Document:

EXHIBIT 10.1

                          SECURITIES PURCHASE AGREEMENT

         This Securities  Purchase  Agreement (this  "Agreement") is dated as of
September  28, 2004 among Diomed  Holdings,  Inc., a Delaware  corporation  (the
"Company"),  and each purchaser  identified on the signature pages hereto (each,
including  its  successors  and assigns,  a  "Purchaser"  and  collectively  the
"Purchasers").

         WHEREAS,  subject  to the  terms  and  conditions  set  forth  in  this
Agreement and pursuant to Section 4(2) of the Securities Act of 1933, as amended
(the "Securities Act") and Rule 506 promulgated thereunder,  the Company desires
to issue  and sell to each  Purchaser,  and each  Purchaser,  severally  and not
jointly, desires to purchase from the Company, securities of the Company as more
fully described in this Agreement.

         NOW,  THEREFORE,  IN CONSIDERATION of the mutual covenants contained in
this Agreement,  and for other good and valuable  consideration  the receipt and
adequacy of which are hereby acknowledged, the Company and each Purchaser agrees
as follows:

                                   ARTICLE I.
                                   DEFINITIONS

1.1 Definitions.  In addition to the terms defined  elsewhere in this Agreement:
(a)  capitalized  terms that are not otherwise  defined herein have the meanings
given to such terms in the Debentures (as defined herein), and (b) the following
terms have the meanings indicated in this Section 1.1:

                  "Action"  shall  have the  meaning  ascribed  to such  term in
         Section 3.1(j).

                  "Affiliate"  means any Person  that,  directly  or  indirectly
         through one or more intermediaries,  controls or is controlled by or is
         under  common  control  with a  Person,  as such  terms are used in and
         construed  under Rule 144 under the  Securities  Act. With respect to a
         Purchaser,  any investment fund or managed account that is managed on a
         discretionary  basis by the same  investment  manager as such Purchaser
         will be deemed to be an Affiliate of such Purchaser.

                  "Closing"  means the closing of the  purchase  and sale of the
         Securities pursuant to Section 2.1.

                  "Closing   Date"  means  the  Trading  Day  when  all  of  the
         Transaction   Documents   have  been  executed  and  delivered  by  the
         applicable  parties  thereto,  and all conditions  precedent to (i) the
         Purchasers'  obligations  to pay the  Subscription  Amount and (ii) the
         Company's  obligations to deliver the Securities have been satisfied or
         waived.

                  "Closing Price" means,  for any date, the price  determined by
         the first of the  following  clauses  that  applies:  (a) if the Common
         Stock is then  listed or quoted on a Trading  Market,  the  closing bid
         price of the Common Stock for such date (or the nearest preceding date)

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

                   "Commission" means the Securities and Exchange Commission.
                    ----------

                  "Common  Stock"  means the common  stock of the  Company,  par
         value $0.001 per share, and any securities into which such common stock
         shall hereinafter have been reclassified into.

                  "Common Stock Equivalents" means any securities of the Company
         or the  Subsidiaries  which would entitle the holder thereof to acquire
         at any time  Common  Stock,  including  without  limitation,  any debt,
         preferred stock, rights, options,  warrants or other instrument that is
         at any time convertible into or exchangeable for, or otherwise entitles
         the holder thereof to receive, Common Stock.

                  "Company Counsel" means McGuireWoods LLP, with offices at 1345
         Avenue of the Americas, 7th Floor, New York, New York 10105.

                  "Conversion  Price"  shall have the  meaning  ascribed to such
         term in the Debentures.

                   "Debentures" means, the Variable Rate Convertible  Debentures
         due,  subject  to the terms  therein,  48  months  from  their  date of
         issuance,  issued by the Company to the  Purchasers  hereunder,  in the
         form of Exhibit A.

                  "Disclosure Schedules" shall have the meaning ascribed to such
         term in Section 3.1 hereof.

                  "Effective Date" means the date that the initial  Registration
         Statement  filed by the  Company  pursuant to the  Registration  Rights
         Agreement is first declared effective by the Commission.

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

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                  "Exempt  Issuance"  means the issuance of (a) shares of Common
         Stock or options to employees,  officers,  directors or  consultants of
         the  Company  pursuant  to any stock or option  plan duly  adopted by a
         majority of the  non-employee  members of the Board of Directors of the
         Company or a majority  of the members of a  committee  of  non-employee
         directors  established  for  such  purpose,  (b)  securities  upon  the
         exercise of or  conversion  of any  securities  issued  hereunder or as
         contemplated  by  this  Agreement  and  related  transaction  documents
         contemplated by Sections 2.3(a)(iii) and 2.3(b)(v) herein,  convertible
         securities,  options or warrants  issued and outstanding on the date of
         this  Agreement,  provided that such  securities  have not been amended
         since  the  date of this  Agreement  to  increase  the  number  of such
         securities  and (c)  securities  issued  pursuant  to  acquisitions  or
         strategic  transactions,  provided any such issuance shall only be to a
         Person  which is,  itself or through  its  subsidiaries,  an  operating
         company in a business  synergistic with the business of the Company and
         in which the Company receives benefits in addition to the investment of
         funds,  but shall not  include a  transaction  in which the  Company is
         issuing  securities  primarily for the purpose of raising capital or to
         an entity whose primary business is investing in securities;  provided,
         however,  for the purpose of clause (a) herein,  shares of Common Stock
         or options issuable to consultants or service  providers to the Company
         shall not exceed  250,000  shares,  in the  aggregate,  in any 12 month
         period.

                   "FW"  means  Feldman   Weinstein  LLP  with  offices  at  420
         Lexington  Avenue,  Suite 2620,  New York, New York  10170-0002,  legal
         counsel to Omicron Mater Trust.

                  "GAAP" shall have the meaning ascribed to such term in Section
         3.1(h) hereof.

                  "Liens" means a lien, charge, security interest,  encumbrance,
         right of first refusal, preemptive right or other restriction.

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

                   "Material  Adverse Effect" shall have the meaning assigned to
         such term in Section 3.1(b) hereof.

                  "Material  Permits"  shall have the  meaning  ascribed to such
         term in Section 3.1(m).

                  "Person"  means an  individual  or  corporation,  partnership,
         trust,  incorporated  or  unincorporated  association,  joint  venture,
         limited  liability  company,  joint stock  company,  government  (or an
         agency or subdivision thereof) or other entity of any kind.

                  "Proceeding" means an action,  claim,  suit,  investigation or
         proceeding (including,  without limitation, an investigation or partial
         proceeding, such as a deposition), whether commenced or threatened.

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                  "Registration  Rights Agreement" means the Registration Rights
         Agreement, dated the date hereof, among the Company and the Purchasers,
         in the form of Exhibit B attached hereto.

                  "Registration   Statement"  means  a  registration   statement
         meeting the requirements set forth in the Registration Rights Agreement
         and covering the resale of the Warrant Shares and the Underlying Shares
         by each Purchaser as provided for in the Registration Rights Agreement.

                  "Required  Approvals"  shall have the meaning ascribed to such
         term in Section 3.1(e).

                  "Required   Minimum"  means,  as  of  any  date,  the  maximum
         aggregate  number of shares of Common Stock then issued or  potentially
         issuable in the future pursuant to the Transaction Documents, including
         any Warrant  Shares or  Underlying  Shares  issuable  upon  exercise or
         conversion in full of all Warrants and Debentures (including Underlying
         Shares  issuable as payment of  interest),  ignoring any  conversion or
         exercise  limits set forth  therein,  and assuming that the  Conversion
         Price is at all times on and after the date of determination 75% of the
         then Conversion Price on the Trading Day immediately  prior to the date
         of determination.

                  "Rule  144"  means  Rule  144  promulgated  by the  Commission
         pursuant to the  Securities  Act, as such Rule may be amended from time
         to time,  or any similar rule or  regulation  hereafter  adopted by the
         Commission having substantially the same effect as such Rule.

                  "SEC Reports" shall have the meaning  ascribed to such term in
         Section 3.1(h) hereof.

                  "Securities" means the Debentures,  the Warrants,  the Warrant
         Shares and the Underlying Shares.

                  "Securities Act" means the Securities Act of 1933, as amended.

                  "Shareholder  Approval" means such approval as may be required
         by the applicable  rules and  regulations of the Trading Market (or any
         successor  entity) from the shareholders of the Company with respect to
         the transactions contemplated by the Transaction Documents,  including,
         without   limitation,   the   transaction   contemplated   by  Sections
         2.3(a)(iii) and 2.3(b)(v) herein,  including the issuance of all of the
         Underlying  Shares and shares of Common Stock issuable upon exercise of
         the Warrants in excess of 19.9% of the Company's issued and outstanding
         Common Stock on the Closing Date.

                  "Subscription  Amount"  means,  as  to  each  Purchaser,   the
         aggregate  amount  to be paid for  Debentures  and  Warrants  purchased
         hereunder as specified  below such  Purchaser's  name on the  signature

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         page of this Agreement and next to the heading  "Subscription  Amount,"
         in United States Dollars and in immediately available funds.

                  "Subsequent Financing" shall have the meaning ascribed to such
         term in Section 4.13.

                  "Subsidiary"  means any subsidiary of the Company as set forth
         on Schedule 3.1(a).

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

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

                   "Transaction Documents" means this Agreement, the Debentures,
         the Warrants, the Registration Rights Agreement and any other documents
         or agreements executed in connection with the transactions contemplated
         hereunder.

                  "Underlying  Shares" means the shares of Common Stock issuable
         upon  conversion of the  Debentures  and issued and issuable in lieu of
         the cash payment of interest on the Debentures.

                  "Warrants"  means   collectively  the  Common  Stock  purchase
         warrants,  in the form of Exhibit C delivered to the  Purchasers at the
         Closing in accordance with Section 2.2 hereof,  which Warrants shall be
         exercisable immediately and have a term of exercise equal to 5 years.

                  "Warrant  Shares"  means the shares of Common  Stock  issuable
         upon exercise of the Warrants.

                                  ARTICLE II.
                                PURCHASE AND SALE

2.1 Closing.  On the Closing Date,  upon the terms and subject to the conditions
set forth herein,  concurrent  with the execution and delivery of this Agreement
by the parties hereto,  the Company agrees to sell, and each Purchaser agrees to
purchase in the aggregate, severally and not jointly, up to $7,000,000 principal
amount of the  Debentures at their face  principal  amount,  as set forth on the
signature page hereof for each Purchaser,  in the proportions set forth for each
such Purchaser. Each Purchaser shall deliver to the Company via wire transfer or
a certified check immediately available funds equal to their Subscription Amount
and the Company shall deliver to each Purchaser their  respective  Debenture and
Warrants as determined  pursuant to Section  2.2(a)(iii) and the other items set

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forth  in  Section  2.2  issuable  at  the  Closing.  Upon  satisfaction  of the
conditions  set forth in Section 2.2, the Closing  shall occur at the offices of
FW, or such other location as the parties shall mutually agree.

         2.2      Deliveries.

                  a)       On the Closing  Date,  the Company  shall  deliver or
                           cause  to  be   delivered  to  each   Purchaser   the
                           following:

                           (i)      this Agreement duly executed by the Company;

                           (ii)     a Debenture with a principal amount equal to
                                    such   Purchaser's    Subscription   Amount,
                                    registered in the name of such Purchaser;

                           (iii)    a  Warrant  registered  in the  name of such
                                    Purchaser  to  purchase  up to a  number  of
                                    shares of Common  Stock equal to 50% of such
                                    Purchaser's  Subscription  Amount divided by
                                    the Market  Price,  with an  exercise  price
                                    equal to 110% of the Market  Price as of the
                                    date hereof, subject to adjustment therein;

                           (iv)     the   Registration   Rights  Agreement  duly
                                    executed by the Company;

                           (v)      the written voting agreement, in the form of
                                    Exhibit  E  attached  hereto,  of all of the
                                    officers and directors on the date hereof to
                                    vote all Common  Stock owned by each of such
                                    officers and directors as of the record date
                                    for the annual  meeting of  shareholders  of
                                    the   Company   in  favor   of   Shareholder
                                    Approval;

                           (vi)     a legal opinion of Company  Counsel,  in the
                                    form of Exhibit D attached hereto.

                  b)       On the Closing Date,  each Purchaser shall deliver or
                           cause to be delivered to the Company the following:

                           (i)      this   Agreement   duly   executed  by  such
                                    Purchaser;

                           (ii)     such Purchaser's Subscription Amount by wire
                                    transfer  to the  account  as  specified  in
                                    writing by the Company; and

                           (iii)    the   Registration   Rights  Agreement  duly
                                    executed by such Purchaser.

         2.3      Closing Conditions.

                  a)       The   obligations   of  the  Company   hereunder   in
                           connection  with  the  Closing  are  subject  to  the
                           following conditions being met:

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                           (i)      the accuracy in all material  respects  when
                                    made  and  on  the   Closing   Date  of  the
                                    representations   and   warranties   of  the
                                    Purchasers contained herein;

                           (ii)     all obligations, covenants and agreements of
                                    the  Purchasers  required to be performed at
                                    or prior to the Closing Date shall have been
                                    performed;

                           (iii)    concurrently  herewith,  the  Company  shall
                                    close on the sale of Common Stock and Common
                                    Stock   Equivalents   realizing   at   least
                                    $3,000,000   in   unencumbered   new   gross
                                    proceeds from such sale; and

                           (iv)     the delivery by the  Purchasers of the items
                                    set   forth  in   Section   2.2(b)  of  this
                                    Agreement.

                  b)       The   respective   obligations   of  the   Purchasers
                           hereunder in connection  with the Closing are subject
                           to the following conditions being met:

                           (i)      the accuracy in all material respects on the
                                    Closing  Date  of  the  representations  and
                                    warranties of the Company contained herein;

                           (ii)     all obligations, covenants and agreements of
                                    the Company  required to be  performed at or
                                    prior to the  Closing  Date  shall have been
                                    performed;

                           (iii)    the delivery by the Company of the items set
                                    forth in Section 2.2(a) of this Agreement;

                           (iv)     there  shall have been no  Material  Adverse
                                    Effect with respect to the Company since the
                                    date hereof;

                           (v)      concurrently  herewith,  the  Company  shall
                                    close on the sale of Common Stock and Common
                                    Stock   Equivalents   realizing   at   least
                                    $3,000,000   in   unencumbered   new   gross
                                    proceeds from such sale; and

                           (vi)     From the date  hereof to the  Closing  Date,
                                    trading in the Common  Stock  shall not have
                                    been suspended by the Commission (except for
                                    any   suspension   of   trading  of  limited
                                    duration  agreed  to by the  Company,  which
                                    suspension  shall be terminated prior to the
                                    Closing),  and,  at any  time  prior  to the
                                    Closing   Date,    trading   in   securities
                                    generally as reported by Bloomberg Financial
                                    Markets  shall  not have been  suspended  or
                                    limited,  or minimum  prices  shall not have
                                    been  established on securities whose trades
                                    are  reported  by  such  service,  or on any

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                                    Trading   Market,   nor   shall  a   banking
                                    moratorium  have been declared either by the
                                    United States or New York State authorities.

                                  ARTICLE III.
                         REPRESENTATIONS AND WARRANTIES

         3.1 Representations and Warranties of the Company.  Except as set forth
under the  corresponding  section of the disclosure  schedules  delivered to the
Purchasers  concurrently herewith (the "Disclosure  Schedules") which Disclosure
Schedules  shall  be  deemed  a  part  hereof,  the  Company  hereby  makes  the
representations and warranties set forth below to each Purchaser.

                  (a) Subsidiaries.  All of the direct and indirect subsidiaries
         of the  Company  are set forth on Schedule  3.1(a).  The Company  owns,
         directly  or  indirectly,  all of the  capital  stock or  other  equity
         interests of each Subsidiary  free and clear of any Liens,  and all the
         issued and  outstanding  shares of capital stock of each Subsidiary are
         validly  issued  and  are  fully  paid,   non-assessable  and  free  of
         preemptive and similar rights to subscribe for or purchase  securities.
         If the Company has no subsidiaries,  then references in the Transaction
         Documents to the Subsidiaries will be disregarded.

                  (b)  Organization and  Qualification.  Each of the Company and
         the Subsidiaries is an entity duly incorporated or otherwise organized,
         validly   existing  and  in  good  standing   under  the  laws  of  the
         jurisdiction of its incorporation or organization (as applicable), with
         the  requisite  power and authority to own and use its  properties  and
         assets and to carry on its business as currently conducted. Neither the
         Company nor any  Subsidiary  is in  violation  or default of any of the
         provisions of its respective  certificate or articles of incorporation,
         bylaws  or  other  organizational  or  charter  documents.  Each of the
         Company and the  Subsidiaries is duly qualified to conduct business and
         is in good  standing as a foreign  corporation  or other entity in each
         jurisdiction in which the nature of the business  conducted or property
         owned  by it makes  such  qualification  necessary,  except  where  the
         failure to be so  qualified  or in good  standing,  as the case may be,
         could not have or  reasonably  be  expected to result in (i) a material
         adverse  effect on the  legality,  validity  or  enforceability  of any
         Transaction Document,  (ii) a material adverse effect on the results of
         operations,  assets, business,  prospects or financial condition of the
         Company  and the  Subsidiaries,  taken as a whole,  or (iii) a material
         adverse  effect on the  Company's  ability to  perform in any  material
         respect  on a  timely  basis  its  obligations  under  any  Transaction
         Document (any of (i), (ii) or (iii), a "Material  Adverse Effect") and,
         to its  knowledge,  no  Proceeding  has  been  instituted  in any  such
         jurisdiction  revoking,  limiting or  curtailing  or seeking to revoke,
         limit or curtail such power and authority or qualification.

                  (c) Authorization;  Enforcement. The Company has the requisite
         corporate  power and  authority  to enter  into and to  consummate  the
         transactions  contemplated  by each of the  Transaction  Documents  and
         otherwise to carry out its  obligations  thereunder.  The execution and

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         delivery of each of the  Transaction  Documents  by the Company and the
         consummation by it of the transactions  contemplated  thereby have been
         duly authorized by all necessary  action on the part of the Company and
         no further  action is required by the Company in  connection  therewith
         other than in connection with the Required Approvals.  Each Transaction
         Document has been (or upon  delivery  will have been) duly  executed by
         the Company and, when  delivered in  accordance  with the terms hereof,
         will  constitute  the  valid  and  binding  obligation  of the  Company
         enforceable against the Company in accordance with its terms except (i)
         as  limited  by  applicable  bankruptcy,  insolvency,   reorganization,
         moratorium and other laws of general application  affecting enforcement
         of creditors'  rights generally and (ii) as limited by laws relating to
         the availability of specific  performance,  injunctive  relief or other
         equitable remedies.

                  (d) No Conflicts.  The execution,  delivery and performance of
         the  Transaction  Documents by the Company and the  consummation by the
         Company of the other transactions  contemplated thereby do not and will
         not: (i) conflict with or violate any provision of the Company's or any
         Subsidiary's certificate or articles of incorporation,  bylaws or other
         organizational  or  charter  documents,   or  (ii)  conflict  with,  or
         constitute  a default (or an event that with notice or lapse of time or
         both would become a default) under,  result in the creation of any Lien
         upon any of the properties or assets of the Company or any  Subsidiary,
         or give to others any rights of termination, amendment, acceleration or
         cancellation  (with or without  notice,  lapse of time or both) of, any
         agreement,  credit  facility,  debt or other  instrument  (evidencing a
         Company or  Subsidiary  debt or  otherwise) to which the Company or any
         Subsidiary  is a party or by which any property or asset of the Company
         or any  Subsidiary  is  bound or  affected,  or  (iii)  subject  to the
         Required Approvals,  conflict with or result in a violation of any law,
         rule,  regulation,   order,  judgment,   injunction,  decree  or  other
         restriction of any court or governmental authority to which the Company
         or a Subsidiary is subject (including federal and state securities laws
         and regulations), or by which any property or asset of the Company or a
         Subsidiary  is bound or affected,  or (iv) conflict with or violate the
         terms of any agreement by which the Company or any  Subsidiary is bound
         or to which any property or asset of the Company or any  Subsidiary  is
         bound or  affected;  except in the case of each of clauses (ii) through
         (iv),  such as could not have or  reasonably be expected to result in a
         Material Adverse Effect.

                  (e)  Filings,  Consents  and  Approvals.  The  Company  is not
         required to obtain any consent, waiver, authorization or order of, give
         any notice to, or make any filing or  registration  with,  any court or
         other federal,  state, local or other  governmental  authority or other
         Person in connection  with the execution,  delivery and  performance by
         the  Company  of the  Transaction  Documents,  other  than (i)  filings
         required  pursuant to Section 4.6, (ii) the filing with the  Commission
         of the Registration  Statement,  (iii) the notice and/or application(s)
         to each applicable  Trading Market for the issuance and sale of (a) the
         Debentures  and Warrants and the listing of the Warrant  Shares and the
         Underlying Shares and (b) the Common Stock and Common Stock Equivalents
         issuable in connection  with the  transaction  contemplated by Sections

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         2.3(a)(iii) and 2.3(b)(v) herein, and the listing of such Common Stock,
         in each  case for  trading  thereon  in the time  and  manner  required
         thereby,  and (iv) the  filing of Form D with the  Commission  and such
         filings as are required to be made under  applicable  state  securities
         laws (collectively, the "Required Approvals").

                  (f)  Issuance  of the  Securities.  The  Securities  are  duly
         authorized  and,  when  issued  and  paid  for in  accordance  with the
         applicable  Transaction  Documents,  will be duly and  validly  issued,
         fully paid and  nonassessable,  free and clear of all Liens  imposed by
         the Company  other than  restrictions  on transfer  provided for in the
         Transaction Documents. The Underlying Shares, when issued in accordance
         with the terms of the  Transaction  Documents,  will be validly issued,
         fully paid and  nonassessable,  free and clear of all Liens  imposed by
         the Company.  The Company has reserved from its duly authorized capital
         stock a number of shares of Common  Stock for  issuance  of the Warrant
         Shares and the Underlying Shares at least equal to the Required Minimum
         on the date  hereof.  Other  than with  respect to the shares of Common
         Stock referred to in Sections  2.3(a)(iii)  and 2.3(b)(v)  hereof,  the
         Company has not, and to the  knowledge of the Company,  no Affiliate of
         the Company has sold,  offered for sale or  solicited  offers to buy or
         otherwise  negotiated in respect of any security (as defined in Section
         2 of the  Securities  Act) that would be  integrated  with the offer or
         sale of the Securities in a manner that would require the  registration
         under  the  Securities  Act  of  the  sale  of  the  Securities  to the
         Purchasers,  or that would be integrated  with the offer or sale of the
         Securities  for  purposes of the rules and  regulations  of any Trading
         Market.

                  (g)  Capitalization.  The  capitalization of the Company is as
         described in the Company's most recent  periodic  report filed with the
         Commission.  The Company  has not issued any  capital  stock since such
         filing other than  pursuant to the exercise of employee  stock  options
         under the  Company's  stock  option  plans,  the  issuance of shares of
         Common  Stock to employees  pursuant to the  Company's  employee  stock
         purchase plan and pursuant to the conversion or exercise of outstanding
         Common  Stock  Equivalents.  No Person has any right of first  refusal,
         preemptive  right,  right of  participation,  or any  similar  right to
         participate  in  the  transactions   contemplated  by  the  Transaction
         Documents.  Except as  described  in Schedule  3.1(g),  other than as a
         result of the sale of the  Common  Stock and Common  Stock  Equivalents
         issued  to  investors  as  contemplated  in  Sections  2.3(a)(iii)  and
         2.3(b)(v)  and  except  as a  result  of the  purchase  and sale of the
         Securities,  there are no outstanding options,  warrants, script rights
         to  subscribe  to, calls or  commitments  of any  character  whatsoever
         relating to, or securities,  rights or obligations  convertible into or
         exchangeable  for, or giving any Person any right to  subscribe  for or
         acquire,  any  shares  of  Common  Stock,  or  contracts,  commitments,
         understandings  or  arrangements by which the Company or any Subsidiary
         is or may become bound to issue  additional  shares of Common Stock, or
         securities or rights  convertible or exchangeable into shares of Common
         Stock.  The issuance and sale of the  Securities  will not obligate the
         Company  to issue  shares of Common  Stock or other  securities  to any
         Person  (other than the  Purchasers)  and will not result in a right of
         any holder of Company  securities to adjust the  exercise,  conversion,
         exchange or reset price under such  securities.  All of the outstanding

                                       10
<PAGE>

         shares of capital stock of the Company are validly  issued,  fully paid
         and nonassessable,  have been issued in compliance with all federal and
         state securities  laws, and none of such outstanding  shares was issued
         in violation of any  preemptive  rights or similar  rights to subscribe
         for or purchase  securities.  Except as contemplated by the Transaction
         Documents with respect to the applicable  rules and  regulations of the
         American Stock Exchange (or any successor entity),  no further approval
         or  authorization  of any  stockholder,  the Board of  Directors of the
         Company  or  others  is  required  for  the  issuance  and  sale of the
         Securities.  Except  as  disclosed  in the SEC  Reports,  there  are no
         stockholders agreements,  voting agreements or other similar agreements
         with respect to the  Company's  capital stock to which the Company is a
         party or, to the knowledge of the Company,  between or among any of the
         Company's stockholders.

                  (h) SEC Reports;  Financial Statements.  The Company has filed
         all reports required to be filed by it under the Securities Act and the
         Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, for
         the two years  preceding the date hereof (or such shorter period as the
         Company  was  required  by law to file such  material)  (the  foregoing
         materials,  including the exhibits thereto, being collectively referred
         to herein as the "SEC  Reports")  on a timely  basis or has  received a
         valid  extension  of such  time of  filing  and has  filed any such SEC
         Reports  prior to the  expiration  of any such  extension.  As of their
         respective dates,  after giving effect to any amendments filed thereon,
         the SEC Reports complied in all material respects with the requirements
         of  the  Securities  Act  and  the  Exchange  Act  and  the  rules  and
         regulations of the Commission promulgated  thereunder,  and none of the
         SEC Reports,  when filed,  contained any untrue statement of a material
         fact or omitted to state a material fact required to be stated  therein
         or necessary in order to make the statements  therein,  in light of the
         circumstances under which they were made, not misleading. The financial
         statements  of the Company  included  in the SEC Reports  comply in all
         material respects with applicable accounting requirements and the rules
         and  regulations of the Commission with respect thereto as in effect at
         the time of filing.  Such  financial  statements  have been prepared in
         accordance with United States generally accepted accounting  principles
         applied on a  consistent  basis during the periods  involved  ("GAAP"),
         except as may be otherwise  specified in such  financial  statements or
         the notes thereto and except that  unaudited  financial  statements may
         not contain all footnotes  required by GAAP,  and fairly present in all
         material  respects  the  financial  position  of the  Company  and  its
         consolidated  subsidiaries  as of and for  the  dates  thereof  and the
         results  of  operations  and cash  flows for the  periods  then  ended,
         subject, in the case of unaudited  statements,  to normal,  immaterial,
         year-end audit adjustments.

                  (i) Material Changes.  Except as described in Schedule 3.1(i),
         since the date of the  latest  audited  financial  statements  included
         within the SEC  Reports,  except as  specifically  disclosed in the SEC
         Reports,  (i) there has been no event,  occurrence or development  that
         has had or that could  reasonably  be  expected to result in a Material
         Adverse  Effect,  (ii) the Company  has not  incurred  any  liabilities
         (contingent  or  otherwise)  other than (A) trade  payables and accrued
         expenses  incurred in the ordinary  course of business  consistent with

                                       11
<PAGE>

         past practice and (B)  liabilities  not required to be reflected in the
         Company's  financial  statements  pursuant  to GAAP or  required  to be
         disclosed  in filings made with the  Commission,  (iii) the Company has
         not altered its method of accounting, (iv) the Company has not declared
         or made any dividend or  distribution  of cash or other property to its
         stockholders or purchased,  redeemed or made any agreements to purchase
         or redeem any shares of its  capital  stock and (v) the Company has not
         issued any equity  securities  to any officer,  director or  Affiliate,
         except  pursuant to existing  Company stock option  plans.  The Company
         does  not  have  pending   before  the   Commission   any  request  for
         confidential treatment of information.

                  (j) Litigation.  Except as described in Schedule 3.1(j), there
         is no  action,  suit,  inquiry,  notice  of  violation,  proceeding  or
         investigation  pending or, to the knowledge of the Company,  threatened
         against  or  affecting  the  Company,  any  Subsidiary  or any of their
         respective properties before or by any court, arbitrator,  governmental
         or  administrative  agency or  regulatory  authority  (federal,  state,
         county,  local  or  foreign)  (collectively,  an  "Action")  which  (i)
         adversely   affects   or   challenges   the   legality,   validity   or
         enforceability of any of the Transaction Documents or the Securities or
         (ii) could, if there were an unfavorable  decision,  have or reasonably
         be expected to result in a Material Adverse Effect. Except as described
         in Schedule  3.1(j),  neither the Company nor any  Subsidiary,  nor any
         director or officer  thereof,  is or has been the subject of any Action
         involving a claim of violation of or liability  under  federal or state
         securities  laws or a claim of  breach  of  fiduciary  duty.  Except as
         described in Schedule 3.1(j),  there has not been, and to the knowledge
         of the Company, there is not pending or contemplated, any investigation
         by the  Commission  involving  the  Company  or any  current  or former
         director or officer of the  Company.  Except as  described  in Schedule
         3.1(j),  the  Commission  has not issued any stop order or other  order
         suspending the effectiveness of any registration statement filed by the
         Company or any Subsidiary under the Exchange Act or the Securities Act.

                  (k) Labor  Relations.  No material labor dispute exists or, to
         the  knowledge of the Company,  is imminent  with respect to any of the
         employees of the Company  which could  reasonably be expected to result
         in a Material Adverse Effect.

                  (l) Compliance.  Neither the Company nor any Subsidiary (i) is
         in default under or in violation of (and no event has occurred that has
         not been  waived  that,  with  notice  or lapse of time or both,  would
         result in a default by the Company or any  Subsidiary  under),  nor has
         the Company or any Subsidiary  received notice of a claim that it is in
         default  under or that it is in violation  of, any  indenture,  loan or
         credit  agreement or any other agreement or instrument to which it is a
         party or by which it or any of its  properties is bound (whether or not
         such default or violation has been waived), (ii) is in violation of any
         order of any court, arbitrator or governmental body, or (iii) is or has
         been  in  violation  of  any  statute,   rule  or   regulation  of  any
         governmental  authority,  including  without  limitation  all  foreign,
         federal, state and local laws applicable to its business except in each
         case as could not have a Material Adverse Effect.

                                       12
<PAGE>

                  (m)  Regulatory  Permits.  The  Company  and the  Subsidiaries
         possess all  certificates,  authorizations  and  permits  issued by the
         appropriate  federal,  state, local or foreign  regulatory  authorities
         necessary to conduct  their  respective  businesses as described in the
         SEC Reports, except where the failure to possess such permits could not
         have or reasonably be expected to result in a Material  Adverse  Effect
         ("Material  Permits"),  and neither the Company nor any  Subsidiary has
         received  any  notice of  proceedings  relating  to the  revocation  or
         modification of any Material Permit.

                  (n) Title to Assets.  Except as described in Schedule  3.1(n),
         the Company and the Subsidiaries  have good and marketable title in fee
         simple  to all real  property  owned by them  that is  material  to the
         business of the Company and the  Subsidiaries  and good and  marketable
         title in all  personal  property  owned by them that is material to the
         business  of the Company  and the  Subsidiaries,  in each case free and
         clear of all Liens,  except for Liens as do not  materially  affect the
         value of such  property and do not  materially  interfere  with the use
         made and  proposed  to be made of such  property by the Company and the
         Subsidiaries  and  Liens for the  payment  of  federal,  state or other
         taxes,  the  payment  of which is  neither  delinquent  nor  subject to
         penalties.  Any real  property and  facilities  held under lease by the
         Company and the Subsidiaries  are held by them under valid,  subsisting
         and enforceable leases of which the Company and the Subsidiaries are in
         compliance.

                  (o) Patents and Trademarks.  The Company and the  Subsidiaries
         have,  or  have  rights  to  use,  all  patents,  patent  applications,
         trademarks,   trademark  applications,   service  marks,  trade  names,
         copyrights, licenses and other similar rights necessary or material for
         use in connection with their respective  businesses as described in the
         SEC  Reports  and which the  failure  to so have  could have a Material
         Adverse Effect  (collectively,  the  "Intellectual  Property  Rights").
         Neither the Company nor any  Subsidiary  has received a written  notice
         that  the  Intellectual  Property  Rights  used by the  Company  or any
         Subsidiary  violates or infringes upon the rights of any Person. To the
         knowledge of the Company,  all such  Intellectual  Property  Rights are
         enforceable  and, except as described in Schedule  3.1(o),  there is no
         existing  infringement  by  another  Person  of any  of  the  Company's
         Intellectual Property Rights.

                  (p) Insurance. The Company and the Subsidiaries are insured by
         insurers of recognized financial responsibility against such losses and
         risks  and  in  such  amounts  as  are  prudent  and  customary  in the
         businesses in which the Company and the  Subsidiaries  are engaged.  To
         the best of Company's knowledge,  such insurance contracts and policies
         are accurate and complete.  Neither the Company nor any  Subsidiary has
         any  reason to believe  that it will not be able to renew its  existing
         insurance  coverage  as and when  such  coverage  expires  or to obtain
         similar  coverage from similar insurers as may be necessary to continue
         its business without a significant increase in cost.

                  (q) Transactions With Affiliates and Employees.  Except as set
         forth in the SEC  Reports,  none of the  officers or  directors  of the
         Company and, to the knowledge of the Company,  none of the employees of

                                       13
<PAGE>

         the Company is presently a party to any transaction with the Company or
         any  Subsidiary  (other than for  services as  employees,  officers and
         directors),  including  any  contract,  agreement or other  arrangement
         providing for the furnishing of services to or by, providing for rental
         of real  or  personal  property  to or  from,  or  otherwise  requiring
         payments to or from any officer,  director or such  employee or, to the
         knowledge of the Company, any entity in which any officer, director, or
         any  such  employee  has a  substantial  interest  or  is  an  officer,
         director,  trustee or partner,  in each case in excess of $60,000 other
         than  (i) for  payment  of  salary  or  consulting  fees  for  services
         rendered,  (ii)  reimbursement  for expenses  incurred on behalf of the
         Company and (iii) for other employee  benefits,  including stock option
         agreements under any stock option plan of the Company.

                  (r) Sarbanes-Oxley;  Internal Accounting Controls. The Company
         is in material compliance with all provisions of the Sarbanes-Oxley Act
         of 2002 which are  applicable to it as of the Closing Date. The Company
         and the Subsidiaries  maintain a system of internal accounting controls
         sufficient to provide  reasonable  assurance that (i)  transactions are
         executed  in   accordance   with   management's   general  or  specific
         authorizations,  (ii)  transactions are recorded as necessary to permit
         preparation  of financial  statements  in  conformity  with GAAP and to
         maintain asset accountability, (iii) access to assets is permitted only
         in accordance with management's general or specific authorization,  and
         (iv) the  recorded  accountability  for  assets  is  compared  with the
         existing assets at reasonable intervals and appropriate action is taken
         with respect to any differences. The Company has established disclosure
         controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
         15d-15(e))  for the Company and designed such  disclosure  controls and
         procedures to ensure that material information relating to the Company,
         including its Subsidiaries, is made known to the certifying officers by
         others within those entities,  particularly  during the period in which
         the Company's most recently  filed  periodic  report under the Exchange
         Act, as the case may be, is being  prepared.  The Company's  certifying
         officers have evaluated the effectiveness of the Company's controls and
         procedures as of the date prior to the filing date of the most recently
         filed   periodic   report  under  the  Exchange  Act  (such  date,  the
         "Evaluation  Date").  The Company  presented in its most recently filed
         periodic   report  under  the  Exchange  Act  the  conclusions  of  the
         certifying  officers about the effectiveness of the disclosure controls
         and procedures  based on their  evaluations as of the Evaluation  Date.
         Since the Evaluation  Date,  there have been no significant  changes in
         the Company's internal controls (as such term is defined in Item 307(b)
         of  Regulation  S-K  under  the  Exchange  Act)  or,  to the  Company's
         knowledge,  in  other  factors  that  could  significantly  affect  the
         Company's internal controls.

                  (s) Certain Fees.  Except as described in Schedule 3.1(s),  no
         brokerage or finder's fees or commissions are or will be payable by the
         Company  to  any  broker,  financial  advisor  or  consultant,  finder,
         placement agent,  investment banker,  bank or other Person with respect
         to the transactions contemplated by this Agreement. Except as described
         in  Schedule  3.1(s),  the  Purchasers  shall have no  obligation  with

                                       14
<PAGE>

         respect to any fees or with  respect to any claims made by or on behalf
         of other Persons for fees of a type  contemplated  in this Section that
         may be due in connection  with the  transactions  contemplated  by this
         Agreement.

                  (t) Private Placement. Assuming the accuracy of the Purchasers
         representations   and   warranties   set  forth  in  Section   3.2,  no
         registration  under the Securities Act or any state  securities laws is
         required for the offer and sale of the Securities by the Company to the
         Purchasers  as  contemplated  hereby.  The  issuance  and  sale  of the
         Securities hereunder, and the issuance and sale of the Common Stock and
         Common Stock Equivalents  pursuant to the transactions  contemplated by
         Sections 2.3(a)(iii) and 2.3(b)(v) herein does not contravene the rules
         and regulations of the Trading Market or any state securities laws.

                  (u)  Investment  Company.  The  Company is not,  and is not an
         Affiliate  of,  and  immediately  after  receipt  of  payment  for  the
         Securities  and the Common  Stock and  Common  Stock  Equivalents  sold
         pursuant to the transactions  contemplated by Sections  2.3(a)(iii) and
         2.3(b)(v)  herein,  will not be or be an Affiliate  of, an  "investment
         company"  within the meaning of the Investment  Company Act of 1940, as
         amended.  The Company shall conduct its business in a manner so that it
         will not become subject to the Investment Company Act.

                  (v)  Registration  Rights.  Except as  described  in  Schedule
         3.1(v),  no Person  has any right to cause the  Company  to effect  the
         registration under the Securities Act of any securities of the Company.

                  (w) Listing and Maintenance Requirements. The Company's Common
         Stock is registered  pursuant to Section 12(b) of the Exchange Act, and
         the Company has taken no action  designed to, or which to its knowledge
         is likely to have the effect of,  terminating  the  registration of the
         Common Stock under the  Exchange  Act nor has the Company  received any
         notification  that the  Commission is  contemplating  terminating  such
         registration.  The Company has not, in the 12 months preceding the date
         hereof,  received  notice from any  Trading  Market on which the Common
         Stock is or has been listed or quoted to the effect that the Company is
         not in compliance with the listing or maintenance  requirements of such
         Trading  Market.  The Company is, and has no reason to believe  that it
         will not  continue  to be,  in  compliance  with all such  listing  and
         maintenance requirements.

                  (x) Application of Takeover  Protections.  The Company and its
         Board of Directors have taken all necessary action, if any, in order to
         render   inapplicable   any   control   share   acquisition,   business
         combination,  poison pill  (including any  distribution  under a rights
         agreement) or other similar anti-takeover provision under the Company's
         Certificate of Incorporation (or similar charter documents) or the laws
         of its state of incorporation that is or could become applicable to the
         Purchasers  as a result of the  Purchasers  and the Company  fulfilling
         their  obligations  or  exercising  their rights under the  Transaction

                                       15
<PAGE>

         Documents,  including  without  limitation as a result of the Company's
         issuance  of  the  Securities  and  the  Purchasers'  ownership  of the
         Securities.

                  (y) Disclosure.  The Company  confirms that neither it nor, to
         its  knowledge,  any other Person acting on its behalf has provided any
         of the Purchasers or their agents or counsel with any information  that
         constitutes or might constitute material,  nonpublic  information.  The
         Company  understands  and confirms that the Purchasers will rely on the
         foregoing  representations  and covenants in effecting  transactions in
         securities of the Company.  All  disclosure  provided to the Purchasers
         regarding the Company,  its business and the transactions  contemplated
         hereby, including the Disclosure Schedules to this Agreement, furnished
         by or on behalf of the Company with respect to the  representations and
         warranties  made  herein  are true and  correct  with  respect  to such
         representations  and warranties and do not contain any untrue statement
         of a material  fact or omit to state any  material  fact  necessary  in
         order  to  make  the   statements   made  therein,   in  light  of  the
         circumstances  under which they were made, not misleading.  The Company
         acknowledges  and  agrees  that no  Purchaser  makes  or has  made  any
         representations   or  warranties  with  respect  to  the   transactions
         contemplated  hereby other than those specifically set forth in Section
         3.2 hereof.

                  (z) No  Integrated  Offering.  Assuming  the  accuracy  of the
         Purchasers'  representations  and  warranties set forth in Section 3.2,
         neither the Company,  nor any of its Affiliates,  nor any Person acting
         on its or their behalf has, directly or indirectly,  made any offers or
         sales of any  security  or  solicited  any offers to buy any  security,
         under circumstances that would cause this offering of the Securities to
         be integrated  with prior  offerings by the Company for purposes of the
         Securities  Act  or any  applicable  shareholder  approval  provisions,
         including,  without limitation,  under the rules and regulations of any
         exchange or automated  quotation  system on which any of the securities
         of the Company are listed or designated.

                  (aa) Solvency. Based on the financial condition of the Company
         as of the  Closing  Date  after  giving  effect to the  receipt  by the
         Company of the proceeds from the sale of the  Securities  hereunder and
         the sale of the Common Stock and Common Stock Equivalents sold pursuant
         to the transactions  contemplated by Sections 2.3(a)(iii) and 2.3(b)(v)
         herein, (i) the Company's fair saleable value of its assets exceeds the
         amount  that  will  be  required  to be paid  on or in  respect  of the
         Company's  existing  debts  and  other  liabilities   (including  known
         contingent  liabilities) as they mature;  (ii) the Company's  assets do
         not constitute  unreasonably small capital to carry on its business for
         the  current  fiscal  year  as  now  conducted  and as  proposed  to be
         conducted   including   its  capital  needs  taking  into  account  the
         particular  capital  requirements  of  the  business  conducted  by the
         Company,  and projected capital  requirements and capital  availability
         thereof; and (iii) the current cash flow of the Company,  together with
         the proceeds the Company would receive, were it to liquidate all of its
         assets,  after  taking into account all  anticipated  uses of the cash,
         would be  sufficient  to pay all  amounts  on or in respect of its debt
         when such amounts are required to be paid.  The Company does not intend

                                       16
<PAGE>

         to incur  debts  beyond its  ability  to pay such debts as they  mature
         (taking into account the timing and amounts of cash to be payable on or
         in respect of its debt).

                  (bb)  Tax  Status.   Except  for   matters   that  would  not,
         individually  or in the  aggregate,  have or  reasonably be expected to
         result in a Material  Adverse  Effect,  the Company and each Subsidiary
         has filed all necessary federal, state and foreign income and franchise
         tax returns and has paid or accrued all taxes shown as due thereon, and
         the  Company  has no  knowledge  of a tax  deficiency  which  has  been
         asserted or threatened against the Company or any Subsidiary.

                  (cc) No General  Solicitation.  Neither  the  Company  nor any
         person  acting on behalf of the  Company has offered or sold any of the
         Securities by any form of general  solicitation or general advertising.
         The Company has offered the  Securities for sale only to the Purchasers
         and certain other "accredited investors" within the meaning of Rule 501
         under the Securities Act.

                  (dd) Foreign Corrupt  Practices.  Neither the Company,  nor to
         the  knowledge  of the  Company,  any agent or other  person  acting on
         behalf of the Company, has (i) directly or indirectly, used any corrupt
         funds  for  unlawful  contributions,   gifts,  entertainment  or  other
         unlawful  expenses related to foreign or domestic  political  activity,
         (ii) made any  unlawful  payment  to  foreign  or  domestic  government
         officials or employees or to any foreign or domestic  political parties
         or campaigns from corporate  funds,  (iii) failed to disclose fully any
         contribution  made by the Company (or made by any person  acting on its
         behalf of which the Company is aware)  which is in violation of law, or
         (iv)  violated in any  material  respect any  provision  of the Foreign
         Corrupt Practices Act of 1977, as amended.

                  (ee) Accountants.  The Company's  accountants are set forth on
         Schedule  3.1(ee)  of  the  Disclosure   Schedule.   To  the  Company's
         knowledge, such accountants, who the Company expects will express their
         opinion with respect to the financial  statements to be included in the
         Company's  Annual Report on Form 10-KSB for the year ended December 31,
         2004 are independent accountants as required by the Securities Act.

                  (ff) Seniority. Except as described in Schedule 3.1(gg), As of
         the  Closing  Date,  no  indebtedness  of the  Company is senior to the
         Debentures  in right of payment,  whether  with  respect to interest or
         upon liquidation or dissolution,  or otherwise, other than indebtedness
         secured by purchase money security  interests  (which is senior only as
         to underlying  assets  covered  thereby) and capital lease  obligations
         (which is senior only as to the property covered thereby).

                  (gg) No Disagreements with Accountants and Lawyers.  There are
         no  disagreements  of  any  kind  presently  existing,   or  reasonably
         anticipated  by the  Company  to arise,  between  the  accountants  and
         lawyers   formerly  or   presently   employed  by  the  Company   which
         individually or in the aggregate could reasonably be expected to result

                                       17
<PAGE>

         in a Material Adverse Effect and the Company is current with respect to
         any fees owed to its accountants and lawyers.

                  (hh)   Acknowledgment   Regarding   Purchasers'   Purchase  of
         Securities.  The  Company  acknowledges  and  agrees  that  each of the
         Purchasers  is  acting  solely  in  the  capacity  of an  arm's  length
         purchaser   with  respect  to  the   Transaction   Documents   and  the
         transactions contemplated hereby. The Company further acknowledges that
         no  Purchaser  is acting as a  financial  advisor or  fiduciary  of the
         Company (or in any similar capacity) with respect to this Agreement and
         the  transactions  contemplated  hereby  and any  advice  given  by any
         Purchaser  or any of their  respective  representatives  or  agents  in
         connection with this Agreement and the transactions contemplated hereby
         is merely incidental to the Purchasers' purchase of the Securities. The
         Company  further  represents  to  each  Purchaser  that  the  Company's
         decision  to enter into this  Agreement  has been  based  solely on the
         independent  evaluation of the transactions  contemplated hereby by the
         Company and its representatives.

         3.2  Representations  and Warranties of the Purchasers.  Each Purchaser
hereby, for itself and for no other Purchaser, represents and warrants as of the
date hereof and as of the Closing Date to the Company as follows:

                  (a) Organization;  Authority. Such Purchaser is an entity duly
         organized,  validly existing and in good standing under the laws of the
         jurisdiction  of  its  organization  with  full  right,   corporate  or
         partnership  power and  authority to enter into and to  consummate  the
         transactions contemplated by the Transaction Documents and otherwise to
         carry out its  obligations  thereunder.  The  execution,  delivery  and
         performance by such Purchaser of the transactions  contemplated by this
         Agreement  have been duly  authorized  by all  necessary  corporate  or
         similar action on the part of such Purchaser. Each Transaction Document
         to which it is a party has been duly  executed by such  Purchaser,  and
         when delivered by such  Purchaser in accordance  with the terms hereof,
         will  constitute  the  valid and  legally  binding  obligation  of such
         Purchaser,  enforceable against it in accordance with its terms, except
         (i)  as  limited  by  general   equitable   principles  and  applicable
         bankruptcy,  insolvency,  reorganization,  moratorium and other laws of
         general   application   affecting   enforcement  of  creditors'  rights
         generally,  (ii) as limited by laws  relating  to the  availability  of
         specific performance, injunctive relief or other equitable remedies and
         (iii) insofar as  indemnification  and  contribution  provisions may be
         limited by applicable law.

                  (b) Purchaser Representation.  Such Purchaser understands that
         the Securities are "restricted securities" and have not been registered
         under the Securities Act or any applicable  state securities law and is
         acquiring the  Securities as principal for its own account and not with
         a view to or for distributing, reselling or offering such Securities or
         any part thereof,  has no present intention of distributing or offering
         any of such Securities and has no arrangement or understanding with any
         other  persons  regarding the  distribution  of such  Securities  (this
         representation and warranty not limiting such Purchaser's right to sell

                                       18
<PAGE>

         the Securities  pursuant to the Registration  Statement or otherwise in
         compliance with applicable  federal and state  securities  laws).  Such
         Purchaser is acquiring the Securities  hereunder in the ordinary course
         of its  business.  Such  Purchaser  does  not  have  any  agreement  or
         understanding, directly or indirectly, with any Person to distribute or
         sell any of the Securities.

                  (c) Purchaser  Status.  At the time such Purchaser was offered
         the Securities,  it was, and at the date hereof it is, and on each date
         on which it exercises  any Warrants or converts any  Debentures it will
         be either:  (i) an "accredited  investor" as defined in Rule 501(a)(1),
         (a)(2),  (a)(3),  (a)(7) or (a)(8) under the  Securities  Act or (ii) a
         "qualified  institutional  buyer" as defined in Rule 144A(a)  under the
         Securities  Act.  Such  Purchaser is not required to be registered as a
         broker-dealer under Section 15 of the Exchange Act.

                  (d) Experience of Such Purchaser. Such Purchaser, either alone
         or   together   with   its   representatives,   has   such   knowledge,
         sophistication  and experience in business and financial  matters so as
         to be capable  of  evaluating  the merits and risks of the  prospective
         investment in the Securities, and has so evaluated the merits and risks
         of such investment. Such Purchaser is able to bear the economic risk of
         an  investment in the  Securities  and, at the present time, is able to
         afford a complete loss of such investment.

                  (e) Short Sales. Each Purchaser  represents that during the 30
         days  prior to the  execution  of this  Agreement,  neither  it nor any
         Persons  over which the  Purchaser  has direct  control,  have made any
         short  sales of, or granted  any option for the  purchase of or entered
         into any hedging or similar  transaction  with the same economic effect
         as a short sale, in the Common Stock.

                  (f) No General Solicitation.  Such Purchaser is not purchasing
         the  Securities as a result of any  advertisement,  article,  notice or
         other   communication   regarding  the  Securities   published  in  any
         newspaper,  magazine or similar media or broadcast  over  television or
         radio or presented at any seminar or any other general  solicitation or
         general advertisement.

                  (g) Limit to Representations and Warranties of Purchaser.  The
         Company  acknowledges  and agrees that each  Purchaser does not make or
         has not made any  representations  or  warranties  with  respect to the
         transactions  contemplated  hereby  other than those  specifically  set
         forth in this Section 3.2.

                  (h) Certain Laws.  Neither the Purchaser nor (if the Purchaser
         is an  individual)  any  Person  who is a  member  of  the  Purchaser's
         household or immediate family, nor any Person who otherwise may have an
         indirect  interest  in  securities  or  other  property  owned  by  the
         Purchaser  has been  designated  as, and that neither you or any of the
         foregoing is under the control of, a "suspected  terrorist"  as defined
         in Executive Order 13224. The Purchaser  acknowledges  that the Company
         seeks to comply with all applicable laws covering money  laundering and
         related  activities.  In furtherance  of those  efforts,  the Purchaser
         hereby  represents,  warrants and agrees that:  (i) none of the cash or
         property that Purchaser will pay or will  contribute to the Company has

                                       19
<PAGE>

         been or shall be derived  from,  or related  to, any  activity  that is
         deemed  criminal under United States law; and (ii) no  contribution  or
         payment by the  Purchaser to the  Company,  to the extent that they are
         within Purchaser's control,  shall cause the Company to be in violation
         of the  Untied  States  Bank  Secrecy  Act,  the  United  States  Money
         Laundering Control Act of 1986 or the Untied States International Money
         Laundering Abatement and Anti-Terrorist Financing Act of 2001.

                                  ARTICLE IV.
                         OTHER AGREEMENTS OF THE PARTIES

4.1      Transfer Restrictions.

                  (a) The Securities may only be disposed of in compliance  with
         state and federal  securities  laws. In connection with any transfer of
         Securities other than pursuant to an effective  registration  statement
         or Rule 144, to the  Company or to an  Affiliate  of a Purchaser  or in
         connection with a pledge as contemplated in Section 4.1(b), the Company
         may require the transferor thereof to provide to the Company an opinion
         of counsel selected by the transferor and reasonably  acceptable to the
         Company,  the  form  and  substance  of  which  opinion  and  shall  be
         reasonably  satisfactory  to the  Company,  to  the  effect  that  such
         transfer does not require  registration of such transferred  Securities
         under  the  Securities  Act.  As a  condition  of  transfer,  any  such
         transferee  shall  agree in  writing  to be bound by the  terms of this
         Agreement and shall have the rights of a Purchaser under this Agreement
         and the Registration Rights Agreement.

                  (b) The  Purchasers  agree  to the  imprinting,  so long as is
         required by this Section  4.1(b),  of a legend on any of the Securities
         in the following form:

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

                                       20
<PAGE>

         SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT
         OR OTHER LOAN SECURED BY SUCH SECURITIES.

                  The Company  acknowledges and agrees that a Purchaser may from
         time to time pledge  pursuant to a bona fide  margin  agreement  with a
         registered broker-dealer or grant a security interest in some or all of
         the  Securities  to a  financial  institution  that  is an  "accredited
         investor"  as defined in Rule 501(a) under the  Securities  Act and who
         agrees to be bound by the provisions of the Transaction  Documents and,
         if required  under the terms of such  arrangement,  such  Purchaser may
         transfer  pledged  or secured  Securities  to the  pledgees  or secured
         parties.  Such a pledge or transfer would not be subject to approval of
         the  Company  and no legal  opinion of legal  counsel  of the  pledgee,
         secured  party or pledgor  shall be required in  connection  therewith.
         Further, no notice shall be required of such pledge. At the appropriate
         Purchaser's   expense,  the  Company  will  execute  and  deliver  such
         reasonable  documentation  as a pledgee or secured  party of Securities
         may reasonably  request in connection  with a pledge or transfer of the
         Securities,  including,  if the Securities are subject to  registration
         pursuant to the  Registration  Rights  Agreement,  the  preparation and
         filing of any required prospectus supplement under Rule 424(b)(3) under
         the Securities Act or other applicable  provision of the Securities Act
         to appropriately amend the list of Selling Stockholders thereunder.

                  (c)  Certificates   evidencing  the  Warrant  Shares  and  the
         Underlying  Shares shall not contain any legend  (including  the legend
         set forth in Section 4.1(b) hereof): (i) while a registration statement
         (including  the  Registration  Statement)  covering  the resale of such
         security is effective  under the Securities  Act, or (ii) following any
         sale of such Warrant Shares and Underlying Shares pursuant to Rule 144,
         or (iii) if such Warrant Shares and Underlying  Shares are eligible for
         sale under Rule 144(k),  or (iv) if such legend is not  required  under
         applicable  requirements  of the  Securities  Act  (including  judicial
         interpretations   and  pronouncements   issued  by  the  staff  of  the
         Commission);  provided, however, in connection with the issuance of the
         Underlying Shares and the Warrant Shares, each Purchaser, severally and
         not jointly with the other  Purchasers,  hereby agrees to adhere to and
         abide by all prospectus delivery  requirements under the Securities Act
         and rules and  regulations of the  Commission.  The Company shall cause
         its counsel to issue a legal  opinion to the Company's  transfer  agent
         promptly after the Effective Date if required by the Company's transfer
         agent to effect  the  removal of the  legend  hereunder.  If all or any
         portion of a  Debenture  or  Warrant  is  converted  or  exercised  (as
         applicable) at a time when there is an effective registration statement
         to cover the resale of the Underlying  Shares or the Warrant Shares, or
         if such Underlying  Shares or the Warrant Shares may be sold under Rule
         144(k) or if such legend is not  otherwise  required  under  applicable
         requirements of the Securities Act (including judicial  interpretations
         thereof) then such Underlying Shares and Warrant Shares shall be issued
         free of all  legends.  The  Company  agrees  that at such  time as such
         legend is no longer  required  under this Section  4.1(c),  it will, no
         later than three Trading Days  following the delivery by a Purchaser to
         the  Company  or  the  Company's   transfer   agent  of  a  certificate
         representing  Underlying  Shares or the Warrant Shares,  as applicable,
         issued with a  restrictive  legend (such third Trading Day, the "Legend

                                       21
<PAGE>

         Removal  Date"),  deliver or cause to be delivered to such  Purchaser a
         certificate  representing such shares that is free from all restrictive
         and other legends. The Company may not make any notation on its records
         or give  instructions to any transfer agent of the Company that enlarge
         the restrictions on transfer set forth in this Section. Notwithstanding
         the  foregoing,  the  Purchasers  agree  that if at any time  after the
         Legend Removal Date a legend would be legally required under applicable
         requirements of the Securities Act (including judicial  interpretations
         and pronouncements  issued by the staff of the Commission) to be placed
         upon the certificates  evidencing the Warrant Shares and the Underlying
         Shares, then the Company shall issue stop-transfer  instructions to its
         transfer agent to prevent the transfer of such Securities.

                  (d) In addition to such Purchaser's other available  remedies,
         the Company shall pay to a Purchaser,  in cash,  as partial  liquidated
         damages and not as a penalty,  for each $1,000 of Underlying  Shares or
         the Warrant  Shares  (based on the Closing Price of the Common Stock on
         the date such Securities are submitted to the Company's transfer agent)
         delivered  for  removal of the  restrictive  legend and subject to this
         Section 4.1(c),  $10 per Trading Day (increasing to $20 per Trading Day
         5 Trading  Days after  such  damages  have  begun to  accrue)  for each
         Trading Day after the Legend  Removal  Date until such  certificate  is
         delivered without a legend. Nothing herein shall limit such Purchaser's
         right to pursue  actual  damages for the  Company's  failure to deliver
         certificates representing any Securities as required by the Transaction
         Documents,  and such  Purchaser  shall  have the  right to  pursue  all
         remedies  available  to  it at  law  or in  equity  including,  without
         limitation, a decree of specific performance and/or injunctive relief.

                  (e) Each  Purchaser,  severally and not jointly with the other
         Purchasers,  agrees  that the  removal of the  restrictive  legend from
         certificates  representing  Securities as set forth in this Section 4.1
         is predicated upon the Company's  reliance that the Purchaser will sell
         any Securities pursuant to either the registration  requirements of the
         Securities   Act,   including  any   applicable   prospectus   delivery
         requirements, or an exemption therefrom.

                  (f) Until the 6 month  anniversary of the Effective  Date, the
         Company  shall  not  undertake  a reverse  or  forward  stock  split or
         reclassification  of the Common Stock without the prior written consent
         of the Purchasers holding a majority in principal amount outstanding of
         the Debentures.

         4.2  Acknowledgment  of  Dilution.  The Company  acknowledges  that the
issuance of the Securities may result in dilution of the  outstanding  shares of
Common  Stock,  which  dilution  may be  substantial  if the Company  undertakes
another financing which triggers the anti-dilution protections of the Debentures
and the Warrants.  The Company further  acknowledges  that its obligations under
the Transaction Documents,  including without limitation its obligation to issue
the  Underlying  Shares  and the  Warrant  Shares  pursuant  to the  Transaction
Documents,  are  unconditional  and absolute and not subject to any right of set
off,  counterclaim,  delay or  reduction,  regardless  of the effect of any such
dilution or any claim the Company may have against any Purchaser and  regardless

                                       22
<PAGE>

of the dilutive effect that such issuance may have on the ownership of the other
stockholders of the Company.

         4.3 Furnishing of Rule 144  Information.  As long as any Purchaser owns
Securities,  the  Company  covenants  to timely  file (or obtain  extensions  in
respect  thereof  and file  within the  applicable  grace  period)  all  reports
required  to be filed by the  Company  after  the date  hereof  pursuant  to the
Exchange Act. As long as any Purchaser  owns  Securities,  if the Company is not
required to file  reports  pursuant  to the  Exchange  Act, it will  prepare and
furnish to the  Purchasers and make publicly  available in accordance  with Rule
144(c) such information as is required for the Purchasers to sell the Securities
under Rule 144.  The Company  further  covenants  that it will take such further
action as any holder of Securities  may  reasonably  request,  all to the extent
required from time to time to enable such Person to sell such Securities without
registration  under the  Securities  Act within the limitation of the exemptions
provided by Rule 144.

         4.4  Integration.  Other than with  respect to the sale of Common Stock
and Common Stock Equivalents  contemplated by Sections 2.3(a)(iii) and 2.3(b)(v)
herein,  the Company shall not sell,  offer for sale or solicit offers to buy or
otherwise  negotiate  in respect of any security (as defined in Section 2 of the
Securities  Act)  that  would  be  integrated  with  the  offer  or  sale of the
Securities in a manner that would require the registration  under the Securities
Act of the sale of the  Securities to the Purchasers or that would be integrated
with  the  offer  or  sale of the  Securities  for  purposes  of the  rules  and
regulations of any Trading Market.

         4.5 Conversion and Exercise Procedures.  The form of Notice of Exercise
included in the  Warrants and the form of Notice of  Conversion  included in the
Debentures set forth the totality of the  procedures  required of the Purchasers
in order to exercise the Warrants or convert the Debentures. No additional legal
opinion or other information or instructions shall be required of the Purchasers
to exercise their Warrants or convert their Debentures.  The Company shall honor
exercises of the Warrants and  conversions  of the  Debentures and shall deliver
Underlying  Shares and Warrant Shares in accordance  with the terms,  conditions
and time periods set forth in the Transaction Documents.

         4.6 Securities Laws Disclosure;  Publicity.  The Company shall, by 8:30
a.m.  Eastern time on the Trading Day following the date hereof,  file a Current
Report on Form 8-K,  reasonably  acceptable  to each  Purchaser  disclosing  the
material  terms  of the  transactions  contemplated  hereby  and  attaching  the
Transaction Documents thereto as exhibits.  The Company and each Purchaser shall
consult with each other in issuing any other press  releases with respect to the
transactions  contemplated  hereby,  and neither  the Company nor any  Purchaser
shall issue any such press release or otherwise  make any such public  statement
without the prior  consent of the Company,  with respect to any press release of
any Purchaser,  or without the prior consent of each Purchaser,  with respect to
any press  release of the  Company,  which  consent  shall not  unreasonably  be
withheld,  except if such  disclosure  is  required  by law,  in which  case the
disclosing  party shall  promptly  provide the other party with prior  notice of
such public  statement or  communication.  Notwithstanding  the  foregoing,  the

                                       23
<PAGE>

Company shall not publicly  disclose the name of any  Purchaser,  or include the
name of any Purchaser in any filing with the Commission or any regulatory agency
or Trading Market,  without the prior written consent of such Purchaser,  except
(i) as required by federal  securities law in connection  with the  registration
statement  contemplated  by the  Registration  Rights  Agreement and (ii) to the
extent such  disclosure  is required by law or Trading  Market  regulations,  in
which case the Company  shall provide the  Purchasers  with prior notice of such
disclosure permitted under subclause (i) or (ii).

         4.7 Shareholders  Rights Plan. No claim will be made or enforced by the
Company or, to the knowledge of the Company, any other Person that any Purchaser
is an "Acquiring  Person" under any shareholders  rights plan or similar plan or
arrangement in effect or hereafter adopted by the Company, or that any Purchaser
could be deemed to trigger the  provisions of any such plan or  arrangement,  by
virtue of  receiving  Securities  under the  Transaction  Documents or under any
other  agreement  between  the  Company and the  Purchasers.  The Company  shall
conduct  its  business  in a manner so that it will not  become  subject  to the
Investment Company Act.

         4.8  Non-Public  Information.  The  Company  covenants  and agrees that
neither it nor any other Person  acting on its behalf will provide any Purchaser
or its  agents  or  counsel  with  any  information  that the  Company  believes
constitutes material non-public information, unless prior thereto such Purchaser
shall have executed a written agreement regarding the confidentiality and use of
such information. The Company understands and confirms that each Purchaser shall
be  relying  on the  foregoing  representations  in  effecting  transactions  in
securities of the Company.

         4.9 Use of  Proceeds.  Except as set  forth on  Schedule  4.9  attached
hereto,  the Company shall use the net proceeds from the sale of the  Securities
hereunder  for working  capital  purposes  and not for the  satisfaction  of any
portion of the  Company's  debt  (other  than  payment of trade  payables in the
ordinary course of the Company's  business and prior  practices),  to redeem any
Company  equity or  equity-equivalent  securities  or to settle any  outstanding
litigation.

         4.10  Reimbursement.  If any Purchaser becomes involved in any capacity
in any  Proceeding by or against any Person who is a stockholder  of the Company
(except as a result of sales, pledges,  margin sales and similar transactions by
such Purchaser to or with any current  stockholder),  solely as a result of such
Purchaser's acquisition of the Securities under this Agreement, the Company will
reimburse such Purchaser for its reasonable legal and other expenses  (including
the cost of any  investigation  preparation and travel in connection  therewith)
incurred  in  connection   therewith,   as  such  expenses  are  incurred.   The
reimbursement  obligations  of the  Company  under  this  paragraph  shall be in
addition to any  liability  which the Company may otherwise  have,  shall extend
upon the same terms and  conditions to any  Affiliates of the Purchasers who are
actually  named in such  action,  proceeding  or  investigation,  and  partners,
directors,  agents,  employees and controlling persons (if any), as the case may
be, of the  Purchasers  and any such  Affiliate,  and shall be binding  upon and
inure  to  the  benefit  of  any   successors,   assigns,   heirs  and  personal
representatives  of the Company,  the  Purchasers and any such Affiliate and any
such Person.  The Company also agrees that neither the  Purchasers  nor any such
Affiliates,  partners, directors, agents, employees or controlling persons shall

                                       24
<PAGE>

have any liability to the Company or any Person asserting claims on behalf of or
in right of the Company  solely as a result of acquiring  the  Securities  under
this Agreement.

         4.11  Indemnification of Purchasers.  Subject to the provisions of this
Section  4.11,  the Company will  indemnify  and hold the  Purchasers  and their
directors,  officers,  shareholders,  partners,  employees and agents  (each,  a
"Purchaser Party") harmless from any and all losses,  liabilities,  obligations,
claims,  contingencies,  damages,  costs and expenses,  including all judgments,
amounts paid in  settlements,  court costs and  reasonable  attorneys'  fees and
costs of  investigation  that any such Purchaser  Party may suffer or incur as a
result  of or  relating  to (a)  any  breach  of  any  of  the  representations,
warranties,  covenants or agreements made by the Company in this Agreement or in
the  other  Transaction  Documents  or  (b)  any  action  instituted  against  a
Purchaser, or any of them or their respective Affiliates,  by any stockholder of
the Company who is not an  Affiliate of such  Purchaser,  with respect to any of
the transactions  contemplated by the Transaction  Documents (unless such action
is  based  upon a  breach  of such  Purchaser's  representation,  warranties  or
covenants  under the Transaction  Documents or any agreements or  understandings
such  Purchaser  may have with any such  stockholder  or any  violations  by the
Purchaser of state or federal  securities  laws or any conduct by such Purchaser
which constitutes fraud,  gross negligence,  willful misconduct or malfeasance).
If any action shall be brought  against any Purchaser  Party in respect of which
indemnity may be sought pursuant to this  Agreement,  such Purchaser Party shall
promptly notify the Company in writing,  and the Company shall have the right to
assume the defense thereof with counsel of its own choosing. Any Purchaser Party
shall  have  the  right to  employ  separate  counsel  in any  such  action  and
participate  in the defense  thereof,  but the fees and expenses of such counsel
shall be at the expense of such  Purchaser  Party  except to the extent that (i)
the  employment  thereof  has been  specifically  authorized  by the  Company in
writing, (ii) the Company has failed after a reasonable period of time to assume
such  defense  and to employ  counsel or (iii) in such  action  there is, in the
reasonable opinion of such separate counsel, a material conflict on any material
issue  between the  position of the Company and the  position of such  Purchaser
Party.  The  Company  will not be  liable  to any  Purchaser  Party  under  this
Agreement (i) for any  settlement  by an Purchaser  Party  effected  without the
Company's prior written  consent,  which shall not be  unreasonably  withheld or
delayed;  or (ii) to the  extent,  but only to the  extent  that a loss,  claim,
damage or liability is  attributable  to any Purchaser  Party's breach of any of
the representations,  warranties, covenants or agreements made by the Purchasers
in this Agreement or in the other Transaction Documents.

         4.12 Reservation and Listing of Securities.

                  (a) The  Company  shall  maintain  a  reserve  from  its  duly
         authorized  shares  of  Common  Stock  for  issuance  pursuant  to  the
         Transaction  Documents in such amount as may be required to fulfill its
         obligations in full under the Transaction Documents.

                  (b) If, on any date,  the number of  authorized  but  unissued
         (and  otherwise  unreserved)  shares of  Common  Stock is less than the
         Required  Minimum  on such  date,  then the Board of  Directors  of the

                                       25
<PAGE>

         Company  shall  use  commercially   reasonable  efforts  to  amend  the
         Company's  certificate  or articles of  incorporation  to increase  the
         number of  authorized  but unissued  shares of Common Stock to at least
         the Required Minimum at such time, as soon as possible and in any event
         not later than the 75th day after such date.

                  (c) The  Company  shall,  if  applicable:  (i) in the time and
         manner  required  by the  Trading  Market,  prepare  and file with such
         Trading  Market an additional  shares  listing  application  covering a
         number of shares of Common Stock at least equal to the Required Minimum
         on the date of such application, (ii) take all steps necessary to cause
         such shares of Common  Stock to be approved  for listing on the Trading
         Market as soon as possible thereafter,  (iii) provide to the Purchasers
         evidence of such listing,  and (iv) maintain the listing of such Common
         Stock on any date at least equal to the  Required  Minimum on such date
         on such Trading  Market or another  Trading  Market.  In addition,  the
         Company shall hold a special meeting of shareholders (which may also be
         at the annual  meeting of  shareholders)  on or before January 31, 2005
         for  the  purpose  of   obtaining   Shareholder   Approval,   with  the
         recommendation  of the Company's  Board of Directors that such proposal
         be  approved,   and  the  Company  shall   solicit   proxies  from  its
         shareholders  in  connection  therewith in the same manner as all other
         management    proposals    in   such    proxy    statement    and   all
         management-appointed  proxyholders shall vote their proxies in favor of
         such proposal.

         4.13 Participation in Future Financing.  From the date hereof until the
Debentures  are no  longer  outstanding  (but in any event for at least one year
from  the  date  hereof),  upon  any  financing  by  the  Company  or any of its
Subsidiaries  of  Common  Stock  or  Common  Stock  Equivalents  (a  "Subsequent
Financing"),  each  Purchaser  shall have the right to  participate in up to the
greater of (i) 25% of the  Subsequent  Financing and (ii) an amount equal to the
aggregate   principal   amount  of  all   Debentures   then   outstanding   (the
"Participation  Maximum").  At least 5 Trading  Days prior to the closing of the
Subsequent  Financing,  the Company  shall  deliver to each  Purchaser a written
notice of its intention to effect a Subsequent Financing  ("Pre-Notice"),  which
Pre-Notice  shall ask such  Purchaser  if it wants to review the details of such
financing (such additional notice, a "Subsequent  Financing  Notice").  Upon the
request  of a  Purchaser,  and only  upon a  request  by such  Purchaser,  for a
Subsequent  Financing  Notice,  the Company shall promptly,  but no later than 1
Trading Day after such request,  deliver a Subsequent  Financing  Notice to such
Purchaser.  The Subsequent  Financing Notice shall describe in reasonable detail
the proposed terms of such Subsequent Financing, the amount of proceeds intended
to be raised  thereunder,  the Person  with whom such  Subsequent  Financing  is
proposed to be effected,  and attached to which shall be a term sheet or similar
document  relating  thereto.  If by 5:30 p.m.  (New  York City  time) on the 5th
Trading  Day  after  all  of  the  Purchasers   have  received  the  Pre-Notice,
notifications  by the  Purchasers of their  willingness  to  participate  in the
Subsequent  Financing (or to cause their  designees to  participate)  is, in the
aggregate,  less than the total amount of the  Participation  Maximum,  then the
Company may effect the  remaining  portion of such  Subsequent  Financing on the
terms and to the Persons set forth in the Subsequent  Financing  Notice.  If the
Company  receives no notice from a Purchaser  as of such 5th Trading  Day,  such
Purchaser shall be deemed to have notified the Company that it does not elect to

                                       26
<PAGE>

participate.  The Company must provide the Purchasers  with a second  Subsequent
Financing Notice,  and the Purchasers will again have the right of participation
set forth above in this Section 4.13, if the Subsequent Financing subject to the
initial  Subsequent  Financing  Notice is not  consummated for any reason on the
terms set forth in such Subsequent Financing Notice within 60 Trading Days after
the date of the initial  Subsequent  Financing  Notice. In the event the Company
receives  responses to Subsequent  Financing Notices from Purchasers  seeking to
purchase more than the aggregate amount of the Participation  Maximum, each such
Purchaser  shall have the right to purchase  their Pro Rata  Portion (as defined
below) of the Participation  Maximum. "Pro Rata Portion" is the ratio of (x) the
Subscription Amount of Securities purchased by a participating Purchaser and (y)
the sum of the aggregate  Subscription  Amount of all participating  Purchasers.
Notwithstanding  the foregoing,  this Section 4.13 shall not apply in respect of
an Exempt  Issuance  or the sale of Common  Stock and Common  Stock  Equivalents
issued  pursuant to the  transaction  contemplated  by Sections  2.3(a)(iii) and
2.3(b)(v) herein.

         4.14 Subsequent Equity Sales.

                  (a) Other than with  respect to the shares of Common Stock and
         Common  Stock  Equivalents  referred  to in  Sections  2.3(a)(iii)  and
         2.3(b)(v)  herein,  from  the  date  hereof  until  90 days  after  the
         Effective  Date,  neither the Company  nor any  Subsidiary  shall issue
         shares of Common Stock or Common Stock Equivalents;  provided, however,
         the 90 day period set forth in this  Section 4.14 shall be extended for
         the number of Trading  Days  during such period in which (y) trading in
         the Common Stock is suspended by any Trading  Market,  or (z) following
         the Effective Date, the Registration  Statement is not effective or the
         prospectus  included in the  Registration  Statement may not be used by
         the  Purchasers for the resale of the Warrant Shares and the Underlying
         Shares. In addition to the limitations set forth herein,  from the date
         hereof  until such time as no  Purchaser  holds more than 10% of any of
         the  Securities  initially  issued  hereunder,  the  Company  shall  be
         prohibited  from  effecting  or enter into an  agreement  to effect any
         Subsequent Financing involving a "Variable Rate Transaction" or an "MFN
         Transaction"   (each  as  defined  below).   The  term  "Variable  Rate
         Transaction"  shall mean a transaction  in which the Company  issues or
         sells (i) any debt or equity  securities  other than an Exempt Issuance
         that are convertible into,  exchangeable or exercisable for, or include
         the right to receive  additional shares of Common Stock either (A) at a
         conversion, exercise or exchange rate or other price that is based upon
         and/or varies with the trading  prices of or quotations  for the shares
         of Common Stock at any time after the initial  issuance of such debt or
         equity securities, or (B) with a conversion, exercise or exchange price
         that is subject to being  reset at some  future  date after the initial
         issuance  of such debt or equity  security  or upon the  occurrence  of
         specified or contingent  events  directly or indirectly  related to the
         business  of the Company or the market for the Common  Stock.  The term
         "MFN Transaction"  shall mean a transaction in which the Company issues
         or sells any securities in a capital  raising  transaction or series of
         related  transactions  which grants to an investor the right to receive
         additional  shares  based upon  future  transactions  of the Company on
         terms more  favorable  than  those  granted  to such  investor  in such
         offering;  provided, however, this prohibition shall not be interpreted
         to preclude the Company from granting an investor standard full ratchet
         or  weighted  average  anti-dilution  protections  for a  warrant  on a

                                       27
<PAGE>

         convertible  instrument.  Notwithstanding  the foregoing,  this Section
         4.14 shall not apply in respect of an Exempt  Issuance,  except that no
         Variable  Rate  Transaction  or  MFN  Transaction  shall  be an  Exempt
         Issuance.

                  (b) Unless  Shareholder  Approval has been obtained and deemed
         effective in accordance  with the rules and  regulations of the Trading
         Market,  the Company  shall not make any issuance  whatsoever of Common
         Stock or Common Stock  Equivalents  to the extent such  issuance  would
         otherwise cause an adjustment of the Conversion Price of the Debentures
         or the Exercise  Price of the  Warrants,  or the exercise  price of any
         Common  Stock   Equivalents   issued   pursuant  to  the   transactions
         contemplated by Sections  2.3(a)(iii) and 2.3(b)(v)  herein,  below the
         applicable  Floor Prices (as defined in the  Debentures  and Warrants).
         Any Purchaser shall be entitled to obtain injunctive relief against the
         Company  to  preclude  any  such  issuance,  which  remedy  shall be in
         addition  to any right to collect  damages  and the  Company  expressly
         waives any  requirement  that any court require the  Purchasers to post
         any bond in connection therewith.

         4.15 Equal Treatment of Purchasers.  No consideration  shall be offered
or paid to any  person to amend or consent  to a waiver or  modification  of any
provision of any of the Transaction  Documents unless the same  consideration is
also offered to all of the parties to the Transaction  Documents.  Further,  the
Company shall not make any payment of principal or interest on the Debentures in
amounts  which  are   disproportionate  to  the  respective   principal  amounts
outstanding  on  the  Debentures  at  any  applicable  time.  For  clarification
purposes,  this provision constitutes a separate right granted to each Purchaser
by the Company and negotiated  separately by each Purchaser,  and is intended to
treat for the Company the Debenture  holders as a class and shall not in any way
be construed as the  Purchasers  acting in concert or as a group with respect to
the purchase, disposition or voting of Securities or otherwise.

         4.16 Maturity  Date Limited  Trading  Restriction.  If the Company duly
elects to redeem the  Debentures  on the Maturity Date by the issuance of shares
of Common Stock pursuant to Section  5(c)(ii) of the Debentures,  each Purchaser
(and its  permitted  assigns)  covenants  that  during the 20 Trading Day period
immediately prior to the Maturity Date used to determine the conversion price of
the  Debentures,  neither it nor any Persons over which the Purchaser has direct
control,  shall make any short sales of, or granted any option for the  purchase
of or entered  into any hedging or similar  transaction  with the same  economic
effect as a short sale, in the Common Stock.

                                   ARTICLE V.
                                  MISCELLANEOUS

         5.1 Termination.  This Agreement may be terminated by any Purchaser, by
written notice to the other parties,  if the Closing has not been consummated on
or before November 15, 2004;  provided that no such  termination will affect the
right of any party to sue for any breach by the other party (or parties).

                                       28
<PAGE>

         5.2 Fees and  Expenses.  At the  Closing,  the  Company  has  agreed to
reimburse  Omicron  Master  Trust  ("Omicron")  up to  $40,000,  for its actual,
reasonable,  out-of-pocket  legal fees and  expenses,  of which the Company paid
$25,000 prior to the Closing.  Accordingly,  in lieu of the foregoing  payments,
the aggregate  amount that Omicron is to pay for the Debentures and the Warrants
at the Closing shall be reduced by $15,000. The Company shall deliver,  prior to
the Closing,  a completed and executed copy of the Closing  Statement,  attached
hereto as Annex A. Except as expressly set forth in the Transaction Documents to
the  contrary,  each  party  shall pay the fees and  expenses  of its  advisers,
counsel,  accountants and other experts, if any, and all other expenses incurred
by such party incident to the negotiation,  preparation, execution, delivery and
performance  of this  Agreement.  The Company shall pay all transfer agent fees,
stamp taxes and other taxes and duties levied in connection with the issuance of
any Securities.

         5.3 Entire  Agreement.  The  Transaction  Documents,  together with the
exhibits and schedules thereto,  contain the entire understanding of the parties
with respect to the subject matter hereof and supersede all prior agreements and
understandings, oral or written, with respect to such matters, which the parties
acknowledge have been merged into such documents, exhibits and schedules.

         5.4 Notices.  Any and all notices or other communications or deliveries
required or permitted to be provided  hereunder shall be in writing and shall be
deemed given and effective on the earliest of (a) the date of  transmission,  if
such notice or  communication is delivered via facsimile at the facsimile number
set forth on the signature  pages  attached  hereto prior to 5:30 p.m. (New York
City  time)  on a  Trading  Day,  (b) the next  Trading  Day  after  the date of
transmission,  if such notice or communication is delivered via facsimile at the
facsimile  number set forth on the signature pages attached hereto on a day that
is not a Trading Day or later than 5:30 p.m. (New York City time) on any Trading
Day, (c) the second  Trading Day following the date of mailing,  if sent by U.S.
nationally  recognized  overnight courier service, or (d) upon actual receipt by
the party to whom such  notice is  required  to be given.  The  address for such
notices and communications shall be as set forth on the signature pages attached
hereto.

         5.5 Amendments;  Waivers.  No provision of this Agreement may be waived
or amended except in a written  instrument  signed, in the case of an amendment,
by the  Company  and each  Purchaser  or, in the case of a waiver,  by the party
against whom enforcement of any such waiver is sought.  No waiver of any default
with respect to any provision,  condition or requirement of this Agreement shall
be deemed to be a continuing  waiver in the future or a waiver of any subsequent
default or a waiver of any other provision, condition or requirement hereof, nor
shall any delay or omission of either party to exercise  any right  hereunder in
any manner impair the exercise of any such right.

         5.6 Construction.  The headings herein are for convenience only, do not
constitute a part of this  Agreement  and shall not be deemed to limit or affect
any of the provisions hereof. The language used in this Agreement will be deemed
to be the language chosen by the parties to express their mutual intent,  and no
rules of strict construction will be applied against any party.

                                       29
<PAGE>

         5.7  Successors and Assigns.  This Agreement  shall be binding upon and
inure to the benefit of the parties and their successors and permitted  assigns.
The Company may not assign this Agreement or any rights or obligations hereunder
without the prior written  consent of each  Purchaser.  Any Purchaser may assign
any or all of its  rights  under  this  Agreement  to any  Person  to whom  such
Purchaser  assigns or transfers any Securities,  provided such transferee agrees
in  writing to be bound,  with  respect to the  transferred  Securities,  by the
provisions hereof that apply to the "Purchasers".

         5.8 No  Third-Party  Beneficiaries.  This Agreement is intended for the
benefit of the parties  hereto and their  respective  successors  and  permitted
assigns and is not for the benefit of, nor may any provision  hereof be enforced
by, any other Person, except as otherwise set forth in Section 4.11.

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

         5.10 Survival.  The  representations  and warranties  contained  herein
shall survive the Closing and the delivery,  exercise  and/or  conversion of the
Securities, as applicable for the applicable statue of limitations.

                                       30
<PAGE>

         5.11  Execution.  This  Agreement  may  be  executed  in  two  or  more
counterparts,  all of which when taken  together shall be considered one and the
same agreement and shall become effective when  counterparts have been signed by
each party and  delivered  to the other  party,  it being  understood  that both
parties need not sign the same  counterpart.  In the event that any signature is
delivered by facsimile  transmission,  such  signature  shall create a valid and
binding  obligation of the party executing (or on whose behalf such signature is
executed)  with the same force and effect as if such  facsimile  signature  page
were an original thereof.

         5.12  Severability.  If any  provision of this  Agreement is held to be
invalid or unenforceable in any respect,  the validity and enforceability of the
remaining  terms  and  provisions  of  this  Agreement  shall  not in any way be
affected or impaired  thereby and the parties will attempt to agree upon a valid
and enforceable provision that is a reasonable substitute therefor,  and upon so
agreeing, shall incorporate such substitute provision in this Agreement.

         5.13 Rescission and Withdrawal Right.  Notwithstanding  anything to the
contrary  contained in (and  without  limiting  any similar  provisions  of) the
Transaction  Documents,  whenever  any  Purchaser  exercises a right,  election,
demand or option  under a  Transaction  Document and the Company does not timely
perform its related  obligations within the periods therein provided,  then such
Purchaser may rescind or withdraw, in its sole discretion from time to time upon
written notice to the Company, any relevant notice,  demand or election in whole
or in part  without  prejudice  to its  future  actions  and  rights;  provided,
however,  in the case of a rescission of a conversion of a Debenture or exercise
of a Warrant,  the  Purchaser  shall be  required to return any shares of Common
Stock subject to any such rescinded conversion or exercise notice.

         5.14  Replacement  of  Securities.  If any  certificate  or  instrument
evidencing any Securities is mutilated,  lost, stolen or destroyed,  the Company
shall  issue or cause to be issued in  exchange  and  substitution  for and upon
cancellation thereof, or in lieu of and substitution therefor, a new certificate
or instrument,  but only upon receipt of evidence reasonably satisfactory to the
Company  of such  loss,  theft  or  destruction  and  customary  and  reasonable
indemnity,  if requested.  The  applicants  for a new  certificate or instrument
under  such  circumstances  shall  also  pay any  reasonable  third-party  costs
associated with the issuance of such replacement Securities.

         5.15  Remedies.  In addition to being  entitled to exercise  all rights
provided herein or granted by law,  including  recovery of damages,  each of the
Purchasers  and the Company will be entitled to specific  performance  under the
Transaction  Documents.  The  parties  agree that  monetary  damages  may not be
adequate  compensation  for  any  loss  incurred  by  reason  of any  breach  of
obligations  described in the  foregoing  sentence and hereby agrees to waive in
any action for specific  performance  of any such  obligation the defense that a
remedy  at law  would  be  adequate.  Without  limiting  the  generality  of the
foregoing, the Company expressly agrees that its breach of Section 4.14(b) would
cause each  Purchaser  irreparable  harm, and consents to granting of injunctive
relief by any  court  having  jurisdiction  to  preclude  any such  issuance  of
securities.

                                       31
<PAGE>

         5.16 Payment Set Aside.  To the extent that the Company makes a payment
or payments to any Purchaser pursuant to any Transaction Document or a Purchaser
enforces or exercises its rights thereunder, and such payment or payments or the
proceeds of such  enforcement  or exercise or any part thereof are  subsequently
invalidated,  declared to be fraudulent or  preferential,  set aside,  recovered
from, disgorged by or are required to be refunded,  repaid or otherwise restored
to the  Company,  a  trustee,  receiver  or  any  other  person  under  any  law
(including, without limitation, any bankruptcy law, state or federal law, common
law or equitable  cause of action),  then to the extent of any such  restoration
the  obligation  or part thereof  originally  intended to be satisfied  shall be
revived and  continued  in full force and effect as if such payment had not been
made or such enforcement or setoff had not occurred.

         5.17 Usury.  To the extent it may  lawfully  do so, the Company  hereby
agrees not to insist upon or plead or in any manner  whatsoever  claim, and will
resist any and all efforts to be compelled to take the benefit or advantage  of,
usury  laws  wherever  enacted,  now or at  any  time  hereafter  in  force,  in
connection  with any  claim,  action or  proceeding  that may be  brought by any
Purchaser  in  order to  enforce  any  right or  remedy  under  any  Transaction
Document.  Notwithstanding  any  provision  to  the  contrary  contained  in any
Transaction  Document,  it is  expressly  agreed  and  provided  that the  total
liability of the Company  under the  Transaction  Documents  for payments in the
nature of interest  shall not exceed the maximum  lawful rate  authorized  under
applicable law (the "Maximum Rate"), and, without limiting the foregoing,  in no
event  shall any rate of  interest or default  interest,  or both of them,  when
aggregated with any other sums in the nature of interest that the Company may be
obligated to pay under the Transaction Documents exceed such Maximum Rate. It is
agreed  that  if the  maximum  contract  rate  of  interest  allowed  by law and
applicable to the Transaction  Documents is increased or decreased by statute or
any official  governmental action subsequent to the date hereof, the new maximum
contract rate of interest  allowed by law will be the Maximum Rate applicable to
the  Transaction  Documents  from  the  effective  date  forward,   unless  such
application  is  precluded  by  applicable  law.  If  under  any   circumstances
whatsoever, interest in excess of the Maximum Rate is paid by the Company to any
Purchaser with respect to indebtedness  evidenced by the Transaction  Documents,
such excess shall be applied by such Purchaser to the unpaid  principal  balance
of any such  indebtedness or be refunded to the Company,  the manner of handling
such excess to be at such Purchaser's election.

         5.18  Independent  Nature of Purchasers'  Obligations  and Rights.  The
obligations of each Purchaser under any Transaction Document are several and not
joint with the  obligations of any other  Purchaser,  and no Purchaser  shall be
responsible  in any way for the  performance  of the  obligations  of any  other
Purchaser under any Transaction  Document.  Nothing  contained  herein or in any
Transaction  Document,  and no action taken by any Purchaser  pursuant  thereto,
shall be deemed to constitute the Purchasers as a partnership, an association, a
joint  venture  or any other kind of entity,  or create a  presumption  that the
Purchasers  are in any way acting in concert or as a group with  respect to such
obligations or the transactions  contemplated by the Transaction Document.  Each
Purchaser  shall be  entitled to  independently  protect and enforce its rights,
including without  limitation the rights arising out of this Agreement or out of
the other  Transaction  Documents,  and it shall not be necessary  for any other
Purchaser  to be  joined  as an  additional  party  in any  proceeding  for such

                                       32
<PAGE>

purpose.  Each Purchaser has been  represented by its own separate legal counsel
in their review and  negotiation of the  Transaction  Documents.  For reasons of
administrative  convenience only,  Purchasers and their respective  counsel have
chosen to communicate  with the Company through FW. FW does not represent all of
the  Purchasers  but only  Omicron.  The  Company  has  elected to  provide  all
Purchasers with the same terms and Transaction  Documents for the convenience of
the  Company  and not  because  it was  required  or  requested  to do so by the
Purchasers.

         5.19 Liquidated Damages.  The Company's  obligations to pay any partial
liquidated  damages or other amounts owing under the Transaction  Documents is a
continuing  obligation of the Company and shall not  terminate  until all unpaid
partial liquidated damages and other amounts have been paid  notwithstanding the
fact that the instrument or security  pursuant to which such partial  liquidated
damages or other amounts are due and payable shall have been canceled.

                            (SIGNATURE PAGES FOLLOW)

                                       33
<PAGE>

         IN WITNESS  WHEREOF,  the parties  hereto  have caused this  Securities
Purchase   Agreement  to  be  duly  executed  by  their  respective   authorized
signatories as of the date first indicated above.

DIOMED HOLDINGS, INC.                              Address for Notice:
                                                   -------------------

By:  /s/ JAMES A. WYLIE, JR.                       ONE DUNDEE PARK
     --------------------------                    ANDOVER, MA 01810
     Name:  James A. Wylie, Jr.                    ATTN: CHIEF EXECUTIVE OFFICER
     Title: Chief Executive Officer                (978) 475-7771 TELEPHONE
                                                   (978) 475-8488 FACSIMILE

With a copy to (which shall not constitute notice):

McGuireWoods LLP
1345 Avenue of the Americas
New York, New York 10105

Attn: William A. Newman, Esq.
(212) 548-2160 Telephone
(212) 548-2170 Facsimile

                   [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
                      SIGNATURE PAGE FOR PURCHASER FOLLOWS]

                                       34
<PAGE>

         [PURCHASER SIGNATURE PAGE TO DIO SECURITIES PURCHASE AGREEMENT]

         IN  WITNESS  WHEREOF,  the  undersigned  have  caused  this  Securities
Purchase   Agreement  to  be  duly  executed  by  their  respective   authorized
signatories as of the date first indicated above.

Name of Investing Entity: ______________________________________________________
Signature of Authorized Signatory of Investing Entity: _________________________
Name of Authorized Signatory: __________________________________________________
Title of Authorized Signatory: _________________________________________________
Email Address of Authorized Entity:_____________________________________________

Address for Notice of Investing Entity:

Address for Delivery of Securities for Investing Entity (if not same as above):

Subscription Amount: $______________________ principal amount of Debentures
Warrant Shares:  ____________________________

US Tax ID Number:

                                       35EXHIBIT 10.2

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

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

                                                                $_______________

                       VARIABLE RATE CONVERTIBLE DEBENTURE
                              DUE OCTOBER ___, 2008

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

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

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

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

<PAGE>

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

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

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

                  "Commission" means the Securities and Exchange Commission.

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

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

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

                                       2
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

                                       3
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

                                       4
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

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

                                       5
<PAGE>

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

         Section 2.    Interest.

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

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

                                       6
<PAGE>

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

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

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

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

         Section 3.   Registration of Transfers and Exchanges.

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

                                       7
<PAGE>

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

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

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

         Section 4.    Conversion.

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

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

                  c) Holder's Restriction on Conversion.

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

                                       8
<PAGE>

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

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

                                       9
<PAGE>

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

                  d)   Mechanics of Conversion.

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

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

                                       10
<PAGE>

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

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

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

                                       11
<PAGE>

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

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

                                       12
<PAGE>

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

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

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

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

                                       13
<PAGE>

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

         Section 5.   Certain Adjustments.

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

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

                                       14
<PAGE>

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

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

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

                  e) Notice to Holders.

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

                                       15
<PAGE>

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

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

                                       16
<PAGE>

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

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

         Section 6.  Redemption and Forced Conversion.

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

                                       17
<PAGE>

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

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

                  c) Forced Conversion.

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

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

                                       18
<PAGE>

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

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

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

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

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

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

         Section 8.   Events of Default.

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

                                       19
<PAGE>

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

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

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

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

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

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

                                       20
<PAGE>

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

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

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

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

                                       21
<PAGE>

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

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

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

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

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

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

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

                                       22
<PAGE>

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

         Section 9.   Miscellaneous.

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

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

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

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

                                       23
<PAGE>

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

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

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

                                       24
<PAGE>

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

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

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

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

                            [SIGNATURE PAGE FOLLOWS]

                                       25
<PAGE>

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

                                          DIOMED HOLDINGS, INC.

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

                                       26
<PAGE>

                                     ANNEX A

                              NOTICE OF CONVERSION

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

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

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

Conversion calculations:

                               Date to Effect Conversion:

                               Principal Amount of Debentures to be Converted:

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

                               Number of shares of Common Stock to be issued:

                               Signature:

                               Name:

                               Address:

                                       27
<PAGE>

                                   SCHEDULE 1

                               CONVERSION SCHEDULE

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

                                              Dated:

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

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                                       28

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