOTE INVESTOR" is defined in the PREAMBLE and shall include
any  successor  agent for the holders of the Secured  Bridge Notes  appointed by
such holders pursuant to SECTION 6.1 (G).

                                       4
<PAGE>

         "DOCUMENTS"  means  a  document  of  title  or a  receipt  of the  type
described in Section 7-201(2) of the U.C.C.

         "ELECTRONIC CHATTEL PAPER" means Chattel Paper evidenced by a record or
records consisting of information stored in an electronic medium.

         "ENTITLEMENT  HOLDER"  means a Person  identified  in the  records of a
Securities  Intermediary as the Person having a Security Entitlement against the
Securities  Intermediary.  If a person acquires a Security Entitlement by virtue
of Section  8-501(b)(2)  or (3) of the U.C.C.,  such  person is the  Entitlement
Holder.

         "EQUIPMENT" means all machinery,  equipment in all its forms,  wherever
located, including all computers,  furniture and furnishings, all other property
similar to the foregoing  (including tools, parts, rolling stock and supplies of
every kind and description), components, parts and accessories installed thereon
or affixed thereto and all parts thereof,  and all Fixtures and all accessories,
additions, attachments, improvements, substitutions and replacements thereto and
therefor.

         "EVLT  PATENT" has the  meaning  provided  in the  Securities  Purchase
Agreement.

         "FINANCIAL ASSET" means

              (a) a Security;

              (b) an obligation of a Person or a share,  participation  or other
interest in a Person or in property or an enterprise  of a Person,  which is, or
is of a type,  dealt  with in or  traded  on  financial  markets,  or  which  is
recognized  in any  area in  which it is  issued  or  dealt  in as a medium  for
investment; or

              (c) any  property  that is held by a Securities  Intermediary  for
another  person in a  Securities  Account  if the  Securities  Intermediary  has
expressly  agreed with the other  Person that the property is to be treated as a
Financial Asset under Article 8 of the U.C.C. As the context requires,  the term
Financial  Asset shall mean either the  interest  itself or the means by which a
Person's claim to it is evidenced,  including a certificated  or  uncertificated
Security, a certificate representing a Security or a Security Entitlement.

         "FIXTURES" means all items of Equipment, whether now owned or hereafter
acquired,  of Grantor that become so related to  particular  real estate that an
interest in them arises under any real estate law applicable thereto.

         "GENERAL  INTANGIBLE" means any personal property,  including things in
action,  Payment Intangibles and software,  other than Accounts,  Chattel Paper,
Commercial  Tort  Claims,  Deposit  Accounts,   Documents,  Goods,  Instruments,
Investment Property, Letter-of-Credit Rights, Letters of Credit, money, and oil,
as, or other minerals before extraction.

         "GOODS"  means all things  that are  movable  when a security  interest
attaches,  including  computer  programs  embedded  in goods and any  supporting
information provided in connection with a transaction relating to the program if
(i)  the  program  is  associated  with  the  goods  in  such a  manner  that is
customarily  is considered  part of the goods,  or (ii) by becoming the owner of
the goods, a person  acquires a right to use the program in connection  with the
goods.

                                       5
<PAGE>

         "GRANTOR" is defined in the PREAMBLE.

         "INTELLECTUAL  PROPERTY COLLATERAL" means,  collectively,  the Computer
Hardware  and  Software  Collateral,   the  Copyright  Collateral,   the  Patent
Collateral  (including,  without  limitations,  the EVLT Patent),  the Trademark
Collateral and the Trade Secrets Collateral.

         "INTELLECTUAL PROPERTY SECURITY AGREEMENT" means a memorandum agreement
with  respect to the  security  interest  granted by  Grantor  pursuant  to this
Agreement in the Copyright Collateral, Patent Collateral or Trademark Collateral
of Grantor  which is  registered  under the federal laws of the United States of
America or the laws of any foreign country, which agreement shall be in form and
substance  satisfactory to the Designated Note Investor and in form suitable for
filing in the United  States  Patent and  Trademark  Office,  the United  States
Copyright  Office or in the  corresponding  filing office under the laws of such
foreign  jurisdiction,  as  applicable,  from Grantor,  as such agreement may be
amended, restated, amended and restated, supplemented or otherwise modified form
time to time.

         "INSTRUMENT"  means a negotiable  instrument  or any other writing that
evidences  a right to the  payment  of a  monetary  obligation,  is not itself a
security  agreement  or  lease,  and is of a type  that in  ordinary  course  of
business  is  transferred   by  delivery  with  any  necessary   endorsement  or
assignment.

         "INVENTORY" means Goods, other than farm products, which:

              (a) are leased by a Person as lessor;

              (b) are  held by a Person  for  sale or  lease or to be  furnished
under a contract of service;

              (c) are furnished by a Person under a contract of service; or

              (d) consist of raw materials,  work in process,  or materials used
or consumed in a business,

and  includes,  without  limitation,  (i)  finished  goods,  returned  goods and
materials and supplies of any kind,  nature or description which are or might be
used in connection with the manufacture, packing, shipping, advertising, selling
or finishing  of any of the  foregoing;  (ii) all goods in which  Grantor has an
interest in mass or a joint or other  interest  or right of any kind  (including
goods in which Grantor has an interest or right as  consignee);  (iii) all goods
which  are  returned  to or  repossessed  by  Grantor;  and (iv) all  accessions
thereto,  products thereof and documents  therefor,  except to the extent that a
security  interest  therein which is deemed necessary by the Grantor or Holdings
is granted to any third party by the Grantor or Holdings pursuant to a factoring
or other asset-based financing transaction entered into from time to time by the
Grantor and/or Holdings.

         "INVESTMENT  DOCUMENT"  has  the  meaning  provided  in the  Securities
Purchase Agreement.

                                       6
<PAGE>

         "INVESTMENT  PROPERTY"  means all Securities  (whether  certificated or
uncertificated),  Security Entitlements,  Securities Accounts, Financial Assets,
Commodity Contracts and Commodity Accounts of Grantor;  PROVIDED,  HOWEVER, that
Investment Property shall not include any certificated  Securities  constituting
Collateral (as defined in the Pledge Agreement).

         "LETTER-OF-CREDIT  RIGHT" means a right to payment or performance under
a letter of credit,  whether or not the  beneficiary  has  demanded or is at the
time  entitled to demand  payment or  performance,  but  excludes the right of a
beneficiary to demand payment or performance under a letter of credit.

         "NOTES" means the Secured Bridge Notes.

         "PATENT COLLATERAL" means:

              (a)  all  letters  patent  and  applications  for  letters  patent
throughout the world  (including  all patent  applications  in  preparation  for
filing  anywhere in the  world),  including  each patent and patent  application
referred to in ITEM A of SCHEDULE II attached  hereto (as such  Schedule  may be
supplemented  from time to time  pursuant to SECTION  4.12  hereof),  including,
without limitation, the EVLT Patent;

              (b) all patent licenses, including each patent license referred to
in ITEM B of SCHEDULE II attached  hereto (as such Schedule may be  supplemented
from  time  to  time  pursuant  to  SECTION  4.12  hereof),  including,  without
limitation, the Patent License Agreement;

              (c) all reissues, divisions, continuations, continuations-in-part,
extensions, renewals and reexaminations of any of the items described in CLAUSES
(A) and (B) above; and

              (d) all proceeds of, and rights  associated  with,  the  foregoing
(including  license royalties and proceeds of infringement  suits), the right to
sue third  parties for past,  present or future  infringements  of any patent or
patent  application,  including any patent or patent application  referred to in
ITEM A of SCHEDULE II attached hereto (as such Schedule may be supplemented from
time to time pursuant to SECTION 4.12 hereof),  and for breach or enforcement of
any patent  license,  including  any  patent  license  referred  to in ITEM B of
SCHEDULE II attached hereto (as such Schedule may be  supplemented  from time to
time  pursuant to SECTION 4.12  hereof),  and all rights  corresponding  thereto
throughout the world.

         "PAYMENT INTANGIBLE" means a general intangible under which the account
debtor's principal obligation is a monetary obligation.

         "PROCEEDS" means the following property:

              (a) whatever is acquired upon the sale, lease, license,  exchange,
or other disposition of the Collateral;

              (b) whatever is collected  on, or  distributed  on account of, the
Collateral;

              (c) rights arising out of the Collateral; and

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<PAGE>

              (d) to the extent of the value of the Collateral and to the extent
payable to the debtor or the secured party,  insurance  payable by reason of the
loss or  nonconformity  of, defects or  infringement of rights in, or damage to,
the Collateral.

Notwithstanding  the  foregoing,  Receivables  Collateral  shall not  constitute
Proceeds of the sale, lease, exchange,  loss, conversion or other disposition of
Inventory.

         "RECEIVABLES  COLLATERAL"  means,  collectively,  Accounts,  Documents,
Instruments  and Chattel  Paper,  except to the extent that a security  interest
therein is granted to any third party by the  Grantor or Holdings  pursuant to a
factoring or other asset-based  financing  transaction entered into from time to
time by the Grantor and/or Holdings.

         "SECURED OBLIGATIONS" is defined in SECTION 2.2.

         "SECURED PARTIES" means the holders of the Secured Bridge Notes and the
Designated Note Investor.

         "SECURITIES"  means  any  obligations  of  an  issuer  or  any  shares,
participations  or other  interests in an issuer or in property or an enterprise
of an issuer which

              (a) are  represented  by a certificate  representing a security in
bearer or registered form, or the transfer of which may be registered upon books
maintained for that purpose by or on behalf of the issuer;

              (b) are one of a class or series or by its terms is divisible into
a class or series of shares, participations, interests or obligations; and

              (c) (i) are, or are of a type,  dealt with or trade on  securities
exchanges or securities markets or (ii) are a medium for investment and by their
terms  expressly  provide that they are a security  governed by Article 8 of the
U.C.C.

         "SECURITIES  ACCOUNT" shall mean an account to which a Financial  Asset
is or may be credited in  accordance  with an  agreement  under which the Person
maintaining  the account  undertakes to treat the Person for whom the account is
maintained as entitled to exercise rights that comprise the Financial Asset.

         "SECURITY  ENTITLEMENTS"  means the rights and property interests of an
Entitlement Holder with respect to a Financial Asset.

         "SECURITY INTERMEDIARY" means

              (a) a clearing corporation; or

              (b) a Person,  including  a bank or broker,  that in the  ordinary
course of its business maintains securities accounts for others and is acting in
that capacity.

         "SUPPORTING  OBLIGATION"  means a  Letter-of-Credit  Right or secondary
obligation  that  supports  the payment or  performance  of an Account,  Chattel
Paper,  Document,   General

                                       8
<PAGE>

Intangible,  Instrument or Investment Property,  including,  without limitation,
all security  agreements,  Guarantees,  leases and other  contracts  securing or
otherwise  relating to any such  Accounts,  Chattel  Paper,  Documents,  General
Intangible,  Instruments or Investment Property,  including Goods represented by
the sale or lease of delivery which gave rise to any of the foregoing,  returned
or  repossessed  merchandise  and  rights  of  stoppage  in  transit,  replevin,
reclamation and other rights and remedies of an unpaid vendor, lienor or secured
party.

         "TANGIBLE  CHATTEL PAPER" means Chattel Paper  evidenced by a record or
records consisting of information that is inscribed on a tangible medium.

         "TERMINATION  DATE" means the date on which the payment in full in cash
of the Secured Obligations is made, PROVIDED, that this Agreement shall continue
to be effective or be reinstated, as the case may be, if at any time any payment
(in whole or in part) of any of the Secured  Obligations  is  rescinded  or must
otherwise be restored by any Secured  Party upon the  insolvency,  bankruptcy or
reorganization of the Grantor, Holdings or otherwise, all as though such payment
had not been made.

         "TRADEMARK COLLATERAL" means:

              (a) all trademarks,  trade names,  corporate names, company names,
business names,  fictitious business names, trade styles,  trade dress,  service
marks,  certification  marks,  collective marks, logos, other source of business
identifiers,  prints and labels on which any of the  foregoing  have appeared or
appear,  designs and general  intangibles of a like nature (all of the foregoing
items in this CLAUSE (A) being collectively called a "Trademark"),  now existing
anywhere in the world or hereafter adopted or acquired, whether currently in use
or not,  all  registrations  and  recordings  thereof  and all  applications  in
connection  therewith,  whether pending or in preparation for filing,  including
registrations,  recordings  and  applications  in the United  States  Patent and
Trademark  Office or in any office or agency of the United  States of America or
any State thereof or any foreign country,  including those referred to in ITEM A
of SCHEDULE III attached hereto (as such Schedule may be supplemented  from time
to time pursuant to SECTION 4.12);

              (b) all  Trademark  licenses,  including  each  Trademark  license
referred to in ITEM B of SCHEDULE III attached  hereto (as such  Schedule may be
supplemented from time to time pursuant to SECTION 4.12);

              (c) all  reissues,  extensions  or  renewals  of any of the  items
described in CLAUSES (A) and (B) above;

              (d) all of the goodwill of the business connected with the use of,
and symbolized by the items described in, CLAUSES (A) and (B) above; and

              (e) all proceeds of, and rights  associated  with,  the foregoing,
including any claim by Grantor against third parties for past, present or future
infringement or dilution of any Trademark,  Trademark  registration or Trademark
license,  including any Trademark,  Trademark  registration or Trademark license
referred to in ITEM B of SCHEDULE III attached  hereto (as such  Schedule may be
supplemented  from time to time pursuant to SECTION 4.12),  or for any injury to

                                       9
<PAGE>

the  goodwill  associated  with the use of any such  Trademark  or for breach or
enforcement of any Trademark  license.

         "TRADE SECRETS COLLATERAL" means common law and statutory trade secrets
and all other confidential or proprietary  information and all know-how obtained
by or used in or  contemplated  at any time for use in the  business  of Grantor
(all of the foregoing being  collectively  called a "TRADE SECRET"),  whether or
not such Trade  Secret has been  reduced  to a writing  or other  tangible  form
(including all documents and things embodying, incorporating or referring in any
way to such Trade  Secret,  all Trade  Secret  licenses),  including  each Trade
Secret  license  referred to in SCHEDULE V attached  hereto,  and  including the
right  to sue for and to  enjoin  and to  collect  damages  for  the  actual  or
threatened   misappropriation  of  any  Trade  Secret  and  for  the  breach  or
enforcement of any such Trade Secret license.

         "U.C.C."  means  the  Uniform  Commercial  Code as from time to time in
effect in the State of New York or, with  respect to any  Collateral  located in
any  state or  jurisdiction  other  than  the  State of New  York,  the  Uniform
Commercial Code as from time to time in effect in such state or jurisdiction.

         "WAIVER  AGREEMENT"  means a waiver agreement with a landlord or bailee
of Grantor in form and substance  satisfactory  to the Designated Note Investor,
entered into among such landlord or bailee,  as the case may be, Grantor and the
Designated Note Investor,  as such agreement may be amended,  restated,  amended
and restated, supplemented or otherwise modified from time to time.

         1.2 SECURITIES PURCHASE AGREEMENT DEFINITIONS. Unless otherwise defined
herein  or the  context  otherwise  requires,  terms  used  in  this  Agreement,
including  its  preamble  and  recitals,  have  the  meanings  provided  in  the
Securities Purchase Agreement.

         1.3 U.C.C. DEFINITIONS.  Unless otherwise defined herein or the context
otherwise requires, terms for which meanings are provided in the U.C.C. are used
in this Agreement, including its preamble and recitals, with such meanings.

         1.4 OTHER INTERPRETIVE PROVISIONS. The rules of construction in Section
20(d) of the Securities  Purchase  Agreement shall be equally applicable to this
Agreement.

                                   ARTICLE II
                                SECURITY INTEREST

         2.1 GRANT OF  SECURITY.  Grantor  hereby  assigns  and  pledges  to the
Designated  Note Purchaser for the benefit of each of the Secured  Parties,  and
hereby grants to the  Designated  Note  Purchaser for the benefit of each of the
Secured Parties a security interest in, all of its right,  title and interest in
and  to  the   following,   whether  now  or  hereafter   existing  or  acquired
(collectively, the "COLLATERAL"):

              (a) all Equipment in all of its forms of Grantor;

                                       10
<PAGE>

              (b)  all  Inventory  in all of its  forms  of  Grantor,  PROVIDED,
HOWEVER,  that the Lien  created  hereby in such  Inventory  shall be junior and
subordinate  to the Axcan  Lien (and no other  Liens) so long as the Axcan  Note
remains outstanding;

              (c) all Receivables  Collateral in all of its forms, including all
Accounts, Documents, Instruments and Chattel Paper, of Grantor;

              (d) all General  Intangibles  in all of its forms,  including  all
Payment Intangibles, of Grantor;

              (e)  all  Assigned  Agreements  to  which  Grantor  is  now or may
hereafter become a party and all Accounts  thereunder,  including (i) all rights
of  Grantor to receive  moneys  due and to become due under or  pursuant  to the
Assigned  Agreements,  (ii) all rights of Grantor  to  receive  proceeds  of any
insurance,  indemnity,  warranty  or  guaranty  with  respect  to  the  Assigned
Agreements,  (iii) claims of Grantor for damages arising out of or for breach of
or  default  under the  Assigned  Agreements  and (iv) the right of  Grantor  to
terminate  the  Assigned  Agreements,   to  perform  thereunder  and  to  compel
performance and otherwise exercise all remedies thereunder;

              (f) all Supporting Obligations of Grantor;

              (g) all  Intellectual  Property  Collateral in all of its forms of
Grantor;

              (h) all  Investment  Property in all of its forms,  including  all
Securities Accounts, of Grantor;

              (i) all Deposit Accounts of Grantor;

              (j) all Commercial  Tort Claims of Grantor  described in PART E of
SCHEDULE  I hereto  (as such  Schedule  may be  supplemented  from  time to time
pursuant to SECTION 4.12 or otherwise);

              (k) all other Goods of Grantor;

              (l)  all  of  Grantor's  books,  records,  writings,  data  bases,
information and other property  relating to, used or useful in connection  with,
evidencing,  embodying,  incorporating  or referring to, any of the foregoing in
this SECTION 2.1;

              (m) except for any real property  interest of the Grantor,  all of
Grantor's  other property and rights of every kind and description and interests
therein,  including all moneys,  securities and other property, now or hereafter
held or received by, or in transit to, the Designated  Note Investor from or for
Grantor, whether for safekeeping,  pledge, custody, transmission,  collection or
otherwise; and

              (n) all Proceeds of any and all of the foregoing Collateral.

         2.2 SECURITY FOR SECURED  OBLIGATIONS.  The Collateral of Grantor under
this Agreement  secures the prompt payment in full of all obligations of Grantor
under each of the

                                       11
<PAGE>

Guarantees,  this  Agreement  and the other  Investment  Documents  to which the
Grantor is a party,  whether for principal,  interest,  costs,  fees,  expenses,
indemnities  or  otherwise  and whether now or hereafter  existing  (all of such
obligations being the "SECURED OBLIGATIONS").

         2.3 CONTINUING SECURITY INTEREST;  TRANSFER OF CREDIT EXTENSIONS.  This
Agreement  shall create a continuing  security  interest in the  Collateral  and
shall remain in full force and effect  until the  Termination  Date,  be binding
upon Grantor, its successors,  transferees and assigns, and inure, together with
the rights and  remedies of the  Designated  Note  Investor  hereunder,  for the
benefit of each Secured Party. Without limiting the generality of the foregoing,
any Secured  Party may assign or  otherwise  transfer  (in whole or in part) any
Secured Bridge Note held by it to any other Person,  and such other Person shall
thereupon  become  vested with all the rights and  benefits  in respect  thereof
granted to such Secured  Party under any  Investment  Document  (including  this
Agreement) or otherwise,  subject,  however,  to any contrary provisions in such
assignment  or transfer and to the  provisions  of the  Investment  Documents in
respect  of  assignment  or  transfer.  Upon the  payment in full in cash of all
Secured Obligations the security interest granted herein shall terminate and all
rights to the Collateral shall revert to Grantor.

         2.4  GRANTOR   REMAINS   LIABLE.   Anything   herein  to  the  contrary
notwithstanding

              (a) Grantor shall remain liable under the contracts and agreements
included in the Collateral (including the Assigned Agreements) to the extent set
forth therein,  and shall perform all of its duties and  obligations  under such
contracts and  agreements  to the same extent as if this  Agreement had not been
executed,

              (b) Grantor  will comply in all  material  respects  with all laws
relating  to the  ownership  and  operation  of the  Collateral,  including  all
registration  requirements  under  applicable  laws,  and shall pay when due all
taxes, fees and assessments imposed on or with respect to the Collateral, except
to the  extent  the  validity  thereof  is  being  contested  in good  faith  by
appropriate proceedings for which adequate reserves in accordance with GAAP have
been set aside by Grantor,

              (c) the  exercise  by the  Designated  Note  Investor or the other
Secured Parties of any of their rights  hereunder shall not release Grantor from
any of its duties or obligations under any such contracts or agreements included
in the Collateral and

              (d) neither the  Designated  Note  Investor nor any other  Secured
Party  shall  have any  obligation  or  liability  under any such  contracts  or
agreements included in the Collateral by reason of this Agreement, nor shall any
Secured  Party be  obligated  to  perform  any of the  obligations  or duties of
Grantor  thereunder  or to take any action to  collect or enforce  any claim for
payment assigned hereunder.

         2.5  SECURITY  INTEREST  ABSOLUTE.  All rights of the  Designated  Note
Investor  and the Secured  Parties  and the  security  interests  granted to the
Designated Note Investor for the benefit of the Secured Parties  hereunder,  and
all  obligations  of Grantor  hereunder,  shall be absolute  and  unconditional,
irrespective of any of the following conditions, occurrences or events:

              (a) any  lack of  validity  or  enforceability  of any  Investment
Document;

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<PAGE>

              (b) the  failure of the  Designated  Note  Investor or any Secured
Party to assert  any claim or demand or to enforce  any right or remedy  against
Grantor or any other Person under the provisions of any  Investment  Document or
otherwise or to exercise any right or remedy against any other  guarantor of, or
collateral securing, any Secured Obligation;

              (c) any change in the time,  manner or place of payment  of, or in
any other term of, all or any of the Secured Obligations or any other extension,
compromise or renewal of any Secured  Obligation,  including any increase in the
Secured Obligations resulting from the extension of additional credit to Grantor
or any other obligor or otherwise;

              (d) any  reduction,  limitation,  impairment or termination of any
Secured  Obligation  for any  reason,  including  any claim of waiver,  release,
surrender,  alteration or  compromise,  and shall not be subject to (and Grantor
hereby  waives any right to or claim of) any  defense  or setoff,  counterclaim,
recoupment or termination  whatsoever by reason of the  invalidity,  illegality,
nongenuineness,  irregularity,  compromise,  unenforceability  of,  or any other
event or occurrence affecting, any Secured Obligation or otherwise;

              (e) any amendment to,  rescission,  waiver, or other  modification
of,  or any  consent  to  departure  from,  any of the  terms of any  Investment
Document;

              (f) any addition,  exchange,  release, surrender or non-perfection
of any collateral  (including the Collateral),  or any amendment to or waiver or
release of or addition to or consent to departure from any guaranty,  for any of
the Secured Obligations; or

              (g) any other  circumstances  which might  otherwise  constitute a
defense  available  to,  or a  legal  or  equitable  discharge  of,  Grantor  or
otherwise.

         2.6 WAIVER OF SUBROGATION.  Until the Termination  Date,  Grantor shall
not exercise  any claim or other  rights  which it may now or hereafter  acquire
against any other Person that arises from the existence, payment, performance or
enforcement of Grantor's  obligations under this Agreement,  including any right
of  subrogation,  reimbursement,  exoneration or  indemnification,  any right to
participate in any claim or remedy against  Holdings or any collateral which any
Secured Party now has or hereafter  acquires,  whether or not such claim, remedy
or right arises in equity or under  contract,  statute or common law,  including
the right to take or receive from Holdings,  directly or indirectly,  in cash or
other property or by set-off or in any manner, payment or security on account of
such claim or other rights.  If any amount shall be paid to Grantor in violation
of the preceding sentence, such amount shall be deemed to have been paid for the
benefit of the Secured  Parties,  and shall  forthwith be paid to the Designated
Note  Investor  to be  credited  and applied  upon the  Secured  Obligations  as
provided in SECTION 5.1(B),  whether matured or unmatured.  Grantor acknowledges
that it will receive direct and indirect benefits for the financing arrangements
contemplated  by the  Investment  Documents  and that the agreement set forth in
this Section is knowingly made in contemplation of such benefits.

         2.7 RELEASE; TERMINATION.

              (a) Upon any sale,  transfer or other  disposition  of any item of
Collateral  of Grantor,  the  Designated  Note Investor on behalf of the Secured
Parties will, at Grantor's expense and without any  representations,  warranties
or  recourse  of any kind  whatsoever,  execute  and

                                       13
<PAGE>

deliver  to  Grantor  such  documents  as Grantor  shall  reasonably  request to
evidence the release of such item of Collateral from the assignment and security
interest granted hereby; PROVIDED, HOWEVER, that (i) at the time of such request
and such release no Event of Default shall have occurred and be continuing, (ii)
Grantor  shall have  delivered to the  Designated  Note  Investor,  at least ten
Business Days prior to the date of the proposed  release,  a written request for
release  describing  the item of  Collateral  and the terms of the sale,  lease,
transfer or other disposition in reasonable detail,  including the price thereof
and any expenses in  connection  therewith,  together with a form of release for
execution by the  Designated  Note Investor  (which release shall be in form and
substance  satisfactory  to the  Designated  Note Investor) and a certificate of
Grantor to the effect that the  transaction is in compliance with the Investment
Documents  and as to such other  matters as the  Designated  Note  Investor  may
reasonably  request and (iii) the proceeds of any such sale, lease,  transfer or
other  disposition  required to be applied,  at the  discretion  of Grantor,  to
either  reinvestment in the business of Grantor or to redemption of the Notes in
accordance  with the terms and  conditions  of the  Notes.  Notwithstanding  the
foregoing,  it is  understood  and agreed that all sales of goods and  inventory
(including  laser systems,  disposables  and related items) made in the ordinary
course of business  shall  automatically  be released  from the liens created by
this  Agreement  and  shall  not  require  any  further  act by or notice to the
Designated Note Investor or the Secured Parties.

              (b) Upon the Termination Date, the pledge, assignment and security
interest  granted hereby shall terminate and all rights to the Collateral  shall
revert to Grantor. Upon any such termination, the Designated Note Investor will,
at Grantor's expense and without any representations,  warranties or recourse of
any kind  whatsoever,  execute and deliver to Grantor such  documents as Grantor
shall reasonably request to evidence such termination and deliver to Grantor all
Instruments,  Tangible  Chattel Paper and negotiable  documents  representing or
evidencing the Collateral, if any, then held by the Designated Note Investor.

                                  ARTICLE III
                         REPRESENTATIONS AND WARRANTIES

         Grantor  represents and warrants unto the Designated  Note Investor and
each other Secured Party as set forth in this Article.

         3.1  LOCATION OF  GRANTOR;  COLLATERAL,  ETC.  (a) ITEM A of SCHEDULE I
hereto  identifies for Grantor (i) the state in which it is organized,  (ii) the
relevant  organizational  identification  number  (or  states  that one does not
exist),  and (iii) the principal place of business and chief executive office of
Grantor  and  the  office  where  Grantor  keeps  its  records   concerning  the
Collateral,  and where the original  copies of each  Assigned  Agreement and all
originals of all Tangible Chattel Paper are located.

              (b) Except as  disclosed  in ITEM C of  SCHEDULE I hereto (as such
Schedule may be supplemented from time to time pursuant to SECTION 4.12 hereof),
all of the  Equipment  and  Inventory  of  Grantor  are  located  at the  places
specified in ITEM B of SCHEDULE I hereto (as such  Schedule may be  supplemented
from time to time pursuant to SECTION 4.12 hereof),  each of which  locations is
owned or leased by Grantor.

                                       14
<PAGE>

              (c) Except as  disclosed  in ITEM C of  SCHEDULE I hereto (as such
Schedule may be supplemented from time to time pursuant to SECTION 4.12 hereof),
none  of  the  Collateral  is  in  the  possession  of  any  consignee,  bailee,
warehouseman,  agent or processor,  located on any leased property or subject to
the Control of any Person, other than any Secured Party or Grantor.

              (d) Except as set forth in ITEM D of  SCHEDULE  I hereto,  Grantor
has no trade names and has not been known by any legal name  different  from the
one set forth on the signature page hereto.

              (e)  ITEM  E of  SCHEDULE  I  hereto  (as  such  Schedule  may  be
supplemented  from time to time pursuant to SECTION 4.12 hereof),  describes all
Commercial Tort Claims owned by Grantor as of the date hereof and as of the date
of each supplement to such Schedule delivered pursuant to SECTION 4.12 hereof.

              (f) Except as notified by Grantor to the Designated  Note Investor
in writing,  Grantor is not a party to any one or more  Federal,  state or local
government contracts.

         3.2 OWNERSHIP. Grantor owns the Collateral.

         3.3  NEGOTIABLE  DOCUMENTS,  INSTRUMENTS,  CHATTEL  PAPER AND  ASSIGNED
AGREEMENTS.  Grantor shall keep in its sole  possession,  free of the Control of
any Person  other than the Secured  Parties,  all  originals  of all  negotiable
documents,  Instruments  and Tangible  Chattel Paper  currently owned or held by
Grantor, and true and correct copies of each Assigned Agreement.

         3.4  INTELLECTUAL   PROPERTY  COLLATERAL.   (a)  With  respect  to  any
Intellectual Property Collateral that is material to the operations of Grantor:

              (i)  Intellectual  Property  Collateral is subsisting  and has not
been adjudged  invalid or  unenforceable,  in whole or in part, and is valid and
enforceable;

              (ii) Grantor has made all necessary  filings and  recordations  to
protect  its  interest  in  such  Intellectual  Property  Collateral,  including
recordations  of all of its  interests in the Patent  Collateral  and  Trademark
Collateral in the United States Patent and Trademark Office and in corresponding
offices  throughout the world and its claims to the Copyright  Collateral in the
United States  Copyright  Office and in  corresponding  offices  throughout  the
world;

              (iii)  in the case of any such  Intellectual  Property  Collateral
that is owned by  Grantor,  Grantor  is the  exclusive  owner of the  entire and
unencumbered  right,  title and  interest in and to such  Intellectual  Property
Collateral other than licenses of such Intellectual Property Collateral in favor
of  Grantor's  subsidiaries  and no  claim  has been  made  that the use of such
Intellectual  Property Collateral does or may violate the asserted rights of any
third party;

              (iv) in the case of any such Intellectual Property Collateral that
is licensed by Grantor,  Grantor is in compliance with all the material terms of
such license; and

                                       15
<PAGE>

              (v) Grantor has  performed  and will  continue to perform all acts
and has paid and will  continue to pay all  required  fees and taxes to maintain
each and every item of such Intellectual  Property  Collateral in full force and
effect throughout the world, as applicable.

              (b)  Grantor  owns  directly  or is  entitled to use by license or
otherwise,  all  patents,  Trademarks,  Trade  Secrets,  copyrights,   licenses,
technology,  know-how, processes and rights with respect to any of the foregoing
used in or necessary for the conduct of Grantor's business.

         3.5  VALIDITY,  ETC.  This  Agreement  creates  a valid  and  perfected
security  interest in the  Collateral  and all  Proceeds  thereof,  securing the
payment of the Secured Obligations,  and all filings and other actions necessary
or desirable to perfect and protect such security interest have been duly taken.

         3.6 AUTHORIZATION,  APPROVAL, ETC. No authorization,  approval or other
action by, and no notice to or filing with, any  governmental  authority  (other
than the filing of financing  statements  in the U.C.C.  filing  offices of each
jurisdiction  referred  to in  SECTION  3.1(A)(I)  and any local  U.C.C.  filing
relating to Fixtures and, if there is any Intellectual Property Collateral,  the
filing of this Agreement or Intellectual  Property Security  Agreements with the
United States Patent and Trademark  Office,  the United States  Copyright Office
and the comparable  filing office of any foreign  jurisdiction,  as the case may
be) is  required  either (a) for the grant by Grantor of the  security  interest
granted hereby or for the execution,  delivery and performance of this Agreement
by Grantor or (b) for the perfection of or the exercise by the  Designated  Note
Investor of the rights and remedies hereunder.

         3.7 DUE EXECUTION, VALIDITY, ETC. Grantor has full power and authority,
and holds all requisite governmental licenses,  permits and other approvals,  to
enter into and perform its  obligations  under this  Agreement.  The  execution,
delivery and  performance  by Grantor of this  Agreement  does not contravene or
result in a default  under  Grantor's  articles of  incorporation  or by-laws or
contravene  or result in a default under any material  contractual  restriction,
Lien or law  binding on  Grantor.  This  Agreement  has been duly  executed  and
delivered  on behalf of Grantor  and  constitutes  the legal,  valid and binding
obligation of Grantor  enforceable  in accordance  with its terms subject to the
effect of any applicable bankruptcy, insolvency,  reorganization,  moratorium or
similar law affecting  creditor's right generally,  and subject to the effect of
general  principles of equity  (regardless of whether considered in a proceeding
in equity or at law).

         3.8 ASSIGNED AGREEMENTS.

              (a)  SCHEDULE VI hereto  accurately  identifies  for Grantor  each
agreement  which is  material  to Grantor to which  Grantor is a party as of the
date hereof and as of the date of each supplement  thereto delivered pursuant to
SECTION 4.12.  For purposes of this SECTION  3.8(A),  any agreement  pursuant to
which  Grantor  reasonably  expects to recognize  aggregate  future  revenues in
excess of  $100,000  or to  receive  indemnity  or other  payments  in excess of
$100,000 shall be deemed to be material.

                                       16
<PAGE>

              (b) The Assigned  Agreements of Grantor,  true and complete copies
of which have been  furnished to the Designated  Note  Investor,  have been duly
authorized,  executed  and  delivered  by Grantor and (to the best  knowledge of
Grantor) each other party thereto,  are in full force and effect and are binding
upon and enforceable against Grantor and (to the best knowledge of Grantor) each
other party thereto,  in accordance  with their terms,  subject to the effect of
any applicable bankruptcy, insolvency, reorganization, moratorium or similar law
affecting  creditor's  right  generally,  and  subject  to the effect of general
principles of equity (regardless of whether considered in a proceeding in equity
or at law).

              (c) To the knowledge of Grantor, there exists no default under any
Assigned Agreement by any party thereto.

         3.9 COMMERCIAL TORT CLAIMS.  Except for matters  disclosed in ITEM E of
SCHEDULE  I hereto  (as such  Schedule  may be  supplemented  from  time to time
pursuant to SECTION  4.12  hereof),  Grantor  does not own any  Commercial  Tort
Claims.

         3.10 DEPOSIT  ACCOUNTS;  SECURITIES  ACCOUNTS.  SCHEDULE VII hereto (as
such  Schedule may be  supplemented  from time to time  pursuant to SECTION 4.12
hereof)  accurately  identifies each Deposit Account and each Securities Account
of Grantor as of the date hereof and as of the date of each  supplement  to such
Schedule delivered pursuant to SECTION 4.12 hereof.

                                   ARTICLE IV
                                    COVENANTS

         Grantor covenants and agrees that, until the Termination Date,  Grantor
will,  unless the  Designated  Note Investor shall  otherwise  agree in writing,
perform the obligations set forth in this Section.

         4.1 AS TO EQUIPMENT AND INVENTORY. Grantor hereby agrees that it shall,
except  in the  ordinary  course  of its  business  or in  the  exercise  of its
reasonable business judgment,

              (a) keep all the  Equipment and  Inventory  (other than  Inventory
sold in the ordinary  course of business)  at the places  therefor  specified in
SECTION 3.1 unless  Grantor has given at least 30 days' prior written  notice to
the  Designated  Note  Investor  of another  location,  whether by delivery of a
supplement  to SCHEDULE I hereto  delivered  pursuant to SECTION  4.12 hereto or
otherwise,  and all action, if any, necessary to maintain in accordance with the
terms hereof the Designated Note Investor'  perfected  security interest therein
(including  any action  requested  pursuant to CLAUSE (E) of this  SECTION  4.1)
shall have been taken with respect to the Equipment and Inventory;

              (b) cause the Equipment to be maintained and preserved in the same
condition,  repair  and  working  order  as when  new,  ordinary  wear  and tear
excepted,  and  make or cause to be made all  repairs,  replacements  and  other
improvements  in  connection  therewith  which are necessary so that Grantor may
properly conduct its business;

              (c)  pay   promptly   when  due  all  property  and  other  taxes,
assessments  and  governmental  charges or levies  imposed upon,  and all claims
(including claims for labor,  materials and supplies) against, the Equipment and
Inventory,  except to the extent the validity thereof is being contested in good
faith by appropriate  proceedings and for which adequate  reserves in accordance
with GAAP have been set aside;

                                       17
<PAGE>

              (d) not sell any  Inventory  to any customer on approval or on any
other basis which entitles the customer to return, or which may obligate Grantor
to repurchase, such Inventory; and

              (e) at the  request of the  Designated  Note  Investor,  cause the
landlord, bailee, warehouseman or processor at any location identified on PART C
of SCHEDULE I with Control  over any  Equipment or Inventory of Grantor to enter
into a Waiver Agreement with Grantor and the Designated Note Investor.

         4.2 AS TO ACCOUNTS, CHATTEL PAPER, DOCUMENTS AND INSTRUMENTS.

              (a)  Grantor  shall  not  change  its  name  or   jurisdiction  of
organization  unless Grantor has given at least 30 days' prior written notice to
the  Designated  Note  Investor,  and all  actions  necessary  to  maintain  the
Designated Note  Investor's  perfected  security  interest shall have taken with
respect to the Collateral of Grantor.

              (b) Upon written notice by the Designated Note Investor to Grantor
pursuant to this  SECTION  4.2(B),  all  Proceeds  received by Grantor  shall be
delivered in kind to the Designated  Note Investor for deposit to the Collateral
Account,  and Grantor  shall not  commingle  any such  Proceeds,  and shall hold
separate and apart from all other  property,  all such Proceeds in express trust
for the benefit of the Secured  Parties  until  delivery  thereof is made to the
Designated Note Investor.  The Designated Note Investor will not give the notice
referred to in the  preceding  sentence  unless there shall have occurred and be
continuing any Event of Default.  No funds, other than proceeds of Collateral of
Grantor, will be deposited in the Collateral Account.

              (c) The Designated Note Investor shall have the right to apply any
amount in the  Collateral  Account to the payment  pursuant to SECTION 5.1(B) of
any Secured  Obligations which are due and payable or payable upon demand, or to
the payment  pursuant to SECTION  5.1(B) of any Secured  Obligations at any time
that any Event of Default shall exist.  Subject to the rights of the  Designated
Note  Investor,  Grantor shall have the right on each Business Day, with respect
to and to the extent of collected  funds in the Collateral  Account,  to require
the  Designated  Note  Investor to purchase  cash  equivalent  investments.  The
Designated Note Investor may at any time and shall promptly following  Grantor's
request therefor, so long as no Event of Default has occurred and is continuing,
transfer to Grantor's  general demand deposit  account at its bank any or all of
the collected funds in the Collateral Account; PROVIDED,  HOWEVER, that any such
transfer  shall  not be  deemed  to be a waiver  or  modification  of any of the
Designated Note Investor's or other Secured Parties' rights under this Section.

         4.3 AS TO COLLATERAL GENERALLY.

              (a) Until such time as the  Designated  Note Investor shall notify
Grantor of the  revocation of such power and authority  after the occurrence and
during the continuance of any Event of Default,  Grantor (i) may sell,  lease or
furnish  under the  contracts of service any of the  Inventory  normally held by
Grantor for such purpose, and use and consume any raw materials,

                                       18
<PAGE>

work in process or materials normally held by Grantor for such purpose, and sell
or otherwise  dispose of any other  Collateral,  (ii) will,  at its own expense,
endeavor to collect, as and when due, all amounts due with respect to any of the
Collateral,  including the taking of such action with respect to such collection
as the  Designated  Note Investor may  reasonably  request or, in the absence of
such request,  as Grantor may deem  advisable;  and (iii) may grant to any party
obligated  on any of the  Collateral,  any rebate,  refund or allowance to which
such party may be lawfully  entitled,  and may accept, in connection  therewith,
the  return of goods,  the sale or lease of which  shall have given rise to such
Collateral.  The Designated Note Investor,  however,  may, at any time following
the  occurrence  and during the  continuance  of any Event of  Default,  whether
before or after any  revocation  of such power and  authority or the maturity of
any of the  Secured  Obligations,  notify any  parties  obligated  on any of the
Collateral to make payment to the Designated Note Investor of any amounts due or
to become due thereunder and enforce collection of any of the Collateral by suit
or otherwise and  surrender,  release,  or exchange all or any part thereof,  or
compromise  or extend or renew for any period  (whether  or not longer  than the
original period) any indebtedness  thereunder or evidenced thereby. Upon request
of the Designated  Note Investor after the occurrence and during the continuance
of any Event of Default,  Grantor will,  at its own expense,  notify any parties
obligated on any of the Collateral to make payment to the Secured Parties of any
amounts due or to become due thereunder.

              (b) The Designated Note Investor is authorized to endorse,  in the
name of Grantor,  any item,  howsoever received by the Designated Note Investor,
representing any Proceeds of any of the Collateral.

         4.4 AS TO INTELLECTUAL PROPERTY COLLATERAL.

              (a) Grantor shall not,  unless Grantor shall either (i) reasonably
and in good faith  determine that any of the Patent  Collateral is of negligible
economic value to Grantor or (ii) have a valid business purpose to do otherwise,
do any act,  or omit to do any act,  whereby  any of the Patent  Collateral  may
lapse or become abandoned or dedicated to the public or unenforceable.

              (b) Grantor  shall not,  and  Grantor  shall not permit any of its
licensees  to,  unless  Grantor  shall either (i)  reasonably  and in good faith
determine that any of the Trademark  Collateral is of negligible  economic value
to Grantor or (ii) have a valid business purpose to do otherwise,

                           (A)  fail to  continue  to use  any of the  Trademark
                  Collateral   in  order  to  maintain  all  of  the   Trademark
                  Collateral  in full force  free from any claim of  abandonment
                  for non-use;

                           (B) fail to  maintain  as in the past the  quality of
                  products  and  services  offered  under  all of the  Trademark
                  Collateral;

                           (C) fail to employ  all of the  Trademark  Collateral
                  registered with any Federal or state or foreign authority with
                  an appropriate notice of such registration; or

                                       19
<PAGE>

                           (D) do or permit any act or knowingly  omit to do any
                  act  whereby  any of the  Trademark  Collateral  may  lapse or
                  become invalid or unenforceable.

              (c) Grantor shall not, unless Grantor shall either  reasonably and
in good faith determine that any of the Copyright Collateral or any of the Trade
Secrets  Collateral is of negligible  economic  value to Grantor or have a valid
business purpose do otherwise,  do or permit any act or knowingly omit to do any
act  whereby  any of the  Copyright  Collateral  or  any  of the  Trade  Secrets
Collateral may lapse or become invalid or  unenforceable or placed in the public
domain  except  upon  expiration  of  the  end  of  an  unrenewable  term  of  a
registration thereof.

              (d) Grantor shall notify the Designated Note Investor  immediately
if it knows that any application or  registration  relating to any material item
of the Intellectual Property Collateral may become abandoned or dedicated to the
public or placed in the public  domain or invalid  or  unenforceable,  or of any
adverse determination or development  (including the institution of, or any such
determination  or development in, any proceeding in the United States Patent and
Trademark Office, the United States Copyright Office or any foreign  counterpart
thereof or any court) regarding  Grantor's  ownership of any of the Intellectual
Property Collateral,  its right to register the same or to keep and maintain and
enforce the same.

              (e)  Grantor  shall take all  necessary  steps,  including  in any
proceeding  before the United  States Patent and  Trademark  Office,  the United
States  Copyright Office or any similar office or agency in any other country or
any political  subdivision  thereof, to maintain and pursue any application (and
to obtain the relevant  registration) filed with respect to, and to maintain any
registration of, the Intellectual  Property Collateral,  including the filing of
applications for renewal,  affidavits of use, affidavits of incontestability and
opposition,  interference and  cancellation  proceedings and the payment of fees
and taxes (except to the extent that dedication,  abandonment or invalidation is
permitted under the foregoing CLAUSES (A), (B) and (C)).

              (f) In no event shall  Grantor  nor any of its agents,  employees,
designees  or  licensees  file  an  application  for  the  registration  of  any
Intellectual  Property  Collateral  with the United  States Patent and Trademark
Office,  the United States  Copyright  Office or any similar office or agency in
any other  country or any  political  subdivision  thereof,  unless it  promptly
informs the Designated  Note Investor and, upon request of the  Designated  Note
Investor, executes and delivers any and all agreements,  instruments,  documents
and papers as the Designated  Note Investor may  reasonably  request to evidence
the Secured Parties' security interest in such Intellectual  Property Collateral
and the  goodwill  and  general  intangibles  of  Grantor  relating  thereto  or
represented thereby.

              (g) Grantor shall at its expense:

              (i) perform and observe in all material respects all the terms and
provisions  of the  Patent  License  Agreement  (as  defined  in the  Securities
Purchase  Agreement)  to be  performed  or observed by it,  maintain  the Patent
License Agreement in full force and effect, enforce the Patent License Agreement
in accordance with its terms and take all such action to such end as may be from
time to time reasonably requested by the Designated Note Investor; and

                                       20
<PAGE>

              (ii) furnish to the Designated Note Investor promptly upon receipt
thereof copies of all material notices, requests and other documents received by
Grantor under or pursuant to the Patent License Agreement, and from time to time
furnish to the Designated Note Investor such  information and reports  regarding
the Patent  License  Agreement as the  Designated  Note Investor may  reasonably
request.

              (h) Grantor shall not,  unless it has reasonably and in good faith
determined that it has a valid business  purpose and upon written consent of the
Designated Note Investor:

              (i) cancel or terminate the Patent License Agreement or consent to
or accept any cancellation or termination thereof;

              (ii) amend or otherwise  modify in any material respect the Patent
License Agreement or give any material consent, waiver or approval thereunder;

              (iii)  waive any  default  under or breach of the  Patent  License
Agremeent; or

              (iv) take any other action in connection  with the Patent  License
Agreement that would impair in any material respect the value of the interest or
rights of Grantor  thereunder  or that would impair in any material  respect the
interest or rights of any Secured Party.

         4.5  INSURANCE.  Grantor will maintain or cause to be  maintained  such
insurance as it deems necessary for the reasonable conduct of its business.

         4.6 [INTENTIONALLY OMITTED].

         4.7 AS TO THE ASSIGNED AGREEMENTS.

              (a) Grantor shall at its expense:

              (i) perform and observe in all material respects all the terms and
provisions  of the  Assigned  Agreements  to be  performed  or  observed  by it,
maintain the Assigned Agreements in full force and effect,  enforce the Assigned
Agreements in  accordance  with their terms and take all such action to such end
as may be  from  time  to  time  reasonably  requested  by the  Designated  Note
Investor; and

              (ii) furnish to the Designated Note Investor promptly upon receipt
thereof copies of all material notices, requests and other documents received by
Grantor  under or pursuant  to the  Assigned  Agreements,  and from time to time
furnish to the Designated Note Investor such  information and reports  regarding
the Assigned Agreements as the Designated Note Investor may reasonably request.

              (b) Grantor shall not,  unless it has reasonably and in good faith
determined that it has a valid business purpose and upon written notification to
the Designated Note Investor:

                                       21
<PAGE>

              (i) cancel or terminate  any  Assigned  Agreement or consent to or
accept any cancellation or termination thereof;

              (ii) amend or otherwise modify any Assigned  Agreement or give any
consent, waiver or approval thereunder;

              (iii) waive any default under or breach of any Assigned Agreement;
or

              (iv)  take any  other  action  in  connection  with  any  Assigned
Agreement that would impair in any material respect the value of the interest or
rights of Grantor  thereunder  or that would impair in any material  respect the
interest or rights of any Secured Party.

         4.8  INSPECTIONS AND  VERIFICATION.  Upon the occurrence and during the
continuance of an Event of Default,  the Designated Note Investor shall have the
right, at Grantor's own cost and expense, to inspect the Collateral, all records
related  thereto  (and to make  extracts  and copies from such  records) and the
premises upon which any of the other Collateral is located, to discuss Grantor's
affairs  with the  officers of Grantor and its  independent  accountants  and to
verify under  reasonable  procedures the validity,  amount,  quality,  quantity,
value, condition and status of, or any other matter relating to, the Collateral,
including,  in the case of Accounts or other Collateral in the possession of any
third Person, by contacting  Account Debtors or the third person possessing such
other Collateral for the purpose of making such a verification.

         4.9 BAILEES,  WAREHOUSES  AND LEASED  PREMISES.  Except in the ordinary
course  of  Grantor's  business,  no  Collateral  shall  at any  time  be in the
possession  or  Control  of any  warehouseman,  bailee  or  Grantor's  agents or
processors  or  located on any  leased  premises  without  the  Designated  Note
Investor's prior written consent and unless the Designated Note Investor, if the
Designated Note Investor has so requested,  has received a Waiver Agreement,  or
warehouse  receipts or other bailee lien waivers  satisfactory to the Designated
Note Investor prior to the  commencement of such possession or Control.  Grantor
shall,  upon the  request  of the  Designated  Note  Investor,  notify  any such
warehouseman,  bailee,  agent,  processor or lessor of the Liens  granted to the
Secured  Parties  hereunder,  shall  instruct  such  Person  to  hold  all  such
Collateral for the Designated Note Investor's  account subject to the Designated
Note  Investor's  instructions  and  shall  obtain a Waiver  Agreement  or other
acknowledgement  satisfactory  to the Designated  Note Investor from such Person
that such Person holds the Collateral for the Secured Parties' benefit.

         4.10 COMMERCIAL  TORT CLAIMS.  Grantor shall advise the Designated Note
Investor  promptly upon Grantor becoming aware,  after the date hereof,  that it
owns any additional  Commercial Tort Claims. With respect to any such Commercial
Tort Claims,  Grantor will execute and deliver such  documents as the Designated
Note Investor deems necessary to create, perfect and protect the Designated Note
Investor's security interest in such Commercial Tort Claim.

         4.11 BANK ACCOUNTS; SECURITIES ACCOUNTS. Upon request by the Designated
Note Investor,  Grantor shall enter into an Account Control  Agreement with each
financial institution with which Grantor maintains from time to time any Deposit
Account or any Securities Account.  Grantor hereby grants to the Designated Note
Investor,  a  continuing  security  interest in all such

                                       22
<PAGE>

Deposit Accounts and Securities  Accounts and all funds and Investment  Property
at any time paid,  deposited,  credited  or held in such  Deposit  Accounts  and
Securities  Accounts  (whether for  collection,  provisionally  or otherwise) or
otherwise  in the  possession  of such  financial  institutions,  and each  such
financial  institution  shall act as the  Designated  Note  Investors'  agent in
connection therewith.

         4.12 FURTHER ASSURANCES, ETC.(i) Grantor agrees that, from time to time
at its own  expense,  Grantor  will  promptly  execute  and  deliver all further
instruments and documents, and take all further action, that the Designated Note
Investor may reasonably request,  in order to perfect,  preserve and protect any
security  interest  granted or purported  to be granted  hereby or to enable the
Designated  Note  Investor  to  exercise  and  enforce  its rights and  remedies
hereunder with respect to any Collateral.  With respect to the foregoing and the
grant  of  the  security  interest  hereunder,  Grantor  hereby  authorizes  the
Designated  Note Investor to  Authenticate  and to file one or more financing or
continuation  statements,  and  amendments  thereto,  and make  filings with the
United States Patent and Trademark  Office or United States Copyright Office (or
any successor  office or any similar office in any other country),  in each case
for the purpose of perfecting,  continuing, enforcing or protecting the security
interest  granted by Grantor,  without  the  signature  of  Grantor,  and naming
Grantor  as  debtor  and the  Secured  Parties  as  secured  parties.  A carbon,
photographic,   telecopied  or  other   reproduction  of  this  Agreement,   any
Intellectual Property Security Agreement or any financing statement covering the
Collateral  or any part thereof  shall be  sufficient  as a financing  statement
where  permitted  by law.  Grantor  shall from time to time amend the  Schedules
hereto to reflect  the  addition  of  Collateral  hereunder  or to  reflect  the
disposition  of  Collateral   pursuant  to  transactions   permitted  under  any
Investment  Document;  PROVIDED that the Grantor's  failure to so amend any such
schedule to reflect the  addition of  Collateral  shall not render the  security
interest  granted to the Secured  Parties in and to such  Collateral  invalid or
unenforceable.  Grantor shall deliver to the Designated  Note Investor copies of
such revised  Schedules and, upon such delivery,  such Schedules shall be deemed
to be the Schedules hereunder.

                                   ARTICLE V
                                    REMEDIES

         5.1  REMEDIES.  If any Event of  Default  shall  have  occurred  and be
continuing:

              (a) Upon receipt of the written  direction of the Secured  Parties
that hold a majority  in  outstanding  principal  amount of the  Secured  Bridge
Notes,  the  Designated  Note  Investor  on behalf of the  Secured  Parties  may
exercise in respect of the Collateral,  in addition to other rights and remedies
provided for herein or otherwise available to it, all the rights and remedies of
a secured party on default under the U.C.C.

              (b) All cash proceeds  received by the Designated Note Investor in
respect of any sale of,  collection  from, or other  realization upon all or any
part of the Collateral  may, in the discretion of the Designated  Note Investor,
be held, to the extent  permitted  under  applicable law, by the Designated Note
Investor as  additional  collateral  security for all or any part of the Secured
Obligations,  and/or  then or at any time  thereafter  shall be  applied  (after
payment of any  amounts  payable to the  Designated  Note  Investor  pursuant to
Section 5.2) in whole or in part by the Designated Note Investor for the ratable
benefit of the Secured  Parties.  Any surplus of such cash

                                       23
<PAGE>

or cash  proceeds  held by the  Designated  Note  Investor and  remaining  after
payment in full of all the Secured Obligations, shall be paid over to Grantor or
to whomsoever may be lawfully entitled to receive such surplus.

              (c) Upon receipt of the written  direction of the Secured  Parties
that hold a majority  in  outstanding  principal  amount of the  Secured  Bridge
Notes, the Designated Note Investor may exercise any and all rights and remedies
of Grantor under or in connection  with the  Collateral,  including the right to
sue upon or otherwise  collect,  extend the time for payment of, modify or amend
the terms of,  compromise  or settle for cash,  credit,  or  otherwise  upon any
terms, grant other indulgences, extensions, renewals, compositions, or releases,
and take or omit to take any other  action with respect to the  Collateral,  any
security  therefor,  any agreement  relating thereto,  any insurance  applicable
thereto,  or any Person liable  directly or indirectly in connection with any of
the  foregoing,  without  discharging  or otherwise  affecting  the liability of
Grantor  for the  Secured  Obligations  or under  this  Agreement  or any  other
Investment  Document and the Assigned  Agreements or otherwise in respect of the
Collateral,  including  any and all  rights of  Grantor  to demand or  otherwise
require  payment of any amount under,  or  performance  of any provision of, any
Collateral.

         5.2 INDEMNITY AND EXPENSES.  Grantor agrees to indemnify the Designated
Note  Investor  from and  against  any and all  claims,  losses and  liabilities
arising  out of or  resulting  from  this  Agreement  and the  other  Investment
Documents  (including   enforcement  of  this  Agreement  and  other  Investment
Documents),  except claims,  losses or liabilities resulting from the Designated
Note Investor's gross negligence or willful  misconduct as determined by a final
judgment of a court of competent  jurisdiction.  Grantor will upon demand pay to
the  Designated  Note  Investor the amount of any and all  reasonable  expenses,
including  the  reasonable  fees and  disbursements  of its  counsel  and of any
experts and  Designated  Note Investor,  which the Designated  Note Investor may
incur in connection with the following:

              (a) the administration of this Agreement;

              (b) the custody,  preservation,  use or operation  of, or the sale
of, collection from, or other realization upon, any of the Collateral;

              (c)  the  exercise  or  enforcement  of any of the  rights  of the
Secured Parties hereunder; or

              (d) the  failure by  Grantor  to  perform  or  observe  any of the
provisions hereof.

         5.3 WAIVERS.  Grantor hereby waives any right, to the extent  permitted
by  applicable  law, to receive  prior notice of or a judicial or other  hearing
with respect to any action or prejudgment remedy or proceeding by the Designated
Note Investor to take  possession,  exercise control over or dispose of any item
of Collateral  where such action is permitted  under the terms of this Agreement
or any other  Investment  Document or by applicable  laws or the time,  place or
terms of sale in connection  with the exercise of the Designated Note Investor's
rights  hereunder.  Grantor waives,  to the extent permitted by applicable laws,
any bonds,  security or sureties  required by the Designated  Note Investor with
respect to any of the  Collateral.  Grantor  also  waives any  damages  (direct,
consequential  or  otherwise)  occasioned  by the  enforcement  of  the

                                       24
<PAGE>

Secured Parties' rights under this Agreement or any other  Investment  Document,
including, the taking of possession of any Collateral or the giving of notice to
any Account Debtor or the collection of any Receivables  Collateral,  all to the
extent that such waiver is permitted by laws.  Grantor  also  consents  that the
Designated  Note Investor,  in connection with the enforcement of the Designated
Note  Investor'  rights and remedies  under this  Agreement,  may enter upon any
premises owned by or leased to it without obligations to pay rent or for use and
occupancy,  through self-help, without judicial process and without having first
obtained an order of any court. These waivers and all other waivers provided for
in this Agreement and the other Investment Documents have been negotiated by the
parties and Grantor  acknowledges that it has been represented by counsel of its
own choice and has consulted such counsel with respect to its rights hereunder.

                                   ARTICLE VI
                          THE DESIGNATED NOTE INVESTOR

         6.1 APPOINTMENT OF DESIGNATED NOTE INVESTOR BY THE SECURED PARTIES.

              (a)  Each of the  Secured  Parties  hereby  irrevocably  appoints,
designates  and  authorizes  GUS as agent  for such  Secured  Party to take such
action on behalf of such Secured Party under the  provisions  of this  Agreement
and each other Investment  Document and to exercise such powers and perform such
duties as are  expressly  delegated to it by the terms of this  Agreement or any
other  Investment  Document,   together  with  such  powers  as  are  reasonably
incidental  thereto.  Notwithstanding  any  provision to the contrary  contained
elsewhere  herein or in any  other  Investment  Document,  the  Designated  Note
Investor shall not have any duties or  responsibilities,  except those expressly
set forth herein,  nor shall the  Designated  Note Investor have or be deemed to
have  any  fiduciary  relationship  with  any  Secured  Party,  and  no  implied
covenants, functions, responsibilities, duties, obligations or liabilities shall
be read into this Agreement or any other Investment  Document or otherwise exist
against the Designated Note Investor.

              (b) The  Designated  Note  Investor  may execute any of its duties
under this  Agreement  or any other  Investment  Document by or through  agents,
employees  or  attorneys-in-fact  and shall be entitled to advice of counsel and
other consultants or experts  concerning all matters  pertaining to such duties.
The  Designated  Note Investor  shall not be  responsible  for the negligence or
misconduct  of any agent or  attorney-in-fact  that it selects in the absence of
gross negligence or willful misconduct.

              (c) The  Designated  Note Investor shall not (a) be liable for any
action  taken or  omitted  to be taken by it under or in  connection  with  this
Agreement  or any other  Investment  Document or the  transactions  contemplated
hereby (except for its own gross negligence or willful  misconduct in connection
with its duties expressly set forth herein), or (b) be responsible in any manner
to any Secured Party for any recital, statement, representation or warranty made
by  the  Grantor  or any  officer  thereof,  contained  herein  or in any  other
Investment Document, or in any certificate,  report, statement or other document
referred to or provided  for in, or received  by the  Designated  Note  Investor
under or in connection with, this Agreement or any other Investment Document, or
the validity, effectiveness,  genuineness, enforceability or sufficiency of

                                       25
<PAGE>

this  Agreement  or any other  Investment  Document,  or for any  failure of the
Grantor or any other party to any Investment Document to perform its obligations
hereunder or thereunder.

              (d) Designated  Note Investor shall be entitled to rely, and shall
be fully  protected  in relying,  upon any  writing,  communication,  signature,
resolution,  representation,  notice, consent,  certificate,  affidavit, letter,
telegram,  facsimile,  telex or  telephone  message,  electronic  mail  message,
statement  or other  document or  conversation  believed by it to be genuine and
correct and to have been signed,  sent or made by the proper  Person or Persons,
and upon  advice  and  statements  of legal  counsel  (including  counsel to the
Grantor),  independent  accountants and other experts selected by the Designated
Note Investor.  The Designated Note Investor shall be fully justified in failing
or refusing to take any action  under any  Investment  Document  unless it shall
first  receive  such advice or  concurrence  of the Secured  Parties as it deems
appropriate  and,  if it so  requests,  it  shall  first be  indemnified  to its
satisfaction  by the Secured  Parties  against any and all liability and expense
which may be incurred by it by reason of taking or  continuing  to take any such
action.  The Designated  Note Investor shall in all cases be fully  protected in
acting,  or in  refraining  from  acting,  under  this  Agreement  or any  other
Investment  Document  in  accordance  with a request or  consent of the  Secured
Parties holding more than 50% of the outstanding  principal  amount of the Notes
(unless the consent of all the Secured  Parties is required  pursuant to SECTION
7.2(A)) and such request and any action taken or failure to act pursuant thereto
shall be binding upon all the Secured Parties.

              (e) Each  Secured  Party  acknowledges  that the  Designated  Note
Investor has not made any  representation  or warranty to it, and that no act by
the  Designated  Note  Investor  hereafter  taken,  including any consent to and
acceptance  of any  assignment  or review of the  affairs of the  Grantor or any
Affiliate thereof,  shall be deemed to constitute any representation or warranty
by the Designated Note Investor to any Secured Party as to any matter, including
whether the  Designated  Note Investor have  disclosed  material  information in
their possession.  Each Secured Party represents to the Designated Note Investor
that it has,  independently  and  without  reliance  upon  the  Designated  Note
Investor  and  based  on  such  documents  and  information  as  it  has  deemed
appropriate,  made its own  appraisal of and  investigation  into the  business,
prospects,   operations,   property,   financial   and   other   condition   and
creditworthiness  of the Grantor and its  subsidiaries,  and all applicable laws
relating to the transactions  contemplated  hereby, and made its own decision to
enter into this Agreement.

              (f)  Whether  or not  the  transactions  contemplated  hereby  are
consummated, the Secured Parties shall indemnify upon demand the Designated Note
Investor  (to the  extent  not  reimbursed  by or on behalf of the  Grantor  and
without  limiting the  obligation  of the Grantor to do so), pro rata,  and hold
harmless the Designated  Note Investor from and against any and all  Indemnified
Liabilities  incurred by it; provided,  however,  that no Secured Party shall be
liable for the payment to the  Designated  Note  Investor of any portion of such
Indemnified  Liabilities  to the  extent  determined  in a final,  nonappealable
judgment  by a court  of  competent  jurisdiction  to  have  resulted  from  the
Designated Note Investor's own gross negligence or willful misconduct; PROVIDED,
HOWEVER,  that no action taken in accordance  with the directions of the Secured
Parties shall be deemed to constitute gross negligence or willful misconduct for
purposes of this SECTION 10. Without  limitation of the foregoing,  each Secured
Party shall  reimburse the Designated  Note Investor upon demand for its ratable
share of any costs or  out-of-pocket  expenses  incurred by the Designated  Note
Investor   in   connection   with   the   preparation,    execution,   delivery,
administration,

                                       26
<PAGE>

modification,  amendment or enforcement  (whether  through  negotiations,  legal
proceedings  or  otherwise)  of,  or  legal  advice  in  respect  of  rights  or
responsibilities  under, this Agreement,  any other Investment Document,  or any
document  contemplated  by or  referred  to  herein,  to  the  extent  that  the
Designated  Note Investor is not reimbursed for such expenses by or on behalf of
the Grantor.

              (g) The  Designated  Note Investor may resign as  Designated  Note
Investor upon thirty (30) days notice to the Secured Parties and to the Grantor.
If the Designated  Note Investor  resigns under this  Agreement,  within fifteen
(15) days after the delivery by the  Designated  Note  Investor of its notice of
resignation,  the Secured  Parties  shall  appoint a successor  Designated  Note
Investor from any of the other Secured Parties,  and shall notify the Grantor of
the  identity of and contact  information  for such  successor  Designated  Note
Investor  within  five (5) days of such  successor  Designated  Note  Investor's
appointment.

              (h) The Designated Note Purchaser need not be an Investor, but may
instead be a trust company, bank, or other fiduciary agent reasonably acceptable
to the Company and the Placement Agent.

         6.2 APPOINTMENT AS ATTORNEY-IN- FACT.

         The Grantor hereby irrevocably  constitutes and appoints the Designated
Note Investor and any officer or agent thereof, with full power of substitution,
as its  true  and  lawful  attorney-in-fact  with  full  irrevocable  power  and
authority  in the place and stead of the  Grantor and in the name of the Grantor
or in its own name, for the purpose of carrying out the terms of this Agreement,
to take, upon the occurrence and during the continuance of any Event of Default,
any and all  appropriate  action  and to  execute  any  and  all  documents  and
instruments  that may be necessary or  desirable to  accomplish  the purposes of
this  Agreement.  Upon the occurrence and during the  continuance of an Event of
Default,  the Grantor  hereby gives the  Designated  Note Investor the power and
right, on behalf of the Grantor,  without notice to or assent by the Grantor, to
do any or all of the following:

              (a) in the name of Grantor  or its own name,  or  otherwise,  take
possession of and indorse and collect any checks, drafts, notes,  acceptances or
other  instruments  for the  payment  of moneys  due under or in  respect of any
Collateral  and file any claim or take any other  action  or  proceeding  in any
court of law or equity or otherwise  deemed  appropriate by the Designated  Note
Investor for the purpose of  collecting  any and all such moneys due under or in
respect of any Collateral whenever payable; and

              (b) (i) direct any party  liable for any payment  under any of the
Collateral to make payment of any and all moneys due or to become due thereunder
directly to the  Designated  Note  Investor or as the  Designated  Note Investor
shall direct;  (ii) ask or demand for, collect,  and receive payment of and give
receipt for, any and all moneys,  claims and other  amounts due or to become due
at any time in respect  of or  arising  out of any  Collateral;  (iii)  receive,
collect, sign and endorse any drafts or other instruments, documents and chattel
paper in connection with any of the Collateral;  (iv) commence and prosecute any
suits,  actions  or  proceedings  at law or in equity in any court of  competent
jurisdiction to collect the Collateral or any portion thereof and to enforce any
other  right in  respect  of any  Collateral;  (v)  defend  any suit,  action or

                                       27
<PAGE>

proceeding  brought  against the Grantor  with respect to any  Collateral;  (vi)
settle,  compromise  or adjust  any such  suit,  action or  proceeding  and,  in
connection  therewith,  give such  discharges or releases as the Designated Note
Investor may deem appropriate;  and (vii) generally,  sell, transfer, pledge and
make any agreement  with respect to or otherwise deal with any of the Collateral
as fully and completely as though the Designated  Note Investor (for the benefit
of the Secured  Parties) were the absolute  owner thereof for all purposes,  and
do, at the option of the Secured  Parties and at their expense,  at any time, or
from time to time,  all acts and things that the Secured  Parties deem necessary
to protect,  preserve or realize upon the  Collateral  and the Secured  Parties'
security  interests  therein and to effect the intent of this Agreement,  all as
fully and effectively as Grantor might do.

Grantor  hereby  acknowledges,  consents  and agrees  that the power of attorney
granted pursuant to this Section is irrevocable and coupled with an interest.

         6.3 SECURED  PARTIES MAY PERFORM.  If the Grantor  fails to perform any
agreement  contained herein, the Designated Note Investor may perform,  or cause
performance  of, such  agreement and the  reasonable  expenses of the Designated
Note  Investor  incurred  in  connection  therewith  shall be payable by Grantor
pursuant to SECTION 6.2.

         6.4  DESIGNATED  NOTE  INVESTOR  HAS NO DUTY.  (a) In addition  to, the
powers conferred on the Designated Note Investor hereunder are solely to protect
its interest (on behalf of the Secured  Parties) in the Collateral and shall not
impose any duty on it to exercise any such powers.  Neither the Designated  Note
Investor nor any of its officers, directors, employees or agents shall be liable
for failure to demand,  collect or realize upon any of the Collateral or for any
delay in doing so or shall be under any obligation to sell or otherwise  dispose
of any Collateral upon the request of Grantor or any other Person or to take any
other  action  whatsoever  with  regard to the  Collateral  or any part  thereof
(including  the taking of any necessary  steps to preserve  rights against prior
parties  or  any  other  rights  pertaining  to  any  Collateral).  Neither  the
Designated Note Investor nor any of its officers, directors, employees or agents
shall be responsible to Grantor for any act or failure to act hereunder,  except
for their own gross negligence or willful misconduct.

              (b) Grantor assumes all  responsibility and liability arising from
or relating to the use, sale or other disposition of the Collateral. The Secured
Obligations shall not be affected by any failure of the Designated Note Investor
to take any steps to perfect the pledge and security  interest granted hereunder
or to collect or realize  upon the  Collateral,  nor shall loss or damage to the
Collateral release the Grantor from any Secured Obligations.

                                  ARTICLE VII
                            MISCELLANEOUS PROVISIONS

         7.1 INVESTMENT  DOCUMENT.  (a) This Agreement is an Investment Document
executed  pursuant  to the  Securiteies  Purchase  Agreement  and shall  (unless
otherwise expressly indicated herein) be construed,  administered and applied in
accordance with the terms and provisions thereof.

                                       28
<PAGE>

              (b)  Concurrently  herewith Grantor is executing and delivering to
the Designated Note Investor the Pledge  Agreement  pursuant to which Grantor is
pledging all the certificated Investment Property of Grantor. Such pledges shall
be governed by the terms of the Pledge Agreement and not by this Agreement.

         7.2 AMENDMENTS, ETC.; SUCCESSORS AND ASSIGNS.

              (a) No amendment to or waiver of any  provision of this  Agreement
nor  consent  to any  departure  by  Grantor  herefrom,  shall  in any  event be
effective  unless the same shall be in writing and signed by the Designated Note
Investor  at the  direction  of  Secured  Parties  holding  more than 50% of the
outstanding Notes; PROVIDED HOWEVER, that the Desginated Note Investor shall not
agree to any such  amendment or waiver  which  modifies  the  definition  of the
Secured  Parties  hereunder  of the terms of ARTICLE V hereof  without a written
direction  from each Secured Party and, with respect to any such  amendment,  by
Grantor, and then such waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given.

              (b) Upon the delivery by Grantor of  supplements  to the Schedules
to this Agreement pursuant to SECTION 4.12 the schedule  supplements attached to
each  such  certificate  shall be  incorporated  into  and  become a part of and
supplement  SCHEDULES I through VII hereto,  as appropriate,  and the Designated
Note Investor may attach such schedule  supplements to such Schedules,  and each
reference to such Schedules shall mean and be a reference to such Schedules,  as
supplemented pursuant hereto.

              (c)  This  Agreement   shall  be  binding  upon  Grantor  and  its
successors,  transferees  and  assigns  and  shall  inure  to  the  benefit  the
Designated  Note  Investor  and  the  Secured   Parties  and  their   respective
successors,  transferees and assigns;  PROVIDED,  HOWEVER,  that Grantor may not
assign  its  obligations  hereunder  without  the prior  written  consent of the
Designated Note Investor.

         7.3  ADDRESSES  FOR  NOTICES.  All  notices  and  other  communications
provided for hereunder shall be in writing and mailed,  delivered or transmitted
by  facsimile to each party hereto at the address set forth in Section 18 of the
Securities Purchase Agreement.  All such notices and other  communications shall
be  deemed  to be given  or made at the  times  provided  in  Section  18 of the
Securities Purchase Agreement.

         7.4 SECTION  CAPTIONS.  Section captions used in this Agreement are for
convenience  of reference  only, and shall not affect the  construction  of this
Agreement.

         7.5  SEVERABILITY.  If any  provision  of this  Agreement is held to be
illegal, invalid or unenforceable, (a) the legality, validity and enforceability
of the remaining  provisions of this Agreement shall not be affected or impaired
thereby and (b) the parties shall endeavor in good faith negotiations to replace
the illegal,  invalid or  unenforceable  provisions  with valid  provisions  the
economic  effect of which  comes as close as  possible  to that of the  illegal,
invalid  or  unenforceable  provisions.  The  invalidity  of  a  provision  in a
particular  jurisdiction  shall  not  invalidate  or render  unenforceable  such
provision in any other jurisdiction.

                                       29
<PAGE>

         7.6  COUNTERPARTS.  This  Agreement  may be  executed  in  one or  more
counterparts,  each of which shall be deemed an original, but all of which shall
constitute one and the same instrument.

         7.7  GOVERNING  LAW, ETC. (A) THIS  AGREEMENT  SHALL BE GOVERNED BY AND
CONSTRUED IN  ACCORDANCE  WITH THE LAWS OF THE STATE OF NEW YORK  APPLICABLE  TO
AGREEMENTS MADE AND PERFORMED  ENTIRELY WITHIN SUCH STATE,  EXCEPT TO THE EXTENT
THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTEREST HEREUNDER,  OR REMEDIES
HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A
JURISDICTION OTHER THAN THE STATE OF NEW YORK.

                  (B) ANY  LEGAL  ACTION  OR  PROCEEDING  WITH  RESPECT  TO THIS
AGREEMENT  MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK  SITTING IN NEW
YORK OR OF THE UNITED STATES FOR THE SOUTHERN DISTRICT OF SUCH STATE;  PROVIDED,
HOWEVER,  THAT ANY SUIT  SEEKING  ENFORCEMENT  AGAINST ANY  COLLATERAL  OR OTHER
PROPERTY SHALL BE BROUGHT,  AT THE DESIGNATED  NOTE  INVESTOR'S  OPTION,  IN THE
COURTS OF ANY JURISDICTION WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND.
BY EXECUTION AND DELIVERY OF THIS  AGREEMENT,  EACH PARTY HERETO  CONSENTS,  FOR
ITSELF AND IN RESPECT OF ITS  PROPERTY,  TO THE  NON-EXCLUSIVE  JURISDICTION  OF
THOSE  COURTS.  GRANTOR  AND  THE  GRANTOR  IRREVOCABLY  WAIVES  ANY  OBJECTION,
INCLUDING  ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM
NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION
OR  PROCEEDING  IN SUCH  JURISDICTION  IN  RESPECT  OF THIS  AGREEMENT  OR OTHER
INVESTMENT  DOCUMENT RELATED THERETO.  EACH PARTY HERETO WAIVES PERSONAL SERVICE
OF ANY SUMMONS, COMPLAINT OR OTHER PROCESS, WHICH MAY BE MADE BY ANY OTHER MEANS
PERMITTED BY THE LAW OF SUCH STATE.

         7.8 WAIVER OF JURY TRIAL. EACH PARTY TO THIS AGREEMENT HEREBY EXPRESSLY
WAIVES  ANY  RIGHT TO TRIAL BY JURY OF ANY  CLAIM,  DEMAND,  ACTION  OR CAUSE OF
ACTION  ARISING UNDER ANY  INVESTMENT  DOCUMENT OR IN ANY WAY CONNECTED  WITH OR
RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES  HERETO OR ANY OF THEM WITH
RESPECT TO ANY INVESTMENT  DOCUMENT OR THE INVESTMENT  RELATED THERETO,  IN EACH
CASE WHETHER NOW EXISTING OR HEREAFTER ARISING,  AND WHETHER FOUNDED IN CONTRACT
OR TORT OR  OTHERWISE;  AND EACH PARTY HEREBY  AGREES AND CONSENTS THAT ANY SUCH
CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT
A JURY, AND THAT ANY PARTY TO THIS AGREEMENT MAY FILE AN ORIGINAL COUNTERPART OR
A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN  EVIDENCE OF THE CONSENT OF THE
SIGNATORIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.

                                       30
<PAGE>

         7.9 ENTIRE AGREEMENT. THIS AGREEMENT AND THE OTHER INVESTMENT DOCUMENTS
REPRESENT THE FINAL  AGREEMENT  AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY
EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES
OR BY PRIOR OR CONTEMPORANEONS  WRITTEN AGREEMENTS.  THERE ARE NO UNWRITTEN ORAL
AGREEMENTS AMONG THE PARTIES.

                            [Signature page follows.]

                                       31
<PAGE>

         IN WITNESS  WHEREOF,  the Grantor and the Designated Note Investor have
caused this Security  Agreement to be duly executed and delivered by its officer
thereunto duly authorized as of the date first above written.

                                         DIOMED, INC.

                                         By: /s/  JAMES A. WYLIE, JR.
                                             -----------------------------------
                                             Name:  James A. Wylie, Jr.
                                             Title:  Chief Executive Officer

                                         DESIGNATED NOTE INVESTOR:

                                         Gibralt US, Inc.,
                                         as the Designated Note Investor

                                         By: /s/ JOHNNY CIAMPI
                                             -----------------------------------
                                             Name: Johnny Ciampi
                                             Title: Authorized Officer

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