Document:

Form of Security Agreement

STOCKERYALE, INC.

SECURITY AGREEMENT

To:       
Laurus Master Fund, Ltd.

            c/o Ironshore Corporate Services, Ltd.

            P.O. Box 1234 G.T

            Queensgate House

            South Church Street

            Grand Cayman, Cayman Islands

Date:   
June 10, 2004

To Whom It
May Concern:

1.    
To secure the
payment of all Obligations (as hereafter defined), StockerYale, Inc., a
Massachusetts corporation (the "Assignor"), hereby assigns and grants to Laurus
a continuing security interest in all of the following property now owned or at
any time hereafter acquired by the Assignor, or in which the Assignor now has or
at any time in the future may acquire any right, title or interest (the
"Collateral"): all cash, cash equivalents , accounts, accounts receivable,
inventory, equipment, goods, documents, instruments (including, without
limitation, promissory notes), contract rights, general intangibles (including,
without limitation, payment intangibles), chattel paper, supporting obligations,
investment property (including, without limitation, all equity interests owned
by the Assignor), letter-of-credit rights, deposit accounts, trademarks,
trademark applications, tradestyles, patents, patent applications, copyrights
and copyright applications in which the Assignor now has or hereafter may
acquire any right, title or interest, all proceeds and products thereof
(including, without limitation, proceeds of insurance) and all additions,
accessions and substitutions thereto or therefore. In the event the Assignor
wishes to finance the acquisition of any hereafter acquired equipment and has
obtained a commitment from a financing source to finance such equipment from an
unrelated third party, Laurus agrees to release its security interest on such
hereafter acquired equipment so financed by such third party financing source. 
Except as otherwise defined herein, all capitalized terms used herein shall have
the meaning provided such terms the Securities Purchase Agreement referred to
below.

2.    
The term
"Obligations" as used herein shall mean and include all debts, liabilities and
obligations owing by the Assignor to Laurus and all loans, advances, extensions
of credit, endorsements, guaranties, benefits and/or financial accommodations
heretofore or hereafter made, granted or extended by Laurus to Assignor or which
Laurus has or will become obligated to make, grant or extend to Assignor or for
Assignor's account and any and all interest, charges and/or expenses heretofore
or hereafter owing by Assignor to Laurus and any and all renewals or extensions
of the foregoing, in each case, whether now existing or hereafter arising,
direct or indirect, liquidated or unliquidated, absolute or contingent, due or
not due, arising under, in connection with, pursuant to or evidenced by the
documents, instruments and agreements set forth on Schedule A hereto
(each a "Document" and collectively the "Documents"), in each case, irrespective
of the genuineness, validity, regularity or enforceability of such Obligations,
or of any instrument evidencing any of the Obligations or of any collateral
therefor or of the existence or extent of such collateral, and irrespective of
the allowability, allowance or disallowance of any or all of the Obligations in
any case commenced by or against the Assignor under Title 11, United States
Code, including, without limitation, obligations or indebtedness of the Assignor
for post-petition interest, fees, costs and charges that would have accrued or
been added to the Obligations but for the commencement of such case.

3.    
The Assignor
hereby represents, warrants and covenants to Laurus that:

(a)    
it is a
corporation validly existing, in good standing and organized under the laws of
the State of Massachusetts, and it will provide Laurus thirty (30) days' prior
written notice of any change in its jurisdiction of organization;

(b)    
its legal name,
as set forth in its Certificate of Incorporation (or equivalent organizational
document) as amended through the date hereof, is StockerYale, Inc. and it will
provide Laurus thirty (30) days' prior written notice of any change in its legal
name;

(c)    
it does not have
an organizational identification number as the same is not issued by the
Massachusetts Secretary of State;

(d)    
it is the lawful
owner of the Collateral and it has the sole right to grant a security interest
therein and will defend the Collateral against all claims and demands of all
persons and entities;

(e)    
it will keep the
Collateral owned by it free and clear of all attachments, levies, taxes, liens,
security interests and encumbrances of every kind and nature ("Encumbrances"),
except (i) Encumbrances securing the Obligations, (ii) to the extent said
Encumbrance does not secure indebtedness in excess of $50,000 and such
Encumbrance is removed or otherwise released within ten (10) days of the
creation thereof and (iii) a security interest in favor of Smithfield Fiduciary
LLC ("Smithfield"), the lien priorities with respect to which are governed by
the terms of an Intercreditor Agreement between Smithfield and Laurus;

(f)     
it will at its
own cost and expense keep the Collateral in good state of repair (ordinary wear
and tear excepted) and will not waste or destroy the same or any part thereof
other than ordinary course discarding of items no longer used or useful in its
business;

(g)    
it will not,
without Laurus' prior written consent, sell, exchange, lease or otherwise
dispose of the Collateral, whether by sale, lease or otherwise, except for the
sale of inventory in the ordinary course of business and for the disposition or
transfer in the ordinary course of business during any fiscal year of obsolete
and worn-out equipment or equipment no longer necessary for its ongoing needs,
having an aggregate fair market value of not more than $25,000 and only to the
extent that:

(i)    
the proceeds of
any such disposition are used to acquire replacement Collateral which is subject
to Laurus' first priority perfected security interest or are used to repay
Obligations or to pay general corporate expenses; and

(ii)    
following the
occurrence of an Event of Default which continues to exist the proceeds of which
are remitted to Laurus to be held as cash collateral for the Obligations;

(h)    
it will insure
the Collateral in Laurus' name against loss or damage by fire, theft, burglary,
pilferage, loss in transit and such other hazards as Laurus shall specify in
amounts and under policies by insurers acceptable to Laurus and all premiums
thereon shall be paid by the Assignor and the policies delivered to Laurus.  If
the Assignor fails to do so, Laurus may procure such insurance and the cost
thereof shall be promptly reimbursed by the Assignor and shall constitute
Obligations;

(i)    
it will at all
reasonable times and upon reasonable notice (provided that no such notice shall
be required following the occurrence and during the continuance of an Event of
Default or in the event Laurus believes (in the exercise of its good faith
judgment) that such access and/or right of inspect is necessary to preserve or
protect the Collateral) allow Laurus or Laurus' representatives free access to
and the right of inspection of the Collateral;

(j)     
the Assignor
hereby indemnifies and saves Laurus harmless from all loss, costs, damage,
liability and/or expense, including reasonable attorneys' fees, that Laurus may
sustain or incur to enforce payment, performance or fulfillment of any of the
Obligations and/or in the enforcement of this Security Agreement or in the
prosecution or defense of any action or proceeding either against the Assignor
or Laurus concerning any matter growing out of or in connection with this
Security Agreement, and/or any of the Obligations and/or any of the Collateral
except to the extent caused by Laurus' own gross negligence or willful
misconduct (as determined by a court of competent jurisdiction in a final and
nonappealable decision).

4.    
The occurrence of
any of the following events or conditions shall constitute an "Event of Default"
under this Security Agreement:

(a)    
any covenant,
warranty, representation or statement made or furnished to Laurus by the
Assignor or on the Assignor's behalf was false in any material respect when made
or furnished, and if subject to cure, shall not be cured for a period of fifteen
(15) days;

(b)    
the loss, theft,
substantial damage, destruction, sale or encumbrance to or of any material
portion (as determined by Laurus in the exercise of its good faith judgment) of
the Collateral or the making of any levy, seizure or attachment thereof or
thereon  except to the extent:

(i)    
such loss is
covered by insurance proceeds which are used to replace the item or repay
Laurus; or

(ii)    
said levy,
seizure or attachment does not secure indebtedness in excess of $100,000 and
such levy, seizure or attachment has not been removed or otherwise released
within ten (10) days of the creation or the assertion thereof;

(c)    
the Assignor
shall become insolvent, cease operations, dissolve, terminate our business
existence, make an assignment for the benefit of creditors, suffer the
appointment of a receiver, trustee, liquidator or custodian of all or any part
of the Assignor's property;

(d)    
any proceedings
under any bankruptcy or insolvency law shall be commenced by or against the
Assignor and if commenced against the Assignor shall not be dismissed within
thirty (30) days;

(e)    
the Assignor
shall repudiate, purport to revoke or fail to perform any of its obligations
under any Document (after passage of applicable cure period, if any); or

(f)     
an Event of
Default (or similar term) shall have occurred under and as defined in any
applicable Document; or

(g)    
an Event of
Default (or similar term) shall have occurred under and as defined in any
document, instrument or agreement entered into between Laurus and StockerYale
Canada, Inc., as such documents, instruments and agreements may be amended,
modified and supplemented from time to time.

5.    
Upon the
occurrence of any Event of Default and at any time thereafter, Laurus may
declare all Obligations immediately due and payable and Laurus shall have the
remedies of a secured party provided in the Uniform Commercial Code as in effect
in the State of New York, this Security Agreement and other applicable law. 
Upon the occurrence of any Event of Default and at any time thereafter, Laurus
will have the right to take possession of the Collateral and to maintain such
possession on the Assignor's premises or to remove the Collateral or any part
thereof to such other premises as Laurus may desire.  Upon Laurus' request, the
Assignor shall assemble the Collateral and make it available to Laurus at a
place designated by Laurus.  If any notification of intended disposition of any
Collateral is required by law, such notification, if mailed, shall be deemed
properly and reasonably given if mailed at least ten (10) days before such
disposition, postage prepaid, addressed to the Assignor either at the Assignor's
address shown herein or at any address appearing on Laurus' records for the
Assignor.  Any proceeds of any disposition of any of the Collateral shall be
applied by Laurus to the payment of all expenses in connection with the sale of
the Collateral, including reasonable attorneys' fees and other legal expenses
and disbursements and the reasonable expense of retaking, holding, preparing for
sale, selling, and the like, and any balance of such proceeds may be applied by
Laurus toward the payment of the Obligations in such order of application as
Laurus may elect, and the Assignor shall be liable for any deficiency. 

6.    
If the Assignor
defaults in the performance or fulfillment of any of the terms, conditions,
promises, covenants, provisions or warranties on the Assignor's part to be
performed or fulfilled under or pursuant to this Security Agreement, Laurus may,
at its option without waiving its right to enforce this Security Agreement
according to its terms, immediately or at any time thereafter and without notice
to the Assignor, perform or fulfill the same or cause the performance or
fulfillment of the same for the Assignor's  account and at the Assignor's cost
and expense, and the cost and expense thereof (including reasonable attorneys'
fees) shall be added to the Obligations and shall be payable on demand with
interest thereon at the highest rate permitted by law.

7.    
The Assignor
hereby appoints Laurus, any of Laurus' officers, employees or any other person
or entity whom Laurus may designate as our attorney, with power to execute such
documents in our behalf and to supply any omitted information and correct patent
errors in any documents executed by the Assignor or on our behalf; to file
financing statements against the Assignor covering the Collateral (and, in
connection with the filing of any such financing statements, describe the
Collateral as "all assets and all personal property, whether now owned and/or
hereafter acquired" (or any substantially similar variation thereof)); to sign
the Assignor's name on public records; and to do all other things Laurus deems
necessary to carry out this Security Agreement.  Neither Laurus nor the attorney
will be liable for any acts of commission or omission, nor for any error of
judgment or mistake of fact or law other than their gross negligence or willful
misconduct (as determined by a court of competent jurisdiction in a final and
non-appealable decision).  This power being coupled with an interest, is
irrevocable so long as any Obligations remains unpaid.

8.    
No delay or
failure on Laurus' part in exercising any right, privilege or option hereunder
shall operate as a waiver of such or of any other right, privilege, remedy or
option, and no waiver whatever shall be valid unless in writing, signed by
Laurus and then only to the extent therein set forth, and no waiver by Laurus of
any default shall operate as a waiver of any other default or of the same
default on a future occasion.  Laurus' books and records containing entries with
respect to the Obligations shall be admissible in evidence in any action or
proceeding, shall be binding upon the Assignor for the purpose of establishing
the items therein set forth and shall constitute prima facie proof thereof. 
Laurus shall have the right to enforce any one or more of the remedies available
to Laurus, successively, alternately or concurrently.  The Assignor agrees to
join with Laurus in executing financing statements or other instruments to the
extent required by the Uniform Commercial Code in form satisfactory to Laurus
and in executing such other documents or instruments as may be required or
deemed necessary by Laurus for purposes of affecting or continuing Laurus'
security interest in the Collateral.

9.    
This Security
Agreement shall be governed by and construed in accordance with the laws of the
State of New York and cannot be terminated orally.  All of the rights, remedies,
options, privileges and elections given to Laurus hereunder shall inure to the
benefit of Laurus' successors and assigns.  Each of Laurus and the Assignor
hereby (a) waives any and all right to trial by jury in litigation relating to
this Security Agreement and the transactions contemplated hereby and the
Assignor hereby agrees not to assert any counterclaim in such litigation, (b)
submit to the nonexclusive jurisdiction of any New York State court sitting in
the borough of Manhattan, the city of New York; provided that nothing in this
Security Agreement shall be deemed to preclude Laurus from bringing suit or
taking other legal action in any other jurisdiction and (c) waive any objection
the Assignor or Laurus may have as to the bringing or maintaining of such action
with any such court.

10.   
All notices from Laurus to the Assignor shall be sufficiently
given if mailed or delivered to the Assignor at its address set forth in the
Securities Purchase Agreement.

Very truly yours,

StockerYale, Inc.

By: /s/                                    

Name:____________________

Title:_____________________

ACKNOWLEDGED:       

LAURUS
MASTER FUND, LTD.             

By: /s/                                      

Name:_____________________

Title:______________________Form of Secured Convertible Note

	 	
THIS
NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THIS NOTE AND THE COMMON SHARES
ISSUABLE UPON CONVERSION OF THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED
OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS
NOTE UNDER SAID ACT OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO STOCKERYALE, INC.,
THAT SUCH REGISTRATION IS NOT REQUIRED. 

SECURED CONVERTIBLE NOTE 

        FOR
VALUE RECEIVED, STOCKERYALE, INC., a Massachusetts corporation (hereinafter called the
“Borrower”), hereby promises to pay to LAURUS MASTER FUND, LTD., c/o
Ironshore Corporate Services Ltd., P.O. Box 1234 G.T., Queensgate House, South Church
Street, Grand Cayman, Cayman Islands, Fax: 345-949-9877 (the “Holder”) or
its registered assigns, on order, without demand, the sum of Five Million Dollars
($5,000,000) (the “Principal Amount”), together with any accrued and
unpaid interest, on June 30, 2007 (the “Maturity Date”). 

        The
following terms shall apply to this Note: 

ARTICLE I 

INTEREST 

1.1 Interest Rate. Interest
payable on this Note shall accrue at the annual rate of Prime Rate plus 1.00% (but in no
event less than 5.0% per annum) (subject to adjustment as hereafter provided based upon
fluctuation in the volume weighted average price of Borrower’s common stock currently
constituted (the “Common Stock”) and be payable in arrears commencing one
month from the date hereof and on the first business day of each consecutive calendar
month thereafter, and on the Maturity Date, accelerated or otherwise, due and payable as
described below (the “Interest Rate”). Interest shall be computed on the
basis of actual days elapsed in a year of 360 days. “Prime Rate” means
the “base rate” or “prime rate” published in the Wall Street Journal
from time to time. The Prime Rate shall be increased or decreased as the case may be for
each increase or decrease in the Prime Rate in an amount equal to such increase or
decrease in the Prime Rate; each change to be effective as of the day of the change in
such rate. If a registration statement covering the resale of the Common Stock underlying
this Note and the Warrant issued pursuant to the Securities Purchase Agreement (as
hereafter defined) becomes effective and remains effective, and the volume weighted
average price of the Common Stock for 10 consecutive trading days during any calendar
month (the “Volume Weighted Average Price”) is greater than the Fixed
Conversion Price, then the applicable annual interest rate for such month shall be
decreased by Two hundred (200) basis points for each 25% increment by which the Volume
Weighted Average Price is greater than the Fixed Conversion Price. 

ARTICLE II 

PAYMENTS OF PRINCIPAL
AND INTEREST 

2.1 Monthly Payments. Subject
to the terms of this Article II, the Borrower shall repay one thirty-second
(1/32nd) of the Principal Amount (to the extent such amount has not been
converted pursuant to Article III below) (the “Monthly Principal
Amount”), together with interest accrued to date on such portion of the Principal
Amount plus any and all other amounts owing under this Note but not previously paid (the
“Monthly Interest Amount and, together with the Monthly Principal Amount and
all other amounts owing under this Note, collectively, the “Monthly
Amount”), in accordance with Section 2.2 below, on the first business day of each
consecutive calendar month (each, a “Repayment Date”), beginning on the
first such day which occurs one-hundred and twenty days following the date hereof. 

2.2 Cash or Common Stock.
Subject to the terms of this Article II, the Borrower has the sole option to determine
whether to satisfy payment of the Monthly Amount in full on each Repayment Date either in
cash or in shares of the Borrower’s Common Stock, or a combination of both. The
Borrower shall deliver to the Holder a written irrevocable notice in the form of Exhibit B
attached hereto electing to pay such Monthly Amount in full on such Repayment Date in
either cash or Common Stock, or a combination of both (“Repayment Election
Notice”). Such Repayment Election Notice shall be delivered at least ten (10)
days prior to the applicable Repayment Date (the date of such notice being hereinafter
referred to as the “Notice Date”). The Holder shall have the right to
defer for any period of time the payment of the Monthly Amount in shares of Common Stock
in its sole discretion. If such Repayment Election Notice is not delivered within the
prescribed period set forth in the preceding sentence, then the repayment shall be made in
either cash or shares of Common Stock on the same terms hereunder at the Holder’s
sole option. If the Borrower elects or is required to repay all or a portion of the
Monthly Amount in cash on a Repayment Date, then on such Repayment Date the Borrower shall
pay to the Holder 101% of the Monthly Principal Amount and 100% of the Monthly Interest
Amount in satisfaction of such obligation. If the Borrower elects or is required to repay
any portion of the Monthly Amount in shares of Common Stock, the number of such shares to
be issued for such Repayment Date shall be the number determined by dividing (x) the
portion of the Monthly Amount to be paid in shares of Common Stock, by (y) the applicable
Conversion Price as of such Repayment Date. Any shares of Common Stock comprising the
Monthly Amount are referred to herein as “Repayment Shares.” 2.3 No
Effective Registration. Notwithstanding anything to the contrary herein, the Borrower
shall be prohibited from exercising its right to repay the Monthly Amount in Repayment
Shares (and must deliver cash in respect thereof) and, if applicable, the Holder shall be
prohibited from exercising its right to require repayment of the Monthly Amount in
Repayment Shares if at any time from the Notice Date until the day on which the Holder
receive such Repayment Shares (i) there fails to exist an effective registration statement
covering the resale of such Repayment Shares or (ii) an Event of Default (as defined in
Article V) exists or occurs which is not waived in writing by the Holder in whole or in
part at the Holder’s option. 2.4 Share Price/Issuance Limitations.
Notwithstanding anything to the contrary herein (a) the Borrower shall have no right to
satisfy payment of the Monthly Amount by delivery of Repayment Shares unless the closing
price of the Common Stock as reported by Bloomberg, L.P. on the Principal Market for any
of the eleven (11) trading days preceding a Repayment Date is greater than 110% of the
Fixed Conversion Price (as defined in Section 3.1 below) and (b) the Borrower shall not be
entitled to issue any Repayment Shares if such issuance would exceed the difference
between the number of shares of Common Stock beneficially owned by such Holder or issuable
upon exercise of warrants held by such Holder and 4.99% of the outstanding shares of
Common Stock of the Borrower. For the purposes of the immediately preceding sentence,
beneficial ownership shall be determined in accordance with Section 13(d) of the Exchange
Act and Rule 13d-3 thereunder. The Holder may void the Repayment Share limitation
described in this Section 2.4 upon 75 days prior notice to the Borrower or without any
notice requirement upon an Event of Default. 2.5 Deemed Conversions. Any repayment
of the Monthly Amount in Repayment Shares pursuant to the terms hereof shall constitute
and be deemed a conversion of such portion of the applicable Principal Amount and accrued
interest for all purposes under this Note (except as otherwise provided herein). 2.6
Optional Prepayments. In the event Borrower wishes to prepay all or a portion of
the Principal Amount or any and all other amounts owing under this Note (collectively, the
“Obligations”), Borrower shall deliver to the Holder written notice
indicating the amount intended to be so prepaid (the “Prepayment Amount”)
and the date on which such prepayment shall be made (the “Prepayment
Date”). Such notice shall be delivered to the Holder at least five (5) Business
Days’ prior to the Prepayment Date. On the Prepayment Date, Borrower shall pay to the
Holder the Applicable Percentage of the Prepayment Amount in satisfaction of the
Prepayment Amount. All such prepayments shall be (a) applied to the Obligations in such
order as the Holder shall elect and (b) credited (conditional upon final collection) to
the Obligations three (3) Business Days after receipt of such amounts by Holder in good
funds in dollars of the United States of America. Any amount received by Holder after
12:00 noon (New York time) on any business day shall be deemed received on the next
business day. For purposes of this Section 2.6, the term “Applicable
Percentage” means (1) 115% for the period commencing on the date hereof (the
“Closing Date”) and ending on the first anniversary of the Closing Date,
(2) 110% for the period commencing on the first day following the first anniversary of the
Closing Date and ending on the second anniversary of the Closing Date and (3) 105% for the
period commencing on the first day following the second anniversary of the Closing Date
and ending on the day immediately preceding the Maturity Date. ARTICLE III 

CONVERSION RIGHTS 

3.1 Optional Conversion.
Subject to the terms of this Article III, the Holder shall have the right, but not the
obligation, at any time until the Maturity Date or thereafter during an Event of Default
(as defined in Article V), to convert all or any portion of the outstanding Principal
Amount and/or accrued interest and fees due and payable into fully paid and nonassessable
shares of Common Stock at the conversion price set forth in Section 3.2 (the
“Conversion Price”). The shares of Common Stock to be issued upon such
conversion are herein referred to as the “Conversion Shares.” 3.2
Conversion Price. Subject to adjustment as provided in Section 3.7 hereof, the
Conversion Price per share shall be $2.15 (the “Fixed Conversion Price”).
If an Event of Default has occurred and shall be continuing hereunder, then the Conversion
Price shall be equal to the lower of (i) the Fixed Conversion Price; or (ii) eighty
percent (80%) of the average of the three lowest closing prices for the Common Stock on
the principal trading exchange or market for the Common Stock, (the “Principal
Market”), or on any securities exchange or other securities market on which the
Common Stock is then being listed or traded, for the thirty (30) trading days prior to but
not including the Conversion Date. 3.3 Conversion Limitation. Notwithstanding
anything contained herein to the contrary, the Holder shall not be entitled to convert
pursuant to the terms of this Note an amount that would be convertible into that number of
Conversion Shares which would exceed the difference between the number of shares of Common
Stock beneficially owned by such holder or issuable upon exercise of warrants held by such
holder and 4.99% of the outstanding shares of Common Stock of the Borrower. For the
purposes of the immediately preceding sentence, beneficial ownership shall be determined
in accordance with Section 13(d) of the Exchange Act and Rule 13d-3 thereunder. The Holder
may void the Conversion Share limitation described in this Section 3.3 upon 75 days prior
notice to the Borrower or without any notice requirement upon an Event of Default.
Notwithstanding the foregoing, to the extent required by the Nasdaq Marketplace Rules, at
no time may the Holder convert all or part of this Note or the interest payable thereon
into a number of Conversion Shares that, together with any shares of Common Stock acquired
upon exercise of warrants held by the Holder, would in the aggregate exceed 19.99% of the
outstanding shares of the Company’s Common Stock, determined as of the date hereof,
without first obtaining stockholder approval of such issuance of Common Stock (the
“Conversion Limitations”). In obtaining stockholder approval, stockholders shall
not be entitled to vote any shares of Common Stock acquired upon conversion of this Note
and/or exercise of any warrant held by the Holder on such matter. In the event such
approval is so required, then the Company shall (i) within fifteen (15) days following
notice by the Holder to convert an amount in excess of the Conversion Limitations file
proxy materials relating to such stockholder approval with the Securities and Exchange
Commission and (ii) use its best efforts to obtain as promptly as possible such
stockholder approval. 3.4 Mechanics of Conversion. In the event that the Holder
elects to convert this Note into Common Stock, the Holder shall give notice of such
election by delivering an executed and completed notice of conversion (“Notice of
Conversion”) to the Borrower and such Notice of Conversion shall provide a
breakdown in reasonable detail of the amount of Principal Amount, accrued interest and
fees that are being converted. On each Conversion Date (as hereinafter defined) and in
accordance with its Notice of Conversion, the Holder shall make the appropriate reduction
to the Principal Amount, accrued interest and fees as entered in its records and shall
provide written notice thereof to the Borrower within two (2) business days after the
Conversion Date. Each date on which a Notice of Conversion is delivered or telecopied to
the Borrower in accordance with the provisions hereof shall be deemed a Conversion Date
(the “Conversion Date”). A form of Notice of Conversion that may be
employed by the Holder is annexed hereto as Exhibit A. The Borrower will use commercially
reasonable efforts to cause the transfer agent to transmit the certificates representing
the Conversion Shares to the Holder as promptly as practicable, but in any event within
three (3) business days. The Company shall use commercially reasonable efforts, subject to
the receipt of reasonably satisfactory customary supporting documentation, in the context
of an exercise of a convertible note in conjunction with an immediate resale of the
underlying shares, to issue such shares by crediting the account of the Holder’s
designated broker with the Depository Trust Corporation (“DTC”) through
its Deposit Withdrawal Agent Commission (“DWAC”) system after receipt by the
Borrower of the Notice of Conversion (the “Delivery Date”), if so
requested by the Holder. 

        In
the case of the exercise of the conversion rights set forth herein the conversion
privilege shall be deemed to have been exercised and the Conversion Shares issuable upon
such conversion shall be deemed to have been issued upon the date of receipt by the
Borrower of the Notice of Conversion. The Holder shall be treated for all purposes as the
record holder of such Common Stock, unless the Holder provides the Borrower written
instructions to the contrary. 

3.5 Partial Conversions. In the
event of any partial conversions of outstanding Principal Amount pursuant to this Article
III, such conversions shall be deemed to constitute conversions of outstanding Principal
Amount applying to Monthly Amounts for the Repayment Dates in chronological order. 

3.6 Late Payments. The Borrower
understands that a delay in the delivery of the shares of Common Stock required pursuant
to this Article beyond the Delivery Date could result in economic loss to the Holder. As
compensation to the Holder for such loss, the Borrower agrees to pay late payments to the
Holder for late issuance of such shares required pursuant to this Article III upon
conversion of the Note, in the amount equal to the greater of (i) $250 per business day
after the Delivery Date and (ii) the Holder’s actual damages from such delayed
delivery. The Borrower shall pay any payments incurred under this Section in immediately
available funds upon demand and, in the case of actual damages, accompanied by reasonable
documentation of the amount of such damages. 

3.7 Adjustment Provisions. The
Fixed Conversion Price and number and kind of shares or other securities to be issued upon
conversion determined pursuant to Sections 3.1 and 3.2, shall be subject to adjustment
from time to time upon the happening of certain events while this conversion right remains
outstanding, as follows: 

     A.    
          Reclassification, etc. If the Borrower at any time shall, by
          reclassification or otherwise, change the Common Stock into the same or a
          different number of securities of any class or classes, this Note, as to the
          unpaid Principal Amount and accrued interest thereon, shall thereafter be deemed
          to evidence the right to purchase an adjusted number of such securities and kind
          of securities as would have been issuable as the result of such change with
          respect to the Common Stock immediately prior to such reclassification or other
          change.

     B.    
          Stock Splits, Combinations and Dividends. If the shares of Common Stock
          are subdivided or combined into a greater or smaller number of shares of Common
          Stock, or if a dividend is paid on the Common Stock in shares of Common Stock,
          the Fixed Conversion Price shall be proportionately reduced in case of
          subdivision of shares or stock dividend or proportionately increased in the case
          of combination of shares, in each such case by the ratio which the total number
          of shares of Common Stock outstanding immediately after such event bears to the
          total number of shares of Common Stock outstanding immediately prior to such
          event. C. Share Issuances. Subject to the provisions of this
          Section 3.7, if the Borrower shall at any time prior to the conversion or
          repayment in full of the Principal Amount issue any shares of Common Stock to a
          person other than the Holder (otherwise than (i) pursuant to Subsections A or B
          above; (ii) pursuant to options, warrants, or other obligations to issue shares
          outstanding on the date hereof as set forth in the Schedules to the Purchase
          Agreement dated as of the date hereof between the Borrower and the Holder, which
          agreement is incorporated herein by this reference (the “Purchase
          Agreement”); or (iii) pursuant to options that may be issued under any
          employee incentive stock option and/or any qualified stock option plan adopted
          by the Borrower) for a consideration per share (the “Offer
          Price”) less than the Fixed Conversion Price in effect at the time
          of such issuance, then the Fixed Conversion Price shall be immediately reset to
          such lower Offer Price. For purposes hereof, the issuance of any security of the
          Borrower convertible into or exercisable or exchangeable for Common Stock shall
          result in an adjustment to the Conversion Price only upon the conversion,
          exercise or exchange of such securities.

     D.    
          Computation of Consideration. For purposes of any computation respecting
          consideration received pursuant to Subsection C above, the following shall
          apply: (a) in the case of the issuance of shares of Common Stock for cash, the
          consideration shall be the amount of such cash, provided that in no case shall
          any deduction be made for any commissions, discounts or other expenses incurred
          by the Company for any underwriting of the issue or otherwise in connection
          therewith; (b) in the case of the issuance of shares of Common Stock for a
          consideration in whole or in part other than cash, the consideration other than
          cash shall be deemed to be the fair market value thereof as determined in good
          faith by the Board of Directors of the Company (irrespective of the accounting
          treatment thereof); and (c) in the case of the issuance of securities
          convertible into or exchangeable for shares of Common Stock, the aggregate
          consideration received therefor shall be deemed to be the consideration received
          by the Company for the issuance of such securities plus the additional minimum
          consideration, if any, to be received by the Company upon the conversion or
          exchange thereof (the consideration in each case to be determined in the same
          manner as provided in clauses (a) and (b) of this Subsection (D)). 3.8
          Reservation of Shares. During the period the conversion right exists, the
          Borrower will reserve from its authorized and unissued Common Stock a sufficient
          number of shares to provide for the issuance of Common Stock upon the full
          conversion of this Note. The Borrower represents that upon issuance, such shares
          will be duly and validly issued, fully paid and non-assessable. The Borrower
          agrees that its issuance of this Note shall constitute full authority to its
          officers, agents, and transfer agents who are charged with the duty of executing
          and issuing stock certificates to execute and issue the necessary certificates
          for shares of Common Stock upon the conversion of this Note. 3.9 Registration
          Rights. The Holder has been granted registration rights with respect to the
          shares of Common Stock issuable upon conversion of this Note as more fully set
          forth in a Registration Rights Agreement dated the date hereof. ARTICLE IV

EVENT OF DEFAULT 

        The
occurrence of any of the following events is an Event of Default (“Event of
Default”): 

4.1 Failure to Pay Principal,
Interest or other Fees. The Borrower fails to pay any installment of principal,
interest or other fees hereon or in respect of any other promissory note issued pursuant
to the Purchase Agreement when due. 4.2 Breach of Covenant. The Borrower breaches
any covenant or other term or condition of this Note or the Purchase Agreement (as
hereafter defined) in any material respect and such breach, if subject to cure, continues
for a period of five (5) business days after the occurrence thereof. 

4.3 Breach of Representations and
Warranties. Any material representation or warranty of the Borrower made herein, in
the Purchase Agreement, or in any agreement, statement or certificate given in writing
pursuant hereto or in connection therewith shall be false or misleading. 

4.4 Receiver or Trustee. The
Borrower shall make an assignment for the benefit of creditors, or apply for or consent to
the appointment of a receiver or trustee for it or for a substantial part of its property
or business; or such a receiver or trustee shall otherwise be appointed. 

4.5 Judgments. Any money
judgment, writ or similar final process shall be entered or filed against the Borrower or
any of its property or other assets for more than $250,000, and shall remain unvacated,
unbonded or unstayed for a period of ninety (90) days. 

4.6 Bankruptcy. Bankruptcy,
insolvency, reorganization or liquidation proceedings or other proceedings or relief under
any bankruptcy law or any law for the relief of debtors shall be instituted by or against
the Borrower. 4.7 Stop Trade; Delisting. (a) An SEC stop trade order or Principal
Market trading suspension of the Common Stock for 5 consecutive days or 5 days during a
period of 10 consecutive days, excluding in all cases a suspension of all trading on a
Principal Market or (b) Borrower’s Common Stock shall fail to be listed on a
Principal Market or any securities exchange or other securities market (including the
Nasdaq OTC Bulletin Board, but excluding the pink and yellow sheets). 4.8 Guaranty.
(a) Any guarantor of all or any part of the obligations owing under this Note (each, a
“Guarantor”) attempts to terminate, challenges the validity of, or its liability
under any guaranty agreement made in favor of the Holder (each, a “Guaranty”),
(b) any Guarantor shall default under any Guaranty or any guaranty security agreement made
in favor of the Holder (each a “Guaranty Security Agreement”), which such
default is not cured within any applicable cure or grace period or (c) any Guaranty or
Guaranty Security Agreement shall cease to be valid, binding and enforceable in accordance
with its terms. 4.9 Further Encumbrance. The Borrower shall not encumber, mortgage,
pledge, assign or grant any lien or security interest in any or all of its assets to any
person or entity other than those liens and security interests set forth on Schedule 4.9
hereof. 4.10 Security Agreement. An Event of Default shall have occurred under and
as defined in the Security Agreement dated as of the date hereof between Borrower and
Holder, as the same may be amended, modified and supplemented from time to time. 4.11
4.11  Other Note.  An Event of Default shall have occurred under and as
defined in the Note issued by Borrower on the date hereof to Smithfield Fiduciary LLC
(“Smithfield”) in the principal amount of $500,000, as the same may be amended,
modified and supplemented from time to time. 

ARTICLE V 

DEFAULT PAYMENT 

5.1      Default Rate.  Upon the occurrence and during the  continuance  of an Event of Default,  a default  interest rate of 5% per
annum above the Interest Rate shall apply to the amounts owed hereunder.
5.2      Cumulative Remedies.  The remedies under this Note shall be cumulative.

ARTICLE VI 

MISCELLANEOUS 

6.1 Failure or Indulgence Not
Waiver. No failure or delay on the part of the Holder hereof in the exercise of any
power, right or privilege hereunder shall operate as a waiver thereof, nor shall any
single or partial exercise of any such power, right or privilege preclude other or further
exercise thereof or of any other right, power or privilege. All rights and remedies
existing hereunder are cumulative to, and not exclusive of, any rights or remedies
otherwise available. 6.2 Notices. Any notice herein required or permitted to be
given shall be in writing and shall be deemed effectively given: (a) upon personal
delivery to the party notified, (b) when sent by confirmed telex or facsimile if sent
during normal business hours of the recipient, if not, then on the next business day, (c)
five days after having been sent by registered or certified mail, return receipt
requested, postage prepaid, or (d) one day after deposit with a nationally recognized
overnight courier, specifying next day delivery, with written verification of receipt. All
communications shall be sent to the Borrower at the address as set forth on the signature
page to the Purchase Agreement executed in connection herewith and to the Holder at the
address set forth on the signature page to the Purchase Agreement for such Holder, with a
copy to Scott J. Giordano, Esq., Loeb & Loeb LLP, 345 Park Avenue, New York, New York
10154, facsimile number (212) 407-4990, or at such other address as the Borrower or the
Holder may designate by ten days advance written notice to the other parties hereto. A
Notice of Conversion shall be deemed given when made to the Borrower pursuant to the
Purchase Agreement. 

6.3 Amendment Provision. The
term “Note” and all reference thereto, as used throughout this
instrument, shall mean this instrument as originally executed, or if later amended or
supplemented, then as so amended or supplemented. 6.4 Assignability. This Note
shall be binding upon the Borrower and its successors and assigns, and shall inure to the
benefit of the Holder and its successors and assigns, and may be assigned by the Holder. 

6.5 Cost of Collection. If
default is made in the payment of this Note, the Borrower shall pay the Holder hereof
reasonable costs of collection, including reasonable attorneys’ fees. 6.6
Governing Law. This Note shall be governed by and construed in accordance with the
laws of the State of New York, without regard to principles of conflicts of laws. Any
action brought by either party against the other concerning the transactions contemplated
by this Agreement shall be brought only in the state courts of New York or in the federal
courts located in the state of New York. Both parties and the individual signing this Note
on behalf of the Borrower agree to submit to the jurisdiction of such courts. The
prevailing party shall be entitled to recover from the other party its reasonable
attorney’s fees and costs. In the event that any provision of this Note is invalid or
unenforceable under any applicable statute or rule of law, then such provision shall be
deemed inoperative to the extent that it may conflict therewith and shall be deemed
modified to conform with such statute or rule of law. Any such provision which may prove
invalid or unenforceable under any law shall not affect the validity or unenforceability
of any other provision of this Note. 

6.7 Maximum Payments. Nothing
contained herein shall be deemed to establish or require the payment of a rate of interest
or other charges in excess of the maximum permitted by applicable law. In the event that
the rate of interest required to be paid or other charges hereunder exceed the maximum
permitted by such law, any payments in excess of such maximum shall be credited against
amounts owed by the Borrower to the Holder and thus refunded to the Borrower. 

6.8 Construction. Each party
acknowledges that its legal counsel participated in the preparation of this Note and,
therefore, stipulates that the rule of construction that ambiguities are to be resolved
against the drafting party shall not be applied in the interpretation of this Note to
favor any party against the other. 

6.9 Management Fee.
Simultaneously with the execution of this Note, the Borrower shall pay to Laurus Capital
Management, LLC a management fee in an amount equal to three and one-half percent (3.50%)
of the Principal Amount, which such amount at the Holder’s option may be deducted
from funds made available by the Holder to the Borrower hereunder. 6.10
Conversions. Notwithstanding anything contained herein to the contrary, no
conversions shall be permitted under the terms of Section 3.1 of this Note unless and
until (i) all amounts currently owing under and pursuant to the terms set forth in the
Secured Convertible Note in the original principal amount of $4,000,000 dated as of
February 20, 2004 made by the Borrower in favor of Laurus filed by the Company on a
Current Report on Form 8-K dated February 26, 2004 (without giving effect to any
amendment, modification or supplement) (the “Prior Note”) are paid in full or
(ii) Laurus has fully converted the Prior Note; provided, however, the foregoing
prohibition on conversions shall not be applicable to Holder following (i) the occurrence
and during the continuance of an Event of Default or (ii) delivery by Borrower of the
written notice pursuant to Section 2.6. 

	 	        IN
WITNESS WHEREOF, the Borrower has caused this Note to be signed in its name effective
as of this 10th day of June 2004. 

STOCKERYALE,
INC. 

By:
/s/___________________________

WITNESS: 

_________________________________

 

NOTICE OF CONVERSION 

(To be executed by the Holder in order
to convert the Note) 

        The
undersigned hereby elects to convert $_________ of the principal and $_________ of the
interest due on the Note issued by STOCKERYALE, INC. (the “Company”) on
June 10, 2004 into Shares of Common Stock of the Company according to the conditions set
forth in such Note, as of the date written below. 

	Date of Conversion:  
	

    _________________________________________________________________
	Conversion Price:  
	

    _________________________________________________________________
	Shares To Be Delivered:  
	

    _________________________________________________________________
	Signature:  
	

    _________________________________________________________________
	Print Name:  
	

    _________________________________________________________________
	Address:  
	

    _________________________________________________________________
	   
	

 

 

EXHIBIT B 

FORM OF REPAYMENT ELECTION NOTICE 

To: [HOLDER AT HOLDER'S ADDRESS]

        Pursuant to Section 2.2 the Note of
StockerYale, Inc. (the "Company") issued on June 10, 2004 we hereby
notify you that we are irrevocably electing to repay the outstanding Monthly
Amount (as defined in the Note) due on the Repayment Date (as defined in the
Note) which occurs on ______, 20__ (CHECK ONE):         

  _____ In full in cash on such
  Repayment Date.
   

 _____ In full in shares of the
 Company's Common Stock within three (3) trading days following such Repayment
 Date.  

    StockerYale, Inc.  

        By: 
        /s/                                                                 
        

  Name:
  ____________________________________

  Title:
  ______________________________________

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