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**U.S. SECURITIES AND EXCHANGE COMMISSION****WASHINGTON, D.C. 20549**

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**FORM 10-QSB**
| x | **QUARTERLY REPORT UNDER  SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|---|-----------------------------------------------------------------------------------------|

 

**FOR THE QUARTERLY PERIOD ENDEDJUNE 30, 2001**

**Commission file number 0-5460**

** **

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** **

**STOCKERYALE,INC.******(Name of smallbusiness issuer in its charter)

** **
| **Massachusetts**                                               | **04-2114473**                        |
|-----------------------------------------------------------------|---------------------------------------|
| (State  of other jurisdiction of incorporation or organization) | (I.R.S.  employer identification no.) |
|                                                            |                                  |
| **32 Hampshire Road**                                           |                                  |
| **Salem, New Hampshire**                                        | **03079**                             |
| (Address  of principal executive offices)                       | (Zip  Code)                           |

** **

**(603)893-8778**(Issuer’stelephone number)

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Check whetherthe issuer (1) filed all reports required to be filed by Section 13 or 15(d) ofthe Exchange Act during the past 12 months (or for such shorter period that theregistrant was required to file such reports), and

(2) has beensubject to such filing requirements for the past 90 days.   ý Yes   o No

As of July 31,2001 there were 10,578,236 shares of the issuer’s common stock outstanding.

TransitionalSmall Business Disclosure Format (check one)  o Yes    ý No

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| **PART I FINANCIAL STATEMENTS**                   |
|---------------------------------------------------|
| **Item 1.1 **                                | **CONSOLIDATED BALANCE SHEETS** |
| **STOCKER****YALE, INC.**                         |
| (In thousands)                                    |
|                                              |
| **Assets**                                        |   |   |   |   |
|                                              | ***June  30, 2001*****(unaudited)** |   | ***December  31, 2000 (*****audited)** |   |
| CURRENT  ASSETS:                                  |   |   |   |   |
|                                              | Cash  and cash equivalents | $ | 16,266 |   | $ | 12,487 |   |
|                                              | Restricted  cash | 2,000 |   | 500 |   |
|                                              | Accounts  receivable, net of reserves of $155,000 and $151,000 in 2001 and 2000,  respectively | 3,041 |   | 2,946 |   |
|                                              | Inventories | 6,262 |   | 5,196 |   |
|                                              | Prepaid  expenses | 1,265 |   | 587 |   |
|                                              |  |   |  |   |
|                                              | Total  current assets | 28,834 |   | 21,716 |   |
|                                              |  |   |  |   |
| Property, Plant and Equipment, net                | 14,791 |   | 8,338 |   |
| Note Receivable                                   | 25 |   | 90 |   |
| Goodwill, net of accumulated amortization         | 2,582 |   | 2,746 |   |
| Identified intangible assets, net                 | 2,503 |   | 2,675 |   |
| Long-Term Investment                              | 740 |   | 250 |   |
| Other Assets                                      | 66 |   | 66 |   |
| Net Assets of discontinued operations             | 1,100 |   | 1,100 |   |
|                                              |  |   |  |   |
|                                              | $ | 50,641 |   | $ | 36,981 |   |
|                                              |  |   |  |   |
| **Liabilities and Stockholders’ Investment** |   |   |   |   |
|                                              |   |   |   |   |
| Current Liabilities:                              |   |   |   |   |
|                                              |   |   |   |   |
|                                              | Current  portion of long-term debt | $ | 3,530 |   | $ | 1,328 |   |
|                                              | Accounts  payable | 1,972 |   | 1,636 |   |
|                                              | Accrued  expenses | 737 |   | 1,332 |   |
|                                              | Short-term  lease obligation | 134 |   | 119 |   |
|                                              |  |   |  |   |
|                                              | Total  current liabilities | 6,373 |   | 4,415 |   |
|                                              |  |   |  |   |
| Long-Term Debt and Capital Lease obligations      | 2,657 |   | 2,779 |   |
|                                              |  |   |  |   |
| Other Long-Term Liabilities                       | 929 |   | 929 |   |
|                                              |  |   |  |   |
| Deferred Income Taxes                             | 897 |   | 959 |   |
|                                              |  |   |  |   |
| Stockholders’ Investment:                    |   |   |   |   |
|                                              | Common  stock, par value $0.001 |   |   |   |   |
|                                              | Authorized—100,000,000 |   |   |   |   |
|                                              | Issued  and outstanding— 11,187,150 and 9,385,656 at June 30, 2001 and December 31,  2000, respectively | 11 |   | 9 |   |
|                                              | Paid-in  capital | 58,206 |   | 42,071 |   |
|                                              | Accumulated  other comprehensive income (loss) | (126 | ) | (129 | ) |
|                                              | Accumulated  deficit | (18,306 | ) | (14,052 | ) |
|                                              |  |   |  |   |
|                                              | Total  stockholders’ investment | 39,785 |   | 27,899 |   |
|                                              |  |   |  |   |
|                                              | $ | 50,641 |   | $ | 36,981 |   |
|                                              |  |   |  |   |
|                                                   |  |  |  |  |  |  |  |  |  |  |

** **

|                                                                     | **Item 1.2**                                | **CONSOLIDATED  STATEMENTS OF OPERATIONS** |                   |
|--------------------------------------------------------------------------|---------------------------------------------|--------------------------------------------|------------------------|
|                                                                     | **STOCKERYALE, INC.**                       |                                       |
|                                                                     | (In thousands except per share data)        |                                       |
|                                                                     |                                        |                                       |
|                                                                     | ***Three Months Ended***                    |                                       | ***Six Months Ended*** |   |
|                                                                     | ***June 30,***                              |                                       | ***June 30,***         |   |
|                                                                     | **2001**                                    |                                       | **2000**               |   | **2001** |   | **2000** |   |
|                                                                     | ****                                        |                                       | ****                   |   | **** |   | **** |   |
|                                                                     | **(unaudited)**                             |                                       | **(unaudited)**        |   | **(unaudited)** |   | **(unaudited)** |   |
|                                                                     |                                        |                                       |                   |   |   |   |   |   |
| Net Sales                                                                | $                                           | 3,602                                      |                   | $ | 5,006 |   | $ | 8,529 |   | $ | 8,943 |   |
|                                                                     |                                        |                                       |                   |   |   |   |   |   |
| Cost of Sales                                                            | 2,355                                       |                                       | 3,089                  |   | 5,056 |   | 5,419 |   |
|                                                                     |                                             |                                       |                        |   |  |   |  |   |
|                                                                     | Gross  Profit                               | 1,247                                      |                   | 1,917 |   | 3,473 |   | 3,524 |   |
|                                                                     |                                             |                                       |                        |   |  |   |  |   |
| Selling Expenses                                                         | 1,004                                       |                                       | 433                    |   | 1,842 |   | 858 |   |
| General and Administrative Expenses                                      | 2,534                                       |                                       | 822                    |   | 3,870 |   | 1,411 |   |
| Amortization and Goodwill Expense                                        | 169                                         |                                       | 121                    |   | 340 |   | 242 |   |
| Charge for Acquired In-Process  Research and Development                 | -                                           |                                       | 402                    |   | - |   | 402 |   |
| Research and Development                                                 | 1,139                                       |                                       | 275                    |   | 1,675 |   | 504 |   |
|                                                                     |                                             |                                       |                        |   |  |   |  |   |
|                                                                     | Total  Operating Expenses                   | 4,846                                      |                   | 2,053 |   | 7,727 |   | 3,417 |   |
|                                                                     |                                        |                                            |                   |  |   |  |   |  |   |
|                                                                     | Operating  Income/(Loss)                    | (3,599                                     | )                      | (136 | ) | (4,254 | ) | 107 |   |
|                                                                     |                                        |                                       |                   |   |   |   |   |   |
| Other Income/(Expense)                                                   | (85                                         | )                                          | 39                     |   | (5 | ) | 56 |   |
| Interest Income                                                          | 72                                          |                                       | 81                     |   | 230 |   | 104 |   |
| Interest Expense                                                         | 178                                         |                                       | 121                    |   | 289 |   | 249 |   |
|                                                                     |                                             |                                       |                        |   |  |   |  |   |
| Income/(Loss)  From Continuing Operations  before  Income Taxes     | (3,790                                      | )                                          | (137                   | ) | (4,318 | ) | 18 |   |
|                                                                     |                                        |                                       |                   |   |   |   |   |   |
| Provision /(Benefit) for Income   Taxes                             | (158                                        | )                                          | 113                    |   | (64 | ) | 132 |   |
|                                                                     |                                             |                                       |                        |   |  |   |  |   |
|                                                                     | Income/(Loss)  From Continuing Operations   | $                                          | (3,632                 | ) | $ | (250 | ) | $ | (4,254 | ) | $ | (114 | ) |
|                                                                     |                                        |                                            |                   |  |   |  |   |  |   |
|                                                                     | Income/(Loss)  From Discontinued Operations | $                                          | -                      |   | $ | (145 | ) | $ | - |   | $ | (307 | ) |
|                                                                     |                                             |                                       |                        |   |  |   |  |   |
|                                                                     | Net  loss                                   | $                                          | (3,632                 | ) | $ | (395 | ) | $ | (4,254 | ) | $ | (421 | ) |
|                                                                     |                                             |                                       |                        |   |  |   |  |   |
| Income/(Loss) per Share from Continuing Operations-Basic  and Diluted    | $                                           | (0.34                                      | )                      | $ | (0.03 | ) | $ | (0.43 | ) | $ | (0.01 | ) |
|                                                                     |                                        |                                       |                   |   |   |   |   |   |
| Income /(Loss) per Share from Discontinued  Operations-Basic and Diluted | -                                           |                                       | $                      | (0.02 | ) | - |   | $ | (0.04 | ) |
|                                                                     |                                             |                                       |                        |   |  |   |  |   |
|                                                                     | Net  Loss per Share-Basic and Diluted       | $                                          | (0.34                  | ) | $ | (0.05 | ) | $ | (0.43 | ) | $ | (0.05 | ) |
|                                                                     |                                             |                                       |                        |   |  |   |  |   |
| Weighted Average Common Shares-Basic and Diluted                         | 10,598,939                                  |                                       | 8,722,936              |   | 10,001,750 |   | 8,343,342 |   |
|                                                                     |                                             |                                       |                        |   |  |   |  |   |
|                                                                          |                                             |                                            |                        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

|                                                                              | **Item 1.3  **                                                    | **CONSOLIDATED STATEMENTS OF CASH FLOWS** |            |
|-----------------------------------------------------------------------------------|-----------------------------------------------------------------------------|-------------------------------------------|-----------------|
|                                                                              | **STOCKERYALE, INC.**                                                       |                                      |
|                                                                              | (In thousands)                                                              |                                      |
|                                                                              | ***Six Months Ended***                                                      |                                      |
|                                                                              | ***June 30,***                                                              |                                      |
|                                                                              | **2001**                                                                    |                                      | **2000**        |   |
|                                                                              | **(unaudited)**                                                             |                                      | **(unaudited)** |   |
| CASH  FLOWS FROM OPERATING ACTIVITIES:                                            |                                                                        |                                      |            |   |
|                                                                              | Net  loss                                                                   | $                                         | (4,254          | ) | $ | (421 | ) |
|                                                                              | Less:  net loss on discontinued operations                                  | -                                         |            | (307 | ) |
|                                                                              |                                                                        |                                           |            |  |   |
|                                                                              | $                                                                           | (4,254                                    | )               | $ | (114 | ) |
|                                                                              |                                                                        |                                      |            |   |
| Adjustments  to reconcile net loss to net cash used in operating activities– |                                                                        |                                      |            |   |
|                                                                              | Acquired  in Process Research and Development                               | -                                         |            | 402 |   |
|                                                                              | Depreciation  and amortization                                              | 631                                       |            | 429 |   |
|                                                                              | (Gain)/Loss  on disposal of equipment                                       | 3                                         |            | - |   |
|                                                                              | Deferred  income taxes                                                      | (62                                       | )               | (93 | ) |
|                                                                              | Other  changes in assets and liabilities–                              |                                      |            |   |   |
|                                                                              | Accounts  receivable, net                                                   | (95                                       | )               | (1,134 | ) |
|                                                                              | Inventories                                                                 | (1,066                                    | )               | (558 | ) |
|                                                                              | Prepaid  expenses                                                           | (678                                      | )               | (285 | ) |
|                                                                              | Accounts  payable                                                           | 336                                       |            | (855 | ) |
|                                                                              | Accrued  expenses                                                           | (595                                      | )               | 175 |   |
|                                                                              |                                                                        |                                           |            |  |   |
|                                                                              | Net  cash provided by (used in) operating activities, continuing operations | (5,780                                    | )               | (2,033 | ) |
|                                                                              | Net  cash used by operating activities, discontinued operations             | -                                         |            | (413 | ) |
|                                                                              |                                                                        |                                           |            |  |   |
|                                                                              | Net  cash provided by (used in) operating activities                        | (5,780                                    | )               | (2,446 | ) |
|                                                                              |                                                                        |                                      |            |   |
| CASH  FLOWS USED FOR INVESTING ACTIVITIES:                                        |                                                                        |                                      |            |   |
|                                                                              | Purchases  of property, plant and equipment                                 | (6,739                                    | )               | (473 | ) |
|                                                                              | Long  term investment                                                       | -                                         |            | (250 | ) |
|                                                                              | Investment  in joint venture                                                | (488                                      | )               | - |   |
|                                                                              | Business  acquired, net of cash acquired                                    | -                                         |            | (2 | ) |
|                                                                              |                                                                        |                                           |            |  |   |
|                                                                              | Net  cash used in investing activities                                      | (7,227                                    | )               | (725 | ) |
|                                                                              |                                                                             |                                      |                 |   |
| CASH  FLOWS FROM FINANCING ACTIVITIES:                                            |                                                                        |                                      |            |   |
|                                                                              | Proceeds  from sale of common stock                                         | 16,137                                    |            | 8,757 |   |
|                                                                              | Proceeds  from (payments of) bank debt                                      | 2,095                                     |            | (443 | ) |
|                                                                              | Proceeds  from note receivable                                              | 65                                        |            | - |   |
|                                                                              |                                                                        |                                           |            |  |   |
|                                                                              | Net  cash provided by (used in) financing activities                        | 18,297                                    |            | 8,314 |   |
|                                                                              |                                                                             |                                      |                 |   |
| EFFECT  OF EXCHANGE RATE ON CHANGES IN CASH                                       | (11                                                                         | )                                         | (91             | ) |
|                                                                              |                                                                        |                                      |            |   |
| NET  INCREASE/(DECREASE)  IN CASH AND CASH  EQUIVALENTS                      | 5,279                                                                       |                                      | 5,052           |   |
|                                                                              |                                                                        |                                      |            |   |
| CASH  AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                   | 12,987                                                                      |                                      | 85              |   |
|                                                                              |                                                                             |                                      |                 |   |
| CASH  AND CASH EQUIVALENTS, END OF PERIOD                                         | $                                                                           | 18,266                                    |            | $ | 5,137 |   |
|                                                                              |                                                                             |                                      |                 |   |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:                                |                                                                        |                                      |            |   |
|                                                                              | Interest  paid                                                              | $                                         | 289             |   | $ | 301 |   |
|                                                                              |                                                                        |                                           |            |  |   |
|                                                                              | Taxes  paid                                                                 | $                                         | -               |   | $ | 74 |   |
|                                                                              |                                                                        |                                           |            |  |   |
| SUPPLEMENTAL  DISCLOSURE OF NONCASH FINANCING ACTIVITIES:                         |                                                                        |                                      |            |   |
|                                                                              | Conversion  of subordinated debt to common stock                            | $                                         | -               |   | $ | 1,350 |   |
|                                                                              |                                                                        |                                           |            |  |   |
|                                                                              | Fair  value of shares used for acquisition of CorkOpt Ltd.                  | $                                         | -               |   | $ | 2,194 |   |
|                                                                              |                                                                        |                                           |            |  |   |
|                                                                              | Liabilities  assumed in acquisition                                         | $                                         | -               |   | $ | 717 |   |
|                                                                              |                                                                        |                                           |            |  |   |
|                                                                                   |                                                                             |                                           |                 |  |  |  |  |  |  |  |  |  |

**Part1 Financial Statements (Continued)**

**Notes to Financial Statements**

1.          Basis of Presentation

The interimconsolidated financial statements presented have been prepared by StockerYale,Inc. (the “Company”) without audit and, in the opinion of the management,reflect all adjustments of a normal recurring nature necessary for a fairstatement of (a) the results of operations for the three and six months endedJune 30, 2001 and 2000, (b) the financial position at June 30, 2001, and (c)the cash flows for the six month periods ended June 30, 2001 and 2000. Theseinterim results are not necessarily indicative of results for a full year orany other interim period.

Theconsolidated balance sheet presented as of December 31, 2000, has been derivedfrom the consolidated financial statements that have been audited by theCompany’s independent public accountants. The consolidated financial statements and notes are condensed aspermitted by Form 10-QSB and do not contain certain information included in theannual financial statements and notes of the Company. The consolidatedfinancial statements and notes included herein should be read in conjunctionwith the consolidated financial statements and notes included in the Company’sAnnual Report on Form 10-KSB for the year ended December 31, 2000.

2.          Earnings per Share

In accordancewith Statement of Financial Accounting Standards (“SFAS”) No. 128, Earnings perShare, basic and diluted net loss per common share for the three and six monthsended June 30, 2001 and 2000 is calculated by dividing the net loss applicableto common stockholders by the weighted average number of vested common sharesoutstanding.

3.          Comprehensive Income/(Loss)

SFAS No. 130, *ReportingComprehensive Income,* requires disclosure of all components ofcomprehensive income (loss) on an annual and interim basis. Comprehensiveincome (loss) is defined as the change in equity of a business enterpriseduring a period from transactions and other events and circumstances fromnon-owner sources. The Company’s total comprehensive income (loss) is asfollows :

|                                | (In thousands)         |       |
|-------------------------------------|------------------------|------------|
|                                | **Three Months Ended** |       | **Six Months Ended** |   |
|                                | ****                   |       | **** |   |
|                                | **June 30, 2001**      |       | **June 30, 2000** |   | **June 30, 2001** |   | **June 30, 2000** |   |
|                                | ****                   |       | **** |   | **** |   | **** |   |
|                                | **(Unaudited)**        |       | **(Unaudited)** |   | **(Unaudited)** |   | **(Unaudited)** |   |
|                                |                   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Net  income /(loss)                 | $                      | (3,632     | ) | $ | (250 | ) | $ | (4,254 | ) | $ | (114 | ) |
| Other  comprehensive income (loss): |                   |       |   |   |   |   |   |   |
| Cumulative  translation adjustment  | (126                   | )          | (53 | ) | 3 |   | (78 | ) |
|                                |                        |       |  |   |  |   |  |   |
| Comprehensive  loss                 | $                      | (3,758     | ) | $ | (303 | ) | $ | (4,251 | ) | $ | (192 | ) |
|                                |                        |       |  |   |  |   |  |   |
|                                     |                        |            |  |  |  |  |  |  |  |  |  |  |  |

4.          Joint Ventures

In October2000, the Company entered into a research and development joint ventureagreement, Optune Technologies, Inc., with Dr. Nicolae Miron, a scientist employedby the Company, to develop a tunable optical filter. In exchange for a 49%ownership interest in Optune Technologies, the Company has committed to fundover a two year period $4.0 million to cover all operating expenses of thejoint venture including salaries, equipment and facility costs. The Company isrecording 100% of the losses associated with the research and development jointventure in the accompanying statement of operations as research and developmentexpense. As of June 30, 2001, the Company has provided approximately $400,000CDN ($257,000 USD) of funding  to thejoint venture and recorded approximately $92,000 of research and developmentexpenses related to the operating losses incurred by the joint venture in thesecond quarter.

5.          Use of Estimates

The preparationof financial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates.

6.          Revenue Recognition

The Securitiesand Exchange Commission released Staff Accounting Bulletin (SAB) No. 101, *RevenueRecognition in Financial Statements*, on December 3, 1999. This SABprovides additional guidance on the accounting for revenue recognition,including both broad conceptual discussions as well as certain industryspecific guidance. The adoption of SAB 101 did not have a material impact onthe Company’s results of operations.

**ITEM2. MANAGEMENT’S DISCUSSION AND ANALYSIS****OFFINANCIAL CONDITION AND OPERATING RESULTS**

***This Quarterly Report on Form 10-QSB containsforward-looking statements within the meaning of Section 27A of the SecuritiesAct of 1933 and Section 21E of the Securities Exchange Act of 1934.  Our actual results could differ materially fromthose set forth in the forward-looking statements****. **When we use words such as “anticipate,” “believe,”“estimate,” “expect,” “intend,” and other similar expressions, they generallyidentify forward-looking statements. Forward-looking statements include, for example, statements relating toacquisitions and related financial information, development activities,business strategy and prospects, future capital expenditures, sources andavailability of capital, environmental and other regulations andcompetition.  Investors should exercisecaution in interpreting and relying on forward-looking statements since theyinvolve known risks, uncertainties and other factors which are, in some cases,beyond our control and could materially affect our actual results, performanceor achievements.******Such factors include, withoutlimitation: market conditions that could make it more difficult or expensivefor the Company to obtain the necessary capital to finance its joint venturesand facilities expansion; the existence of other independent suppliers ofoptical fiber, who may have greater resources than the Company; the existenceand availability of acquisition and joint venture opportunities that willcompliment our existing product lines; and the uncertainty that the Company’ssignificant investments in R&D will result in products that achieve marketacceptance.  Additional such factors arediscussed in the Section entitled “Certain Factors Affecting Future OperatingResults” on page 12 of the Company’s Annual Report on Form 10-KSB for thefiscal year ended December 31, 2000.***

**Results of Operations**

The followingdiscussion should be read in conjunction with the attached consolidatedfinancial statements and notes thereto and with our audited financialstatements and notes thereto included in our Annual Report on Form 10-KSB forthe year ended December 31, 2000.

**Fiscal Quarters Ended June 30,2001 and 2000**

NetSales

Net sales were$3.6 million in the three months ended June 30, 2001 compared to $5.0 millionin the second fiscal quarter of 2000, a decrease of 28% or $1.4 million.

Net sales fromour specialized illumination products were $2.7 million in the second quarterof 2001 compared to $3.7 million in the comparable quarter in 2000, a decreaseof 27.0% or $1.0 million. The decrease was primarily caused by a reduction indemand due to a cyclical downturn in the semi-conductor and related industries.

Net sales fromour optical sub-component products were $715,000 in the second quarter of 2001compared to $736,000 in the comparable quarter in 2000, a decrease of 2.9% or$21,000. The decrease was largely due to the shut down of phase mask productionin order to complete construction of a state of the art clean room, which willprovide improved quality and efficiency in the phase mask manufacturingprocess. Accordingly, our backlog for phase masks grew to approximately $2.5million.

Net sales fromprinter and recorder products decreased from $535,000 in the second quarter offiscal 2000 to $225,000 in the comparable quarter of fiscal 2001, a 58.0%decrease. As previously disclosed, we plan to discontinue these product linesby the end of 2001.

Costof Sales

Cost of saleswere $2.4 million in the second quarter of fiscal 2001 compared to $3.1 millionin the comparable quarter of fiscal 2000, a decrease of 23.7% or $734,000. Thedecrease in cost of sales resulted from the decrease in net sales during thesame period.

Gross profitwas $1.2 million in the second quarter of fiscal 2001 compared to $1.9 millionin the comparable quarter of 2000 as a result of decreased net sales. Grossmargin decreased from 38.3% in 2000 to 34.6% in 2001. The decrease in grossmargin resulted primarily from increased unabsorbed manufacturing costs due tothe shortfall of shipments during the quarter combined with the expansion ofour manufacturing capacity.

OperatingExpenses

Sellingexpenses were $1.0 million in the three months ended June 30, 2001, or 27.9% ofnet sales, compared to $433,000 in the comparable quarter in 2000, or 8.6% ofnet sales. General and administrative expenses were $2.5 million in the secondquarter of fiscal 2001, or 70.4% of net sales, compared to $822,000, or 16.4%of net sales in the comparable quarter of fiscal 2000. Selling, general andadministrative expenses increased primarily due to growth in staffing levels insales and administrative personnel as well as due to non-recurring chargesrelating to legal and professional fees associated with our joint ventures andmoving costs associated with our new Montreal facility. Research anddevelopment expenses were $1.1 million in the second quarter of fiscal 2001compared to $275,000 in the comparable quarter of 2000; reflecting our strategyof making significant investments in research and development for our specialtyoptical fiber and optical sub-component products.

InterestExpense

Interestexpense was $178,000 in the second quarter of fiscal 2001 compared to $121,000in 2000. The increase in interest expense resulted primarily from borrowings tofund operating losses and working capital.

NetIncome

Net loss forthe three months ended June 30, 2001 was $3.6 million compared to a net loss of$395,000 for the same period in 2000. Net loss from continuing operations forthe second quarter of 2001 was $3.6 million compared to a net loss fromcontinuing operations of $250,000 in the comparable quarter of 2000. Net lossfrom discontinued operations for the second quarter of 2000 was $145,000. Theseoperations were discontinued as of December 31, 2000.

Provisionfor Income Taxes

We recorded abenefit for income taxes of $158,000 in the fiscal quarter ended June 30, 2001compared to a tax provision of $113,000 in the comparable quarter in 2000. Thetax benefit for the current quarter is a result of operating losses generatedin Canada which offset a previously recorded tax provision. The tax provisionin the comparable quarter is a result of taxable income generated in Canadathat could not be used to offset operating losses in the United States.

**First Six Months of Fiscal 2001and 2000**

NetSales

Net sales were$8.5 million in the six months ended June 30, 2001 compared to $8.9 million inthe comparable period of fiscal quarter of 2000, a decrease of 4.6% or$414,000.

Net sales fromour specialized illumination products were $6.3 million in the first six monthsof 2001 compared to $6.8 million in the comparable  period of the prior year, a decrease of 7.7% or $530,000. Thedecrease was primarily caused by a reduction in demand due to a cyclicaldownturn in the semi-conductor and related industries.

Net sales fromour optical communication sub-component products were $1.7 million in the firstsix months of 2001 compared to $1.2 million in the comparable period of theprior year, an increase of 43.2% or $508,000. The increase was primarily due tostrong demand for our phase mask products. In order to meet current demand, wehave completed construction on a state of the art clean room that will increaseproduction capacity and improve quality.

Net sales fromprinter and recorder products decreased from $923,000 in the first six monthsof  2000 to $531,000 in the first sixmonths of fiscal 2001, a 42.5% decrease. As previously disclosed, we plan todiscontinue these product lines by the end of 2001.

Costof Sales

Cost of saleswas $5.1 million in the first six months of fiscal 2001 compared to $5.4million in the comparable period of fiscal 2000, a decrease of 6.7% or$363,000. The decrease in cost of sales resulted from a decrease in net salesduring the same period.

Gross profitwas $3.5 million in the first six months of fiscal 2001 compared to $3.5million in the comparable period of fiscal 2000. Gross margin increased from39.4% in fiscal 2000 to 40.7% in fiscal 2001 resulting from a favorable productmix, which was partially offset by higher manufacturing costs.

OperatingExpenses

Sellingexpenses were $1.8 million in the six months ended June 30, 2001, or 21.6% ofnet sales, compared to $858,000 in the comparable period in fiscal 2000, or9.6% of net sales. General and administrative expenses were $3.9 million in thefirst six months of fiscal 2001, or 45.4% of net sales, compared to $1.4million, or 15.8% of net sales in the comparable period of fiscal 2000.Selling, general and administrative expenses increased primarily due to growthin staffing levels in sales and administrative personnel as well as due tonon-recurring charges relating to legal and professional fees associated withour joint ventures and moving costs associated with our new Montreal facility.Research and development expenses were $1.7 million in the first six months offiscal 2001 compared to $504,000 in the comparable period of fiscal 2000,reflecting our strategy of making significant investments in research anddevelopment for our specialty optical fiber and optical sub-component products.

InterestExpense

Interestexpense was $289,000 in the first six months of fiscal 2001 compared to$249,000 in 2000. The increase in interest expense resulted primarily fromborrowings to fund operating losses and working capital.

NetIncome

Net loss forthe six months ended June 30, 2001 was $4.3 million compared to a net loss of$421,000 for the same period in 2000. Net loss from continuing operations forthe six months ended June 30, 2001 was $4.3 million compared to a net loss fromcontinuing operations of $114,000 in the comparable period in 2000. Net lossfrom discontinued operations for the six months ended June 30, 2000 was$307,000. These operations were discontinued as of December 31, 2000.

Provisionfor Income Taxes

We recorded abenefit for income taxes of $64,000 in the six months ended June 30, 2001compared to a tax provision of $132,000 in the comparable quarter in 2000. Thetax benefit is a result of certain research and development tax credits fromour Canadian operations. The tax provision in the comparable quarter is aresult of taxable income generated in Canada that could not be used to offsetoperating losses in the United States.

**Liquidity and Capital Resources**

On May 31,2001, the Company completed a private placement of 1,700,000 shares of commonstock at a price of $10.25 per share with net proceeds of approximately $16.1million. For the six months ended June 30, 2001, cash and cash equivalentsincreased $5.3 million over the corresponding period in 2000. Cash used inoperating activities was $5.8 million in the first six months of fiscal 2001,which primarily resulted from an operating loss of $4.3 million and an increasein inventories of $1.1 million, which was partially offset by depreciation andamortization and changes in working capital to fund our continued strategicinvestment in specialty optical fiber and optical sub-components.

Cash of $18.3million was provided by financing activities, primarily due to the receipt of$16.1 million from the sale of common stock in the above private placement andnet proceeds from bank debt of $2.1 million. Cash used in investing activitieswas $7.2 million in the six months ended June 30, 2001; primarily resultingfrom the purchase of production and development equipment and facilityexpansion.

As part of ourstrategic plan to expand our specialty optical fiber production capabilities,we have continued the construction of a 14,000 square foot addition to ourexisting Salem facility. This building will be used for research anddevelopment of specialty optical fiber and optical sub-components, includingMCVD systems, drawing towers and other optical measuring equipment. We believethat we will be able to finance a significant portion of this project, which isexpected to cost approximately $7 million, although we can have no assurance atthis time as to the availability and terms of any such financing.

On May 19,2001, we entered into a credit agreement with Merrill Lynch Financial Services,Inc. providing total borrowing availability up to $6,000,000. Initial proceeds wereused to pay off the credit agreement between the Company and Wells FargoBusiness Credit, Inc. The new credit facility with Merrill Lynch consists of aline of credit of up to $2,500,000 and a reducing revolver in the amount of$3,500,000. As of June 30, 2001, $1,440,000 was outstanding under the reducingrevolver and approximately $4,560,000 was available for additional borrowings.The outstanding principal balance of all advances under this credit facilitybears interest at 2.5% over the one month LIBOR rate. Our obligations underthis credit facility are secured by substantially all of our assets other thanreal property along with a pledge of restricted cash in the amount of$2,000,000.

On December 5,2000, StockerYale Canada amended its credit agreement with Toronto DominionBank.  The credit agreement provides for(a) a $2,000,000 CDN operating line of credit; (b) a mortgage loan and (c)various term notes totaling up to $1,049,000 CDN.  The line of credit bears interest at 1% over Toronto Dominion’sprime rate, requires monthly payments of interest only, and is payable ondemand. As of June 30, 2001,  $2,869,000CDN ($1,894,000 US) had been borrowed on the line of credit. The mortgagerequires monthly principal payments of $10,797 CDN (approximately $7,200 US)plus interest at prime rate plus 0.870% and matures in December 2005. As ofJune 30, 2001, the outstanding balance on the mortgage was $1,878,717 CDN($1,240,000 US).

The term loansrequire aggregate monthly principal payments of approximately $25,000 CDN($16,750 US) plus interest ranging from the prime rate plus 1.20% to 2.0% andmature between May 2002 and December 2005. On June 30, 2001, the outstandingaggregate balance on the term loans was $383,124 CDN ($252,939 US).

Ourheadquarters in Salem, New Hampshire is subject to a mortgage and note issuedto Granite Bank on August 26, 1996 (the “Granite Note”). The Granite Note, inan initial principal amount of $1,500,000 is due August 29, 2011. The GraniteNote bears interest at a rate of 10% per annum and is reviewed annually inAugust. The principal and interest are repayable in 180 equal monthlyinstallments. In accordance with the terms of the Granite Note, we may prepayamounts outstanding thereunder, in whole or in part, at any time withoutpremium or penalty. As of June 30, 2001, the outstanding balance on the GraniteNote was $1,232,000.

On May 20, 1997we entered into an equipment line of credit agreement with Granite Bank tofinance capital equipment related to new product development. The line ofcredit provides that equipment purchases will be converted quarterly into aseries of five year notes, not to exceed $500,000 in the aggregate, bearinginterest at the bank’s prime rate plus .75%. As of June 30, 2001, we hadborrowed $136,000 pursuant to such line of credit.

From time totime, we explore possible acquisitions of companies or product lines andinvestments in joint ventures with third parties that we believe will fit withour strategic plan and complement our existing product lines. On October 12,2000, we entered into a joint venture with Dr. Nicolae Miron and formed OptuneTechnologies, Inc., a Quebec corporation, to develop a new class of tunableoptical filters.  Under the terms ofthis joint venture arrangement, we acquired a 49% equity interest in Optune andwe agreed to contribute an aggregate of $4,000,000 to be made over a two yearperiod pursuant to a fixed schedule. On April 25, 2001, we formed a limitedliability company with Dr. Danny Wong called Innovative Specialty OpticalFiber Components LLC, which will pursue the research and development of newproducts and technologies involving specialty optical fiber fortelecommunication applications. Under the terms of our agreement, we acquired a60% equity interest in the entity and agreed to contribute up to $7,000,000 infinancing. These arrangements will require us to fund a significant amount ofresearch and development costs at both joint ventures, which may require us toobtain additional financing through the future issuance of equity or debtsecurities or future borrowings.

Periodically,we contemplate raising additional capital by the issuance of equity securities,the proceeds of which may be used, among other things, to fund working capitalneed or future acquisitions and joint ventures.  Assuming our borrowing base remains at its current level orhigher and our ability to raise necessary capital, we believe that ouravailable financial resources are adequate to meet foreseeable working capital,debt service and capital expenditure requirements through the next twelvemonths.

**PARTII**

**ITEM 1.  LEGALPROCEEDINGS**

At times theCompany may be involved in disputes and/or litigation with respect to itsproducts and operations in its normal course of business.  The Company does not believe that theultimate impact of the resolution of such matters would have a material adverseeffect on the Company’s financial condition or results of operations.

**ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS**

On May 31,2001, the Company completed a private placement of 1,700,000 shares of itscommon stock, par value $.001 per share. The Company offered these shares toeighteen purchasers at $10.25 per share. The Company did not engage any underwriters in connection with theprivate placement, but the Company did enter into an agreement with WilliamBlair & Company to act as exclusive placement agent for the shares.  The Company paid a commission of $1,219,750to William Blair & Company. The private placement resulted in net proceedsto the Company of approximately $16.1 million. Proceeds will be used for working capital purposes.  In light of information received by theCompany in connection with the private placement, management believes that theprivate placement was exempt from registration under Section 4(2) of theSecurities Act of 1933.

**ITEM 4. SUBMISSION OF MATTERSTO A VOTE OF SECURITY HOLDERS**

a)          A special meeting of stockholders ofthe Company in lieu of the annual meeting was held on May 24, 2001.

b)          The following matters were presentedand voting results were as follows:

| PROPOSAL I – Election of Directors | Number  of Shares/Votes |
|-----------------------------------------|-------------------------|
|                                    |                         |
|                                    | For                     | Authority  Withheld |
|                                    |                         |  |
| Mark W. Blodgett                        | 6,610,825               | 1,739 |
| Alain Beauregard                        | 6,601,836               | 10,728 |
| Clifford L. Abbey                       | 6,610,836               | 1,728 |
| Lawrence W. Blodgett                    | 6,599,845               | 12,719 |
| Steven E. Karol                         | 6,611,116               | 1,448 |
| Dr. Herbert Cordt                       | 6,611,136               | 1,428 |
| Raymond J. Oglethorpe                   | 6,611,036               | 1,528 |

 

| PROPOSAL  II – Amending the Articles of Organization to increase the authorized shares. |                                                                                                            |
|----------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------|
|                                                                                         |                                                                                                            |
|                                                                                         | FOR:                                                                                                            | 6,445,747 |   |   |
|                                                                                         | AGAINST                                                                                                         | 165,544 |   |   |
|                                                                                         | ABSTAIN                                                                                                         | 1,273 |   |   |
|                                                                                         |                                                                                                            |   |   |
| PROPOSAL  III – Amending the Company’s 2000 Stock Option and Incentive Plan.       |                                                                                                            |
|                                                                                         |                                                                                                            |
|                                                                                         | FOR:                                                                                                            | 4,807,640 |   |
|                                                                                         | AGAINST                                                                                                         | 166,056 |   |
|                                                                                         | ABSTAIN                                                                                                         | 1,514 |   |
|                                                                                         | NON  VOTES                                                                                                      | 1,637,354 |   |
|                                                                                         |                                                                                                            |   |   |
| PROPOSAL  IV –                                                                     | Ratifying  the appointment of Arthur Andersen LLP as the Company’s independent public  accountants.   |
|                                                                                         |                                                                                                            |
|                                                                                         | FOR:                                                                                                            | 6,600,366 |   |
|                                                                                         | AGAINST                                                                                                         | 4,688 |   |
|                                                                                         | ABSTAIN                                                                                                         | 7,510 |   |
|                                                                                              |                                                                                                                 |  |  |  |  |  |  |

 

**ITEM.6 EXHIBITS, LISTS AND REPORTS ON FORM 8-K**

(a)         The following is a complete list ofExhibits filed as part of this Form 10-QSB:

| Exhibit  |                                                                                                                                                                                                                                                                                                                                     |
|----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Number   | Description                                                                                                                                                                                                                                                                                                                              |
|     |                                                                                                                                                                                                                                                                                                                                     |
| 3.1      | Amendment to the Amended and Restated Articles  of Organization of StockerYale, Inc. The Amended and Restated Articles of  Organization of StockerYale, Inc., together with all previous amendments, are  incorporated by reference to Exhibit 3.1 of StockerYale, Inc.’s Form 10-KSB  for the fiscal year ended December 31, 2000. |
|     |                                                                                                                                                                                                                                                                                                                                     |
| 10.3(e)  | Amendment No. 1 to the 2000 Stock Option and  Incentive Plan.                                                                                                                                                                                                                                                                            |
|     |                                                                                                                                                                                                                                                                                                                                     |
| 10.3(f)  | Amended Form of Incentive Stock Option  Agreement for employees under the 2000 Stock Option and Incentive Plan.                                                                                                                                                                                                                          |
|     |                                                                                                                                                                                                                                                                                                                                     |
| 10.3(g)  | Amended Form of Nonqualified Stock Option  Agreement for employees under the 2000 Stock Option and Incentive Plan.                                                                                                                                                                                                                       |
|     |                                                                                                                                                                                                                                                                                                                                     |
| 10.3(h)  | Amended Form of Nonqualified Stock Option  Agreement for Outside Directors under the 2000 Stock Option and Incentive  Plan.                                                                                                                                                                                                              |
|     |                                                                                                                                                                                                                                                                                                                                     |
| 10.4(b)  | Amendment No. 1 to the 2000 Employee Stock  Purchase Plan.                                                                                                                                                                                                                                                                               |
|     |                                                                                                                                                                                                                                                                                                                                     |
| 10.8 (a) | Credit Agreement, dated as of May 3, 2001, by  and between Merrill Lynch Financial Services Inc. and StockerYale, Inc. as  amended by letter dated May 16, 2001.                                                                                                                                                                         |
|     |                                                                                                                                                                                                                                                                                                                                     |
| 10.8 (b) | Credit Agreement, dated as of May 3, 2001, by  and between Merrill Lynch Financial Services Inc. and StockerYale, Inc. as  amended by letter dated May 16, 2001.                                                                                                                                                                         |
|     |                                                                                                                                                                                                                                                                                                                                     |
| 10.8 (c) | Financial Securities Agreement, dated as of  May 1, 2001, by and between Merrill Lynch Financial Services Inc. and  StockerYale, Inc.                                                                                                                                                                                                    |
|     |                                                                                                                                                                                                                                                                                                                                     |

(b)        Reports on Form 8-K

|   | The Company filed a report of Form 8-K on June  4, 2001 to report the completion of a private placement of 1,700,000 shares  of its common stock. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------|

 

 

**SIGNATURES**

In accordancewith the requirements of the Exchange Act, the registrant caused this report tobe signed on its behalf by the undersigned, thereto duly authorized.

StockerYale,Inc.

| August 13, 2001 |   | /s/ Mark W. Blodgett                 |
|-----------------|--------|--------------------------------------|
|            |   |                                      |
|            |   | Mark W. Blodgett,                    |
|            |   | Chairman and Chief Executive Officer |
|            |   |                                 |
| August 13, 2001 |   | /s/ Gary B. Godin                    |
|            |   |                                      |
|            |   | Gary B. Godin,                       |
|            |   | Executive Vice President-Finance and |
|            |   | Treasurer                            |

 

 

** **