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**U.S. SECURITIES AND EXCHANGE COMMISSION**

**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 THE QUARTERLY PERIOD ENDED JUNE 30, 2003**

**Commission File Number:  0-****27372**

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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)
 

 

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

As of July 31, 2003 there were 14,314,659 shares of the issuer's common stock  outstanding.

 

 

**STOCKERYALE, INC.**

**INDEX TO FORM 10-Q**

** **

**PART I -     FINANCIAL INFORMATION** 	         	     Item 1    Financial Statements (Unaudited) 	      	         	         	      	        Unaudited Condensed Consolidated Balance Sheets at            June 30, 2003            and December 31, 20021 	         	         	      	        Unaudited Condensed Consolidated Statement    of Operations for the three and six months ended June 30, 2003 and 2002 2 	         	         	      	        Unaudited    Condensed Consolidated Statement of Cash Flows for the six months ended            June 30, 2003 and 20023 	         	         	      	        Notes to Unaudited Condensed Consolidated Financial Statements4 	         	         	     Item 2Management's Discussion and    Analysis of Financial Condition and Results of Operations9   Item 3Quantitative and Qualitative    Disclosure About Market Risk   14 	         	          Item 4Controls & Procedures14    	     
**PART II -     OTHER INFORMATION** 	         	         	     Item 1Legal    Proceedings15 	         	         	     Item 2Changes in Securities15 	         	         	     Item 3Defaults Upon Senior Securities15 	         	         	     Item 4Submission of Matters to a Vote of Security Holders15 	         	         	     Item 5Other    Information16 	         	         	     Item 6Exhibits and Reports on Form    8-K16 	         	         	      	        Signature (s)16 
 

 
i  /  STKR    2003 Form 10-Q Table of Contents Part I Item 1
ITEM 1.        FINANCIAL STATEMENTS

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
**In thousands**     	         
**June 30, 2003**     
**December 31, 2002**Assets      ** **** **         Current assets:      ** **** **         Cash and cash equivalents      **$****563**     $ 3,070 Restricted cash      ** ****2,277**       2,000 Accounts receivable, less       reserves of approximately $90 at June 30, 2003 and $155 at December 31, 2002      ** ****2,515**       2,200 Inventories      ** ****4,879**       4,478 Prepaid expenses and other       current assets      ** ****645**       747 Total current assets      ** ****10,879**       12,495 Property, plant and equipment,       net      ** ****23,339**       23,650 Goodwill     ** ****2,677**       2,677 Identified intangible assets,       net      ** ****1,629**       1,785 Officer note receivable      ** ****249**       249 Other long-term assets      ** ****766**       464 Total assets      **$****39,539**     $ 41,320 Liabilities and stockholders'       equity      ** **** **         Current liabilities:      ** **** **         Current portion of long-term debt     **$****170**     $ 5,306 Short-term debt ,net of unamortized discount of $224 at June 30, 2003 and $269           at December 31, 2002      ** ****6,557**       7,446 Accounts payable      ** ****2,188**       2,050 Accrued expenses      ** ****1,380**       1,399 Short-term portion of capital       lease obligation      ** ****67**       61 Total current liabilities      ** ****10,362**       16,262 Long-term debt and capital lease       obligations - less current portion     ** ****6,369**       96 Other long-term liabilities**270**       - Commitments and contingencies     ** **** **         Stockholders' equity:      ** **** **         Common stock, par value $0.001-shares authorized 100,000,000;         Shares issued and outstanding         14,392,070 and 12,771,524 at           June 30, 2003         and December 31, 2002, respectively      ** ****14**       13 Paid-in capital      ** ****69,563**       68,637 Accumulated other comprehensive           income (loss)     ** ****923**       (266) Accumulated deficit      ** ****(47,962)**    (43,422) Total stockholders' equity      ** ****22,538**       24,962 Total liabilities and       stockholders' equity      **$****39,539**     $ 41,320 
*See notes to unaudited condensed consolidated financial statements.*
 1  /  STKR    2003 Form 10-Q Table of Contents Part I Item 1
UNAUDITED         CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
**In thousands, except per share****data**     	      	      	      	      	      	      	      	 **Thee Months**                  **Six Months**     	      	      	 **Ended June 30,**                  **Ended June 30,**     	      	      	 **2003**     	      	 **2002**                  **2003**              **2002**         Net sales      **$****3,586**** **     $ 3,523                   
$**7,170**         
$6,431          Cost of sales   ** ****2,800**** **    2,907                   **5,435**              5,491          Gross profit      ** ****786**** **       616                   **1,735**              940          Operating expenses:      ** **** **** **              	      	 ** **          	        	 Selling expenses      ** ****773**** **       869                   **1,549**              1,903          General and administrative      ** ****1,106**** **       1,445                   **2,334**              3,300          Amortization expense      ** ****79**** **       79                   **159**              169          Research and development      ** ****926**** **       1,987                   **1,816**              3,751          Total operating expenses      ** ****2,884**** **       4,380                   **5,858**              9,123         Operating loss      ** ****(2,098****)**       (3,764)         **(4,123****)**              (8,183)Interest and other income/(expense)     ** ****(52****)**       180                   **  (130****)**              189          Interest expense      ** ****253**** **       85                   **437**              170         Loss before income tax benefit     ** ****(2,403****)**       (3,669 )         **(4,690****)**              (8,164 )Income tax benefit     ** ****0**     	        0                   **(150****)**              0          Net loss      **$****(2,403****)**     $ (3,669 )         
$**(4,540****)**     $(8,164 )Basic and diluted loss per           share:      ** **** **** **              	      	 ** **          	        	 Net loss per share      **$****(0.18****)**     $ (0.29 )         
$**(0.35****)**     $(0.65 )Weighted average shares           outstanding:      ** **** **** **              	      	 ** **          	        	 Basic and diluted      ** ****13,319**** **       12,721                   **13,050**          
12,598     	  *See notes to unaudited condensed consolidated financial statements.* 2  /  STKR    2003 Form 10-Q Table of Contents Part I Item 1
UNAUDITED CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS
**In thousands**
**Six Months EndedJune 30,**     	        **2003**    **2002**Operations    ** **** **** **       Net loss    **$****(4,540****)**    $(8,164)     ** **** **** **       Adjustments to reconcile net loss to net cash used in operating activities:    ** **** **** **       Depreciation and amortization    ** ****1,496**** **     1,390 Deferred                 income taxes and other charges    ** ****-**** **     (91)     	     Loss on investment in joint        venture    ** ****-**** **     287Other changes in assets and liabilities:    ** **** **** **       Accounts receivable, net    ** ****(315****)**     (721)Inventories    ** ****(401****)**     162 Prepaid expenses and other current assets    ** ****102**** **     126 Accounts payable    ** ****138**     	         (1,902)Accrued expenses    ** ****(20)**      93        Officer note receivable     	      	 -     	         (250)Other assets and liabilities    ** ****53**** **             -     	    Net cash used in operating activities    ** ****(3,487****)**     (9,070)Financing    ** **** **** **       Proceeds from sale of common stock    ** ****1,197**** **     9,819 Proceeds of term note**985**        -Repayments of bank debt    ** ****(1,481)**      2,164 Repayment of bank debt to Toronto Dominion Bank    ** ****(2,210)**              - Proceeds from the National Bank of Canada    ** ****2,918**              - Restricted cash related to term deposit with National           Bank of Canada     ** ****(738)**        -  Decrease in note receivable ** ****63**** **  42     	 Net cash provided by financing activities    ** ****734**      12,025 Investing    ** **** **** **       Proceeds from land sale    ** ****306**** **               -  Purchases of property, plant and equipment    ** ****(64****)**     (1,460)Net                 investment in joint venture    ** ****-**** **     (260) Net cash used in investing    ** ****242**     	         (1,720)Effect of exchange rates    ** ****4**** **     466 Net change in cash and equivalents    ** ****(2,507****)**     1,701 Cash and                 equivalents, beginning of year    ** ****3,070**** **     1,576 Cash and equivalents, end of year    **$****563**** **    $3,277 Supplemental disclosure of cash flow information:    ** **** **** **       Interest paid    ** ****437**** **     170 Stock issued in Ciena acquisition    ** ****-**** **     200 
*See notes to unaudited condensed consolidated financial statements.*
3  /  STKR    2003 Form 10-Q Table of Contents Part I Item 1 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTSMarch 31, 2003
(1) ORGANIZATION AND BASIS OF PRESENTATION

The interim condensed consolidated                      financial statements presented have been prepared by StockerYale, Inc. (the                      "Company") are unaudited and, in the opinion of the management, reflect all                      adjustments of a normal recurring nature necessary for a fair statement of (a)                      the results of operations for the three and six months ended   June 30, 2003 and 2002,                      (b) the financial position at June 30, 2003 and December   31, 2002, and (c) the cash flows for the six month periods ended June 30, 2003 and 2002.                      These interim results are not necessarily indicative of results for a full                      year or any other interim period.

The unaudited consolidated balance                      sheet presented as of December 31, 2002, has been derived from the                      consolidated financial statements that have been audited by the Company's                      independent auditors. The accompanying financial statements and                      notes are condensed as permitted by Form 10-Q and do not contain certain                      information included in the annual financial statements and notes of the                      Company.  The condensed consolidated financial statements and notes included herein                      should be read in conjunction with the consolidated financial statements and                      notes included in the Company's Annual Report on Form 10-K for the year ended                      December 31, 2002.

The Company has prepared the unaudited condensed financial statements on a going   concern basis, which contemplates the realization of assets and the satisfaction of liabilities   in the normal course of business.  The Company will be required to generate sufficient cash flow to meet its obligations on a   timely basis through improved operations, refinancing of existing debt and/or additional financing.

The Company has taken action to address these financing issues and closed   a new credit facility in Canada in June, which, brought  it into compliance with all debt agreements. Furthermore, the Company is actively pursuing   additional financing options, including: a Canadian government development loan, the sale of real   estate and a private placement of equity or debt securities.

(2) LOSS 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 six   months ended June 30, 2003 and 2002 is calculated by dividing the net loss applicable to common   stockholders by the weighted average number of common shares outstanding. There were 3,223,886 and 2,929,319 options                      and 672,000 and 19,500 warrants outstanding as of June  30, 2003 and 2002,                      respectively, which were not included in the diluted per share calculation                      because their inclusion would be anti-dilutive.
 4  /  STKR    2003 Form 10-Q Table of Contents Part I Item 1
(3) INVENTORIES

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

(in thousands)
 
**June 30, 2003**
 
**December 31, 2002**Finished goods $
834 
$
1,028Work-in-process 
147 
101Raw materials 
3,898 
3,349  $
4,879 
$
4,478
Management performs periodic reviews of inventory and disposes of items not          required by their manufacturing plan and reduces the carrying cost of inventory to the          lower of cost or market.

(4) STOCK BASED COMPENSATION
The Company accounts for employee stock options and share awards under the intrinsic-value method prescribed by Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees*, (APB 25). No compensation cost has been recognized for stock option grants since the options granted to date have exercise prices per share of not less than the fair value of the Company's stock at the date of the grant.  Had the Company determined the stock-based compensation expense for the Company's stock options under the provisions of Statement of Financial Accounting Standards No. 123, *Accounting for Stock Based Compensation*, the Company's net loss and net loss per share based upon the fair value at the grant date for stock options awards  would have increased the pro-forma amounts as indicated below: (in thousands)**Three Months Ended**
**Six Months Ended****June 30,**
**June 30,****2003****2002**** ****2003**
**2002**Net loss as reported $(2,403)$(3,669)$(4,540)$(8,164)Additional compensation expense  (1,078) (1,232)(2,153)(2,090)Pro forma  $(3,481) (4,901)$(6,693)(10,254) Net loss per share (basic and diluted)         As reported $(0.18)$(0.29)$(0.35)$(0.65)Pro forma  (0.26) (0.39)(0.51)(0.81) The fair value of options at the date of grant were estimated using the Black-Scholes  option pricing model with the following assumptions:  
**For the Quarter Ended****June 30,****2003****2002**Volatility114%111%Expected option life-years from vest55Interest rate (risk free)2.27%4.40%DividendsNoneNone 5  /  STKR    2003 Form 10-Q Table of Contents Part I Item 1
(5) COMPREHENSIVE LOSS
SFAS No. 130, *Reporting Comprehensive Income,* requires disclosure of all                            components of comprehensive income (loss) on an annual and interim                            basis. Comprehensive income (loss) is defined as the change in equity of                            a business enterprise during a period from transactions and other events                            and circumstances from non-owner sources. The Company's total                            comprehensive income (loss) is as follows: (in thousands)
**Three Months Ended**
**Six Months Ended**
**June 30,**
**June 30,****2003****2002****2003****2002**Net loss   $ (2,403 )   $ (3,669 ) 
$ (4,540 )
$(8,164 )Other comprehensive income (loss):                           Cumulative translation adjustment     640      307  1,189466  Comprehensive loss   $  (1,763)    $  (3,362 )  $  (3,351)(7,698)
(6) INTANGIBLE ASSETS
Intangible assets consist primarily of acquired patented  technology and trademarks. Intangible assets are amortized over their  estimated useful lives which range from two to five years. The Company has no intangible assets with indefinite lives.  The Company reviews intangible assets when indications of potential impairment  exists, such as a significant reduction in cash flows associated with the  assets. Intangible assets as of June 30, 2003 and 2002 are as  follows:                     **For the Quarter Ended**(in thousands)**June 30,2003****December 31,2002**Identified intangible assets  $ 3,549     $ 3,549   Less: accumulated amortization  $ 1,920    $ 1,764      $ 1,629    $ 1,785   Amortization of intangible assets was $79,000 and $79,000 for the three months ended June 30, 2003 and 2002, respectively and $159,000 and $169,000 for the six months ended June 30, 2003 and 2002, respectively. As of June 30, 2003, the estimated future amortization expense of intangible assets, in thousands,  is as follows: **2003** **2004** **2005** **2006** **2007 and thereafter**
$
162  
$
318  
$
318  
$
318  
$
513 
(7) USE OF ESTIMATES

The preparation of financial statements in conformity with                                         generally accepted accounting principles requires                                         management to make estimates and assumptions that affect                                         the reported amounts of assets and liabilities and                                         disclosure of contingent assets and liabilities as of the                                         date of the financial statements and the reported amounts                                         of income and expenses during the reporting periods. Actual                                         results in the future could vary from the amounts derived                                         from management's estimates and assumptions.
6 /  STKR    2003 Form 10-Q Table of Contents Part I Item 1
(8) REVENUE RECOGNITION

The Company recognizes revenue from product sales at the time                                         of shipment and when persuasive evidence of an arrangement                                         exists, performance of the Company's obligation is                                         complete, the price to the buyer is fixed or determinable,                                         and collectibility is reasonably assured.  In certain                                         limited situations, customers have the right to return                                         products. Such rights of return, have not precluded revenue                                         recognition because the Company has a long history with                                         such returns and accordingly provides a reserve.

(9) RECENT ACCOUNTING PRONOUNCEMENTS

In June, 2002, FASB issued SFAS No. 146, *Accounting for Cost Associated with Exit or Disposal Activities*. SFAS No. 146 nullifies previous guidance on accounting for costs associated with exit or disposal activities and requires a liability for these costs to be recognized and measured at its fair value in the period in which the liability is incurred. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. The Company did not exit or dispose of any activities during the first or second quarters of 2003.

(10) SEGMENT INFORMATION

The Company has adopted the SFAS No. 131, *Disclosures About Segments of an Enterprise and Related information*. SFAS No. 131 requires financial and supplementary information to be disclosed on an annual and interim basis of each reportable segment of an enterprise. SFAS No. 131 also establishes standards for related disclosures about product and services, geographic areas and major customers. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief decision-making group, in making decisions how to allocate resources and assess performance. The Company's chief decision-maker is the chief executive officer.
The illumination segment develops and manufactures specialized  illumination products for the inspection, machine vision, medical and military  markets. Illumination products are sold both through distributors as well as  directly to original equipment manufacturers (OEM's). The optical components  segment develops and manufactures specialty optical fibers and phase masks  used primarily in sensor, gyroscope and telecommunication equipment. Optical  component products are sold primarily to original equipment  manufacturers (OEM's). The Company evaluates performance and allocates resources based  on revenues and operating income (loss). The operating loss for each segment  includes selling, research and development and expenses directly attributable  to the segment. In addition, the operating loss includes amortization of  acquired intangible assets, including any impairment of these assets and of  goodwill. The Company's non-allocable overhead costs, which include corporate  general and administrative expenses, are allocated between the segments based  upon an estimate of costs associated with each segment. Segment assets include  accounts receivable, inventory, machinery and equipment, goodwill and  intangible assets directly associated with the product line segment.   7 /  STKR    2003 Form 10-Q Table of Contents Part I Item 1 The Corporate assets include cash and cash equivalents,  buildings and furniture and fixtures.**Quarter Ended June 30, 2003****Quarter Ended June 30, 2002****Illumination****Optical Components****Total****Illumination(1)****Optical Components****Total**Net sales$3,373$213$3,586$3,177$346$3,523Gross margin1,070(284)78654769616Operating loss(599)(1,499)(2,098)(1,012)(2,752)(3,764)**Six Months Ended****June 30,    2003****Six Months Ended June 30, 2002****Illumination****Optical Components****Total****Illumination(1)****Optical Components****Total**Net sales$6,561$609$7,170$5,774$657$6,431Gross margin2,127(392)1,735811129940Operating loss(1,167)(2,956)(4,123)(2,870)(5,313)(8,183)
**June 30, 2003****December 31, 2002****Illumination****Optical Components****Corporate****Total****Illumination****Optical Components****Corporate****Total**Total current assets$6,711$536$3,402$10,879$6,301$404$5,790$12,495Property, plant & equipment78111,21311,34523,3397779,69913,17423,650Intangible assets1,629--1,6291,785--1,785Goodwill2,677--2,6772,677--2,677Other assets991601941,01540559249713$12,789$11,809$14,941$39,539$11,945$10,162$19,213$41,320
(1) Illumination revenue in 2002 includes printer and recorder revenues which were transferred to an outside distributor in 2003.

The Company's export sales are denominated in U.S. dollars. These sales are as follows:   
** Three Months Ended June 30,       
** Six Months Ended June 30,**Export sales by region (in thousands) ** 
** 2003** ** **** 
**2002****       
**        **2003     	      	       
 **2002**United States  $2,152  $2,114       $4,302            $3,859Canada  322    317        645             579Europe  789   775        1,577             1,415Asia  323   317        646                  578 Total sales $3,586  $3,523       $7,170            $6,431 8  /  STKR    2003 Form 10-Q Table of Contents Part I Items 1, 2
(11) DEBT
**National Bank of Canada**On May 26, 2003, the Company entered   into a credit agreement with the National Bank of Canada replacing the facility with Toronto   Dominion Bank. The new agreement provides total   borrowing availability up to $4,800,000 CDN. Initial proceeds were used to   pay off the credit agreement with Toronto Dominion Bank.
    

 The credit facility consists of a   $2,500,000 CDN line of credit secured by accounts receivable and inventory   bearing a variable interest rate of Canadian prime rate plus 1.5% and a   $2,300,000 CDN ten year term note bearing a variable interest rate of   Canadian prime rate plus 2.25%. The term note availability is $1,300,000 CDN   net of a $1,000,000 CDN term deposit. The term deposit will become available   to the Company at a rate of $125,000 CDN per quarter based upon the Company   (StockerYale Canada) achieving 90% of its forecasted earnings before   interest, depreciation, taxes and amortization (EBIDTA).

    

As of June 30, 2003, $1,654,000 CDN was   outstanding under the line of credit and $2,300,000 CDN was outstanding under   the term note. As of June 30, 2003 the interest rate on the line of credit   and the term note were 6.50% and 7.25%, respectively. 

    

The National Bank of Canada credit facility requires the following financial   covenants including: working capital,   net worth, capital expenditures, a financial coverage ratio   and maximum inventory levels.   The Company's Canadian subsidiary was in compliance with all provisions of the credit agreement as of June 30, 2003.

    
**TJJ Corporation**The amended TJJ Corporation term note requires the Company to maintain a   stockholders' equity balance of at least $22.0 million. As of June 30, 2003, the Company's   stockholders' equity balance was $22.5 million. 
(12) PRIVATE PLACEMENT
In June, the Company raised $1,200,000 through a private placement of equity   composed of 1,610,000 shares of common stock at $0.60 per share plus $270,000 convertible at   $0.60 per share less issuance costs.
Item 2.                                                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL                                                 CONDITION AND OPERATING RESULTS

***This Quarterly Report on Form 10-Q contains forward-lookingstatements within the meaning of Section 27A of theSecurities Act of 1933 and section 21E of theSecurities Exchange Act of 1934. The company's actual results could differ materiallyfrom those set forth in the forward-looking statements. When the Company uses words such as "anticipate,""believe," "estimate," "expect," "intend," and other similar expressions, they generally identifyforward-looking statements. Forward-looking statements include, for example, statementsrelating to acquisitions and related financial information, development activities, businessstrategy and prospects, future capital expenditures, sources and availability of capital,environmental and other regulations and competition. Investors should exercisecaution in interpreting and relying on forward-looking statements since they involve knownrisks, uncertainties and other factors which are, in some cases, beyond the company's control andcould materially affect the Company's actual results,performance or achievements. Such factors include, without limitation: market conditions that could make itmore difficult or expensive for the Company to obtain the necessary capital to finance itsresearch and development projects, operations, as well as its ability to refinance existing debt; the existenceof other independent suppliers of optical fiber, who may have greater resources than theCompany; and the uncertainty that the company's significant investments in research anddevelopment will not result in products that achieve market acceptance. Additional suchfactors are discussed in the section entitled "certain factors affecting future operatingresults" on page 20 of the Company's annual report on form 10-K for the fiscal year ended December 31,2002.***
9  /  STKR    2003 Form 10-Q Table of Contents Part I Item 2
RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the attached   unaudited condensed consolidated financial statements and notes thereto and with our audited financial statements and   notes thereto included in the company's Annual Report on form 10-K for the year ended December   31, 2002.

THREE MONTHS ENDED JUNE 30, 2003 AND 2002

Net Sales

For the quarter ended June 30, net salesincreased $0.1 million or 2% from $3.5 million in 2002 to $3.6 million in 2003. Illumination  revenues increased $0.4 million or   14% over the comparable period in 2002 which more than offest a modest   decline in phase mask sales and the elimination of printer and recorder revenue resulting from   the transfer of this product line to an outside distributor in the fourth quarter of 2002.   Fiber optic lighting from the Company's Salem facility, structured light laser sales from   the Company's Canadian subsidiary and initial shipments of recently announced major   orders from the Company's operations in Ireland (LEDs) and Singapore   (advanced imaging systems) were the principal factors driving the   illumination gain. 

Gross Profit

Gross margins improved from $0.6 million or 17% of sales in 2002 to $0.8 million   or 22% of sales in 2003 as increased sales and lower manufacturing overhead contributed   incremental profits of $0.1   million and $0.1 million, respectively.

Operating Expenses

Operating expenses decreased $1.5 million or 34% from $4.4 million                                                     in the second quarter of 2002 to $2.9 million in                                                     the second quarter of 2003. Research and   development expenses declined $1.1 million or 53% due to reduced salaries and   benefits, lower development costs and the elimination of    joint venture expenditures. Lower salaries and commissions combined with tighter marketing   expenditures resulted in a $0.1 million or 11% decline in selling expenditures. General   and administrative expenses were reduced $0.3 million or 23% due to lower   salaries, travel and professional fees. 

Interest Expense

Interest expense was $253,000 in the second                                                     quarter of fiscal 2003 compared to $85,000 in                                                     2002 due to both higher interest rates and a higher                                                     level of borrowing.

Provision (Benefit) for Income Taxes

 The Company's   historical operating losses raise doubt as to the realizability of the deferred tax assets. As a   result, management has provided a valuation allowance for the net deferred tax assets that may   not be realized.
 10  /  STKR    2003 Form 10-Q Table of Contents Part I Item 2
SIX MONTHS ENDED JUNE 30, 2003 AND 2002

Net Sales

For the six months ended June 30, net salesincreased $0.8 million or 11% from $6.4 million in 2002 to $7.2 million in 2003.   Illumination  revenues increased $1.4 million or 25% over the comparable period in 2002 which more than   offset a   decline in phase mask sales and a $0.4 million decline from the elimination of printer and recorder revenue resulting from   the transfer of this product line to an outside distributor in the fourth quarter of 2002.   Specialty fiber sales increased $0.1 million over 2002. Structured light laser sales from   the Company's Canadian subsidiary and initial shipments of recently announced major   orders from the Company's operation in Ireland (LEDs) and Singapore (advanced   imaging systems) were the principal factors driving the illumination gain. 

Gross Profit

Gross margins improved from $0.8 million or 85%  in 2003 to $1.7 million or   24% of sales as increased sales and lower manufacturing overhead contributed   incremental profits of $0.6   million and $0.2 million, respectively.

Operating Expenses

Operating expenses decreased $3.3 million or 36% from $9.1 million                                                     for the first six months of 2002 to $5.9 million in                                                     the first six months of 2003. Research and   development expenses declined $1.9 million or 52% due to reduced salaries,   lower development costs and   the elimination of joint venture expenditures. The Company's focus on only those product development projects, which   would positively impact near-term revenue, resulted in a  35% reduction in research and   development headcount. Lower salaries and commissions combined with tighter marketing   expenditures resulted in a $0.4 million or 19% decline in selling expenditures. General   and administrative expenses were reduced $1.0 million or 29% due to lower salaries, travel and   professional fees. Overall, the cost realignment programs implemented in the second half of 2002   eliminated 62 positions, reducing total headcount from 223 to 161, as of the   six months ended June 30, 2002   and 2003, respectively.

Interest Expense

Interest expense was $437,000 for the six months ended June   30, 2003 compared to $170,000 in                                                     2002 due to both higher interest rates and a higher                                                     level of borrowing.

Net Income (Loss)

Net  loss for the six months ended June 30, 2003                  decreased $3.7 million or 43% to $4.5 million compared to a net loss of $8.2                  million for the same period in 2002.

Provision (Benefit) for Income Taxes

The Company's   historical operating losses raise doubt as to the realizability of the   deferred tax assets. As a result, management has provided a valuation   allowance for the net deferred tax assets that may not be realized.
 11  /  STKR    2003 Form 10-Q Table of Contents Part I Item 2
LIQUIDITY AND CAPITAL RESOURCES

As discussed in both the previously filed Form 10-K for the year ended December 31, 2002 and Form 10-Q for the quarter ended March 31, 2003, the Company is pursuing various options to raise additional capital to finance operations.

 Two of these options were consummated in the second quarter of 2003, including the completion of refinancing the Company's Canadian subsidiary's credit facility with the National Bank of Canada and closing a $1.2 million equity placement with several of the Company's institutional investors. The new National Bank of Canada credit facility did not raise any additional capital. The new facility principally retired the Toronto Dominion (TD) Bank facility upon closing, however, the new facility provides the Company incremental future financing beyond the levels available under the TD Bank loan agreement. The private placement of $1,200,000 was composed of 1,610,000 shares of common stock at $0.60 per share plus $270,000 convertible at $0.60 per share less issuance expenses.

The Company is also evaluating several short-term options to raise additional funds through the sale of real estate and/or a private placement of equity/debt securities. The Company expects to make a final decision on these options by the end of the third quarter. The Company also expects to submit a proposal in the third quarter for a Canadian government development loan. The Company anticipates a decision by the Canadian government in the fourth quarter with funding commencing in the first quarter of 2004.

The Company can give no assurances to the timing or terms of such arrangements, assuming it is able to consummate one or more of these options. If the Company is unable to raise sufficient funds through these options by the end of the third quarter of 2003, it will need to implement further cost reduction strategies, and the Company will not have adequate capital to sustain its current operations. 

For the six months ended June 30, 2003,                                                          unrestricted cash and cash equivalents                                                          decreased $2.5 million. Cash used in                                                          operating activities was $3.5 million for the period ended June 30, 2003 which primarily resulted from an operating loss of $4.5   million  excluding cash and debt,   partially offset by a $1.5 million in depreciation and amortization.

Cash from financing activities was $0.7 million principally   due to  in proceeds from the sale of common stock as the refinancing of   the Canadian credit facility was cash neutral.

Investing activities provided $0.2 million as proceeds from a land sale in   Montreal offset nominal capital expenditures.
**TJJ Corporation**On December 27, 2002, the Company entered into a Term Note agreement with                                                           TJJ Corporation. The Term Note is a $5                                                           million, three-year note due December 26,                                                           2005, secured by the Company's Salem                                                           headquarters and bears an interest rate                                                           of 8.5%. The note allows the Company to                                                           initially draw down $4,000,000 subject to                                                           a 2% commitment fee. The Company had the                                                           option to draw down the additional                                                           $1,000,000 subject to a 1.25% commitment                                                           fee in increments of $250,000 which was                                                           exercised in full in March 2003. In                                                           addition, the Company issued warrants to                                                           purchase 250,000 shares of the Company's                                                           common stock. The warrants can be                                                           exercised over a five-year period and                                                           each warrant can be exchanged for one                                                           share of common stock at a purchase price                                                           of $1.35 per share. As of June 30,                                                           2003, $5,000,000 was outstanding under                                                           the Term Note Agreement. The Term Note                                                           was issued together with the warrants.                                                           The aggregate purchase price of the Term                                                           Note and the warrants ($5,000,000) was                                                           allocated between the Term Note and the                                                           warrants based upon their relative fair                                                           market values. The purchase price                                                           assigned to the Term Note and warrants                                                           was $4,753,256 and $246,744                                                           respectively. The difference between the                                                           face amount of the Term Note, and the                                                           aggregate purchase price allocated to the                                                           Term Note $4,753,256 was recorded as debt                                                           discount, and is being amortized over the                                                           life of the Term Note. As of June 30,                                                           2003, $5,000,000 was outstanding under       the Term Note and the Company was in compliance with the covenants of the       Term Note.The Term Note requires the Company to maintain stockholders'equity of $22.0 million. The Company's stockholders' equity was $22.5 million at June 30, 2003. TheCompany was in compliance with all provisions of the agreement as of June 30, 2003. 12  /  STKR    2003 Form 10-Q Table of Contents Part I Item 2 **Merrill Lynch Financial Services**On May 19, 2001, the Company entered into a credit agreement with Merrill       Lynch Financial Services, Inc. providing total borrowing availability up to $6,000,000. Initial proceedswere used to pay off the credit agreement between the Company and Wells Fargo Business Credit, Inc. Theinitial credit facility with Merrill Lynch consisted of a line of credit of up to $2,500,000 and a reducingrevolver in the amount of $3,500,000. On April 24, 2002, the Company entered into an amendment of the creditagreement, which increased the borrowing availability up to $7,000,000 by increasing the line ofcredit to $3,500,000 and maintaining the reducing revolver at $3,500,000.
On December 27, 2002, the Company entered into a second   amendment of the credit agreement,   which decreased the borrowing   availability to $6,000,000 by   decreasing the line of credit to   $2,500,000 as of July 31, 2003 and maintaining the   reducing revolver at $3,500,000. The   line of credit is subject to review   and renewal  as of July 31,   2003. As of  June 30, 2003,   $2,624,993 was outstanding under the   reducing revolver and $2,541,667 was   outstanding under the line of credit.   The outstanding principal balance of   all advances under this credit   facility bears interest at 2.5% over   the one month LIBOR rate.   As of June 30, 2003 the interest rate was approximately 3.5%.

The Company's obligations under this credit facility are secured by substantially   all the Company's Salem 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 million tangible   net worth. The Company was in compliance with all provisions of the credit agreement   as of June 30, 2003. The reducing   revolver is a seven-year loan with monthly principal and interest payments.
 **National Bank of Canada**On May 26, 2003, the Company entered   into a credit agreement with the National Bank of Canada replacing the facility with Toronto   Dominion Bank. The new agreement provides total   borrowing availability up to $4,800,000 CDN. Initial proceeds were used to   pay off the credit agreement with Toronto Dominion Bank.
    

 The credit facility consists of a   $2,500,000 CDN line of credit secured by accounts receivable and inventory   bearing a variable interest rate of Canadian prime rate plus 1.5% and a   $2,300,000 CDN ten year term note bearing a variable interest rate of   Canadian prime rate plus 2.25%. The term note availability is $1,300,000 CDN   net of a $1,000,000 CDN term deposit. The term deposit will become available   to the Company at a rate of $125,000 CDN per quarter based upon the Company   (StockerYale Canada) achieving 90% of its forecasted earnings before   interest, depreciation, taxes and amortization (EBIDTA).

    

As of June 30, 2003, $1,654,000 CDN was   outstanding under the line of credit and $2,300,000 CDN was outstanding under   the term note. As of June 30, 2003 the interest rate on the line of credit   and the term note were 6.50% and 7.25%, respectively. 

    

The National Bank of Canada credit facility requires the following financial   covenants including: working capital,   net worth, capital expenditures, a financial coverage ratio   and maximum inventory levels.   The Company's Canadian subsidiary was in compliance with all provisions of the credit agreement as of June 30, 2003.

CRITICAL ACCOUNTING POLICIES,   COMMITMENTS AND CERTAIN OTHER MATTERS

The Company considered the disclosure requirements of FR-60 regarding critical accountingpolicies and FR-61 regarding liquidity and capital resources, certain trading activities and relatedparty/certain other disclosures, and concluded that nothing materially changed during the quarterthat would warrant further disclosure under these releases.
 13  /  STKR    2003 Form 10-Q Table of Contents Part I Item 3
ITEM 3.      QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

FOREIGN CURRENCY EXCHANGE RISK

Management has determined that all of the Company's foreign   subsidiaries operate primarily in local currencies that represent the   functional currencies of the subsidiaries. All assets and liabilities of   foreign subsidiaries are translated into U.S. dollars using the exchange rate   prevailing at the balance sheet date, while income and expense accounts are   translated at average exchange rates during the year. As such, the Company's   operating results are affected by fluctuations in the value of the U.S.   dollar as compared to currencies in foreign countries, as a result of the   Company's transactions in these foreign markets. The Company does not operate   a hedging program to mitigate the effect of a significant rapid change in the   value of the Canadian Dollar or Euro as compared to the U.S. dollar. If such   a change did occur, the Company would have to take into account a currency   exchange gain or loss in the amount of the change in the U.S. dollar   denominated 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   not likely be material, there can be no assurance that such a loss would not   have an adverse material effect on the Company's results of operations or   financial condition.

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 and cash 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 borrowings under its $2.5 million credit line and   $3.5 million Reducing Revolver with Merrill Lynch with an interest rate at   2.5% over the one month LIBOR and its $4.8 million CDN credit facility with   the National Bank of Canada with interest rates of 1.5% and 2.5% over the   Canadian   prime rate. As of June 30, 2003 the fair market value of the Company's   outstanding debt approximates its carrying value due to the short-term   maturities and variable interest rates. A 1% change in interest rates could   increase or decrease interest expense by approximately $120,000 on an annual   basis.

ITEM 4.    CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures.

As required by new Rule 13a-15 under the Securities Exchange Act of 1934, within the 90 days prior to the date of this report, the Company carried out an evaluation under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. In connection with the new rules, we currently are in the process of further reviewing and documenting our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.

(b) Changes in internal controls

None
14  /  STKR    2003 Form 10-Q Table of Contents Part II Items 1 - 4
Item 1.     LEGAL PROCEEDINGS

At times the company may be involved in disputes and/or litigation with respect to its products and operations in its normal course of business. The company does not believe that the ultimate impact of the resolution of such matters would have a material adverse effect on the company's financial condition or results of operations. The company is not currently involved in any legal proceedings.

Item 2.    CHANGES IN SECURITIES AND USE OF PROCEEDS

Not applicable.

Item 3.    DEFAULTS UPON SENIOR SECURITIES

Not applicable.

Item 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY

   a) A special meeting of stockholders of the Company in lieu of the annual   meeting was held on May 22, 2003.

   b) The following matters were presented and voting results were as follows:
   PROPOSAL I - Election of Directors    
**Number of Shares/Votes****Nominees**
**For** 
**Withheld**Mark W. Blodgett 9,493,598110,005Clifford L. Abbey9,597,3286,275Lawrence W. Blodgett 9,494,793108,810Steven E. Karol 9,598,3285,275Dr. Herbert Cordt* 9,594,8288,775  Raymond J. Oglethorpe9,598,5285,075
Dr. Herbert Cordt   has resigned from the Board of Directors.
15  /  STKR    2003 Form 10-Q Table of Contents Part II Items 5, 6
Item 5.    OTHER INFORMATION

Not applicable.

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

(a)  The following is a complete list of exhibits filed as part of this Form 10-Q: Exhibit Number    	   Description31.1                 CEO Certification31.2                 CFO Certification32.1                 CEO Certification32.2                 CFO Certification
(b)  Reports on Form 8-K: None

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 the undersigned, thereto duly authorized.
StockerYale, Inc.                                    August 13, 2003/s/ Mark W. Blodgett         Mark W. Blodgett,         Chairman and Chief Executive Officer               August 13, 2003/s/ Francis J. O'Brien         Francis J. O'Brien,         Chief Financial Officer and Treasurer                16  /  STKR    End2003 Form 10-Q**************** |
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