Diomed 10QSB 2007 Q2 Quarterly report (small business)

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE		84-1480636
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1 DUNDEE PARK
ANDOVER, MA		01810
(Address of principal executive offices)		(Zip Code)

(978) 475-7771

(Registrant's telephone number)

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES x NO o

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

DIOMED HOLDINGS, INC. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-QSB

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007

TABLE OF CONTENTS

Item Number		Page Number
	Part I - Financial Information

1	Condensed Consolidated Balance Sheets - June 30, 2007 (unaudited) and December 31, 2006	F-1

	Unaudited Consolidated Statements of Operations - Three Months and Six Months Ended June 30, 2007 and 2006	F-2

	Unaudited Consolidated Statements of Cash Flows - Six Months Ended June 30, 2007 and 2006	F-3

	Notes to Consolidated Financial Statements	F-4

2	Management's Discussion and Analysis or Plan of Operation	1

3	Controls and Procedures	8

	Part II - Other Information	9

1	Legal Proceedings	9

4	Submission of Matters to a Vote of Security Holders	10

6	Exhibits	12

	Signatures	13

-i-

Diomed Holdings, Inc.

Condensed Consolidated Balance Sheets

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

	June 30, 2007		December 31, 2006
Assets
Current assets:
Cash and cash equivalents	$	3,405,061	$	7,306,578
Short term investments		435,046		2,626,880
Accounts receivable, net		3,207,501		3,144,056
Inventories		5,009,749		4,021,217
Prepaid expenses and other current assets		735,946		268,343
Total current assets		12,793,303		17,367,074

Property, plant and equipment, net		1,281,940		1,260,507
Intangible assets, net		3,770,193		4,006,927
Investment in Luminetx		1,000,000		1,000,000
Other assets		158,311		204,770
Total assets	$	19,003,747	$	23,839,278

Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	5,095,862	$	2,970,443
Accrued expenses		2,356,317		2,158,157
Current portion of deferred revenue		334,642		278,284
Bank loan		433,263		223,491
Total current liabilities		8,220,084		5,630,375

Deferred revenue, net of current portion		167,619		110,044
Convertible notes payable ($3,712,000 face value, net of $2,456,872 debt discount at June 30, 2007 and $3,712,000 face value, net of $2,671,285 debt discount at December 31, 2006)		1,255,128		1,040,715
Total liabilities		9,642,831		6,781,134
Commitments and contingencies
Stockholders' equity		9,360,916		17,058,144
Total liabilities and stockholders' equity	$	19,003,747	$	23,839,278

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

F-1

Diomed Holdings, Inc.

Unaudited Condensed Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2007 and 2006

	Three Months Ended June 30,						Six Months Ended June 30
	2007			2006			2007			2006
Revenues	$	6,506,017		$	6,075,244		$	12,411,288		$	10,651,396
Cost of revenues		3,555,919			3,221,633			6,781,349			5,744,264
Gross profit		2,950,098			2,853,611			5,629,939			4,907,132
Operating expenses:
Research and development		362,171			363,027			777,517			717,574
Selling and marketing		3,294,563			3,010,196			6,430,895			5,803,263
General and administrative		2,975,982			1,900,331			6,048,572			3,958,553
Total operating expenses		6,632,716			5,273,554			13,256,984			10,479,390
Loss from operations		(3,682,618	)		(2,419,943	)		(7,627,045	)		(5,572,258	)
Other (income) expense, net:
Gain on fair value adjustment on warrant liability		--			(1,810,858	)		--			(1,040,437	)
Interest (income) expense, non-cash		(163,643	)		96,075			214,414			192,151
Interest expense, net and other		76,812			(94,353	)		106,135			(77,438	)
Total other (income) expense, net		(86,831	)		(1,809,136	)		320,549			(925,724	)
Net loss		(3,595,787	)		(610,807	)		(7,947,594	)		(4,646,534	)

Less preferred stock cash dividends		--			(149,102	)		--			(298,290	)
Less preferred stock non-cash dividends		--			(161,116	)		--			(316,107	)
Net loss applicable to common stockholders	$	(3,595,787	)	$	(921,025	)	$	(7,947,594	)	$	(5,260,931	)
Basic and diluted net loss per share applicable to common stockholders	$	(0.12	)	$	(0.05	)	$	(0.31	)	$	(0.27	)
Basic and diluted weighted average common shares outstanding		29,517,045			19,448,728			25,486,276			19,447,347

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

F-2

Unaudited Consolidated Statements of Cash Flows

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

Cash and Cash Equivalents, beginning of period		7,306,578			9,562,087
Cash and Cash Equivalents, end of period	$	3,405,061		$	6,489,592
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest	$	191,575		$	170,778
Non-cash Investing and Financing Activities:
Issuance of common stock in exchange for preferred stock	$	12,988,595		$	54,250
Non-cash increasing rate preferred stock dividend	$	-		$	316,107

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

F-3

Under the modified prospective approach, SFAS 123R applies to new awards and to awards that were outstanding on January 1, 2006 that are subsequently modified, repurchased or cancelled. Under the modified prospective approach, compensation cost includes all share-based payments granted prior to, but not yet vested on, January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123, and compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. Compensation cost is recognized as expense over the requisite service period, which is generally the vesting period. Prior periods were not restated to reflect the impact of adopting the new standard.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2007

(UNAUDITED)

(1) OPERATIONS

Diomed Holdings, Inc. ("Diomed" or "the Company") develops and commercializes minimally invasive medical procedures that employ its laser technologies and associated disposable products. Using its proprietary technology, including its exclusive rights to U.S. Patent No. 6,398,777, the Company currently focuses on endovenous laser treatment (EVLT(R)) of varicose veins. The Company also develops and markets lasers and disposable products for photodynamic therapy (PDT) cancer procedures and products for other clinical applications, including dental and general surgical procedures.

In developing and marketing its clinical solutions, the Company uses proprietary technology and aims to secure strong commercial advantages over competitors by gaining governmental approvals in advance of others, by developing and offering innovative practice enhancement programs, including physician training and promotional materials, and by obtaining exclusive commercial arrangements. To optimize revenues, Diomed focuses on clinical procedures that generate revenues from both capital equipment and disposable products, such as procedure kits and optical fibers.

Diomed's high power semiconductor diode lasers combine clinical efficacy, operational efficiency and cost effectiveness in a versatile, compact, lightweight, easy-to-use and easy-to-maintain system. Along with lasers and single-use procedure kits for EVLT(R), the Company provides its customers with state of the art physician training and practice development support. The EVLT(R) procedure and the Company's related products were cleared by the United States FDA in January of 2002.

(2) BASIS OF PRESENTATION

In the opinion of management, these unaudited condensed consolidated financial statements contain all adjustments considered normal and recurring and necessary for their fair presentation. Interim results are not necessarily indicative of results to be expected for the year. These interim financial statements have been prepared in accordance with the instructions for Form 10-QSB and therefore do not include all information and footnotes necessary for a complete presentation of operations, financial position, and cash flows of the Company in conformity with accounting principles generally accepted in the United States. The Company filed with the Securities and Exchange Commission its 2006 annual report on Form 10-KSB on March 20, 2007, which included audited consolidated financial statements for the year ended December 31, 2006, and included information and footnotes necessary for such presentation. These unaudited consolidated financial statements should be read in conjunction with the audited condensed consolidated financial statements and the notes thereto included in the Company’s annual report on Form 10-KSB for the year ended December 31, 2006.

(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company’s Annual Report on Form 10-KSB for the year ended December 31, 2006 includes a comprehensive summary of the significant accounting policies and methods used in the preparation of our consolidated financial statements. The application of these policies has a significant impact on the Company’s reported results. In addition, the application of some of these policies depends on management's judgment, with financial reporting results relying on estimations and assumptions about the effect of matters that are inherently uncertain. For all of these policies, management cautions that future events rarely develop exactly as forecast and the best estimates routinely require adjustment.

(a) RECLASSIFICATIONS

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

F-4

DIOMED HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2007

(UNAUDITED)

(b) INVENTORIES

Inventories are valued at the lower of cost (first-in, first-out) or market. Work-in-progress and finished goods consist of materials, labor and manufacturing overhead. Inventories consist of the following:

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

Deferred revenue at June 30, 2007 was as follows:

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

(d) ACCOUNTING FOR STOCK-BASED COMPENSATION

The Company maintains stock-based incentive plans, providing stock incentives to employees and directors. The Company grants options to employees and directors to purchase common stock at an option price equal to the market value of the stock at the date of grant. Effective January 1, 2006, the Company accounts for share-based payments in accordance with SFAS 123(R). Prior to the effective date of SFAS 123R, the Company applied APB 25 and related interpretations to stock option grants. APB 25 provided that the compensation expense relative to stock options was measured based on the intrinsic value of the stock option at date of grant.

F-5

DIOMED HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2007

(UNAUDITED)

(e) COMPREHENSIVE INCOME

SFAS No. 130, Reporting Comprehensive Income, requires disclosure of all components of comprehensive income (loss). Comprehensive income is defined as the change in stockholders' equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. For all periods presented, comprehensive loss consists of the Company's net loss, changes in the cumulative translation adjustment account, and unrealized gains (loss) on marketable securities. Comprehensive net loss for all periods presented is as follows:

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

(f) SHORT TERM INVESTMENTS

Marketable securities with original maturities greater than three months are classified as short-term investments. Investments designated as short-term consist of U.S. Agency discount notes and corporate bonds, are classified as available-for-sale, and are reported at fair value using the specific identification method. Unrealized gains and losses, net of related tax effects, are reflected in other comprehensive income (loss) until realized.

Marketable securities included in cash and cash equivalents and short term investments at June 30, 2007, all of which mature within one year, consist of the following:

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

As Reported:

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

Marketable securities included in cash and cash equivalents and short term investments at December 31, 2006, all of which mature within one year, consist of the following:

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

As Reported:

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

F-6

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

(g) RECENT ACCOUNTING PRONOUNCEMENTS

In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109. This interpretation addresses the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. It prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken in a tax return. It requires that only benefits from tax positions that are more-likely-than-not of being sustained upon examination should be recognized in the financial statements. These benefits would be recorded at amounts considered to be the maximum amounts more-likely-than-not of being sustained. At the time these positions become more-likely-than-not to be disallowed, their recognition would be reversed. This interpretation is effective for fiscal years beginning after December 15, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to retained earnings. The Company adopted the provisions of FIN 48 effective January 1, 2007. The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. Upon adoption of FIN 48 on January 1, 2007, the Company did not record any interest or penalties.

The Company is subject to taxation in the UK, US and various state jurisdictions. The Company’s tax years for 1998 and forward are subject to examination by the US tax authorities due to the carryforward of unutilized net operating losses. The Company’s tax years for 2004 and forward are subject to examination by the UK tax authorities.

The adoption of FIN 48 did not have a material impact on the financial condition, results of operations or cash flows. At January 1, 2007, the Company had US net operating loss (“NOL”) carryforwards of approximately $46 million and foreign NOLs of approximately $20 million. At January 1, 2007, the Company had a net deferred tax asset of approximately $25 million related to these NOLs. Due to uncertainties surrounding the Company’s ability to generate future taxable income to realize these assets, a full valuation has been established to offset the net deferred tax asset. Additionally, the future utilization of the US NOL carryforwards to offset future taxable income may be subject to a substantial annual limitation as a result of Section 382 ownership changes that may have occurred previously or that could occur in the future. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain shareholders or public groups in the stock of a corporation by more than 50 percentage points over a three year period. Since the Company’s formation, the Company has raised capital through the issuance of capital stock which, combined with the purchasing shareholders’ subsequent disposition of those shares, may have resulted in a change of control, as defined by Section 382, or could result in a change of control in the future upon subsequent disposition. If the Company has experienced a change in control at any time since the Company’s formation, utilization of the Company’s NOL carryforwards would be subject to an annual limitation under Section 382. Any limitation may result in expiration of a portion of the NOL carryforwards before utilization. Any carryforwards that will expire prior to utilization as a result of such limitations will be removed from deferred tax assets with a corresponding reduction of the valuation allowance. Due to the existence of the valuation allowance, future changes in our unrecognized tax benefits related to NOLs will not impact the Company’s effective tax rate.

(4) NET LOSS PER SHARE

Net loss per share is computed based on the guidance of SFAS No. 128, Earnings per Share. SFAS No. 128 requires companies to report both basic loss per share, which is based on the weighted average number of common shares outstanding, and diluted loss per share, which is based on the weighted average number of common shares outstanding and the dilutive potential common shares outstanding using the treasury stock method. The calculation of net loss applicable to common stockholders for the three and six month periods ended June 30, 2006 includes $161,116 and $316,107, respectively, of non-cash preferred stock dividends accreted for future increasing rate dividends and $149,102 and $298,290, respectively, of preferred stock cash dividends earned during the period related to the September 30, 2005 private placement. Upon completion of the 2006 preferred stock financing, the Company exchanged the 2005 preferred stock for new preferred stock which does not currently accrue dividends. Therefore, there were no dividends recorded during the three and six month periods ended June 30, 2007.

F-7

As a result of the losses incurred by the Company for the three and six month periods ended June 30, 2007 and 2006, all potential common shares were antidilutive and were excluded from the diluted net loss per share calculations. The following table summarizes securities outstanding as of each of the periods, which were not included in the calculation of diluted net loss per share since their inclusion would be antidilutive.

	Three Months Ended June 30,				Six Months Ended June 30,
	2007		2006		2007		2006
Common Stock Options		3,022,506		2,423,787		2,942,498		2,423,787
Common Stock Warrants		6,055,304		5,196,776		6,055,304		5,196,776
Convertible Debt		3,227,826		1,620,961		3,227,826		1,620,961
Preferred Stock		6,736,044		3,975,000		6,736,044		3,975,000

(5) LINE OF CREDIT ARRANGEMENTS

Diomed, Ltd., the Company's United Kingdom-based subsidiary, utilizes an overdraft facility as well as an accounts receivable line of credit with Barclays Bank, limited to the lesser of (GBP) 100,000 or 80% of eligible accounts receivable. As of June 30, 2007, Barclay’s had provided a temporary increase in the overdraft facility up to approximately $433,000. The credit line bears interest at a rate of 2.5% above Barclays' base rate (5.5% at June 30, 2007) and borrowings are due upon collection of receivables from customers. As security for the line of credit, Barclay's Bank has a lien on all of the assets of Diomed, Ltd., excluding certain intellectual property. As of June 30, 2007, there was approximately $433,000 outstanding and at December 31, 2006, there was approximately $223,000 outstanding under this line of credit.

(6) STOCK OPTIONS

(a) In November 2003, the Company's stockholders approved the 2003 Omnibus Plan, under which the Company reserved 1,600,000 shares of common stock for future issuance. In May 2005, the Company's stockholders approved an increase of 1,500,000 reserved shares providing for a total of 3,100,000 shares of common stock reserved for future issuance. In June 2007, the Company's stockholders approved an increase of 2,500,000 reserved shares providing for a total of 5,600,000 shares of common stock reserved for future issuance. The 2003 Omnibus Plan provides for grants or awards of stock options, restricted stock awards, restricted stock units, performance grants, stock awards, and stock appreciation rights. Only present and future employees and outside directors and consultants are eligible to receive incentive awards under the 2003 Omnibus Plan.

The exercise price and vesting are determined by the Board of Directors at the date of grant. Options generally vest over two to three years and expire 10 years after the date of grant. Incentive stock options under the Plans are granted at not less than fair market value per share of Common Stock on the date of grant or 110% of fair market value for any stockholder who holds more than 10% of the total combined voting power of all classes of stock of the Company. The Company plans on settling any exercised employee stock options by issuing authorized but unissued shares.

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

F-8

DIOMED HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2007

(UNAUDITED)

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

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

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

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

The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants during the applicable period:

	Six Months Ended June 30,
	2007		2006
Risk-free interest rate		3.01 - 4.71%		3.01 - 4.37%
Expected dividend yield		--%		--%
Expected lives (in years)		5.0 - 5.8 years		2.5 - 5.9 years
Expected volatility		80.0 - 88.5%		71.2 - 89.3%

Expected volatility is based on a weighted average of the historical daily volatility of the Company's stock and peer company volatility commensurate with the expected life of the option. The average expected life used in 2007 and 2006 was calculated using the simplified method under Staff Accounting Bulletin No. 107 which averages the contractual term of the option with the vesting term. The risk-free rate is based on the rate of U.S. Treasury zero-coupon issues with a remaining term equal to the expected life of option grants. The Company uses historical data to estimate pre-vesting forfeiture rates of 5%.

The intrinsic value of options vested at June 30, 2007 was $40,343. The fair value of options vested during the six months ended June 30, 2007 was $293,915. At June 30, 2007, there were 986,469 unvested shares outstanding with a weighted average grant date fair value of $0.95.

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

	OUTSTANDING						EXERCISABLE
					Weighted Average				Weighted Average
Exercise Price	Shares		Remaining Life*		Exercise Price		Shares		Exercise Price
$ 0.81 - 2.15		964,190		9.24	$	1.02		243,170	$	1.28
2.16 - 2.29		569,701		8.54		2.24		330,501		2.24
2.30 - 4.00		155,708		7.18		3.18		129,459		3.19
4.01 - 4.75		669,943		7.31		4.25		669,943		4.25
4.76 - 5.00		546,300		6.66		5.00		546,300		5.00
5.01 - 11.50		95,611		5.62		8.69		95,611		8.69
11.51 - 49.00		6,640		3.99		31.16		6,640		31.66
49.01 - 87.00		4,700		4.56		51.06		4,700		51.06
87.01 - 164.00		3,329		0.86		118.27		3,329		118.27
164.01 - 205.75		6,384		0.78		174.47		6,384		174.47
				3,022,506	$	3.68		2,036,037	$	4.83

* Weighted average remaining contractual life (in years).

F-9

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

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

(7) SEGMENT REPORTING

The Company's reportable segments are determined by product type: laser systems; and fibers, accessories and service. The Executive Management Committee evaluates segment performance based on revenue. Accordingly, all expenses are considered corporate level activities and are not allocated to segments. Also, the Executive Management Committee does not assign assets to its segments.

This table presents revenues by reportable segment:

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

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

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

F-10

(8) COMMITMENTS AND CONTINGENCIES

(a) Litigation

'777 PATENT LITIGATION

On January 6, 2004, the Company filed a lawsuit in the United States District Court for the District of Massachusetts against AngioDynamics, Inc. seeking injunctive relief and damages for infringement of the Company’s U.S. Patent Number 6,398,777 (the "'777 patent") covering the endovascular laser treatment of varicose veins which the Company uses in the EVLT(R) product line, the exclusive rights to which the Company acquired on September 3, 2003. On March 4, 2004, the Company filed a second lawsuit against Vascular Solutions in the United States District Court for the District of Massachusetts seeking injunctive relief and damages for infringement of the '777 patent. At the parties' joint request, the Company’s patent cases involving AngioDynamics and Vascular Solutions were consolidated by the court. On August 20, 2006, Judge Nathaniel Gorton rejected all of the various challenges raised by the defendants to the validity or enforceability of the '777 patent, and granted the Company summary judgment of validity and enforceability of the patent. Judge Gorton further denied all parties' cross-motions for summary judgment on infringement.

Trial commenced on March 12, 2007 and on March 28, 2007, the jury found in favor of Diomed and against both defendants, both for inducing infringement and for contributory infringement of Diomed’s patent, and awarded nearly $12.5 million in damages. On June 20, 2007, the defendants filed for an appeal with the US Court of Appeals for the Federal Circuit. Therefore, the Company will not record this amount until final resolution of the appeal. In particular, the jury awarded $8.36 million against AngioDynamics and $4.1 million against VSI. On March 30, 2007 Diomed filed a motion for a permanent injunction against AngioDynamics and VSI. Defendants sought judgment as a matter of law and/or a new trial. Diomed sought prejudgment interest and additional post-judgment damages. On July 2, 2007, the Court granted Diomed’s motion for a permanent injunction and denied defendants’ motion for judgment as a matter of law or new trial. The parties reached a stipulation regarding the issues of prejudgment interest and additional post-judgment damages, which resulted in a stipulated increase in the judgment against AngioDynamics to $9.71 million and against VSI to $4.975 million. On July 11, 2007, Diomed filed a motion to find the defendants in contempt of the permanent injunction. Defendants filed their opposition on July 25, 2007. That motion is pending.

On April 2, 2004, the Company filed a lawsuit in the United States District Court for the District of Massachusetts against Total Vein Solutions, LLC, seeking injunctive relief and damages for infringement of the '777 patent. Total Vein Solutions answered the complaint, generally denying the Company’s allegations and counterclaiming for declaratory judgment of non-infringement and invalidity of the EVLT(R) patent. The Company is in the discovery phase of this litigation. This case is also pending before Judge Gorton. On July 13, 2007, Magistrate Judge Alexander granted the Company’s motion to compel Total Vein to respond to discovery requests and denied Total Vein’s motion to stay the litigation.

On October 14, 2004, the Company filed a lawsuit in the United States District Court for the District of Massachusetts against New Star Lasers, Inc., d/b/a Cooltouch, Inc., seeking injunctive relief and damages for infringement of the '777 patent. CoolTouch answered the complaint, generally denying the Company’s allegations and counterclaiming for declaratory judgment of non-infringement and invalidity of the '777 patent. The Company is now proceeding with the discovery phase of this litigation. This case is also pending before Judge Gorton.

On March 29, 2007 the Company filed a lawsuit in United States District Court for the District of Massachusetts against Dornier Medtech America, Inc. seeking injunctive relief and damages for infringement of the '777 patent. This case is also pending before Judge Gorton.

If the Company does not prevail in the appeal and infringement actions and is not be able to exclude third parties from using the Company's EVLT(R) technology, the EVLT(R) patent may be determined to be impaired and the Company's EVLT(R) revenue stream may be adversely affected.

F-11

On July 21, 2005, a lawsuit was filed against the Company in the United States District Court for the Northern District of California by VNUS Medical Technologies, Inc., alleging infringement of U.S. patents Nos. 6,258,084, 6,638,273, 6,752,803, and 6,769,433, seeking injunctive relief and damages in an unspecified amount. The complaint was served on the Company on July 27, 2005. On September 15, 2005, the Company filed an answer denying the allegations of infringement, and counterclaiming against VNUS for a declaration that none of the patents are infringed and that they are all invalid.

VNUS TECHNOLOGIES LITIGATION

On October 12, 2005, VNUS served an amended complaint adding two additional parties, AngioDynamics, Inc. and Vascular Solutions, Inc., as defendants. On October 31, 2005, the Company filed an answer to the First Amended Complaint, again denying the allegations of infringement, and counterclaiming against VNUS for a declaration that none of the patents are infringed, that they are all invalid and that two of VNUS' patents are unenforceable for inequitable conduct. The Court held a claim construction tutorial and a hearing on claim construction issues on October 30, 2006 and issued a ruling on claims construction on November 20, 2006. The case is in the expert discovery phase, with summary judgment motions due in August. The Court has currently set a trial date of October 29, 2007. The Company intends to continue to defend against the allegations against the Company in this case and believes that the Company has meritorious defenses.

OTHER

Insofar as legal proceedings other than patent litigation are concerned, from time to time the Company is the defendant in legal and administrative proceedings and claims of various types. Although any such litigation contains an element of uncertainty, management, in consultation with the Company's general counsel, presently believes that the outcome of such proceedings or claims which are pending or known to be threatened, or all of them combined, will not have a material adverse effect on the Company.

(b) Commitments

On August 5, 2005, the Company entered into a distribution agreement with Luminetx, pursuant to which Luminetx appointed the Company as a distributor and granted the Company the exclusive right to distribute and sell the Luminetx patented biomedical imaging system known as the VeinViewer(TM) Imaging System to physicians who perform sclerotherapy, phlebectomies or varicose vein treatments, initially in the United States and the United Kingdom, with additional territories to be negotiated as VeinViewer(TM) receives regulatory clearance in other countries, on terms to be agreed. Luminetx agreed to supply the Company with a certain minimum number of VeinViewer(TM) systems for distribution by the Company at specified prices during the term of the distribution agreement, initially three years. During May 2007, the Company and Luminetx amended the agreement and revised the targeted number of VeinViewer(TM) systems to be purchased through December 31, 2007 and through April 30, 2008 to better reflect current market development and positioning strategies. The agreement was also amended so that both companies may sell to dermatologists who are not performing EVLT®. If the Company fails to purchase the annual target number of VeinViewer(TM) systems prior to May 1, 2008, for any reason, Luminetx may terminate the distribution agreement with written notice.

(9) STOCKHOLDERS’ EQUITY

At December 31, 2006, the Company had 19,448,728 shares of common stock outstanding. During the six month period ended June 30, 2007, the holders of 1,061.8303 shares of preferred stock exchanged their shares of preferred stock into 10,618,303 shares of common stock. At June 30, 2007, the Company had 30,067,031 shares of common stock outstanding.

On September 29, 2006, the Company issued 1,735.4347 shares of preferred stock, each share of which has a stated value of $11,500 per share. The Company issued 870.4348 of these shares to investors who purchased these shares for cash at a price of $11,500 per share, and the Company issued 864.9999 shares to investors who tendered 3,975,000 shares of preferred stock issued in 2005, all in accordance with the terms of a securities purchase agreement entered into with the investors in July 2006. Each share of preferred stock is exchangeable for 10,000 shares of common stock. At December 31, 2006, the Company had 1,735.4347 shares of preferred stock outstanding.

During the six month period ended June 30, 2007, the holders of 1,061.8303 shares of preferred stock exchanged their shares of preferred stock into 10,618,303 shares of common stock. At June 30, 2007, the Company had 673.6044 shares of preferred stock outstanding.

F-12