**U.S. SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM 10-Q**

 

**QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF**

**THE SECURITIES EXCHANGE ACT OF 1934**

 

**FOR THEQUARTERLY PERIOD ENDED SEPTEMBER 30, 2002**

 

**Commissionfile number****0-5460**

 

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| **STOCKERYALE,  INC.**                                     |
|------------------------------------------------------------|
| (Exact name of  registrant as specified in its charter)    |
|                                                       |   |   |
| **Massachusetts**                                          |   | **04-2114473** |
| (State of  Incorporation)                                  |   | (I.R.S. Employer  Identification Number) |
|                                                       |   |   |
| **32 Hampshire Road,  Salem, New Hampshire 03079**    |
| (Address of  registrant’s principal executive office) |
|                                                       |   |   |
| **(603) 893-8778**                                         |
| (Registrant’s telephone  number)                      |

 

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Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15 (d) of the Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  ý   Yes   o   No

 

As of October 31, 2002 there were 12,453,475 shares of the issuer’scommon stock outstanding.

 

 

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**STOCKERYALE, INC.**

**INDEX TO FORM 10-Q**

** **
| **PART I – FINANCIAL INFORMATION** |
|-----------------------------------------|
|                                    |   |
| Item 1                                  | Financial Statements  (Unaudited) |
|                                    |   |
|                                    | Condensed  Consolidated Balance Sheets at September 30, 2002 and December 31, 2001 |
|                                    |   |
|                                    | Condensed  Consolidated Statement of Operations for the three and nine months ended  September 30, 2002 and 2001 |
|                                    |   |
|                                    | Condensed  Consolidated Statement of Cash Flows for the nine months ended September 30,  2002 and 2001 |
|                                    |   |
|                                    | Notes to  Condensed Consolidated Financial Statements |
|                                    |   |
| Item  2                                 | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|                                    |   |
| Item  3                                 | Quantitative  and Qualitative Disclosure About Market Risk |
|                                    |   |
| Item 4                                  | Controls  & Procedures |
|                                    |
| **PART II – OTHER INFORMATION**    |
|                                    |   |
| Item 1                                  | Legal Proceedings |
|                                    |   |
| Item 2                                  | Changes in  Securities |
|                                    |   |
| Item 3                                  | Defaults Upon Senior Securities |
|                                    |   |
| Item  4                                 | Submission  of Matters to a Vote of Security Holders |
|                                    |   |
| Item 5                                  | Other Information |
|                                    |   |
| Item  6                                 | Exhibits  and Reports on Form 8-K |
|                                    |   |
|                                    | Signature (s) |

 

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FORM  10 - Q

PART  I

ITEM  1

**ITEM 1 — FINANCIAL STATEMENTS**

 

**STOCKERYALE, INC.**

**UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS**

 (In thousands, except share and per sharedata)

 
|                                                                                                                                                |   | **September 30, 2002** |   | **December  31, 2001** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|--------|------------------------|--------|
| **ASSETS**                                                                                                                                          |   |                   |   |                   |   |
| CURRENT ASSETS:                                                                                                                                     |   |                   |   |                   |   |
| Cash and cash  equivalents                                                                                                                          |   | $                      | 2,091  |                   | $      | 1,576 |   |
| Restricted cash                                                                                                                                     |   | 2,000                  |   | 2,000                  |   |
| Trade  receivables, less reserves of $179 and $128 at September 30, 2002 and  December 31, 2001, respectively                                       |   | 2,953                  |   | 2,091                  |   |
| Inventories                                                                                                                                         |   | 4,878                  |   | 5,224                  |   |
| Prepaid expenses  and other current assets                                                                                                          |   | 919                    |   | 1,078                  |   |
| Total current  assets                                                                                                                               |   | 12,841                 |   | 11,969                 |   |
|                                                                                                                                                |   |                   |   |                   |   |
| PROPERTY, PLANT  AND EQUIPMENT, NET                                                                                                                 |   | 25,474                 |   | 25,813                 |   |
| GOODWILL, NET                                                                                                                                       |   | 2,677                  |   | 2,677                  |   |
| IDENTIFIED  INTANGIBLE ASSETS, NET                                                                                                                  |   | 1,866                  |   | 2,115                  |   |
| OFFICER NOTE  RECEIVABLE                                                                                                                            |   | 249                    |   | —                 |   |
| OTHER LONG-TERM  ASSETS                                                                                                                             |   | 494                    |   | 786                    |   |
|                                                                                                                                                |   | $                      | 43,601 |                   | $      | 43,360 |   |
|                                                                                                                                                |   |                   |   |                   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                      |   |                   |   |                   |   |
| CURRENT  LIABILITIES:                                                                                                                               |   |                   |   |                   |   |
| Current portion  of long-term debt                                                                                                                  |   | $                      | 1,714  |                   | $      | 339 |   |
| Short-term debt                                                                                                                                     |   | 7,553                  |   | 3,566                  |   |
| Accounts payable                                                                                                                                    |   | 1,775                  |   | 3,791                  |   |
| Accrued expenses                                                                                                                                    |   | 1,047                  |   | 1,438                  |   |
| Short-term lease  obligation                                                                                                                        |   | 74                     |   | 147                    |   |
| Total current  liabilities                                                                                                                          |   | 12,163                 |   | 9,281                  |   |
|                                                                                                                                                |   |                   |   |                   |   |
| LONG-TERM DEBT  AND CAPITAL LEASE OBLIGATIONS                                                                                                       |   | 1,136                  |   | 2,862                  |   |
|                                                                                                                                                |   |                   |   |                   |   |
| OTHER LONG-TERM  LIABILITIES                                                                                                                        |   | 841                    |   | 929                    |   |
|                                                                                                                                                |   |                   |   |                   |   |
| DEFERRED INCOME  TAXES                                                                                                                              |   | 205                    |   | 263                    |   |
|                                                                                                                                                |   |                   |   |                   |   |
| COMMITMENTS AND  CONTINGENCIES (SEE NOTE 5)                                                                                                         |   |                   |   |                   |   |
|                                                                                                                                                |   |                   |   |                   |   |
| STOCKHOLDERS’  EQUITY:                                                                                                                         |   |                   |   |                   |   |
| Common stock,  par value $0.001                                                                                                                     |   |                   |   |                   |   |
| Authorized—100,000,000,  Issued and outstanding—12,453,475 and  11,391,825 at September 30, 2002 and December 31, 2001, respectively |   | 13                     |   | 11                     |   |
| Paid-in capital                                                                                                                                     |   | 68,367                 |   | 58,309                 |   |
| Accumulated  other comprehensive loss                                                                                                               |   | (438)                  |   | (381                   | )      |
| Accumulated  deficit                                                                                                                                |   | (38,686                | )      | (27,914                | )      |
| Total  stockholders’ equity                                                                                                                    |   | 29,256                 |   | 30,025                 |   |
|                                                                                                                                                |   | $                      | 43,601 |                   | $      | 43,360 |   |

 

*See notes to unaudited condensedconsolidated financial statements.*

 

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**STOCKERYALE, INC.**

**UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

(Inthousands, except per share data)

 
|                                              |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|---------------------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                                              |   | **2002**                              |   | **2001**                             |   | **2002** |   | **2001** |   |
|                                              |   |                                  |   |                                 |   |   |   |   |   |
| NET SALES                                         |   | $                                     | 3,456  |                                 | $      | 3,663 |   | $ | 9,887 |   | $ | 12,183 |   |
| COST OF SALES                                     |   | 2,758                                 |   | 2,692                                |   | 8,249 |   | 7,723 |   |
| Gross Profit                                      |   | 698                                   |   | 971                                  |   | 1,638 |   | 4,460 |   |
|                                              |   |                                  |   |                                 |   |   |   |   |   |
| OPERATING  EXPENSES:                              |   |                                  |   |                                 |   |   |   |   |   |
| Selling Expenses                                  |   | 704                                   |   | 1,178                                |   | 2,607 |   | 3,122 |   |
| General and  Administrative Expenses              |   | 1,013                                 |   | 2,226                                |   | 4,312 |   | 5,997 |   |
| Amortization  Expense                             |   | 81                                    |   | 171                                  |   | 250 |   | 509 |   |
| Research and  Development Expenses                |   | 1,488                                 |   | 1,293                                |   | 5,241 |   | 2,986 |   |
| Total Operating Expenses                          |   | 3,286                                 |   | 4,868                                |   | 12,410 |   | 12,614 |   |
|                                              |   |                                  |   |                                 |   |   |   |   |   |
| Operating Loss                                    |   | (2,588                                | )      | (3,897                               | )      | (10,772 | ) | (8,154 | ) |
|                                              |   |                                  |   |                                 |   |   |   |   |   |
| Interest and  Other Income/(Expense)              |   | 75                                    |   | 31                                   |   | 265 |   | 257 |   |
| Interest Expense                                  |   | 95                                    |   | 224                                  |   | 265 |   | 513 |   |
|                                              |   |                                  |   |                                 |   |   |   |   |   |
| Loss from  Operations Before Income Tax           |   | (2,608                                | )      | (4,090                               | )      | (10,772 | ) | (8,410 | ) |
|                                              |   |                                  |   |                                 |   |   |   |   |   |
| Income Tax  (Benefit)                             |   | —                                |   | (30                                  | )      | — |   | (96 | ) |
|                                              |   |                                  |   |                                 |   |   |   |   |   |
| Net Loss                                          |   | $                                     | (2,608 | )                                    | $      | (4,060 | ) | $ | (10,772 | ) | $ | (8,314 | ) |
|                                              |   |                                  |   |                                 |   |   |   |   |   |
| Net Loss per  Share-Basic and Diluted             |   | $                                     | (0.20  | )                                    | $      | (0.36 | ) | $ | (0.85 | ) | $ | (0.80 | ) |
|                                              |   |                                  |   |                                 |   |   |   |   |   |
| Weighted Average  Common Shares-Basic and Diluted |   | 12,771,524                            |   | 11,336,592                           |   | 12,656,020 |   | 10,446,697 |   |

 

*Seenotes to unaudited condensed consolidated financial statements.*

 

2

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**STOCKERYALE, INC.**

**UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

(Inthousands)

 
|                                                                              |   | **Nine Months Ended  September 30,** |    |
|-----------------------------------------------------------------------------------|--------|--------------------------------------|---------|
|                                                                              |   | **2002**                             |    | **2001** |   |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                            |   |                                 |    |   |   |
| Net loss                                                                          |   | $                                    | (10,772 | ) | $ | (8,123 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities— |   |                                 |    |   |   |
| Depreciation and  amortization                                                    |   | 2,029                                |    | 1,336 |   |
| Deferred income  taxes                                                            |   | (58                                  | )       | (95 | ) |
| Loss on  investment in joint venture                                              |   | 287                                  |    | 218 |   |
| Other changes in  assets and liabilities—                                    |   |                                 |    |   |   |
| Accounts  receivable, net                                                         |   | (602                                 | )       | 218 |   |
| (Increase)  decrease in officer note receivable                                   |   | (249                                 | )       | — |   |
| Inventories                                                                       |   | 346                                  |    | (1,261 | ) |
| Prepaid expenses  and other current assets                                        |   | 159                                  |    | (1,142 | ) |
| Accounts payable                                                                  |   | (2,016                               | )       | 4,859 |   |
| Accrued expenses                                                                  |   | (558)                                |    | (647 | ) |
| Net cash  provided by (used in) operating activities                              |   | (11,434                              | )       | (4,637 | ) |
|                                                                              |   |                                 |    |   |   |
| CASH FLOWS USED  FOR INVESTING ACTIVITIES:                                        |   |                                 |    |   |   |
| Purchases of  property, plant and equipment                                       |   | (1,241                               | )       | (13,357 | ) |
| Net investment  in joint venture                                                  |   | (260                                 | )       | (600 | ) |
| Net proceeds  from the sale of discontinued operations                            |   | —                               |    | 659 |   |
| Restricted cash  related to line of credit                                        |   | —                               |    | (1,500 | ) |
| Net cash used in  investing activities                                            |   | (1,501                               | )       | (14,798 | ) |
|                                                                              |   |                                 |    |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                            |   |                                 |    |   |   |
| Proceeds from  sale of common stock                                               |   | 9,860                                |    | 16,306 |   |
| Borrowings  (repayments) of bank debt                                             |   | 3,563                                |    | 402 |   |
| (Increase)  decrease in note receivable                                           |   | 84                                   |    | 65 |   |
| Net cash  provided by (used in) financing activities                              |   | 13,507                               |    | 16,773 |   |
|                                                                              |   |                                 |    |   |   |
| EFFECT OF  EXCHANGE RATE ON CHANGES IN CASH                                       |   | (57                                  | )  | (256 | ) |
|                                                                              |   |                                 |    |   |   |
| NET INCREASE  (DECREASE)  IN CASH AND CASH  EQUIVALENTS                      |   | 515                                  |    | (2,918 | )  |
|                                                                              |   |                                 |    |   |   |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF PERIOD                                   |   | 1,576                                |    | 12,487 |   |
| CASH AND CASH  EQUIVALENTS, END OF PERIOD                                         |   | $                                    | 2,091   |   | $ | 9,569 |   |
|                                                                              |   |                                 |    |   |   |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:                                |   |                                 |    |   |   |
| Interest paid                                                                     |   | $                                    | 265     |   | $ | 513 |   |
| Stock issued in  Ciena acquisition                                                |   | $                                    | 200     |   | $ | — |   |

 

*Seenotes to unaudited condensed consolidated financial statements.*

 

3

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**STOCKERYALE, INC.**

**Notes to Consolidated FinancialStatements**

**September 30, 2002**

 

1.     BASIS OF PRESENTATION

 

The interim consolidated financial statements presented have beenprepared by StockerYale, Inc. (the “Company”) without audit and, in the opinionof the management, reflect all adjustments of a normal recurring naturenecessary for a fair statement of (a) the results of operations for the threeand nine months ended September 30, 2002 and 2001, (b) the financial positionat September 30, 2002 and December 31, 2001, and (c) the cash flows for thenine month periods ended  September 30,2002 and 2001. These interim results are not necessarily indicative of resultsfor a full year or any other interim period.

 

The consolidated balance sheet presented as of December 31, 2001, hasbeen derived from the consolidated financial statements that have been auditedby independent public accountants. The consolidated financial statements andnotes are condensed as permitted by Form 10-Q and do not contain certaininformation included in the annual financial statements and notes of theCompany. The consolidated financial statements and notes included herein shouldbe read in conjunction with the consolidated financial statements and notesincluded in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2001.

 

2.     EARNINGS PER SHARE

 

In accordance with Statement of Financial Accounting Standards (“SFAS”)No. 128, *Earnings per Share*,basic and diluted net loss per common share for the three and nine months endedSeptember 30, 2002 and 2001 is calculated by dividing the net loss applicableto common stockholders by the weighted average number of common sharesoutstanding. There were 2,938,417 and 2,232,124 options outstanding as ofSeptember 30, 2002 and 2001, respectively which were not included in thediluted per share calculation because their inclusion would be anti-dilutive.

 

4

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3.       INVENTORIES

 

Inventories are stated atthe lower of cost (first-in, first-out basis) or market and include materials,labor and overhead. Inventories are as follows:

 

|            |   | **September  30, 2002** |   | **December  31, 2001** |   |
|-----------------|--------|-------------------------|--------|------------------------|--------|
|            |   | **(in  thousands)**     |   |
|            |   |                    |   |                   |   |
| Finished goods  |   | $                       | 1,061  |                   | $      | 1,040 |   |
| Work-in-process |   | 68                      |   | 121                    |   |
| Raw materials   |   | 3,749                   |   | 4,063                  |   |
|            |   |                    |   |                   |   |
|            |   | $                       | 4,878  |                   | $      | 5,224 |   |

 

Management performsperiodic reviews of inventory and disposes of items as required

 

4.       COMPREHENSIVE INCOME/(LOSS)

 

SFAS No. 130, *Reporting Comprehensive Income,* requiresdisclosure of all components of comprehensive income (loss) on an annual andinterim basis. Comprehensive income (loss) is defined as the change in equityof a business enterprise during a period from transactions and other events andcircumstances from non-owner sources. The Company’s total comprehensive income(loss) is as follows:

 
|                                    |   | **Three Months Ended** |   | **Nine Months Ended**  |   |
|-----------------------------------------|--------|------------------------|--------|------------------------|--------|
|                                    |   | **September 30, 2002** |   | **September 30, 2001** |   | **September 30, 2002** |   | **September 30, 2001** |   |
|                                    |   | **(In thousands)**     |   |
|                                    |   |                   |   |                   |   |   |   |   |   |
| Net loss                                |   | $                      | (2,608 | )                      | $      | (4,060 | ) | $ | (10,772 | ) | $ | (8,314 | ) |
| Other comprehensive income (loss):      |   |                   |   |                   |   |   |   |   |   |
| Cumulative translation  adjustment |   | (523                   | )      | (259                   | )      | (57 | ) | (256 | ) |
| Comprehensive loss                      |   | $                      | (3,131 | )                      | $      | (4,319 | ) | $ | (10,829 | ) | $ | (8,570 | ) |

 

5

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5.       JOINT VENTURES

 

Optune Technologies

 

On October 12, 2000, theCompany 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, the Company owns a 49% equity interest inOptune and the Company agreed to contribute an aggregate of $4,000,000 to coverall operating costs of the joint venture including salaries, equipment andfacility costs. The contributions are to be made over a two-year periodpursuant to a fixed milestone schedule. The Company is recording 100% of thelosses associated with the research and development joint venture in theaccompanying statement of operations as research and development expense. TheCompany provided approximately $936,000 CDN ($600,000 USD) through December 31,2001. For the three months ended September 30, 2002 and 2001, the Company hasprovided $0 CDN ($0 USD) and $70,000 CDN ($46,000 USD) of funding to the jointventure and recorded approximately $0 and $108,000 of research and developmentexpenses related to the operating losses, respectively. The Company hasprovided $394,000 CDN ($260,000 USD) and $210,000 CDN ($137,000 USD) of fundingto the joint venture and recorded approximately $287,000 USD and $218,000 USDof research and development expenses related to the operating losses for thenine months ending September 30, 2002 and 2001, respectively.

 

The Board of Directors ofthe joint venture, which includes Dr. Nicolae Miron and representatives ofStockerYale, held four meetings over the prior ten months to discuss productdevelopment progress as well as the market for tunable optical filters in lightof the economic conditions that had negatively impacted the telecommunicationsmarket.

 

The Board concluded thatalthough the potential demand for the tunable optical filters was promising,that material product and/or license revenue from the technology in the shortterm was unlikely. Therefore, the Board on August 8, 2002 unanimously approvedan amendment to the original joint venture agreement, whereby StockerYale wouldcease funding the joint venture and was no longer obligated to fund up to the$4,000,000 as originally contemplated in the joint venture. Both Dr. Miron andStockerYale will continue to own 51% and 49%, respectively of the jointventure.

 

On August 23, 2002,Optune entered into an agreement with Inno-centre, an organization dedicated tohelping advanced technology entrepreneurs start up commercial ventures,whereby  Inno-centre will provideassistance, services as well as assist on raising capital in exchange for  up to 15% of Optune’s capital.

 

 

Innovative SpecialtyOptical Fiber Components LLC

 

In April 2001, theCompany entered into a research and development joint venture agreement to formInnovative Specialty Optical Fiber Components LLC (“iSOFC”) with Dr. Danny Wongto develop specialty optical fiber products. In exchange for a 60% ownershipinterest in iSOFC, the Company has committed to fund up to $7.0 million over atwo-year period to cover all operating costs of the majority owned subsidiary,including salaries, equipment and facility costs. ISOFC has been consolidatedby the Company and the Company has recorded 100% of the losses associated withiSOFC as research and development expense in the accompanying statement ofoperations. The Company provided approximately $418,000 of funding throughDecember 31, 2001. During the three months ended September 30, 2002 and 2001,the Company did not provide  fundingrelated to the iSOFC joint venture and recorded $77,000 and $0 of research anddevelopment expenses relating to the operating losses for the three monthsending September 30, 2002 and 2001, respectively. During the nine months endingSeptember 30, 2002 and 2001, the Company has provided $298,000 and $0 offunding related to the iSOFC joint venture, and recorded $587,000 and $0 ofresearch and development expenses relating to the operating losses for the ninemonths ending September 30, 2002 and 2001, respectively.

 

Dr. Wong resigned fromiSOFC on May 22, 2002. In a letter sent to Dr. Wong on August 19, 2002, iSOFC exercised its right under the LimitedLiability Company Agreement to repurchase Dr. Wong’s entire equity interest inthe joint venture for fair market value. Although he had the right to disputethe repurchase price within ten business days, Dr. Wong did not respond to theexercise notice and the repurchase was effective as of August 29, 2002.

 

As a result, StockerYalecurrently owns 100% of iSOFC, which has revised its business plan to operate asa wholly-owned subsidiary of StockerYale funded on a significantly reduced “asneeded” basis,  and StockerYale is nolonger obligated to fund up to the $7,000,000 as originally contemplated in thejoint venture.

 

6

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6.       USE OF ESTIMATES

 

The preparation offinancial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities as of the date of the financial statements and thereported amounts of income and expenses during the reporting periods. Actualresults in the future could vary from the amounts derived from management’sestimates and assumptions.

 

7.       REVENUE RECOGNITION

 

The Company recognizesrevenue from product sales at the time of shipment and when persuasive evidenceof an arrangement exists, performance of seller’s obligation is complete, seller’sprice to the buyer is fixed or determinable, and collectibility is reasonablyassured.  If a loss is anticipated onany contract, a provision for the entire loss is made immediately.

 

8.       RECENT ACCOUNTING PROUNCEMENTS

 

In June 2001, the FASBissued SFAS No. 141, *Business Combinations*.SFAS No. 141 requires that all business combinations be accounted for under thepurchase method only and that certain acquired intangible assets in a businesscombination be recognized as assets apart from goodwill. SFAS No. 141 iseffective for all business combinations initiated after June 30, 2001 and forall business combinations accounted for by the purchase method for which thedate of acquisition is after June 30, 2001. The adoption of SFAS No. 141 didnot have a material effect on the Company’s financial position or results ofoperations.

 

In June 2001, the FASBissued SFAS No. 142, *Goodwill and OtherIntangible Assets*, which requires that the ratable amortization ofgoodwill and indefinite lived intangibles be replaced with periodic impairmenttests and that most intangible assets other than goodwill be amortized overtheir useful lives. Certain intangibles will be allowed indefinite lives andwill not be amortized but rather evaluated for impairment annually based onfair market value. The provisions of SFAS No. 142 are effective for fiscalyears beginning after December 15, 2001. The Company has initially applied SFASNo. 142 and ceased goodwill amortization as of January 1, 2002. Management hasreviewed SFAS No. 142 and performed the test during fiscal 2002 and determinedthat there has been no impairment of goodwill. In addition, the Company willcontinue to amortize definite lived intangible assets over their useful lives.Goodwill amortization was $171,000 and $509,000 for the three and nine monthsended September 30, 2001, respectively. Proforma net loss for the three andnine months ended September 30, 2001 would have been $3.9 million and $7.8million, respectively, excluding goodwill amortization expense. Proforma basicand diluted loss per share for three and nine months ended September 30, 2001would have been $0.34 and $0.75, respectively.

 

7

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In July 2001, the FASBissued SFAS No. 144, Accounting for the Impairment or Disposal of Long-LivedAssets. SFAS No. 144 supercedes SFAS No. 121, Accounting for the Impairment ofLong-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 144applies to all long-lived assets (including discontinued operations) andconsequently amends APB Opinion No. 30, Reporting Results ofOperations-Reporting the Effects of Disposal of a Segment of a Business. SFASNo. 144 is effective for financial statements issued for fiscal years beginningafter December 15, 2001 and thus will be adopted by the Company, as required,on January 1, 2002. Management is currently determining what effect, if any,SFAS No. 144 will have on its financial position and results of operations.

 

In June 2002, the FASBissued Statement No. 146, Accounting for Costs Associated with Exit or DisposalActivities. This Statement requires recording costs associated with exit ordisposal activities at their fair values when a liability has been incurred.Under previous guidance, certain exit costs were accrued upon management’scommitment to an exit plan, which is generally before an actual liability hasbeen incurred. Adoption of this Statement is required with the beginning offiscal year 2003. The Company has not yet completed its evaluation of the impactof adopting this Statement.

 

9.       LOANS TO OFFICERS

 

On May 31, 2002, Mark W.Blodgett, the chairman and chief executive officer of the Company, issued apromissory note to the Company in the principal amount of $250,000. The note ispayable upon demand with interest on the unpaid principal accruing at a rateper annum equal to 4.5%. As of September 30, 2002 the principal amount of$248,750 remains outstanding. The Board of Directors of the Company approvedthis loan transaction.

 

10.     CIENA ACQUISITION

 

On May 13, 2002, theCompany announced the acquisition of Ciena Corporation’s specialty opticalfiber (SOF) assets. StockerYale entered into the transaction to expand itscurrent product line of specialty optical fibers; become an independentsupplier to a major OEM in the telecommunications sector; and take advantage ofdistressed prices for capital assets. The acquisition included intellectualproperty related to Ciena’s specialty optical fiber technology; a fullydeveloped SOF product line; a three-year primary supply agreement between Cienaand the Company; and Ciena’s specialty fiber manufacturing equipment andrelated test and measurement assets. The purchase price of $550,000 includedcash and stock of $350,000 and $200,000, respectively. Subsequent to closingthe transaction, StockerYale paid an additional $25,000 to fulfill its purchaseand sales obligations, resulting in a total purchase price of $575,000.

 

 

11.     INCOME TAXES

 

In accordance with SFASNo. 109, Accounting for Income Taxes, the Company has recorded a valuationallowance against its net deferred tax assets in 2002 and 2001 after concludingthat it is not likely such deferred tax asset will be realized.

 

8

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FORM 10 - Q

PART  I

ITEM  2

 

**STOCKERYALE, INC.**

**ITEM 2.****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND OPERATINGRESULTS**

 

***This Quarterly Report on Form 10-Q containsforward-looking statements within the meaning of Section 27A of the SecuritiesAct of 1933 and Section 21E of the Securities Exchange Act of 1934.  The Company’s actual results could differmaterially from those set forth in the forward-looking statements****. **When theCompany use words such as “anticipate,” “believe,” “estimate,” “expect,”“intend,” and other similar expressions, they generally identifyforward-looking statements. Forward-looking statements include, for example, statements relating toacquisitions and related financial information, development activities, businessstrategy and prospects, future capital expenditures, sources and availabilityof capital, environmental and other regulations and competition.  Investors should exercise caution ininterpreting and relying on forward-looking statements since they involve knownrisks, uncertainties and other factors which are, in some cases, beyond theCompany’s control and could materially affect our actual results, performanceor achievements.******Such factors include, without limitation: market conditions that couldmake it more difficult or expensive for the Company to obtain the necessarycapital to finance strategic initiatives; the existence of other independentsuppliers of optical fiber, who may have greater resources than the Company;and the uncertainty that the Company’s significant investments in R&D willnot result in products that achieve market acceptance.  Additional such factors are discussed in theSection entitled “Certain Factors Affecting Future Operating Results” on page25 of the Company’s Annual Report on Form 10-K for the fiscal year ended December31, 2001.***

 

### **RESULTS OFOPERATIONS**

 

The following discussion should be read in conjunction with theattached consolidated financial statements and notes thereto and with ouraudited financial statements and notes thereto included in the Company’s AnnualReport on Form 10-K for the year ended December 31, 2001.

 

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### **Three MonthsEnded  September 30, 2002 and 2001**

 

#### Net Sales

 

Net sales declined $0.2 million or 5% to $3.5 million as a sharpdecline of $1.0 million in phase mask revenue related to recent weakness in thetelecommunications sector was mostly offset by continued strong demand forlasers and LEDs for the machine vision sector, with a sales gain of $0.2million and $0.6 million, respectively.

 

#### Gross Profit

 

Gross profit in the third quarter of 2002 declined $0.3 million or 28%as a result of  lower revenue, highermanufacturing overhead and an unfavorable product mix. The higher manufacturingoverhead, especially depreciation, was due to the infrastructure build-outcosts, which began in the second half of 2001.

 

#### Operating Expenses

 

Overall operating expenses declined $1.6 million or 32% to $3.3 millionas reduced selling and general and administrative expenses offset higherresearch and development costs.  Reducedsalaries, trade show and commission expenses accounted for the $0.4 milliondecrease in selling expenses while lower salaries, employee benefits, traveland professional fees generated the majority of the $1.1 million savings forgeneral and administrative expenses. Higher depreciation expenses were theprincipal factors influencing the $0.2 million increase in research anddevelopment costs.

 

Interest expense declined $0.1 million in the third quarter as lowerinterest rates offset a higher level of borrowing.

 

#### Provision (Benefit) for Income Taxes

 

The Company did not record a net tax benefit from the operating loss inthe current quarter of 2002.  Based uponhistorical losses, the Company has provided a valuation allowance for thedeferred tax assets that may not be realized.

 

#### Net Income (Loss)

 

Net loss for the third quarter of 2002 was 2.6 million, a decrease of$1.5 million or 36% from the third quarter of 2001.

 

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### **Nine Months EndedSeptember 30, 2002 and 2001**

 

#### Net Sales

 

Net sales of $9.9 million declined $2.3 million or 19% as  illumination shipments slowed byapproximately $0.1 million and optical components shipments slowed byapproximately $2.0 million. The downturn in the telecommunications industry wasthe primary factor influencing the lower revenue performance.

 

#### Gross Profit

 

Gross profits for the nine months ended September 30, 2002 dropped  $2.8 million to $1.6 million or 16% ofrevenue compared to 37% of revenue in 2001. A lower sales volume represented$0.8 million of the decline, while higher manufacturing overhead and anunfavorable product mix accounted for $2.0 million of the margin erosion.

 

#### Operating Expenses

 

Operating expenses decreased $0.2 million or 2% to $12.4 million aslower selling and general and administrative expenses offset a sharp increasein research and development costs. Increased staffing and depreciation costs resulted in research anddevelopment expenses rising $2.3 million to $5.2 million. Lower professionalfees, travel and overhead costs accounted for the majority of the $1.7millionof general and administrative expense savings, while reduced trade show andtravel expenses accounted for $0.5 million decrease in selling expenses.

 

Interest expenses declined $0.3 million during the nine months endedSeptember 30, 2002 as lower interest rates offset a higher level of debt.

 

#### Provision (Benefit) for Income Taxes

 

The Company did not record a net tax benefit from the operating lossesduring the period ended September 30, 2002. Based upon historical losses, the Company has provided a valuationallowance for the deferred tax assets that may not be realized.

 

#### Net Income (Loss)

 

The net loss of $10.8 million for the nine months ended September 30,2002 was $2.4 million higher than nine months ended September 30, 2001.

 

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### **Liquidity andCapital Resources**

 

For the nine months ended September 30, 2002, unrestricted cash andcash equivalents increased $0.5 million compared to December 31, 2001. Cashused in operating activities was $11.4 million in the nine months of fiscal2002 which primarily resulted from an operating loss of $10.8 million and adecrease in accounts payable and accrued expenses of $2.6 million offset bydepreciation and amortization of $2 million.

 

Cash used in investing activities was $1.5 million principally due toan increase in capital assets of $1.2 and an investment in the Optune jointventure of $ 0.2 million.  Included incapital assets was approximately $0.5 million of fixed assets purchased fromCiena Corporation in the second quarter of 2002.

 

Cash of $13.5 million was provided by financing activities primarilydue to the receipt of $9.7 million from the sale of 1,242,600 shares at $7.76 ina private placement of common stock in March of 2002 and an increase in netproceeds from bank debt of $3.6 million.

 

On May 19, 2001, the Company entered into a credit agreement withMerrill Lynch Financial Services, Inc. providing total borrowing availabilityup to $6,000,000. Initial proceeds were used to pay off the credit agreementbetween the Company and Wells Fargo Business Credit, Inc. The new creditfacility with Merrill Lynch consists of a line of credit of up to $2,500,000and a reducing revolver in the amount of $3,500,000. On April 24, 2002, theCompany entered into an amendment of the credit agreement, which increased theborrowing availability up to $7,000,000 by increasing the line of credit to$3,500,000 and maintaining the reducing revolver at $3,500,000. As of September30, 2002, $2,999,999 was outstanding under the reducing revolver and 3,483,491was outstanding under the line of credit. Approximately $516, 510 was availablefor additional borrowings through the reducing revolver and the line of credit.The outstanding principal balance of all advances under this credit facilitybears interest at 2.5% over the one month LIBOR rate. As of September 30, 2002the interest rate was approximately 4.3%. The Company’s obligations under thiscredit facility are secured by substantially all the Company’s assets,excluding real property, plus a pledge of restricted cash in the amount of$2,000,000. In addition, the Company is required to maintain a $7.8 millionTangible Net Worth. The Company is in compliance with all provisions of thecredit agreement. These restrictions will lapse when the Company achievesprofitability or at such time as no balance is outstanding. The reducingrevolver is a seven-year loan with monthly principal and interest payments. Theline of credit is subject to an annual renewal.

 

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The Company’s headquarters in Salem, New Hampshire is subject to amortgage and note issued to Granite Bank on August 26, 1996 (the “Granite Note”).The Granite Note, in an initial principal amount of $1,500,000 is due August29, 2011. The Granite Note bears interest at a rate of 5.75% per annum and isreviewed annually in August and adjusted to an interest rate of prime plus 1%for the next twelve month period. The principal and interest are repayable in180 equal monthly installments. In accordance with the terms of the GraniteNote, the Company may prepay amounts outstanding there under, in whole or inpart, at any time without premium or penalty. As of September 30, 2002, theoutstanding balance on the Granite Note was $1,129,312.

 

On May 20, 1997, the Company entered into an equipment line of creditagreement with Granite Bank to finance capital equipment related to new productdevelopment. The line of credit provides that equipment purchases will beconverted quarterly into a series of five year notes, not to exceed $500,000 inthe aggregate, bearing interest at the bank’s prime rate plus .75%.  As of September 30, 2002, the Company hadborrowed $29,682 pursuant to such line of credit.

 

On December 5, 2000, StockerYale Canada amended its credit agreementwith Toronto Dominion Bank.  The creditagreement provides for (a) a $3,500,000 CDN operating line of credit of which$1,000,000 CDN must be offset by credit balances; (b) two mortgage loans for$2,020,000 CDN and (c) four term notes totaling up to $1,049,000 CDN. The lineof credit bears interest at 1% over Toronto Dominion’s prime rate, requiresmonthly payments of interest only, and is payable on demand.  As of September 30, 2002, $1,493,934 CDN($942,523 US) was outstanding under the line of credit and approximately$2,006,066 ($1,265,627 US) was available for additional borrowings. Themortgage requires monthly principal payments of $10,797 CDN (approximately$7,200 US) and $1,111 CDN (approximately $698 US) plus interest at prime rateplus 0.875% and mature in December 2015 and July 2016. As of September 30,2002, the outstanding balance on the mortgage loans was $1,901,205 CDN($1,199,470 US). The four term loans require monthly principle payments ofapproximately $36,125 CDN ($22,694 US) plus interest ranging from the primerate plus 1.25% to 2.0% and mature between May 2002 and October 2006. OnSeptember 30, 2002, the outstanding aggregate balance on the term loans was$636,581 CDN ($401,619 US). Under the credit agreement with Toronto DominionBank, the Company is required to maintain three financial covenants, including,1.) working capital, 2.) debt service coverage and 3.) debt to tangible networth. As of September 30, 2002, the Company was in compliance with the workingcapital and debt to tangible net worth covenants but not in compliance with thedebt service coverage. Toronto Dominion Bank has issued a waiver to thecovenant, however under SFAS No. 78, *Classificationof Obligations that are Callable by the Creditor*, the Company isrequired to re-classify all long-term obligations with the bank as current.Therefore, the Company has re-classified the long-term portion of the mortgageand term loans $1,200,000 and $402,000 respectively, to current portion oflong-term debt.

 

On October 12, 2000, the Company entered into a joint venture with Dr.Nicolae Miron and formed Optune Technologies, Inc., a Quebec corporation, todevelop a new class of tunable optical filters.  Under the terms of this joint venture arrangement, the Companyowns a 49% equity interest in Optune and the Company agreed to contribute anaggregate of $4,000,000 to cover all operating costs of the joint ventureincluding salaries, equipment and facility costs. The contributions are to bemade over a two-year period pursuant to a fixed milestone schedule. The Companyis recording 100% of the losses associated with the research and developmentjoint venture in the accompanying statement of operations as research anddevelopment expense. The Company provided approximately $936,000 CDN ($600,000USD) through December 31, 2001.

 

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For the three months ended September 30, 2002 and 2001, the Company hasprovided $0 CDN ($0 USD) and $70,000 CDN ($46,000 USD) of funding to the jointventure and recorded approximately $0 and $108,000 of research and developmentexpenses related to the operating losses, respectively. The Company has provided$394,000 CDN ($260,000 USD) and $210,000 CDN ($137,000 USD) of funding to thejoint venture and recorded approximately $287,000 USD and $218,000 USD ofresearch and development expenses related to the operating losses for the ninemonths ending September 30, 2002 and 2001, respectively.

 

The Board of Directors of the joint venture, which includes Dr. NicolaeMiron and representatives of StockerYale, held four meetings over the prior tenmonths to discuss product development progress as well as the market fortunable optical filters in light of the economic conditions that had negativelyimpacted the telecommunications market.

 

The Board concluded that although the potential demand for the tunableoptical filters was promising, that the product and/or license revenue from thetechnology in the short term was unlikely. Therefore, the Board on August 8,2002 unanimously approved an amendment to the original joint venture agreement,whereby StockerYale would cease funding the joint venture and was no longerobligated to fund up to the $4,000,000 as originally contemplated in the jointventure. Both Dr. Miron and StockerYale will continue to own 51% and 49%,respectively of the joint venture.

 

On August 23, 2002, Optune entered into an agreement with Inno-centre,an organization dedicated to helping advanced technology entrepreneurs start upcommercial ventures, whereby Inno-centre will provide assistance, services as well as assist onraising capital in exchange for  up to15% of Optune’s capital.

 

In April 2001, the Company entered into a research and developmentjoint venture agreement to form Innovative Specialty Optical Fiber ComponentsLLC (“iSOFC”) with Dr. Danny Wong to develop specialty optical fiber products.In exchange for a 60% ownership interest in iSOFC, the Company has committed tofund up to $7.0 million over a two-year period to cover all operating costs ofthe majority owned subsidiary, including salaries, equipment and facilitycosts. iSOFC has been consolidated by the Company and the Company has recorded100% of the losses associated with iSOFC as research and development expense inthe accompanying statement of operations. The Company provided approximately$418,000 of funding through December 31, 2001. During the three months endedSeptember 30, 2002 and 2001, the Company did not provide  funding related to the iSOFC joint ventureand recorded $77,000 and $0 of research and development expenses relating tothe operating losses for the three months ending September 30, 2002 and 2001,respectively. During the nine months ending September 30, 2002 and 2001, theCompany has provided $298,000 and $0 of funding related to the iSOFC jointventure, and recorded $587,000 and $0 of research and development expensesrelating to the operating losses for the nine months ending September 30, 2002and 2001, respectively.

 

Dr. Wong resigned from iSOFC on May 22, 2002. In a letter sent to  Dr. Wong on August 19, 2002, iSOFC exercisedits right under the Limited Liability Company Agreement to repurchase Dr. Wong’sentire equity interest in the joint venture for fair market value. Although hehad the right to dispute the repurchase price within ten business days, Dr.Wong did not respond to the exercise notice and the repurchase was effective asof August 29, 2002.

 

As a result, StockerYale currently owns 100% of iSOFC, which hasrevised its business plan to operate as a wholly-owned subsidiary ofStockerYale funded on a significantly reduced “as needed” basis,  and StockerYale is no longer obligated tofund up to the $7,000,000 as originally contemplated in the joint venture.

 

As a result of stabilized revenue from current product lines as well asnew revenue opportunities from the Company’s recently developed specialtyoptical fibers; significantly reduced capital expenditures and an additional$4.0 million annualized cost reduction implemented in October, the Companyexpects to have sufficient resources to fund operations through year-end 2002.However, the Company is currently reviewing several financing options,including a possible sale/leaseback of its Salem facilities, to provide abuffer to its forecast and thus provide the Company with flexibility in fundingits short and long-term goals. The Company expects internal cash flows coupledwith additional real estate financing will be more than sufficient to fundoperations through 2003.

 

*Critical Accounting Policies,Commitments and Certain Other Matters*

 

The Company considered the disclosure requirements of FR-60 regardingcritical accounting policies and FR-61 regarding liquidity and capitalresources, certain trading activities and related party/certain otherdisclosures, and concluded that nothing materially changed during the quarterthat would warrant further disclosure under these releases.

 

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FORM10 - Q

PART  I

ITEM  3

 

**STOCKERYALE, INC.**

 

## **ITEM 3.**QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

Foreign Currency Exchange Risk Management has determined that all ofthe Company’s foreign subsidiaries operate primarily in local currencies thatrepresent the functional currencies of the subsidiaries. All assets andliabilities of foreign subsidiaries are translated into U.S. dollars using theexchange rate prevailing at the balance sheet date, while income and expenseaccounts are translated at average exchange rates during the year. As such, theCompany’s operating results are affected by fluctuations in the value of theU.S. dollar as compared to currencies in foreign countries, as a result of theCompany’s transactions in these foreign markets. The Company does not operate ahedging program to mitigate the effect of a significant rapid change in thevalue of the Canadian Dollar or Euro as compared to the U.S. dollar. If such achange did occur, the Company would have to take into account a currencyexchange gain or loss in the amount of the change in the U.S. dollardenominated balance of the amounts outstanding at the time of such change.While the Company does not believe such a gain or loss is likely, and would notlikely be material, there can be no assurance that such a loss would not havean adverse material effect on the Company’s results of operations or financialcondition.

 

### **Interest Rate Risk**

 

The Company is exposed to market risk from changes in interest rates,which may adversely affect its financial position, results of operations andcash flows. In seeking to minimize the risks from interest rate fluctuations,the Company manages exposures through its regular operating and financing activities.The Company is exposed to interest rate risk primarily through its borrowingsunder its $3.5 million credit line with Merrill Lynch with an interest rate at2.5% over the one month LIBOR and its $3.5 million CDN line of credit withToronto Dominion bank with an interest rate at 1% over Toronto Dominion’s primerate. As of September 30, 2002 the fair market value of the Company’soutstanding debt approximates its carrying value.

 

 

## **ITEM4**. CONTROLS AND PROCEDURES

 

(a)  Evaluation of disclosure controls andprocedures.

 

As required by newRule 13a-15 under the Securities Exchange Act of 1934, within the 90 days priorto the date of this report, the Company carried out an evaluation under thesupervision and with the participation of the Company’s management, includingthe Company’s Chief Executive Officer and Chief Financial Officer, of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures.  Based upon thatevaluation, the Chief Executive Officer and Chief Financial Officer concludedthat the Company’s disclosure controls and procedures are effective to ensurethat information required to be disclosed by the Company in the reports itfiles or submits under the Exchange Act is recorded, processed, summarized and reported,within the time periods specified in the Securities and Exchange Commission’srules and forms.  In connection with thenew rules, we currently are in the process of further reviewing and documentingour disclosure controls and procedures, including our internal controls andprocedures for financial reporting, and may from time to time make changesaimed at enhancing their effectiveness and to ensure that our systems evolvewith our business.

 

(b)    Changes in internal controls

 

None

 

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FORM 10- Q

PART  II

ITEM  1-4

 

**STOCKERYALE,INC.**

**PARTII — Other Information**

**September 30, 2002**

 

**ITEM  1 – LEGALPROCEEDINGS**

 

At times the Company may be involved in disputes and/or litigation withrespect to its products and operations in its normal course of business. TheCompany does not believe that the ultimate impact of the resolution of suchmatters would have a material adverse effect on the Company’s financialcondition or results of operations. The Company is not currently involved inany legal proceedings.

 

**ITEM 2 -CHANGES IN SECURITIES AND USE OFPROCEEDS**

 

Not applicable

 

**ITEM 3 -DEFAULTS UPON SENIOR SECURITIES**

 

Not applicable

 

**ITEM 4 -SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

Not applicable

 

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FORM 10- Q

PART  II

ITEM  5-6

 

**ITEM 5 -OTHER INFORMATION**

 

The Company’s chiefexecutive officer and chief financial officer have furnished to the SEC thecertification with respect to this Form 10-Q that is required by Section 906 ofthe Sarbanes-Oxley Act of 2002.

 

**ITEM 6 - EXHIBITS, LISTS AND REPORTS ONFORM 8-K**

 

(a)   The following is a complete list of Exhibitsfiled as part of this Form 10-Q

 
| **Exhibit  Number** |   | **Description** |
|---------------------|--------|-----------------|
| 99.1                |   | Certification   |
|                |   |            |
| 99.2                |   | Certification   |

 

(b) Reports on Form 8-K

 

None.

 

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FORM 10- Q

PART II

 

**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned, thereto duly authorized.

 
| StockerYale, Inc. |                                  |
|-------------------|---------------------------------------|
|              |                                  |
|              |                                  |
| November 8, 2002  | /s/ Mark W. Blodgett                  |
|              | Mark W. Blodgett,                     |
|              | Chairman and Chief Executive Officer  |
|              |                                  |
| November 8, 2002  | /s/ Francis J. O’Brien           |
|              | Francis J. O’Brien,              |
|              | Chief Financial Officer and Treasurer |
|              |                                  |

 

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**Certification**

I, Mark W. Blodgett,certify that:

 

1.             I have reviewed this quarterly report on Form 10-Q ofStockerYale, Inc.;

 

2.             Based on my knowledge, this quarterly report does notcontain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the period coveredby this quarterly report;

 

3.             Based on my knowledge, the financial statements, andother financial information included in this quarterly report, fairly presentin all material respects the financial condition, results of operations andcash flows of the registrant as of, and for, the periods presented in thisquarterly report;

 

4.             The registrant’s other certifying officers and I areresponsible for establishing and maintaining disclosure controls and procedures(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and wehave:

 

a)             Designed such disclosure controlsand procedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

b)            Evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)             Presented in this quarterly reportour conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

 

5.             The registrant’s other certifying officers and I havedisclosed, based on our most recent evaluation, to the registrant’s auditorsand the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

 

a)             All significant deficiencies in thedesign or operation of internal controls which could adversely affect theregistrant’s ability to record, process, summarize and report financial dataand have identified for the registrant’s auditors any material weaknesses ininternal controls; and

 

b)            Any fraud, whether or not material,that involves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.             The registrant’s other certifying officers and I haveindicated in this quarterly report whether or not there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 
| Date:   11/8/02 | /s/ Mark W. Blodgett                 |
|--------------------------------|--------------------------------------|
|                           | Mark W. Blodgettt                    |
|                           | Chairman and Chief Executive Officer |

 

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**Certification**

I, Francis J. O’Brien,certify that:

 

1.             I have reviewed this quarterly report on Form 10-Q ofStockerYale, Inc.;

 

2.             Based on my knowledge, this quarterly report does notcontain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this quarterly report;

 

3.             Based on my knowledge, the financial statements, andother financial information included in this quarterly report, fairly presentin all material respects the financial condition, results of operations andcash flows of the registrant as of, and for, the periods presented in thisquarterly report;

 

4.             The registrant’s other certifying officers and I areresponsible for establishing and maintaining disclosure controls and procedures(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and wehave:

 

a)             Designed such disclosure controlsand procedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

b)            Evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)             Presented in this quarterly reportour conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

 

5.             The registrant’s other certifying officers and I havedisclosed, based on our most recent evaluation, to the registrant’s auditorsand the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

 

a)             All significant deficiencies in thedesign or operation of internal controls which could adversely affect theregistrant’s ability to record, process, summarize and report financial dataand have identified for the registrant’s auditors any material weaknesses ininternal controls; and

 

b)            Any fraud, whether or not material,that involves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.             The registrant’s other certifying officers and I haveindicated in this quarterly report whether or not there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies and materialweaknesses.

 
| Date:    11/8/02 | /s/ Francis J. O’Brien |
|---------------------------------|-----------------------------|
|                            | Francis J. O’Brien     |
|                            | Chief Financial Officer     |

 

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