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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE
QUARTERLY PERIOD ENDED MARCH 31, 2007

Commission file number: 000-27372

StockerYale, Inc.

(Exact
name of small business issuer as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Massachusetts                                                  |  | 04-2114473                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|32 Hampshire RoadSalem, New Hampshire                          |  | 03079                               
|(Address of principal executive offices)                       |  | (Zip Code)                          



Issuers telephone
number: (603) 893-8778

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ̈No x

Transitional Small Business Disclosure Format (Check one): Yes ̈No x

As of
May 11, 2007, there were 35,306,940 shares of the issuers common stock outstanding.



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STOCKERYALE, INC.

INDEX TO FORM 10-QSB



|                               |  |                                                                                                   |  |     
|------------------------------ |  | ------------------------------------------------------------------------------------------------- |  | ----
|                               |  |                                                                                                   |  | Page
|PART I - FINANCIAL INFORMATION
|                               |  |                                                                                                  
|Item 1                         |  | Condensed Consolidated Financial Statements (unaudited)                                           |  | 3   
|                               |  |                                                                                                  
|                               |  | Condensed Consolidated Balance Sheets at March 31, 2007 and December 31, 2006                     |  | 3   
|                               |  |                                                                                                  
|                               |  | Condensed Consolidated Statement of Operations for the three months ended March 31, 2007 and 2006 |  | 4   
|                               |  |                                                                                                  
|                               |  | Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2007 and 2006 |  | 5   
|                               |  |                                                                                                  
|                               |  | Notes to Condensed Consolidated Financial Statements                                              |  | 6   
|                               |  |                                                                                                  
|Item 2                         |  | Managements Discussion of Financial Condition and Results of Operations                          |  | 20  
|                               |  |                                                                                                  
|Item 3                         |  | Controls and Procedures                                                                           |  | 31  
|PART II - OTHER INFORMATION   
|                               |  |                                                                                                  
|Item 1                         |  | Legal Proceedings                                                                                 |  | 31  
|                               |  |                                                                                                  
|Item 5                         |  | Other Information                                                                                 |  | 32  
|                               |  |                                                                                                  
|Item 6                         |  | Exhibits                                                                                          |  | 32  
|                               |  |                                                                                                  
|                               |  | Signatures                                                                                        |  | 33  



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Part I

I
TEM 1. FINANCIAL STATEMENTS

STOCKERYALE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

In thousands except share data

Unaudited



|                                                                                                                                                           |  |               |         |   |                  |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                           |  | March 31,2007 |         |   | December 31,2006 |  
|Assets                                                                                                                                                     |  |               |         |   |                  |   |         |  
|Current assets:                                                                                                                                            |  |               |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                                                                  |  | $             | 1,597   |   |                  | $ | 1,366   |  
|Restricted Cash                                                                                                                                            |  |               | 3       |   |                  |   | 11      |  
|Accounts receivable less allowances of $79 at March 31, 2007 and $76 at December 31, 2006                                                                  |  |               | 4,190   |   |                  |   | 3,868   |  
|Inventories                                                                                                                                                |  |               | 4,003   |   |                  |   | 4,015   |  
|Prepaid expenses and other current assets                                                                                                                  |  |               | 472     |   |                  |   | 536     |  
|Current assets  discontinued operations                                                                                                                   |  |               | 14      |   |                  |   | 36      |  
|                                                                                                                                                           |  |               |         |   |                  |   |         |  
|Total current assets                                                                                                                                       |  |               | 10,279  |   |                  |   | 9,832   |  
|Net property, plant and equipment                                                                                                                          |  |               | 10,960  |   |                  |   | 11,255  |  
|Goodwill                                                                                                                                                   |  |               | 7,967   |   |                  |   | 7,957   |  
|Acquired intangible assets, net                                                                                                                            |  |               | 4,390   |   |                  |   | 4,691   |  
|Other long-term assets                                                                                                                                     |  |               | 1,153   |   |                  |   | 1,244   |  
|                                                                                                                                                           |  |               |         |   |                  |   |         |  
|Total assets                                                                                                                                               |  | $             | 34,749  |   |                  | $ | 34,979  |  
|                                                                                                                                                           |  |               |         |   |                  |   |         |  
|Current liabilities:                                                                                                                                       |  |               |         |   |                  |   |         |  
|Current portion of long-term debt, net of unamortized discount of $199 at March 31, 2007 and $247 at December 31,
2006                                     |  | $             | 2,426   |   |                  | $ | 2,322   |  
|Current portion of capital lease obligation                                                                                                                |  |               | 122     |   |                  |   | 124     |  
|Current portion of financing lease obligation                                                                                                              |  |               | 507     |   |                  |   | 507     |  
|Accounts payable                                                                                                                                           |  |               | 2,910   |   |                  |   | 3,136   |  
|Accrued expenses                                                                                                                                           |  |               | 2,302   |   |                  |   | 2,411   |  
|Current liabilities  discontinued operations                                                                                                              |  |               | 39      |   |                  |   | 41      |  
|                                                                                                                                                           |  |               |         |   |                  |   |         |  
|Total current liabilities                                                                                                                                  |  |               | 8,306   |   |                  |   | 8,541   |  
|Long-term debt, net of unamortized discount of $1,376 at March 31, 2007 and $1,505 at December 31, 2006                                                    |  |               | 8,799   |   |                  |   | 9,512   |  
|Capital lease obligation                                                                                                                                   |  |               | 285     |   |                  |   | 313     |  
|Financing lease obligation                                                                                                                                 |  |               | 3,163   |   |                  |   | 3,171   |  
|Deferred income taxes                                                                                                                                      |  |               | 1,186   |   |                  |   | 1,252   |  
|                                                                                                                                                           |  |               |         |   |                  |   |         |  
|Total liabilities                                                                                                                                          |  |               | 21,739  |   |                  |   | 22,789  |  
|                                                                                                                                                           |  |               |         |   |                  |   |         |  
|Stockholders equity:                                                                                                                                      |  |               |         |   |                  |   |         |  
|Common stock, par value $0.001; shares authorized 100,000,000; 34,074,583 shares issued and outstanding at March 31, 2007 and 31,960,462
December 31, 2006 |  |               | 34      |   |                  |   | 32      |  
|Paid-in capital                                                                                                                                            |  |               | 97,089  |   |                  |   | 94,700  |  
|Accumulated other comprehensive income                                                                                                                     |  |               | 2,329   |   |                  |   | 2,269   |  
|Accumulated deficit                                                                                                                                        |  |               | (86,442 | ) |                  |   | (84,811 | )
|                                                                                                                                                           |  |               |         |   |                  |   |         |  
|Total stockholders equity                                                                                                                                 |  |               | 13,010  |   |                  |   | 12,190  |  
|                                                                                                                                                           |  |               |         |   |                  |   |         |  
|Total liabilities and stockholders equity                                                                                                                 |  | $             | 34,749  |   |                  | $ | 34,979  |  
|                                                                                                                                                           |  |               |         |   |                  |   |         |  

See notes to unaudited condensed consolidated financial statements.



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STOCKERYALE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Unaudited



|                                                                  |  |                                   |        |   |      |   |        |  
|----------------------------------------------------------------- |  | --------------------------------- | ------ | - | ---- | - | ------ | -
|                                                                  |  | Three Months EndedMarch 31,       |       
|                                                                  |  | 2007                              |        |   | 2006 |  
|                                                                  |  | In thousands exceptper share data |       
|Net sales                                                         |  | $                                 | 7,476  |   |      | $ | 4,441  |  
|Cost of sales                                                     |  |                                   | 4,904  |   |      |   | 2,752  |  
|                                                                  |  |                                   |        |   |      |   |        |  
|Gross profit                                                      |  |                                   | 2,572  |   |      |   | 1,689  |  
|                                                                  |  |                                   |        |   |      |   |        |  
|Operating expenses:                                               |  |                                   |        |   |      |   |        |  
|Selling expenses                                                  |  |                                   | 1,017  |   |      |   | 639    |  
|General and administrative                                        |  |                                   | 1,478  |   |      |   | 1,141  |  
|Research and development                                          |  |                                   | 770    |   |      |   | 703    |  
|Amortization expense                                              |  |                                   | 307    |   |      |   | 80     |  
|                                                                  |  |                                   |        |   |      |   |        |  
|Total operating expenses                                          |  |                                   | 3,572  |   |      |   | 2,563  |  
|                                                                  |  |                                   |        |   |      |   |        |  
|Loss from operations                                              |  |                                   | (1,000 | ) |      |   | (874   | )
|Interest income and other (income) expense                        |  |                                   | 154    |   |      |   | 14     |  
|Amortization of debt discount and financing costs                 |  |                                   | 267    |   |      |   | 155    |  
|Interest expense                                                  |  |                                   | 311    |   |      |   | 163    |  
|                                                                  |  |                                   |        |   |      |   |        |  
|Loss from continuing operations before income taxes               |  |                                   | (1,732 | ) |      |   | (1,206 | )
|Income tax provision (benefit)                                    |  |                                   | (83    | ) |      |   |       |  
|                                                                  |  |                                   |        |   |      |   |        |  
|Loss from continuing operations                                   |  | $                                 | (1,649 | ) |      | $ | (1,206 | )
|Income (Loss) from discontinued operations                        |  |                                   | 18     |   |      |   | (39    | )
|                                                                  |  |                                   |        |   |      |   |        |  
|Net loss                                                          |  |                                   | (1,631 | ) |      |   | (1,245 | )
|                                                                  |  |                                   |        |   |      |   |        |  
|Basic and diluted net loss per share from continuing operations   |  | $                                 | (0.05  | ) |      | $ | (0.04  | )
|Basic and diluted net loss per share from discontinued operations |  | $                                 | (0.00  | ) |      | $ | (0.00  | )
|                                                                  |  |                                   |        |   |      |   |        |  
|Basic and diluted net loss per share                              |  | $                                 | (0.05  | ) |      | $ | (0.04  | )
|                                                                  |  |                                   |        |   |      |   |        |  
|Weighted average shares outstanding:                              |  |                                   |        |   |      |   |        |  
|Basic and diluted                                                 |  |                                   | 34,047 |   |      |   | 28,465 |  
|                                                                  |  |                                   |        |   |      |   |        |  

See notes to unaudited condensed consolidated financial statements.



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STOCKERYALE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited



|                                                                            |  |                             |        |   |      |   |        |  
|--------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                                            |  | Three MonthsEnded March 31, |       
|                                                                            |  | 2007                        |        |   | 2006 |  
|                                                                            |  | In thousands                |       
|Operations                                                                  |  |                             |        |   |      |   |        |  
|Net loss                                                                    |  | $                           | (1,631 | ) |      | $ | (1,245 | )
|Income (Loss) from discontinued operations                                  |  |                             | 18     |   |      |   | (39    | )
|                                                                            |  |                             |        |   |      |   |        |  
|Loss from continuing operations                                             |  | $                           | (1,649 | ) |      | $ | (1,206 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                             |        |   |      |   |        |  
|Stock based compensation                                                    |  |                             | 101    |   |      |   | 94     |  
|Depreciation and amortization                                               |  |                             | 773    |   |      |   | 543    |  
|Amortization of debt discount and financing costs                           |  |                             | 267    |   |      |   | 155    |  
|Other changes in assets and liabilities:                                    |  |                             |        |   |      |   |        |  
|Accounts receivable                                                         |  |                             | (354   | ) |      |   | (243   | )
|Inventories                                                                 |  |                             | (10    | ) |      |   | 205    |  
|Prepaid expenses and other current assets                                   |  |                             | 61     |   |      |   | (98    | )
|Accounts payable                                                            |  |                             | (211   | ) |      |   | 163    |  
|Accrued expenses                                                            |  |                             | (162   | ) |      |   | (442   | )
|Other assets and liabilities                                                |  |                             | (36    | ) |      |   | 2      |  
|                                                                            |  |                             |        |   |      |   |        |  
|Net cash used in continuing operations                                      |  |                             | (1,220 | ) |      |   | (827   | )
|Net cash provided by (used in) discontinued operations                      |  |                             | 38     |   |      |   | (342   | )
|                                                                            |  |                             |        |   |      |   |        |  
|Net cash used in operating activities                                       |  |                             | (1,182 | ) |      |   | (485   | )
|Financing                                                                   |  |                             |        |   |      |   |        |  
|Net proceeds from sale of common stock and exercise of options              |  |                             | 2,290  |   |      |   | 4      |  
|Restricted cash related to credit facilities                                |  |                             | 8      |   |      |   |       |  
|Repayments of revolving credit facilities                                   |  |                             | (290   | ) |      |   |       |  
|Principal repayment of long-term debt                                       |  |                             | (526   | ) |      |   | (124   | )
|                                                                            |  |                             |        |   |      |   |        |  
|Net cash provided by (used in) continuing activities                        |  |                             | 1,482  |   |      |   | (120   | )
|Net cash provided by (used in) discontinued operations                      |  |                             |       |   |      |   |       |  
|                                                                            |  |                             |        |   |      |   |        |  
|Net cash provided by (used in) financing activities                         |  |                             | 1,482  |   |      |   | (120   | )
|Investing                                                                   |  |                             |        |   |      |   |        |  
|Payments of financing obligation                                            |  |                             | (8     | ) |      |   | (85    | )
|Purchases of plant and equipment                                            |  |                             | (151   | ) |      |   | (27    | )
|                                                                            |  |                             |        |   |      |   |        |  
|Net cash used in continuing operations                                      |  |                             | (159   | ) |      |   | (112   | )
|Net cash provided by (used in) discontinued operations                      |  |                             | 21     |   |      |   | 289    |  
|                                                                            |  |                             |        |   |      |   |        |  
|Net cash provided by (used in) investing activities                         |  |                             | (138   | ) |      |   | 177    |  
|Effect of exchange rates                                                    |  |                             | 69     |   |      |   | (19    | )
|Net change in cash and equivalents                                          |  |                             | 231    |   |      |   | (447   | )
|Cash and equivalents, beginning of period                                   |  |                             | 1,366  |   |      |   | 3,427  |  
|                                                                            |  |                             |        |   |      |   |        |  
|Cash and equivalents, end of period                                         |  | $                           | 1,597  |   |      | $ | 2,980  |  
|                                                                            |  |                             |        |   |      |   |        |  
|                                                                            |  |                            
|Supplemental disclosure of cash flow information:                           |  |                             |        |   |      |   |        |  
|Interest paid                                                               |  | $                           | 316    |   |      | $ | 138    |  

See notes to unaudited condensed consolidated financial statements.



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STOCKERYALE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1) ORGANIZATION AND BASIS OF PRESENTATION

The
accompanying unaudited condensed consolidated financial statements have been prepared by StockerYale, Inc. (the Company) and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary for a fair
statement of (a) the results of operations for the three month periods ended March 31, 2007 and 2006, (b) the financial position at March 31, 2007 and December 31, 2006, and (c) the cash flows for the three month
periods ended March 31, 2007 and 2006. These interim results are not necessarily indicative of results for a full year or any other interim period.

The accompanying consolidated financial statements and notes are condensed as permitted by Form 10-QSB and do not contain certain information included in the annual financial statements and notes of the Company. These unaudited condensed
consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes included in the Companys Annual Report on Form 10-KSB for the year ended December 31, 2006.

The Companys current forecast for 2007 calls for increased revenues, and improved margins, cash flow and asset turnover. It also calls for significant investments
in sales and marketing, production and information technology that will impact near-term profitability. The Company intends to pursue various options to finance any acquisitions and also to fund operations, as necessary, through the end of 2007. On
January 26, 2007, the Company sold and issued 2,000,000 shares of its common stock at a per share purchase price of $1.15 and a warrant to purchase 1,000,000 shares of its common stock at an exercise price of $1.72 per share to
Smithfield Fiduciary LLC for an aggregate purchase price of $2,300,000.

If the Company does not achieve its goals for 2007, management would implement
cost reduction strategies to conserve cash; however, management believes that there is adequate capital to sustain current operations through 2007.

(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 months ended March 31, 2007 and 2006, respectively is calculated by dividing the net loss applicable to common stockholders by the weighted average number of vested common
shares outstanding. There were 2,604,634 and 3,494,098 shares subject to options and 7,589,057and 5,104,058 shares subject to warrants outstanding as of March 31, 2007 and March 31, 2006, respectively, which were not included in the
diluted shares calculation because their inclusion would be anti-dilutive. The Company had 1,278,075 and 530,180 shares of unvested restricted stock outstanding as of March 31, 2007 and March 31, 2006, respectively. The unvested shares of
unvested restricted stock were not included in the diluted shares calculation as their effect would be anti-dilutive.

(3) 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. The Companys non-standard products are limited to components supplied to original equipment
manufacturers and produced in accordance with a customer approved design. Non-standard product revenue is recognized when the criteria for acceptance has been met. In certain limited situations, distributors 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 is able to estimate a reserve for their cost.

(4) WARRANTY



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The Company provides warranties on most of its products for periods of between one to two years. The warranty is limited
to the cost of the product and the Company will repair or replace the product as required. The Company monitors the actual warranty repair costs and trends versus the reserve as a percent of sales. The Company annually adjusts the warranty provision
based on the actual experience and for any particular known instances.

Warranty Reserves:



|                                        |  |              |     |   |      |   |     |  
|--------------------------------------- |  | ------------ | --- | - | ---- | - | --- | -
|Quarters Ended March 31                 |  | 2007         |     |   | 2006 |  
|                                        |  | In thousands |    
|Balance at beginning of period          |  | $            | 259 |   |      | $ | 208 |  
|Charges to costs and expenses           |  |              | 37  |   |      |   | 45  |  
|Account write-offs and other deductions |  |              | (31 | ) |      |   | (37 | )
|                                        |  |              |     |   |      |   |     |  
|Balance at end of period                |  | $            | 265 |   |      | $ | 216 |  

(5) ACQUISITION

Acquisition of Photonic Products Ltd.

On October 31, 2006, the Company entered into a Stock
Purchase Agreement with the stockholders of Photonic Products Ltd. to acquire all of the outstanding stock of privately held Photonic Products Ltd., a provider of laser diode modules and laser diodes for industrial, medical and scientific markets.
Under the terms of the transaction, StockerYale paid an aggregate of $9.4 million for 100% of the outstanding stock of Photonic Products Ltd. consisting of (i) US$4,250,000 of cash in the aggregate from StockerYale (UK) Ltd. to the stockholders
of Photonic Products Ltd., (ii) bonds issued by StockerYale (UK) Ltd. to each of the stockholders of Photonic Products Ltd. with an aggregate initial principal amount equal to US$2,400,000, and (iii) 2,680,311 shares of the Companys
common stock, valued at approximately $2,780,000 issued to the stockholders of Photonic Products Ltd. The Company also agreed to an earnout agreement with some of the stockholders of Photonic Products Ltd. contingent upon specified financial targets
being met over the next three years in an amount up to 439,966 pounds sterling to be made in either cash or common stock of the Company, at the sole discretion of StockerYale. The Company filed a registration statement on Form S-3 on
January 29, 2007 to register the shares of its common stock issued to the stockholders of Photonic Products Ltd. The registration statement became effective February 14, 2007. The results of Photonic Products Ltd. have been included in the
Companys financial statements from the date of acquisition.

The valuation of the Companys stock was set using an average
closing price of the Companys common stock on the Nasdaq Stock Market over the five trading days immediately preceding and including the acquisition date. See details of the financing for this acquisition at Note 12.

Based on a valuation prepared by an independent third-party appraisal firm using assumptions provided by management, the purchase price for Photonic
Products Ltd. was allocated among the tangible assets and its intellectual property. The fair value of brand and trade names was based on the relief from royalty method; the fair value of designs and development and other technology was based on
replacement cost and distributor and customer contracts and relationships were valued using the discounted cash flow method. The rate used to discount the cash flows of 26.65% was based on the forecast figures and assumptions provided by management
and the risk associated with achieving the growth forecast.

The total purchase price, which included the related acquisition costs of
approximately $332,000 exceeded the appraised fair value of the acquired identified net assets by $5.1 million which was allocated to goodwill. Goodwill is not deductible for tax purposes. The following represents the allocation of the aggregate
purchase price to the acquired net assets of Photonic Products Ltd.:



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|                                                       |  |   |            |  
|------------------------------------------------------ |  | - | ---------- | -
|Purchase Price:                                        |  |   |            |  
|Cash                                                   |  | $ | 4,250,000  |  
|Amount due seller                                      |  |   | 2,400,000  |  
|Direct acquisition costs                               |  |   | 332,113    |  
|Value of common stock issued                           |  |   | 2,779,482  |  
|                                                       |  |   |            |  
|Total purchase consideration paid                      |  | $ | 9,761,595  |  
|                                                       |  |   |            |  
|                                                       | 
|Fair value of assets acquired and liabilities assumed: |  |   |            |  
|Cash                                                   |  | $ | 202,454    |  
|Accounts receivable                                    |  |   | 1,361,703  |  
|Inventory                                              |  |   | 1,447,560  |  
|Property, plant and equipment                          |  |   | 751,073    |  
|Goodwill                                               |  |   | 5,124,300  |  
|Identifiable intangible assets                         |  |   | 4,193,654  |  
|Accounts payable and accrued expenses                  |  |   | (1,591,602 | )
|Term loan                                              |  |   | (88,062    | )
|Capital lease obligations                              |  |   | (381,389   | )
|Deferred tax liability                                 |  |   | (1,258,096 | )
|                                                       |  |   |            |  
|Total Purchase consideration made                      |  | $ | 9,761,595  |  
|                                                       |  |   |            |  

The acquired intangible assets that are subject to amortization have a weighted average useful
life of approximately 5.6 years. These assets will be amortized over their respective useful lives.

Pro Forma Financial Information

The following unaudited pro forma financial information presents the combined results of operations of StockerYale, Inc. and
Photonic Products Ltd. as if the acquisition had occurred as of the beginning of fiscal 2006, after giving effect to certain adjustments, including amortization of intangibles. The unaudited pro forma financial information may not reflect the
results of operations that would have occurred had the combined companies constituted a single entity during such periods, and may not be indicative of the results which may be obtained in the future.



|                                                    |  |                                    |        |  
|--------------------------------------------------- |  | ---------------------------------- | ------ | -
|                                                    |  | Three monthsendedMarch 31,2006     |       
|                                                    |  | (in thousandsexcept pershare data) |       
|Pro forma revenues                                  |  | $                                  | 6,724  |  
|                                                    | 
|Pro forma loss from continuing operations           |  | $                                  | (1,117 | )
|                                                    | 
|Pro forma net loss                                  |  | $                                  | (1,156 | )
|                                                    | 
|Pro forma loss per share from continuing operations |  |                                    |        |  
|Basic                                               |  | $                                  | (0.04  | )
|Diluted                                             |  | $                                  | (0.04  | )
|Pro forma loss per share, net                       |  |                                    |        |  
|Basic                                               |  | $                                  | (0.04  | )
|Diluted                                             |  | $                                  | (0.04  | )



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(6) 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:



|                |  |               |       |                  |   |      
|--------------- |  | ------------- | ----- | ---------------- | - | -----
|                |  | March 31,2007 |       | December 31,2006
|                |  | In thousands 
|Finished goods  |  | $             | 811   |                  | $ | 412  
|Work-in-process |  |               | 571   |                  |   | 548  
|Raw materials   |  |               | 2,621 |                  |   | 3,055
|                |  |               |       |                  |   |      
|Net inventories |  | $             | 4,003 |                  | $ | 4,015
|                |  |               |       |                  |   |      

(7) STOCK BASED COMPENSATION PLANS AND STOCK-BASED COMPENSATION EXPENSE

The Company has stock-based compensation plans for its employees, officers, and directors. The plans permit the grant of a variety of awards with various terms and
prices as determined by the Governance, Nominating and Compensation committee of the Companys Board of Directors. Generally the grants vest over terms of two to four years and are priced at fair market value, or in certain circumstances 110%
of the fair market value, of the common stock on the date of the grant. The options are generally exercisable after the period or periods specified in the option agreement, but no option may be exercised after 10 years from the date of grant.

Additionally, in the case of incentive stock options, the exercise price may not be less than 100% of the fair market value of the Companys common
stock on the date of grant. However, there is an exception in the case of a grant to an employee who owns or controls more than 10% of the combined voting power of all classes of the Companys stock or the stock of any parent or subsidiary. In
that case, the exercise price shall not be less than 110% of the fair market value on the date of grant. In the case of non-qualified stock options, the exercise price shall not be less than 85% of the fair market value of the Companys common
stock on the date of grant, except in the case of a grant to an independent director, in which case the exercise price shall be equal to fair market value determined by reference to market quotations on the date of grant.

Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 123(R), Share-Based
Payment, (SFAS 123(R)) and Staff Accounting Bulletin No. 107 (SAB 107). SFAS 123(R) establishes accounting for stock-based awards issued for employee services, while SAB107 provides guidance regarding the interaction
of SFAS 123(R) and certain SEC rules and regulations. Accordingly, stock-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized as an expense over the employees requisite service
period. The Company previously applied Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations and provided the required pro forma disclosures of SFAS
No. 123, Accounting for Stock-Based Compensation (SFAS 123). The Company elected to adopt the modified prospective application method as provided by SFAS 123(R), and, accordingly, the Company recorded compensation costs as
the requisite service was rendered for the unvested portion of previously issued awards that remain outstanding at the initial date of adoption and any awards issued, modified, repurchased, or cancelled after the effective date of SFAS 123(R).
Periods prior to adoption have not been restated.

In March 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin
No. 107 (SAB 107) which provides guidance regarding the interaction of SFAS 123(R) and certain SEC rules and regulations. The new guidance includes the SECs view on the valuation of share-based payment arrangements for public companies
and clarifies some of SFAS 123(R)s implementation for registrants. The Company adopted the provisions of SAB 107 on January 1, 2006.

On
November 10, 2005, the Financial Accounting Standards Board (the FASB) issued FASB Staff Position SFAS 123R-3 Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards. The
Company has elected to adopt the alternative transition method provided the FASB Staff Position for calculating the tax effects (if any) of stock-based compensation expense pursuant to SFAS 123R. The alternative transition method includes simplified
methods to establish the beginning balance of the additional paid-in capital pool related to the tax effects of employee stock-based compensation, and to determine the subsequent impact to the additional paid-in capital pool and the consolidated
statement of operation and cash flows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of SFAS 123R.



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Stock Option AwardsThe fair value of each option grant is estimated using the Black-Scholes option pricing model.
The fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. Use of a valuation model requires management to make certain assumptions with respect to selected
model inputs. Expected volatility was calculated based on the historical volatility of the Companys stock, at the time of the award. The average expected option term was estimated at 5 years. The risk-free interest rate is based on U.S.
Treasury zero-coupon issues assumed at the date of grant and no dividends were assumed in the calculation. The compensation expense recognized for all equity-based awards is net of estimated forfeitures for the three months ending March 31,
2007. Forfeitures are estimated based on the historical trends. The fair value of options at the date of grant was estimated using the Black-Scholes option pricing model. There were no options granted during 2006 or the first quarter of 2007.

A summary of option activity as of March 31, 2007 and changes during the first quarter is presented below:



|                                            |  |                    |   |  |                                        |  |                                                   |  |                                      
|------------------------------------------- |  | ------------------ | - |  | -------------------------------------- |  | ------------------------------------------------- |  | -------------------------------------
|                                            |  | OptionsOutstanding |   |  | WeightedAverageExercise Priceper Share |  | WeightedAverageRemainingContractualTerm (inYears) |  | AggregateIntrinsicValue (inthousands)
|Balance at December 31, 2006                |  | 2,859,083          |   |  | 4.86                                   |  | 5.18                                              |  | 490                                  
|                                            |  |                    |   |  |                                        |  |                                                   |  |                                      
|Vested and Exercisable at December 31, 2006 |  | 2,520,048          |   |  | 5.36                                   |  | 4.93                                              |  | 437                                  
|                                            |  |                    |   |  |                                        |  |                                                   |  |                                      
|Balance at December 31, 2006                |  | 2,859,083          |   |  | 4.77                                   |  | 6.47                                              |  | 234                                  
|Granted                                     |  |                   |   |  |                                       |  |                                                   |  |                                      
|Exercised                                   |  | (72,500            | ) |  | 0.79                                   |  |                                                   |  |                                      
|Cancelled                                   |  | (181,949           | ) |  | 8.22                                   |  |                                                   |  |                                      
|                                            |  |                    |   |  |                                        |  |                                                   |  |                                      
|Balance at March 31, 2007                   |  | 2,604,634          |   |  | 4.74                                   |  | 4.94                                              |  | 660                                  
|                                            |  |                    |   |  |                                        |  |                                                   |  |                                      
|Vested and Exercisable at March 31, 2007    |  | 2,309,475          |   |  | 5.20                                   |  | 4.70                                              |  | 594                                  
|                                            |  |                    |   |  |                                        |  |                                                   |  |                                      

As of March 31, 2007, there was approximately $57,000 of total unrecognized compensation cost related to
non-vested stock options granted. The cost is expected to be recognized over the next 1.75 years. The intrinsic value of the options exercised in the three months ended March 31, 2007 was approximately $48,000.

Restricted Share Awards  The Company awards to a number of key employees restricted shares of the Companys common stock. The awards vest in equal annual
installments over a period of four years, assuming continued employment, with some exceptions. The fair market value of the award at the time of the grant is amortized over the vesting period. The fair value of awards of shares of restricted stock
is based on the fair market value of the stock on the date of grant. During the quarter ended March 31, 2007 there were 5,987 shares of restricted stock awarded. During the quarter ended March 31, 2006, there were no shares of restricted
stock awarded. None of the grants vested during the quarters ended March 31, 2006 or March 31, 2007.

A summary of the status of the
Companys restricted shares of common stock as of March 31, 2007 and changes during the first quarter are presented below:



|                                |  |           |  |                                    
|------------------------------- |  | --------- |  | -----------------------------------
|                                |  | Shares    |  | WeightedAverageGrant-Date FairValue
|Non-vested at December 31, 2006 |  | 1,272,088 |  | 1.03                               
|Granted                         |  | 5,987     |  | 1.51                               
|Vested                          |  |          |  |                                   
|Cancelled                       |  |          |  |                                   
|                                |  |           |  |                                    
|Non-Vested at March 31, 2007    |  | 1,278,075 |  | 1.04                               
|                                |  |           |  |                                    



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As of March 31, 2007, there was approximately $1,135,000 of total unrecognized compensation cost related to
non-vested shares of restricted stock awards. The Company expects to recognize the costs over the next 3.08 years.

(8) 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 loss is as
follows:



|                                   |  |                             |        |   |      |   |        |  
|---------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                   |  | Three Months EndedMarch 31, |       
|                                   |  | 2007                        |        |   | 2006 |  
|                                   |  | In thousands                |       
|Net loss                           |  | $                           | (1,631 | ) |      | $ | (1,245 | )
|Other comprehensive income (loss): |  |                             |        |   |      |   |        |  
|Cumulative translation adjustment  |  |                             | 60     |   |      |   | (1     | )
|                                   |  |                             |        |   |      |   |        |  
|Comprehensive loss                 |  | $                           | (1,571 | ) |      | $ | (1,246 | )
|                                   |  |                             |        |   |      |   |        |  

(9) INTANGIBLE ASSETS

Intangible assets consist of trademarks, acquired patents and patented technologies, distributor and customer relationships and related contracts, trade and brand names and associated logos, technology design and
programs, non-compete agreements and other intangible assets. There are no intangible assets with indefinite lives. Acquired patented technologies and trademarks are amortized over their useful lives of between 10 to 16 years.

Gross carrying amounts and accumulated amortization of intangible assets were as follows as of March 31, 2007 for each intangible asset class.



|                                                              |  |                     |       |                         |   |        |             |  |   |      
|------------------------------------------------------------- |  | ------------------- | ----- | ----------------------- | - | ------ | ----------- |  | - | -----
|                                                              |  | GrossCarryingAmount |       | AccumulatedAmortization |   |        | NetBalances
|                                                              |  | (in thousands)     
|Acquired patents and patented technology                      |  | $                   | 3,088 |                         | $ | (2,652 | )           |  | $ | 436  
|Trademarks                                                    |  |                     | 471   |                         |   | (469   | )           |  |   | 2    
|Acquired trade name                                           |  |                     | 593   |                         |   | (31    | )           |  |   | 562  
|Acquired distributor and customer contracts and relationships |  |                     | 2,412 |                         |   | (207   | )           |  |   | 2,205
|Acquired non compete agreement                                |  |                     | 781   |                         |   | (108   | )           |  |   | 673  
|Acquired technology design and programs                       |  |                     | 408   |                         |   | (22    | )           |  |   | 386  
|Other                                                         |  |                     | 140   |                         |   | (14    | )           |  |   | 126  
|                                                              |  |                     |       |                         |   |        |             |  |   |      
|Total                                                         |  | $                   | 7,893 |                         | $ | (3,503 | )           |  | $ | 4,390
|                                                              |  |                     |       |                         |   |        |             |  |   |      



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Gross carrying amounts and accumulated amortization of intangible assets were as follows as of December 31, 2006 for
each intangible asset class.



|                                                              |  |                     |       |                         |   |        |             |  |   |      
|------------------------------------------------------------- |  | ------------------- | ----- | ----------------------- | - | ------ | ----------- |  | - | -----
|                                                              |  | GrossCarryingAmount |       | AccumulatedAmortization |   |        | NetBalances
|                                                              |  | (in thousands)     
|Acquired patents and patented technology                      |  | $                   | 3,088 |                         | $ | (2,574 | )           |  | $ | 514  
|Trademarks                                                    |  |                     | 471   |                         |   | (467   | )           |  |   | 4    
|Acquired trade name                                           |  |                     | 592   |                         |   | (12    | )           |  |   | 580  
|Acquired distributor and customer contracts and relationships |  |                     | 2,407 |                         |   | (83    | )           |  |   | 2,324
|Acquired non compete agreement                                |  |                     | 780   |                         |   | (43    | )           |  |   | 737  
|Acquired technology design and programs                       |  |                     | 407   |                         |   | (9     | )           |  |   | 398  
|Other                                                         |  |                     | 140   |                         |   | (6     | )           |  |   | 134  
|                                                              |  |                     |       |                         |   |        |             |  |   |      
|Total                                                         |  | $                   | 7,885 |                         | $ | (3,194 | )           |  | $ | 4,691
|                                                              |  |                     |       |                         |   |        |             |  |   |      

Amortization of intangible assets was $307,000 for the three months ended March 31, 2007 and $80,000 for the
three months ended March 31, 2006.

As of March 31, the estimated future amortization expense of intangible assets, in thousands, is as follows:



|                                          |  |                          |     |      |   |       |  |      |     |       |   |     |  |   |      
|----------------------------------------- |  | ------------------------ | --- | ---- | - | ----- |  | ---- | --- | ----- | - | --- |  | - | -----
|                                          |  | Estimated Future Expense |     |     
|                                          |  | 2007                     |     | 2008 |   | 2009  |  | 2010 |     | 2011+
|Amortization expense of intangible assets |  | $                        | 922 |      | $ | 1,109 |  | $    | 841 |       | $ | 463 |  | $ | 1,055

(10) 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.

(11) RECENT ACCOUNTING PRONOUNCEMENTS

In June 2006, FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in an enterprises financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods,
disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006 and the Company is required to adopt FIN 48.

The
Corporation had net deferred tax assets totaling $23.6 million as of December 31, 2006. Realization of the deferred tax assets is dependent upon the Corporations ability to generate sufficient future taxable income and, if necessary, execution
of tax planning strategies.

The Corporations historical operating losses raise considerable doubt as to when, if ever, any of the deferred tax
assets will be realized. As a result, management has provided a full valuation allowance for the net deferred tax assets. In the event management determines that sufficient future taxable income may be generated in subsequent periods and the
previously recorded valuation allowance is no longer needed, the Corporation will decrease the valuation allowance by providing an income tax benefit in the period that such a determination is made.

On January 1, 2007, the Corporation adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the accounting
for uncertainty in income tax positions recognized in accordance with SFAS No. 109, Accounting for Income Taxes. FIN 48 requires that an enterprise must determine whether it is more-likely-than-not that a tax position will be sustained
upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. A tax position that meets the more-likely-than-not threshold is then measured to determine the amount of benefit to
recognize in the financial statements. Based on its assessment, The Corporation has concluded that there are no significant uncertain tax positions that require recognition in the financial statements.

With respect to any future uncertain tax positions, the Corporation intends to record interest and penalties, if any, as a component of income tax expense.

We are subject to taxation in the US and various states and foreign jurisdictions. As a result of the Companys tax loss position, The tax years 1999- 2006
remain open to examination by the federal and most state tax authorities. In addition, the years 2002--2006 are open to examination in foreign jurisdictions.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 Defining Fair Value Measurement (FAS 157) which defines fair value, establishes a framework for measuring fair value in generally
accepted accounting principles and expands disclosures about fair value measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, which is the beginning of the Companys fiscal
2009. The Company is currently evaluating the impact of adopting FAS 157 on its financial statements.

In September 2006, the FASB also issued Statement of
Financial Accounting Standards No. 158 (FAS 158) Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FAS Statements No. 87, 88, 106, and 132(R). FAS 158 requires an
employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur
through comprehensive income of a business entity. This statement also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. The Company will be required
to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006, which for the Company will be the end of fiscal 2007. The
requirement to measure plan assets and benefit obligations as of the date of the employers fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008, or fiscal 2009 for the Company. The
Company is currently evaluating the impact of adopting FAS 158 on its financial statements.

In February 2007, the FASB issued Statement of Financial
Accounting Standards (FAS 159) The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115. FAS 159 provides entities with an option to choose to measure eligible
items at fair value at specified election dates. If elected, an entity must report unrealized gains and losses on the item in earnings at each subsequent reporting date. The fair value option may be applied instrument by instrument, with a few
exceptions, such as investments otherwise accounted for by the equity method, is irrevocable (unless a new election date occurs); and is applied only to entire instruments and not to portions of instruments. The Company is currently evaluating the
impact of adopting FAS 159 on its financial statements, which is effective beginning in fiscal year 2008.

In December 2006, the FASB issued FASB Staff
Position EITF 00-19-2, Accounting for Registration Payment Arrangement (FSP), which addresses an issuers accounting for registration payment arrangements. This FSP specifies that the contingent obligation to make future
payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in
accordance with FASB Statement No. 5, Accounting for Contingencies. For registration payment arrangements and financial instruments subject to those arrangements this guidance is effective for financial statements issued for fiscal
years beginning after December 15, 2006.



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(12) DEBT

Photonic Products Ltd.

The Company issued bonds to each of the stockholders of Photonic Products Ltd. with an aggregate initial principal
amount equal to US$2,400,000 (the Bonds). The outstanding principal under the Bonds issued to the stockholders of Photonic Products Ltd. accrues interest at an annual rate of 1% above the LIBOR rate as determined on the first business day of each
month. StockerYale (UK) Ltd. may elect to prepay the Bonds at any time, in whole or in part, without penalty or premium. If the stockholders of Photonic Products Ltd. breach any representation, warranty, covenant or agreement made in the Purchase
Agreement, StockerYale (UK) Ltd. or the Company may make a claim and the amounts outstanding under the Bonds will be reduced by an amount equal to any damages, claims, demands, losses, expenses, costs, obligations and liabilities reasonably and
foreseeably arising to the Company and/or StockerYale (UK) Ltd. If StockerYale (UK) Ltd. fails to make any payments under the Bonds, the stockholders of Photonic Products Ltd. will then have the right to require payment from the Company in the form
of newly issued shares of the Companys common stock. All unpaid principal plus accrued but unpaid interest under the Bonds is due and payable on October 31, 2009.

As of March 31, 2007 and December 31, 2006 , $2,400,000 was outstanding under the bonds issued to the stockholders of Photonic Products Ltd.

Laurus Master Fund

Security Agreement:

On June 28, 2006 the Company entered into a Security and Purchase Agreement with Laurus Master Fund, Ltd. (Laurus). Under the Security Agreement, a three-year revolving line of credit was established. The
proceeds from this line of credit were used to pay in full the outstanding amount under the credit facility between StockerYale Canada Inc. and National Bank of Canada as described below. Additional amounts borrowed under the line of credit from
time to time may be used for the Companys and StockerYale Canada Inc.s working capital needs. The Security Agreement provides for a revolving line of credit not to exceed an aggregate principal amount of $4 million and grants a security
interest in and lien upon all of the Companys assets in favor of Laurus. The Company may borrow a total amount at any given time up to $4,000,000, limited to qualifying receivables and inventories as defined.

The Company began making monthly payments to Laurus of accrued interest only on August 1, 2006. The outstanding principal under the note accrues interest at an
annual rate of 1% above the prime rate. The interest rate was 9.25% as of March 31, 2007. The Company may elect to prepay the note at any time, in whole or in part, without penalty or premium. All unpaid principal plus accrued but unpaid
interest is due and payable on June 28, 2009.

Also under the terms of this Security Agreement and in consideration of the line of credit, the Company
issued and sold to Laurus 642,857 shares of its common stock at a per share purchase price of $.001, for an aggregate purchase price of $643. The Company recorded debt acquisition costs relating to the line of credit for cash fees paid of $209,487
and an additional amount as debt acquisition costs of $757,925 representing the fair market value of the stock issued. The debt acquisition charges are being amortized over the life of the line of credit using the effective interest method.

There was $2,128,482 and $2,418,000 outstanding under the line of credit, which has been classified as long-term debt, as of March 31, 2007 and
December 31, 2006, respectively. Credit line availability was approximately $549,000 and approximately $100,000 as of March 31, 2007 and December 31, 2006, respectively.

In addition, the Company entered into a Registration Rights Agreement under which it agreed to register for resale within 60 days the shares of common stock issued and sold to Laurus. On July 21, 2006 the Company
filed a registration statement on Form S-3 (declared effective on August 25, 2006) with the SEC for the resale of the shares.

Term Note

On December 30, 2005, under the terms of a Securities Purchase Agreement, the Company issued a secured term note in the aggregate principal amount
of $4,000,000 to Laurus. The note is due on December 30, 2008 and is collateralized by U.S. accounts receivable, inventory and equipment, and a second security interest in accounts



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receivable, inventory and equipment in Montreal, Canada. The Company began making monthly payments of principal and interest on the note on April 1,
2006. The outstanding principal on the note accrues interest at an annual rate of 2% above the prime rate, subject to a minimum annual interest rate of 8% (subject to certain adjustments). The Company could elect to prepay the note provided that
(i) if prepayment occurred during the first year of the date of issuance, the Company would pay a 15% prepayment penalty, (ii) if prepayment occurred during the second year of the date of issuance, the Company would pay a 10% prepayment
penalty, and (iii) if prepayment occurred during the third year of the date of issuance, the Company would pay a 5% prepayment penalty.

Also, under
the terms of the Securities Purchase Agreement, the Company sold and issued to Laurus an aggregate of 750,000 shares of common stock of the Company at a per share purchase price of $.001, for an aggregate purchase price of $750, related to the
prepayment of certain convertible notes. The Company recorded debt acquisition costs of $102,650 and a debt discount of $720,000 representing the fair market value of the stock issued. The debt acquisition and debt discount charges were being
amortized over the life of the note using the effective interest method.

At March 31, 2007, $2,545,453 was outstanding under the note, which has been
classified as $1,454,542 short-term debt and $1,090,911 long term debt and reported net of $240,470 of unamortized debt discount, which has been classified as $199,422 short term and $41,048 long term.

At December 31, 2006, $2,909,092 was outstanding under the note, which has been classified as $1,454,546 short-term debt and $1,454,546 long term debt and reported
net of $316,164 of unamortized debt discount, which has been classified as $240,761 short term and $75,403 long term.

The Company has registered for
resale under the Securities Act of 1933, as required by the agreement, the shares of common stock sold and issued to Laurus. Because of certain provisions contained in the agreement, the Company initially classified the amounts allocated to the
common stock as a liability. This amount was reclassified to equity on February 14, 2006 when the shares were registered. The Company reclassified the market value of the stock on this date of $660,000 as equity and recorded a $60,000 gain to
other income (expense).

National Bank of Canada

The
Company had a revolving line of credit with the National Bank of Canada. The original agreement, dated May 26, 2003, was amended and renewed in March 2004 and March 2005. On March 29, 2006, the Company entered into a new, six-month
agreement with the National Bank of Canada under which the bank effectively waived the Companys noncompliance with the terms of the previous amended agreement. The banks waiver remained in effect only during the term of the new
agreement. All outstanding amounts under the new agreement were payable on demand, but in any event no later than September 30, 2006, the date on which the agreement automatically expired. The new agreement specifically provided that
(i) the bank will not renew the line of credit upon expiration of the agreement on September 30, 2006, and (ii) the Company must seek alternative financing and use the funds from the financing to pay all amounts owed to National Bank
of Canada under the agreement.

The new agreement provided a line of credit of CAD $2,725,000 ($2,338,000 US, converted at the December 31, 2005 rate
of $0.858) restricted by the borrowing base, as defined. The new agreement was collateralized by the Companys accounts receivable, inventory and equipment in Montreal and bore interest at the Canadian prime rate plus 2.50%. The credit facility
required the maintenance of certain financial covenants, including working capital, net worth, limitations on capital expenditures, restrictions on dividends, a financial coverage ratio and maximum inventory levels.

On June 28, 2006, this revolving line of credit was paid in full with the proceeds from the new line of credit from Laurus as described above.

Eureka Interactive Fund Ltd.

On May 12, 2005, the Company
issued a note to Eureka Interactive Fund, Ltd. The $1,500,000 note was initially due and payable in full on September 12, 2005. The note accrues interest on the outstanding principal balance at



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the rate of 10% per year, payable on the last day of each month. The Company also issued to Eureka five-year common stock warrants to purchase 250,000
shares at an exercise price per share of $0.90. The aggregate purchase price of the note and warrants ($1,500,000) was allocated between the note and warrants based upon their relative fair market value. The difference between the face amount of the
note of $1,500,000 and the aggregate purchase price of the note of $1,341,362 was recorded as a debt discount of $158,638 and is being amortized over the life of the note. The Company used the Black-Scholes Model to calculate the fair value of the
warrants. The underlying assumptions included in the Black-Scholes Model were: a risk-free interest rate of 3.87%, an expected life of five years and an expected volatility of 116% with no dividend yield.

On August 26, 2005, the Company entered into an amendment to the note in which the maturity date of the note
was extended to December 31, 2005. On December 15, 2005, the maturity date of the note was extended to January 15, 2007. The note accrues interest on the outstanding principal balance at the rate of 10% per year. The aggregate
outstanding principal amount of the note and accrued interest was payable in equal installments of $50,000 on the 15thday of each month, with the entire balance of unpaid principal and interest previously due on January 15, 2007. As a part of the December 15, 2005 agreement, the Company issued to the holder additional five-year common
stock warrants to purchase 150,000 shares at an exercise price per share of $0.90. An additional debt discount was recorded in the amount of $90,149 and is being amortized over the life of the note. The Company used the Black-Scholes Model to
calculate the fair value of the warrants. The underlying assumptions included in the Black-Scholes Model were: a risk-free interest rate of 4.40%, an expected life of five years and an expected volatility of 92% with no dividend yield.

On December 27, 2006, the Company entered into Amendment No. 3 to the note. The amendment extended the maturity date of the note from January 15, 2007
to January 15, 2008. The aggregate outstanding principal amount of the note as of the date of the amendment along with accrued interest is payable in equal installments of $50,000 on the 15th day of each month beginning on January 15, 2007
and continuing until March 15, 2007, and in equal installments of $100,000 on the 15th day of each month beginning on April 15, 2007 and continuing until December 15, 2007. The entire balance of unpaid principal and interest
thereafter shall be paid on January 15, 2008.

At March 31, 2007, $896,768 was outstanding under the note which has been classified as short-term
debt.

At December 31, 2006, $1,021,415 was outstanding under the note, which has been classified as $988,618 short-term debt and $34,796 long-term
debt and reported net of $5,138 of unamortized debt discount.

On October 31, 2006, StockerYale (UK) Ltd. issued a 10% Senior Fixed Rate Secured Bond
to The Eureka Interactive Fund Ltd. in the original principal amount of US$4,750,000. The bond is due on October 31, 2011. StockerYale (UK) Ltd. agreed to make payments of principal and interest over the term; however, during the first twelve
months of the term of the bond, only accrued interest will be required to be paid (no payments of principal will be required) and an amount equal to 50% of the original principal sum of US$4,750,000 will be paid on October 31, 2011. The
outstanding principal on the bond accrues interest at an annual rate of 10%. StockerYale (UK) Ltd. may prepay the bond at any time, in whole or in part, without penalty or premium. The bond is secured by all of the equity interests of Photonic
Products Ltd. owned by the Company and StockerYale (UK) Ltd. as stated in the Charge Over Shares by and among the Company, StockerYale (UK) Ltd. and The Eureka Interactive Fund Ltd., which was entered into in connection with the financing. The
Company used the net proceeds to make the cash payment for the acquisition of Photonic Products Ltd. The remaining proceeds will be used for transaction fees and working capital.

Stock and Warrant Purchase Agreements

In connection with the bond, on October 31, 2006, the Company issued a
Common Stock Purchase Warrant to Eureka to purchase 2,375,000 shares of its common stock for a purchase price of $1.15 per share. The warrant expires on the tenth anniversary of the date of issuance. If StockerYale (UK) Ltd. prepays all amounts
outstanding under the bond prior to the third anniversary of the date of issuance, then the number of shares of the Companys common stock purchasable upon exercise of the warrant shall be changed to the following numbers: (i) 1,900,000 if
the bond is repaid in full prior to the first anniversary of the date of issuance; (ii) 2,018,750 if the bond is repaid in full prior to the second anniversary of the date of issuance; and (iii) 2,137,500 if the bond is repaid in full
prior to the third anniversary of the date of issuance. The aggregate purchase price of the bond and warrants of



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$4,750,000 was allocated between the bond and the common stock warrants based upon their relative fair market value. The purchase price allocated to the bond
was $3,255,349 and the purchase price allocated to the common stock warrants was $1,494,651. The difference between the aggregate face amount of the bond of $4,750,000 and the aggregate purchase price of the bond was recorded as a debt discount of
$1,494,651 and will be amortized over the life of the bond. The Company used the Black-Scholes Model to calculate the fair value of the warrants. The underlying assumptions included in the Black-Scholes Model were: a risk-free interest rate of
4.61%, an expected life of ten years and an expected volatility of 102% with no dividend yield.

At March 31, 2007, $4,750,000 remained outstanding
under the note which has been classified as $247,396 short-term debt and $4,502,604 long term and reported net of $1,335,432 of unamortized debt discount, which has been reported as long-term.

(13) EQUITY

Stock and Warrant Purchase Agreement

On January 26, 2007, the Company entered into a Securities Purchase Agreement with Smithfield Fiduciary LLC, a fund which is managed by Highbridge Capital
Management, LLC. Under the terms of that agreement, the Company sold and issued to Smithfield Fiduciary LLC for an aggregate purchase price of $2,300,000, (i) 2,000,000 shares of common stock of the Company at a per share purchase price of
$1.15 (a discount to the 30 day trading average) and (ii) a warrant to purchase 1,000,000 shares of common stock of the Company at an exercise price of $1.72 per share. The warrant expires on the tenth anniversary of the date of issuance.

The Company used the Black-Scholes Model to calculate the fair value of the warrants which totaled $1,292,814. The underlying assumptions included in the
Black-Scholes Model were: a risk-free interest rate of 4.88%, an expected life of ten years and an expected volatility of 101% with no dividend yield.

The
warrant and the shares of common stock issued and sold under the agreement were issued and sold under the exemption from the registration and prospectus delivery requirements of the Securities Act of 1933 under Section 4(2) and Rule 506 of
Regulation D as a sale by the Company not involving a public offering. No underwriters were involved with the issuance and sale of the securities.

The
Company and Smithfield Fiduciary LLC also entered into a Registration Rights Agreement under which the Company agreed, at its sole expense, to file a registration statement within seven business days to register for resale under the Securities Act
of 1933, as amended, the shares issuable upon exercise of the warrant and the shares of common stock issued and sold to Smithfield Fiduciary LLC under the Securities Purchase Agreement. The Company filed a registration statement that was declared
effective February 14, 2007.

The Company plans to use the net proceeds from the transaction with Smithfield Fiduciary LLC for general corporate
purposes, including to invest in its information technology infrastructure and to accelerate operational improvements.

(14) DISCONTINUED
OPERATIONS

In December 2005, the Companys management and the Board of Directors made a decision to sell or close its Singapore operation as well
as its fiber optic illumination and galvanometer product lines including a planned workforce reduction of 11%. Accordingly, the results of those operations have been reclassified and are included in discontinued operations.

On February 15, 2006, the Company completed the sale of 100% of its stock ownership in its StockerYale Asia subsidiary to Radiant Scientific Pte. Ltd. for the
consideration of $1 and a note for $250,000, which was initially recorded at $0 value. The Company recorded $76,000 as income during 2006 for cash collected on the note. Radiant assumed all obligations and liabilities of approximately $465,000 and
assets of approximately $466,000. The assets were mainly accounts receivable and inventory. The Company has no contractual arrangements with Radiant Scientific Pte., Ltd. The Company expects to continue to sell an insignificant amount of product to



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previous customers of StockerYale Asia. In the first quarter ended March 31, 2007, the Company recorded income of approximately $21,000 from payments
made on the note payable.

On March 1, 2006, the Company completed the sale of its fiber optic lighting business to Techni-Quip Corp. of Pleasanton,
California. For $275,000 the Company sold inventory and fixed assets valued at $275,000 and agreed to supply specialty fiber products to Techni-Quip over a five-year period with a minimum total value of $275,000 and a maximum total value of
$550,000. In addition, Techni-Quip assumed Company supplier purchase order obligations valued at $105,000. Those revenues would have been eliminated as inter-company sales within the illumination segment before the restructure. The fiber optic
illumination product line and Singapore operations were previously classified under the Companys illumination segment. The sale to Radiant was structured as a stock sale and the sale to Techni-Quip was in the form of an asset purchase.

The Company completed its last shipment from the galvanometer product line on December 1, 2006. On December 22, 2006, the Company signed an
asset purchase agreement with a third party to provide the remaining assets of the galvanometer line in return for a royalty of 5% of sales of Galvo Pen Motors that are sold by the third party during the five years following the date of the
agreement, to a maximum of $35,000. In the first quarter of 2007, the Company has recorded a loss of approximately $3,000 related to warranty credits for galvanometer.

No interest was allocated to any of the discontinued operations.

Current assets of discontinued businesses at
December 31, 2006 and March 31, 2007 in the accompanying balance sheet mainly represent inventory for the galvanometer product line and trade receivables from sales made from the galvanometer product line during the year. Current
liabilities of discontinued businesses at December 31, 2006 in the accompanying balance sheet represent trade payables and accrued liabilities for potential cancellation charges.

(15) COMMITMENTS AND CONTINGENCIES

Lease obligation treated as financing

On December 30, 2005, the Company closed a sale-leaseback transaction on the Companys Salem, New Hampshire headquarters with 55 Heritage LLC.
The terms of the Real Estate Purchase Agreement dated November 29, 2005, as amended on December 22, 2005 between the Company and the buyer were that (i) the Company agreed to sell the property to the buyer, for $4,700,000, and
(ii) the Company agreed to lease from the buyer (a) approximately 32,000 square feet of the property for an initial term of five years with a rental rate during such period of $192,000 per year in base rent and (b) approximately
63,000 square feet of the property for an initial term of five years with rental rates during such period ranging from approximately $220,500 to $315,000 per year in base rent, plus a pro rata share of all operating costs of the property. The
Company plans to sublease all or part of the 63,000 square feet block of space. At the time an opportunity arises to enter into a sublease agreement with a third party, either (i) the Company will enter into a sublease agreement with such third
party or (ii) the buyer will enter into a direct lease with such third party. The lease agreement grants the Company the option to extend the initial term for a period of five years. Because the transaction did not qualify as a sale for
Generally Accepted Accounting Principles (GAAP) reporting purposes under SFAS 66, Accounting for Sales of Real Estate and SFAS 98, Accounting for Leases, the net proceeds were classified as a financing obligation. This was
primarily due to the terms of the lease agreement. Additionally, the Company continues to carry the value of the building on its balance sheet and record depreciation expense until the criteria to record a sale are met. The Company continues to
account for the financing lease in accordance with the provisions of SFAS 98. During the first quarter of 2007, the Company recorded $77,000 as a non-cash interest expense and $8,000 as a reduction of the lease obligation. During the first quarter
of 2006, the Company recorded $81,000 as non-cash interest expense and $46,000 as a reduction of the lease obligation.

At March 31,
2007, $3,670,000 was recorded on the balance sheet as a financing lease obligation, which has been classified as $507,000 short-term obligation and $3,163,000 long-term obligation.

At December 31, 2006, $3,678,000 was recorded on the balance sheet as a financing lease obligation, which has been classified as $507,000 short-term
obligation and $3,171,000 long-term obligation.



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On October 26, 2005, the Company signed a sub-lease agreement with Onvio Servo, LLC for
approximately 17,000 square feet of its Salem facility at a rate of $10.00 per square foot, or for $14,166.67 per month. The commencement date of the lease was November 15, 2005 for a term of twelve months. The agreement also provided for
either party to terminate the sub-lease after sixth months upon sixty days notice to the other party. At any event, the lease was effective for a minimum of six months. The Company received $42,500 in the first quarter of 2006 for sublease income.
This sub-lease to Onvio Servo, LLC ended in November, 2006.

Other obligations

Our Canadian subsidiary, StockerYale Canada, Inc., conducts research and development, manufacturing, sales and administration from a property located at
275 Kesmark Street, Montreal, Quebec, Canada. On December 20, 2005, StockerYale Canada sold the Montreal property to a buyer for CAD $4,150,000 in gross proceeds. StockerYale Canada leases back 59,433 square feet of the Montreal property from
the new owner for an initial term of ten years. StockerYale Canada paid a security deposit in the amount of CAD $502,915. The rent during the ten-year term ranges from approximately CAD $416,031 to CAD $469,521 per year plus all operating costs.
StockerYale Canada has the option to extend the initial term of the lease for an additional term of five years.

On May 1, 2006, the
Company signed a sub-lease agreement with PyroPhotonics Lasers, Inc. for approximately 3,000 square feet of its Montreal facility at a rate of CAD $12.58 per square foot, or for CAD $3,146 per month. The commencement date of the lease was
May 1, 2006 and the term is twelve months. The agreement also provides the tenant with an option to renew for one additional year upon ninety days written notice to the Company.

On January 23, 2007 the Company revised and signed a sub-lease agreement with PyroPhotonics Lasers, Inc. for approximately 9,000 square feet of its
Montreal facility at a rate of CAD $11.89 per square foot, or for CAD $8,916.67 per month. The commencement date of the revised lease is February 1, 2007 and the term is eight years and nine months. The Company has received CAD $20,978
year-to-date for sublease income.

Indemnification Agreements

On March 29, 2006, each member of the Board of Directors and the Chief Executive Officer and Chief Financial Officer entered into a form of
Indemnification Agreement with the Company. Each Indemnification Agreement provides that if the director or executive officer is involved in any threatened, pending or completed action, suit or proceeding, whether brought by or in the right of the
Company or by any other party and whether of a civil, criminal, administrative or investigative nature, by reason of the fact that the director or executive officer is or was a director or executive officer of the Company, or is or was serving at
the request of the Company as a director, officer, employee, trustee, partner or other agent of another organization or other enterprise, then the Company must indemnify the directors and executive officers to the fullest extent authorized or
permitted by applicable law against all expenses, judgments, awards, fines and penalties provided that (i) the director or executive officer acted in good faith and in a manner in which the director or executive officer reasonably believed to
be in the best interests of the Company, (ii) in a criminal matter, the director or executive officer had no reasonable cause to believe that his conduct was unlawful, and (iii) the director or executive officer is not adjudged liable to
the Company. There have been no additional provisions recorded as it is believed that the insurance coverage is adequate.

(16)
LITIGATION

Beginning in May 2005, three putative securities class action complaints were filed in the United States District Court for the District of
New Hampshire against the Company and Mark Blodgett, the Companys President, Chief Executive Officer and Chairman of the Board, Lawrence Blodgett, a former director, Frances OBrien, the Companys former Chief Financial Officer,
Richard Lindsay, the Companys former Chief Financial Officer, and Ricardo Diaz, the Companys former Chief Operating Officer, purportedly on behalf of some of the Companys shareholders. The complaints, which assert claims under the
Securities Exchange Act of 1934, allege that some disclosures made by the Company in press releases dated April 19, 2004 and April 21, 2004 were materially false or misleading. The complaints seek unspecified damages, as well as interest,
costs, and attorneys fees. The three complaints were consolidated into one action and assigned to a single federal judge. The Court also



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appointed a group of lead plaintiffs and plaintiffs counsel, who recently filed a consolidated amended complaint to supersede the previously filed
complaints. Mr. Lindsay is not named as a defendant in the amended complaint; therefore, he is not a party to the currently pending proceeding. The consolidated amended complaint asserts claims under Sections 10(b), 20(a), and 20A of the
Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder. On January 31, 2006, the Company and the individual defendants moved to dismiss all claims asserted in the consolidated amended complaint. On September 29, 2006, the
United States District Court for the District of New Hampshire ruled against the defendants on the motions to dismiss. On October 12, 2006, the Company and the individual defendants answered the consolidated amended complaint, denying all
allegations of liability and setting forth affirmative defenses to the claims. On November 17, 2006, the Court approved a plan for the conduct of discovery in this matter.

On June 17, 2005, a purported shareholder derivative action was filed in the United States District Court for the District of New Hampshire against the Company (as a nominal defendant) and Mark Blodgett, our
Chief Executive Officer and Chairman of the Board, Lawrence Blodgett, a former director, and Steven Karol, Dietmar Klenner, Raymond Oglethorpe and Mark Zupan, all of whom are current directors of the company. The plaintiff derivatively claimed
breaches of fiduciary duty by the defendant directors and officers in connection with the disclosures made by us in press releases dated April 19, 2004 and April 21, 2004, the awarding of executive bonuses, and trading in Company common
stock while allegedly in possession of material, non-public information. On January 30, 2007, the Court granted the plaintiffs request for voluntarily dismissal and dismissed the action without prejudice.

The Company intends to vigorously contest the allegations in the securities complaint. However, due to the nature of these cases, the Company is unable to predict the
outcome of this litigation or the application of, or coverage provided by, the Companys insurance carriers.

The Company is party to various legal
proceedings generally incidental to its business. Although the disposition of any legal proceedings cannot be determined with certainty, it is the Companys opinion that any pending or threatened litigation will not have a material adverse
effect on the Companys results of operations, cash flow or financial condition.

(17) DERIVATIVE FINANCIAL INSTRUMENTS

The Company has entered into forward foreign currency exchange rate contracts and option contracts with financial institutions to reduce the risk that
our cash flows and earnings will be adversely affected by foreign currency exchange rate fluctuations between the U.S. dollar and the Canadian dollar. These programs are not designed for trading or speculative purposes. The Company does not believe
that our Cork, Ireland subsidiary has material foreign currency exchange rate exposure. In accordance with SFAS No. 133, the Company recognizes derivative instruments as either assets or liabilities on the balance sheet at fair value. These
forward contracts are not accounted for as hedges and, therefore, changes in the fair value of these instruments are recorded as interest income and other, net. Neither the cost nor the fair value of the contracts was material at December 31,
2006. The notional principal of the Companys forward contracts to purchase Canadian dollars with foreign currencies as of December 31, 2006 was $1,250,000. The fair value of the Companys open forward contracts was $31,900 as of
December 31, 2006 and is recorded in the accompanying condensed consolidated balance sheet. The net impact of these forward contracts during 2006 was a net loss of $14,500 and it was recorded in the accompanying condensed consolidated statement
of operations. The net gain recorded in the quarter ended March 31, 2007 on these remaining forward contracts was $8,559.

The objective of this
option contract is to limit the fluctuations in prices paid materials and labor and the potential volatility in cash flows from future foreign exchange rate movements CAD versus USD. The Company continually evaluates those currency exchange rates
with respect to its future usage requirements.

On December 6, 2006 the Company entered into a forward foreign currency exchange rate contract with
Anglo-Irish bank to convert $500,000 U.S. dollars per month into Canadian dollars at a strike rate with a bottom end range of $1.09 CAD to the USD, and 100% upside flexibility to market rates in excess of the $1.09 strike rate. This arrangement
began on March 1, 2007 and continues until December 31, 2007. The Company paid a premium of $61,500 USD to the bank on this date. At March 31, 2007, the value of this contract was approximately $9,000.

Management has determined that all of our 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 foreign currency exchange rate prevailing at the balance sheet date, while income and expense accounts are translated at average exchange rates during the
year.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 our transactions in these foreign markets.

(18) SEGMENT INFORMATION

SFAS No. 131
(SFAS 131), Disclosures about Segments of an Enterprise and Related information, 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 Companys accounting policies and
method of presentation for segments is consistent with that used throughout the consolidated financial statements.

The Company operates in three segments:
illumination, optical components and Photonic Products. In the illumination segment the Company acts as an independent designer and manufacturer of advanced illumination products, consisting of lasers, light emitting diodes and florescent lighting
products for the inspection, machine vision, medical and military markets. The Company is a developer and manufacturer of specialty optical fiber (SOF) and diffractive optics such as phase masks used primarily in the telecommunications, defense, and
medical markets by original equipment manufacturers. The Photonic Products segment distributes laser diodes and designs and manufactures custom laser diodes modules for industrial, commercial and medical applications. The policies relating to
segments are the same as the Companys corporate policies.

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. Certain of the Companys indirect 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.



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All revenues and costs associated with our discontinued businesses have been eliminated from segment reporting, so that
the net effect is to report from continuing operations only.



|               |  |                                   |       |   |                                   |   |      |                  |  |   |       |   |  |              |       |   |                   |   |       |                  |  |       |      |   |  |   |   |  |   |       |  
|-------------- |  | --------------------------------- | ----- | - | --------------------------------- | - | ---- | ---------------- |  | - | ----- | - |  | ------------ | ----- | - | ----------------- | - | ----- | ---------------- |  | ----- | ---- | - |  | - | - |  | - | ----- | -
|               |  | Three months Ended March 31, 2007 |       |   | Three months Ended March 31, 2006 |  
|               |  | Illumination                      |       |   | OpticalComponents                 |   |      | PhotonicProducts |  |   | Total |   |  | Illumination |       |   | OpticalComponents |   |       | PhotonicProducts |  | Total |     
|Net sales      |  | $                                 | 4,153 |   |                                   | $ | 805  |                  |  | $ | 2,518 |   |  | $            | 7,476 |   |                   | $ | 3,863 |                  |  | $     | 578  |   |  | $ |  |  | $ | 4,441 |  
|Gross margin   |  |                                   | 1,635 |   |                                   |   | 302  |                  |  |   | 635   |   |  |              | 2,572 |   |                   |   | 1,490 |                  |  |       | 199  |   |  |   |  |  |   | 1,689 |  
|Operating loss |  |                                   | (525  | ) |                                   |   | (158 | )                |  |   | (317  | ) |  |              | (1000 | ) |                   |   | (623  | )                |  |       | (251 | ) |  |   |  |  |   | (874  | )



|                                 |  |                |        |                   |   |                  |  |           |        |       |   |              |  |                   |        |                  |   |           |  |       |       |  |   |        |  |   |       |  |   |       
|-------------------------------- |  | -------------- | ------ | ----------------- | - | ---------------- |  | --------- | ------ | ----- | - | ------------ |  | ----------------- | ------ | ---------------- | - | --------- |  | ----- | ----- |  | - | ------ |  | - | ----- |  | - | ------
|                                 |  | March 31, 2007 |        | December 31, 2006
|                                 |  | Illumination   |        | OpticalComponents |   | PhotonicProducts |  | Corporate |        | Total |   | Illumination |  | OpticalComponents |        | PhotonicProducts |   | Corporate |  | Total
|Total current assets             |  | $              | 5,015  |                   | $ | 475              |  | $         | 3,219  |       | $ | 1,556        |  | $                 | 10,265 |                  | $ | 4,967     |  | $     | 444   |  | $ | 3,042  |  | $ | 1,343 |  | $ | 9,796 
|Property, plant & equipment, net |  |                | 3,164  |                   | $ | 2,980            |  |           | 698    |       | $ | 4,118        |  |                   | 10,960 |                  |   | 3,212     |  |       | 3,400 |  |   | 791    |  |   | 3,852 |  |   | 11,255
|Acquired intangible assets, net  |  |                | 438    |                   |   |                  |  |           | 3,952  |       |   |              |  |                   | 4,390  |                  |   | 518       |  |       |       |  |   | 4,173  |  |   |       |  |   | 4,691 
|Goodwill                         |  |                | 2,677  |                   |   |                  |  |           | 5,290  |       |   |              |  |                   | 7,967  |                  |   | 2,677     |  |       |       |  |   | 5,280  |  |   |       |  |   | 7,957 
|Other long-term assets           |  |                | 394    |                   |   |                  |  |           |        |       | $ | 759          |  |                   | 1,153  |                  |   | 391       |  |       |       |  |   |        |  |   | 853   |  |   | 1,244 
|Total                            |  | $              | 11,688 |                   | $ | 3,329            |  | $         | 13,285 |       | $ | 6,433        |  | $                 | 34,735 |                  | $ | 11,765    |  | $     | 3,844 |  | $ | 13,286 |  | $ | 6,048 |  | $ | 34,943
|                                 |  |                |        |                   |   |                  |  |           |        |       |   |              |  |                   |        |                  |   |           |  |       |       |  |   |        |  |   |       |  |   |       

The Companys sales by geographic region are denominated in U.S. dollars. These sales are as follows:



|                         |  |                             |       |      |   |      
|------------------------ |  | --------------------------- | ----- | ---- | - | -----
|                         |  | Three monthsEnded March 31,
|Sales by region          |  | 2007                        |       | 2006
|Domestic  United States |  | $                           | 3,473 |      | $ | 1,970
|Canada                   |  |                             | 622   |      |   | 609  
|                         |  |                             |       |      |   |      
|Europe                   |  |                             | 2,333 |      |   | 1,382
|                         |  |                             |       |      |   |      
|Asia                     |  |                             | 819   |      |   | 417  
|ROW                      |  |                             | 229   |      |   | 63   
|                         |  |                             |       |      |   |      
|Total                    |  | $                           | 7,476 |      | $ | 4,441
|                         |  |                             |       |      |   |      



|ITEM 2. | MANAGEMENTS DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | ------------------------------------------------------------------------

The following discussion of the consolidated financial condition and results of operations of the Company should be read in conjunction with the unaudited condensed consolidated financial statements and the related
notes thereto included elsewhere in this Form 10-QSB. Except for the historical information contained herein, the following discussion, as well as other information in this report, contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and is subject to the safe harbor created by those sections. Some of the forward-looking statements can
be identified by the use of forward-looking terms such as believes, expects, may, will, should, could, seek, intends, plans,
estimates, anticipates or other comparable terms. Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those in the
forward-looking statements. We urge you to consider the risks and uncertainties described in Risk Factors in this report and in our annual report on Form 10-KSB for the year ended December 31, 2006. We undertake no obligation to
update our forward-looking statements to reflect events or circumstances after the date of this report. We caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made.



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Overview

StockerYale, Inc. is an independent designer and manufacturer of structured light lasers, LED modules, fluorescent lighting products, and specialty optical fibers and phase masks for industry-leading original equipment manufacturers (OEMs),
as well as a specialist distributor of visible, infrared and blue violet laser diodes. Our illumination products include the Lasiris and Photonic Products brands of laser diode modules, extremely bright light emitting diode (LED) illuminators and
fluorescent lighting products for the machine vision, industrial inspection, defense, telecommunications, sensors, and medical markets. Our products are sold to over 2,000 customers, primarily in North America, Europe and the Pacific Rim. We sell
directly to, and work with, a group of distributors and machine vision integrators to sell their specialized illumination products. In October 2006, we acquired Photonic Products Ltd., a designer and manufacturer of laser modules and a specialist
distributor of laser diodes.

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-KSB for the year ended December 31, 2006.

Our current forecast for 2007 calls for us to increase
revenues, and to improve margins, cash flow and asset turnover. Our acquisition of Photonic Products significantly broadened our product portfolio of laser modules at all price levels. Equally important, it gave us a closer working relationship with
the worlds leading laser diode manufacturers, including Opnext, Sanyo and Sony. These relationships will ultimately reduce our diode sourcing costs, reduce inventory levels and improve our product performance and market penetration.

During 2006, we completed the divestiture of three non-core product lines  our Singapore distribution subsidiary, and our fiber optic lighting and
galvanometer product lines. Strategically, these actions set the stage for our increased focus on the three higher return core businesses: lasers, LEDs, and specialty optical fiber. Following these transactions we were able to increase our focus on
R&D and sales and marketing on core higher margin units and accelerate our product development efforts in key areas.

We expect accelerated revenues in
2007 from our product development efforts. Since the beginning of 2007, we launched two innovative laser products. Our Lasiris PureBeam Fiber-Coupled Laser was our largest R&D initiative over the last three years. We expect this product launch
to significantly impact laser revenues over time due to new medical and biomedical applications. We also launched our Lasiris PowerLine Laser, a high power laser line generator for fast-speed machine vision and medical applications. In July 2006, we introduced our
patent-pending Flat-Top2 Generator for our low power laser category. This is an innovative beam shaping module for laser applications in bio-detection, night vision, and optical character recognition.

The Company intends to pursue various options to finance any acquisitions and also to fund operations, as necessary, through the end of 2007. If the Company does not
achieve its goals for 2007, management would implement cost reduction strategies to conserve cash; however, management believes that there is adequate capital to sustain current operations through 2007.

FISCAL QUARTERS ENDED MARCH 31, 2007 AND 2006

Net Sales

Net sales were $7.5 million for the three months ended March 31, 2007, a 68% increase over $4.4 million for the first
quarter of 2006, and a 28% sequential increase compared with $5.8 million for the fourth quarter of 2006. Photonic Products revenue accounted for 59% of the total revenue growth and 35% of total revenue for the three months ended March 31,
2007. Geographic distribution of our first quarter sales was 47% in the U.S., 8% in Canada, 31% in Europe, and 11% in Asia.



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Gross Profit

Gross profit was $2.6 million for the three months ended March 31, 2007. This represents an increase of 52% from $1.7 million for the first quarter of 2006, and 50% from $1.7 million in the fourth quarter of 2006.

During the three months ended March 31, 2007 gross margin was 34% compared with 38% in the first quarter of 2006, due to the inclusion of Photonic Products
mix of distributed and manufactured products and associated overhead expense. Gross margin increased 3% over fourth quarter 2006 gross margin of 31%, primarily due to laser line volume increase at StockerYale Canada.

Operating Expenses

Operating expenses totaled $3.3
million for the three months ended March 31, 2007, increasing 32% year-over-year and 20% quarter-over-quarter. The increase was primarily due to the additional operating expenses of Photonic Products, along with infrastructure investments being
made by management in the areas of IT, Sarbanes-Oxley compliance and sales and marketing. Non-cash amortization of intangible assets increased $0.2 million. Research and development spending increased by 10% to $0.8 million, but declined as a
percentage of revenue to 10% from 16%. Sales and marketing and general and administrative expense increased 40%, or $0.7 million, but declined as a percentage of revenue to 33% from 40%.

Operating loss for the first quarter was $1.0 million compared with operating losses of $0.9 million for the first quarter of 2006 and $1.2 million for the fourth quarter of 2006.

Non-Operating Expenses

Other expenses, which include
primarily non-cash debt and interest expense, increased by $0.4 million, or 121%, for the three months ended March 31, 2007 mainly due to new borrowing in October 2006 for the acquisition of Photonic Products, Ltd.

Net Income (Loss)

Net loss including discontinued
operations was $1.6 million or $0.05 per share. This compares to net loss of $1.2 million or $0.04 per share for the first quarter of 2006 and $1.6 million or $0.05 per share for the fourth quarter of 2006.

Provision (Benefit) for Income Taxes

We have
recorded a valuation allowance against our net deferred tax assets after concluding that it is more likely than not that we will not be able to use those deferred tax assets. The Company recorded an income tax benefit for the quarter ended
March 31, 2007 related to one of its non-U.S. based subsidiaries.



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LIQUIDITY AND CAPITAL RESOURCES

The current ratio (the ratio of current assets to short term liabilities) as of March 31, 2007 was 1.24. This was approximately the same as the December 31, 2006 current ratio of 1.20. Our March 31,
2007 cash balance of $1.6 million was $0.2 million higher than our cash balance on December 31, 2006.

We used $1.2 million of cash for operating
activities during the first quarter of 2007 compared to $0.5 million in the first quarter of 2006. Total financing activities conducted during the first quarter of 2007 contributed $1.5 million in cash mainly from net proceeds from the sale of
common stock ($2.3 million). We made principal payments of debt of $0.5 million. Investing activities for the first quarter of 2007 were $(0.2) million mainly for the acquisition of plant and equipment.

On June 28, 2006 we entered into a Security and Purchase Agreement with Laurus Master Fund, Ltd. Under the Security Agreement, a three-year revolving line of credit
was established as described below under Borrowing Arrangements. We may borrow a total amount at any given time up to $4,000,000, limited to qualifying receivables and inventories, as defined in the agreement, for our working capital
needs.

On January 26, 2007, we entered into a Securities Purchase Agreement with Smithfield Fiduciary LLC, under which we sold and issued for an
aggregate purchase price of $2,300,000 to Smithfield Fiduciary LLC 2,000,000 shares of our common stock at a per share purchase price of $1.15 (a discount to the 30 day trading average) and a 10-year warrant to purchase 1,000,000 shares of
common stock at an exercise price of $1.72 per share. We are using the proceeds from the transaction with Smithfield Fiduciary LLC for general working capital, including investments in our information technology infrastructure and accelerated
operational improvements.

Our cash balance improved from $1.4 million at December 31, 2006 to $1.6 million at March 31, 2007 primarily as a
result of the $2,300,000 we raised from Smithfield as described above.

Despite higher revenues, inventory stayed constant at $4.0 million. Capital
spending for the period was $0.2 million.



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Finally, headcount was 204 at March 31, 2007 up slightly from year-end due to the addition of R&D and sales
personnel. We expect modest increases in headcount during the second quarter in line with our sales reengineering program and R&D investment.

OFF-BALANCE SHEET ARRANGEMENTS



We have no significant
off-balance sheet arrangements, including derivative instruments that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources.

RISK FACTORS

We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. Forward looking statements in this report and those made from time to time by us through our senior
management are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward looking statements concerning the expected future revenues, earnings or financial results or concerning project plans,
performance, or development of products and services, as well as other estimates related to future operations are necessarily only estimates of future results and there can be no assurance that actual results will not materially differ from
expectations. Forward-looking statements represent managements current expectations and are inherently uncertain. We do not undertake any obligation to update forward-looking statements. If any of the following risks actually occurs, our
financial condition and operating results could be materially adversely affected.

In addition to the other information set forth in this report, you
should carefully consider the factors discussed in Risk Factors in our annual report on Form 10-KSB for the year ended December 31, 2006, which could materially affect our business, financial condition or future results. The risks
described in our annual report on Form 10-KSB are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business,
financial condition and/or operating results. The risk factors in this report were disclosed in our annual report on Form 10-KSB and have been updated to provide information as of the date of this filing unless a different date is referred to in the
risk factor.

We have a history of losses and may never achieve or sustain profitability and may not continue as a going concern.

We have experienced operating losses over the last several years and may continue to incur losses and negative operating cash flows. We cannot predict the size or
duration of any future losses. We have historically financed our operations with proceeds from debt financings and the sale of equity securities. We anticipate that we will continue to incur net losses in the future. As a result, we cannot assure
you that we will achieve profitability or be capable of sustaining profitable operations. If we are unable to reach and sustain profitability, we risk depleting our working capital balances and our business may not continue as a going concern.

We need to obtain additional financing, which may not be available on favorable terms or at all.

As of March 31, 2007, we had cash and cash equivalents of approximately $1.6 million. On June 28, 2006, we established a three-year, $4 million revolving line
of credit with Laurus Master Fund, Ltd. and issued 642,857 shares of our common stock to Laurus Master Fund, Ltd. for $643. We used approximately $1.41 million of the proceeds available from this transaction to repay in full the amount outstanding
under our credit facility with the National Bank of Canada. We may borrow a total amount at any given time up to $4 million under the line of credit, limited to qualifying receivables and inventories as defined in the agreement. As of
December 31, 2006, $2,418,000 was outstanding under the line of credit, which has been classified as short-term debt.

On January 26, 2007, we
sold and issued to Smithfield Fiduciary LLC 2,000,000 shares of our common stock at a per share purchase price of $1.15 (a discount to the 30 day trading average), for an aggregate purchase price of $2,300,000, and a 10-year warrant to purchase
1,000,000 shares of our common stock at an exercise price of $1.72 per share.



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Notwithstanding the completion of these recent financings, we may have to raise additional capital but may not be able to
find it on favorable terms or at all. If we require additional capital and are unsuccessful in raising it, our business may not continue as a going concern. Even if we do find outside funding sources, we may be required to issue securities with
greater rights than those currently possessed by holders of our common stock. We may also be required to take other actions that may lessen the value of our common stock or dilute our common stockholders, including borrowing money on terms that are
not favorable to us or issuing additional equity securities. If we experience difficulties raising money in the future, our business and liquidity will be materially adversely affected.

We may not realize all of the anticipated benefits of our recent acquisition of Photonic Products Ltd.

On
October 31, 2006, we signed a purchase agreement that completed the acquisition of all of the issued and outstanding capital stock of Photonic Products Ltd. for (i) US$4,250,000 of cash from StockerYale (UK), a wholly owned subsidiary,
(ii) bonds issued by StockerYale (UK) to each of the stockholders of Photonic Products with an aggregate initial principal amount equal to US$2,400,000, (iii) 2,680,311 shares of our common stock and (iv) certain payments to the
stockholders of Photonic Products contingent upon specified financial targets being met over the next three years in an amount up to 439,966 pounds sterling in the aggregate to be made in either cash or shares of our common stock, at our sole
discretion. As a result of our acquisition of Photonic Products, a greater percentage of our total revenue is from customers outside the U.S.

The success
of the acquisition depends, in part, on our ability to realize anticipated synergies and growth and marketing opportunities from integrating the businesses of Photonic Products with the business of StockerYale. Our success in realizing these
benefits and the timing of this realization depend upon the successful integration of the technology, personnel and operations of Photonic Products. The integration of two independent companies is a complex, costly and time-consuming process. The
difficulties of combining the operations of the companies include, among others:



| |  |  | retaining key employees;
| | - |  | ------------------------



| |  |  | consolidating corporate and administrative infrastructures;
| | - |  | -----------------------------------------------------------



| |  |  | maintaining customer service levels;
| | - |  | ------------------------------------



| |  |  | coordinating sales and marketing functions;
| | - |  | -------------------------------------------



| |  |  | preserving the distribution, marketing, promotion and other important internal operations and third-party relationships of Photonic Products;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | minimizing the diversion of managements attention from our current business;
| | - |  | -----------------------------------------------------------------------------



| |  |  | coordinating geographically disparate organizations; and
| | - |  | --------------------------------------------------------



| |  |  | retaining key customers.
| | - |  | ------------------------

There can be no assurance
that the integration of Photonic Products with StockerYale will result in the realization of the full benefits that the parties anticipate in a timely manner or at all.

Securities we issue to fund our operations could dilute or otherwise adversely affect our stockholders.

We may need
to raise additional funds through public or private debt or equity financings to fund our operations. If we raise funds by issuing equity securities, or if we issue additional equity securities to acquire assets, a business or another company, the
percentage ownership of current stockholders will be reduced. If we raise funds by issuing debt securities, we may be required to agree to covenants that substantially restrict our ability to operate our business. We may not obtain sufficient
financing on terms that are favorable to investors or us. We may delay, limit or eliminate some or all of our proposed operations if adequate funds are not available.

In addition, on issuance of the shares of common stock upon exercise of outstanding warrants or stock options, the percentage ownership of current stockholders will be diluted substantially.



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We may be unable to fund the initiatives required to achieve our business strategy.

In 2002, we began to focus our resources on opportunities that would result in near-term revenue and simultaneously reduced our operating expenses by 40% on an annualized
basis. In 2004, 2005 and 2006, we continued to reduce costs and we are currently restructuring our product lines. In January 2006, we began a realignment of our operations into three core growth businesses: lasers, LEDs and specialty optical fiber.
The realignment is intended to (i) accelerate growth of our highest gross margin businesses by better leveraging our technology and products, (ii) reduce our overall cost structure, (iii) improve customer focus and responsiveness, and
(iv) accelerate new product development through more focused R&D efforts. In addition, in February 2006, we sold all of our interests in our Singapore operations. While we believe these efforts will assist us in improving our financial
condition, we can give no assurances as to whether our cost reduction and product restructuring efforts will be successful. If our cost reduction strategies are unsuccessful, we may be unable to fund our operations.

We face risks related to securities litigation that could have a material adverse effect on our business, financial condition and results of operations.

Beginning in May 2005, three putative securities class action complaints were filed in the United States District Court for the District of New
Hampshire against the Company and Mark Blodgett, the Companys President, Chief Executive Officer and Chairman of the Board, Lawrence Blodgett, a former director, Frances OBrien, the Companys former Chief Financial Officer, Richard
Lindsay, the Companys former Chief Financial Officer, and Ricardo Diaz, the Companys former Chief Operating Officer, purportedly on behalf of some of the Companys shareholders. The complaints, which assert claims under the
Securities Exchange Act of 1934, allege that some disclosures made by the Company in press releases dated April 19, 2004 and April 21, 2004 were materially false or misleading. The complaints seek unspecified damages, as well as interest,
costs, and attorneys fees. The three complaints were consolidated into one action and assigned to a single federal judge. The Court also appointed a group of lead plaintiffs and plaintiffs counsel, who recently filed a consolidated
amended complaint to supersede the previously filed complaints. Mr. Lindsay is not named as a defendant in the amended complaint; therefore, he is not a party to the currently pending proceeding. The consolidated amended complaint asserts
claims under Sections 10(b), 20(a), and 20A of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder. On January 31, 2006, the Company and the individual defendants moved to dismiss all claims asserted in the consolidated
amended complaint. On September 29, 2006, the United States District Court for the District of New Hampshire ruled against the defendants on the motions to dismiss. On October 12, 2006, the Company and the individual defendants answered
the consolidated amended complaint, denying all allegations of liability and setting forth affirmative defenses to the claims. On November 17, 2006, the Court approved a plan for the conduct of discovery in this matter.

On June 17, 2005, a purported shareholder derivative action was filed in the United States District Court for the District of New Hampshire against the Company (as
a nominal defendant) and Mark Blodgett, our President and Chief Executive Officer and Chairman of the Board, Lawrence Blodgett, a former director, and Steven Karol, Dietmar Klenner, Raymond Oglethorpe and Mark Zupan, all of whom are current
directors of the company. The plaintiff derivatively claimed breaches of fiduciary duty by the defendant directors and officers in connection with the disclosures made by us in press releases dated April 19, 2004 and April 21, 2004, the
awarding of executive bonuses, and trading in Company common stock while allegedly in possession of material, non-public information. On January 30, 2007, the Court granted the plaintiffs request for voluntarily dismissal and dismissed
the action without prejudice.

We intend to vigorously contest the allegations in the securities complaint. However, due to the nature of this case, we are
not able to predict the outcome of this litigation or the application of, or coverage provided by, our insurance carriers. There is no assurance we and our current and former directors and officers will prevail in defending this action or that our
insurance policies will cover all or any expenses or financial obligations arising from the lawsuit. If our defenses are ultimately unsuccessful, or if we are unable to achieve a favorable settlement or coverage from our insurance carriers, we could
be liable for large damage awards that could have a material adverse effect on our business, results of operations and financial condition.

A small
number of affiliated stockholders control more than 10% of our stock.

Our executive officers and directors as a group own or control approximately
thirteen percent (13%) of our common stock and five investors collectively own approximately thirty-nine percent (39%) of our common stock. Accordingly, these stockholders, if they act together, will be able to influence our management and
affairs and all matters requiring stockholder approval, including the election of directors and approval of significant corporate



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transactions. In addition, this concentration of ownership may have the effect of delaying or preventing a change in control of our Company and might
adversely affect the market price of our common stock.

The unpredictability of our quarterly results may cause the trading price of our common stock to
fluctuate or decline.

Our operating results have varied on a quarterly basis during our operating history and are likely to continue to vary
significantly from quarter-to-quarter and period-to-period as a result of a number of factors, many of which are outside of our control and any one of which may cause our stock price to fluctuate.

Factors that can impact our stock price include the implementation of our new business strategy, which makes prediction of future revenues difficult. Our ability to
accurately forecast revenues from sales of our products is further limited by the development and sales cycles related to our products, which make it difficult to predict the quarter in which sales will occur. In addition, our expense levels are
based, in part, on our expectations regarding future revenues, and our expenses are generally fixed, particularly in the short term. We may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Any
significant shortfall of revenues in relation to our expectations could cause significant declines in our quarterly operating results.

Due to the above
factors, we believe that quarter-to-quarter or period-to-period comparisons of our operating results may not be good indicators of our future performance. Our operating results for any particular quarter may fall short of our expectations or those
of stockholders or securities analysts. In this event, the trading price of our common stock would likely fall.

Our stock price has been volatile and
may fluctuate in the future.

Our common stock has experienced significant price and volume fluctuations in recent years. Since January 2005, our common
stock has closed as low as $0.66 per share and as high as $1.82 per share. These fluctuations often have no direct relationship to our operating performance. The market price for our common stock may continue to be subject to wide fluctuations in
response to a variety of factors, some of which are beyond our control. Some of these factors include:



| |  |  | the results and affects of litigation;
| | - |  | --------------------------------------



| |  |  | our performance and prospects;
| | - |  | ------------------------------



| |  |  | sales by selling stockholders of shares issued and issuable in connection with our private placements;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | changes in earnings estimates or buy/sell recommendations by analysts;
| | - |  | ----------------------------------------------------------------------



| |  |  | general financial and other market conditions; and
| | - |  | --------------------------------------------------



| |  |  | domestic and international economic conditions.
| | - |  | -----------------------------------------------

In
addition, some companies that have experienced volatility in the market price of their stock have been the subject of securities class action litigation or other litigation or investigations. In May 2005, the Company and certain of its current and
former directors and officers were sued in several purported class action lawsuits. Litigation often results in substantial costs and a diversion of managements attention and resources and could harm our business, prospects, results of
operations, or financial condition.

Our common stock price may be negatively impacted if it is delisted from the Nasdaq Global Market.

Our common stock is currently listed for trading on the Nasdaq Global Market. We must continue to satisfy Nasdaqs continued listing requirements, including a
minimum stockholders equity of $10 million and a minimum bid price for our common stock of $1.00 per share, or risk delisting which would have a material adverse affect on our business. A delisting of our common stock from the Nasdaq Global
Market could materially reduce the liquidity of our common stock and result in a corresponding material reduction in the price of our common stock. In addition, delisting could harm our ability to raise capital through alternative financing sources
on terms acceptable to us, or at all, and may result in the potential loss of confidence by investors, suppliers, customers and employees.

In the past, we
have received notices from the Nasdaq Stock Market indicating that we were not in compliance with Nasdaq Marketplace Rule 4450(a)(5) (the Minimum Bid Price Rule) but we have always regained



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compliance with the Minimum Bid Price Rule within the stated cure period. We also previously received a notice from the Nasdaq Stock Market indicating that
we were not in compliance with Nasdaq Marketplace Rule 4450(a)(3) regarding the minimum $10,000,000 stockholders equity requirement, but we regained compliance with this rule. However, there is no assurance that we will continue to comply with
the Minimum Bid Price Rule or the minimum stockholders equity requirement and our common stock may ultimately be delisted from the Nasdaq Global Market.

An impairment of goodwill and/or long-lived assets could affect net income.

We record goodwill on our balance sheet as a result of business
combinations consummated in prior years. We have also made a significant investment in long-lived assets. In accordance with applicable accounting standards, we periodically assess the value of both goodwill and long-lived assets in light of current
circumstances to determine whether impairment has occurred. If an impairment should occur, we would reduce the carrying amount to our fair market value and record an amount of that reduction as a non-cash charge to income, which could adversely
affect our net income reported in that quarter in accordance with generally accepted accounting principles. In 2006, we recorded $5.2 million in goodwill and $4.2 million in intangible assets as a result of our acquisition of Photonic Products Ltd.
In 2005, we recorded $1,397,000 in impairment charges. These 2005 impairment charges were a result of the Salem building valuation, the sale of the Montreal building and the fixed asset impairment of our phase-mask product line. We cannot
definitively determine whether additional impairments will occur in the future, and if impairments do occur, what the timing or the extent would be.

The loss of key personnel or the inability to recruit additional personnel may harm our business.

Our success depends to a significant
extent on the continued service of our executive officers, our senior and middle management and our technical and research personnel. In particular, the loss of Mark W. Blodgett, our President, Chairman and Chief Executive Officer, or other key
personnel, could harm us significantly. Hiring qualified management and technical personnel will be difficult due to the limited number of qualified professionals in the work force in general and the intense competition for these types of employees.
The loss of key management personnel or an inability to attract and retain sufficient numbers of qualified management personnel could materially and adversely affect our business, results of operations, financial condition or future prospects.

We depend on a limited number of suppliers and may not be able to ship products on time if we are unable to obtain an adequate supply of raw materials
and equipment on a timely basis.

We depend on a limited number of suppliers for raw materials and equipment used to manufacture our products. We depend
on our suppliers to supply critical components in adequate quantities, consistent quality and at reasonable costs. If our suppliers are unable to meet our demand for critical components at reasonable costs, and if we are unable to obtain an
alternative source, or the price for an alternative source is prohibitive, our ability to maintain timely and cost-effective production of our products would be harmed. We generally rely on purchase orders rather than long-term agreements with our
suppliers; therefore, our suppliers may stop supplying materials and equipment to us at any time. If we are unable to obtain components in adequate quantities we may incur delays in shipment or be unable to meet demand for our products, which could
harm our revenues and damage our relationships with customers and prospective customers.

We have many competitors in our field and our technologies may
not remain competitive.

We participate in a rapidly evolving field in which technological developments are expected to continue at a rapid pace. We
have many competitors in the United States and abroad, including various fiber optic component manufacturers, universities and other private and public research institutions.

Our major competitors in the specialty fiber optic market segment are Furukawa OFS, Fibercore, and Corning. In the laser market, we compete against Power Technology, Inc. in the United States, Schafter &
Kirchoff GMBH in Europe and several other smaller laser manufacturers. Our high-intensity LEDs compete with LEDs of Elcos, a subsidiary of Perkin Elmer, and Schott-Foster. In the industrial fluorescent lighting market, we have two primary
competitors, MicroLite and Techni-Quip Corporation. MicroLite markets a product similar in appearance to our circular fluorescent microscope illuminator. Techni-Quip Corporation offers industrial fluorescent lighting as part of its product line.

Our success depends upon our ability to develop and maintain a competitive position in the product categories and technologies on which we focus. To be
successful in the illumination and optical components industries, we



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will need to keep pace with rapid changes in technology, customer expectations, new product introductions by competitors and evolving industry standards, any
of which could render our existing products obsolete if we fail to respond in a timely manner. We could experience delays in introduction of new products. If others develop innovative proprietary illumination products or optical components that are
superior to ours, or if we fail to accurately anticipate technology and market trends and respond on a timely basis with our own innovations, our competitive position may be harmed and we may not achieve sufficient growth in our revenues to attain
or sustain profitability.

Many of our competitors have greater capabilities and experience and greater financial, marketing and operational resources than
us. Competition is intense and is expected to increase as new products enter the market and new technologies become available. To the extent that competition in our markets intensifies, we may be required to reduce our prices in order to remain
competitive. If we do not compete effectively, or if we reduce our prices without making commensurate reductions in our costs, our revenues and profitability, and our future prospects for success, may be harmed.

Our customers are not obligated to buy material amounts of our products and may cancel or defer purchases on short notice.

Our customers typically purchase our products under individual purchase orders rather than long-term contracts or contracts with minimum purchase requirements. Therefore,
our customers may cancel, reduce or defer purchases on short notice without significant penalty. Accordingly, sales in a particular period are difficult to predict. Decreases in purchases, cancellations of purchase orders or deferrals of purchases
may have a material adverse effect on us, particularly if we do not anticipate them. There can be no assurance that our revenue from key customers will not decline in future periods.

Our products could contain defects, which could result in reduced sales of those products or in claims against us.

Despite testing both by us and our customers, errors have been found and may be found in the future in our existing or future products. These defects may cause us to incur significant warranty, support and repair costs, divert the attention
of our technical personnel from our product development efforts and harm our relationship with our customers. Defects, integration issues or other performance problems in our illumination and optical products could result in personal injury or
financial or other damages to our customers or could damage market acceptance of our products. Our customers could also seek damages from us for their losses. A product liability claim brought against us, even if unsuccessful, would likely be time
consuming and costly to defend.

We are subject to risks of operating internationally.

We distribute and sell some of our products internationally, and our success depends in part on our ability to manage our international operations. Sales outside the United States accounted for 53% of our total
revenue for the year ended December 31, 2006 and approximately 53% of our total revenue for the first quarter ended March 31, 2007. We are subject to risks associated with operating in foreign countries, including:



| |  |  | foreign currency risks;
| | - |  | -----------------------



| |  |  | costs of customizing products for foreign countries;
| | - |  | ----------------------------------------------------



| |  |  | imposition of limitations on conversion of foreign currencies into dollars;
| | - |  | ---------------------------------------------------------------------------



| |  |  | remittance of dividends and other payments by foreign subsidiaries;
| | - |  | -------------------------------------------------------------------



| |  |  | imposition or increase of withholding and other taxes on remittances and other payments on foreign subsidiaries;
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | hyperinflation and imposition or increase of investment and other restrictions by foreign governments;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | compliance with multiple, conflicting and changing governmental laws and regulations;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | longer sales cycles and problems collecting accounts receivable;
| | - |  | ----------------------------------------------------------------



| |  |  | labor practices, difficulties in staffing and managing foreign operations, political instability and potentially
| | - |  | ----------------------------------------------------------------------------------------------------------------



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| | adverse tax consequence; and
| | ----------------------------



| |  |  | import and export restrictions and tariffs.
| | - |  | -------------------------------------------

If we
are unable to manage these risks, we may face significant liability, our international sales may decline and our financial results may be adversely affected.

Quantitative and Qualitative Disclosure about Market Risk

Foreign Currency Exchange Rate Risk

We have entered into forward foreign currency exchange rate contracts and option contracts with financial institutions to reduce the risk that our cash flows and earnings
will be adversely affected by foreign currency exchange rate fluctuations between the U.S. dollar and the Canadian dollar. These programs are not designed for trading or speculative purposes. We do not believe that our Cork, Ireland subsidiary has
material foreign currency exchange rate exposure. In accordance with SFAS No. 133, we recognize derivative instruments as either assets or liabilities on the balance sheet at fair value. These forward contracts are not accounted for as hedges
and, therefore, changes in the fair value of these instruments are recorded as interest income and other, net. Neither the cost nor the fair value of the contracts was material at December 31, 2006. The notional principal of our forward
contracts to purchase Canadian dollars with foreign currencies as of December 31, 2006 was $1,250,000. The fair value of our open forward contracts was $31,900 as of December 31, 2006 and is recorded in the accompanying condensed
consolidated balance sheet. The net impact of these forward contracts during 2006 was a net loss of $14,500 and it was recorded in the accompanying condensed consolidated statement of operations. The net gain recorded in the quarter ended
March 31, 2007 on these remaining forward contracts was $8,559.

The objective of this option contract is to limit the fluctuations in prices paid
materials and labor and the potential volatility in cash flows from future foreign exchange rate movements CAD versus USD. The Company continually evaluates those currency exchange rates with respect to its future usage requirements.

On December 6, 2006 we entered into a forward foreign currency exchange rate contract with Anglo-Irish bank to convert $500,000 U.S. dollars per month into Canadian
dollars at a strike rate with a bottom end range of $1.09 CAD to the USD, and 100% upside flexibility to market rates in excess of the $1.09 strike rate. This arrangement began on March 1, 2007 and continues until December 31, 2007. We
paid a premium of $61,500 USD to the bank on this date. At March 31, 2007, the value of this contract was approximately $9,000.

Management has
determined that all of our 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 foreign
currency exchange rate prevailing at the balance sheet date, while income and expense accounts are translated at average exchange rates during the year. Our 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 our transactions in these foreign markets.

Interest Rate Risk

We are exposed to market risk from changes in interest rates, which may adversely affect our financial position, results of operations and cash flows. In seeking to
minimize the risks from interest rate fluctuations, we manage exposures through our regular operating and financing activities. We are exposed to interest rate risk primarily through our borrowings under the Laurus Master Fund Ltd. line of credit of
$2,128 million with an interest rate of prime plus 1% and the Laurus Master Fund, Ltd. term note of $2,545 million with an interest rate of prime plus 2%. As of March 31, 2007, the fair market value of our outstanding debt approximates our
carrying value due to the short-term maturities and variable interest rates.



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|ITEM 3. | CONTROLS AND PROCEDURES
|------- | -----------------------



|(a) | Evaluation of disclosure controls and procedures.
|--- | -------------------------------------------------

We conducted an
evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective, as of the end of the period covered by this report, to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission rules and forms, and that the information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.



|(b) | Changes in internal control over financial reporting.
|--- | -----------------------------------------------------

There was no change
in our internal control over financial reporting during the first fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II: OTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------

Beginning in May 2005, three putative securities
class action complaints were filed in the United States District Court for the District of New Hampshire against the Company and Mark Blodgett, the Companys President, Chief Executive Officer and Chairman of the Board, Lawrence Blodgett, a
former director, Frances OBrien, the Companys former Chief Financial Officer, Richard Lindsay, the Companys former Chief Financial Officer, and Ricardo Diaz, the Companys former Chief Operating Officer, purportedly on behalf
of some of the Companys shareholders. The complaints, which assert claims under the Securities Exchange Act of 1934, allege that some disclosures made by the Company in press releases dated April 19, 2004 and April 21, 2004 were
materially false or misleading. The complaints seek unspecified damages, as well as interest, costs, and attorneys fees. The three complaints were consolidated into one action and assigned to a single federal judge. The Court also appointed a
group of lead plaintiffs and plaintiffs counsel, who recently filed a consolidated amended complaint to supersede the previously filed complaints. Mr. Lindsay is not named as a defendant in the amended complaint; therefore, he is not a
party to the currently pending proceeding. The consolidated amended complaint asserts claims under Sections 10(b), 20(a), and 20A of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder. On January 31, 2006, the Company
and the individual defendants moved to dismiss all claims asserted in the consolidated amended complaint. On September 29, 2006, the United States District Court for the District of New Hampshire ruled against the defendants on the motions to
dismiss. On October 12, 2006, the Company and the individual defendants answered the consolidated amended complaint, denying all allegations of liability and setting forth affirmative defenses to the claims. On November 17, 2006, the Court
approved a plan for the conduct of discovery in this matter.

On June 17, 2005, a purported shareholder derivative action was filed in the United
States District Court for the District of New Hampshire against the Company (as a nominal defendant) and Mark Blodgett, our Chief Executive Officer and Chairman of the Board, Lawrence Blodgett, a former director, and Steven Karol, Dietmar Klenner,
Raymond Oglethorpe and Mark Zupan, all of whom are current directors of the company. The plaintiff derivatively claimed breaches of fiduciary duty by the defendant directors and officers in connection with the disclosures made by us in press
releases dated April 19, 2004 and April 21, 2004, the awarding of executive bonuses, and trading in Company common stock while allegedly in possession of material, non-public information. On January 30, 2007, the Court granted the
plaintiffs request for voluntarily dismissal and dismissed the action without prejudice.



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|ITEM 5. | OTHER INFORMATION
|------- | -----------------

During the quarter ended March 31, 2007, we
made no material changes to the procedures by which shareholders may recommend nominees to our Board of Directors, as described in our most recent proxy statement.



|ITEM 6. | EXHIBITS
|------- | --------



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



|            |  |                                                                                                                                                       
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Document                                                                                                                               
|            | 
|31.1        |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                   
|            | 
|31.2        |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                   
|            | 
|32.1        |  | Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|            | 
|32.2        |  | Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



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SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.



|                   |  |  |  |                   |  |                                                                              
|------------------ |  |  |  | ----------------- |  | -----------------------------------------------------------------------------
|                   |  |  |  | STOCKERYALE, INC.
|                   |  |  | 
|Date: May 15, 2007 |  |  |  | By:               |  | /s/    MARK W. BLODGETT                                                      
|                   |  |  |  |                   |  | Mark W. Blodgett President, Chief Executive Officer
and Chairman of the Board
|                   |  |  |  |                   |  |                                                                              
|                   |  |  | 
|Date: May 15, 2007 |  |  |  | By:               |  | /s/    MARIANNE MOLLEUR                                                      
|                   |  |  |  |                   |  | Marianne Molleur Senior Vice President and Chief Financial Officer           



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