10-K

United States Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED December 31, 2002

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM               TO             

COMMISSION FILE NUMBER 0 - 5460

STOCKERYALE, INC.

Massachusetts
(STATE OF INCORPORATION) 04-2114473
(I.R.S. ID)

32 HAMPSHIRE ROAD, SALEM, NEW HAMPSHIRE 03079

(603) 893-8778

Securities registered pursuant to Section 12(b) of the Act:

NONE

Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK, $0.001 par value

Name of each exchange on which registered:

The NASDAQ Stock Market, Inc.

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule12b-2, of the Act).  YES  o     NO  x

The registrant's revenues for the fiscal year ended December 31, 2002 were $12,992,000.

The aggregate market value of common stock held by non-affiliates of the registrant as of June 30, 2002 was $15,861,651.

The number of shares outstanding of the registrant's common stock as of February 28, 2003 was 12,696,633.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held May 22, 2003 are incorporated by reference into Part III.

StockerYale, Inc.

    FORM 10-K

For the Fiscal Year Ended December 31, 2002

INDEX

Part I
Item 1	Business	1
Item 2	Properties	8
Item 3	Legal Proceedings	8
Item 4	Submission of Matters to a Vote of Security Holders	8
Part II
Item 5	Market for Registrant's Common Stock and Related Stockholder Matters	9
Item 6	Selected Financial Data	10
Item 7	Management's Discussion and Analysis of Results of Operations and Financial Condition	10
Item 7a	Quantitative and Qualitative Disclosures about Market Risk	22
Item 8	Financial Statements and Supplementary Data	26
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosures	49
Part III
Item 10	Directors and Executive Officers of the Registrant	49
Item 11	Executive Compensation	49
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	50
Item 13	Certain Relationships and Related Transactions	50
Item 14	Controls and Procedures	50
Part IV
Item 15	Exhibits, Financial Statement Schedules, and Reports on Form 8-K	53
	Signatures	56
	Certifications	56

1  /  STKR 2002 FORM 10-K

 Part I 

Item 1

This Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.You can identify forward-looking statements by the use of the words "believe," "expect," "anticipate," " intend," "estimate," "assume," and other similar expression which predict or indicate future events and trends and which do not relate to historical matters. The Company's actual results, performance or achievements could differ materially from our expectations expressed or implied by the forward-looking statements sometimes for reasons that are beyond the Company's control. Such reasons include, without limitation: the existence of other suppliers of optical components and illumination products, who may have greater resources than the Company; the risk that the Company's products may infringe patents held by other parties; the uncertainty that the Company's significant investments in R&D will result in products that achieve market acceptance; the Company's ability to attract and maintain key personnel; whether the Company is able to design products to meet the special needs of its customers; and that market conditions could make it more difficult or expensive for the Company to obtain the necessary capital to finance necessary research and development projects, operations as well as its ability to refinance existing debt. Additional factors that might cause such a difference are discussed in the section entitled "Certain Factors Affecting Future Operating Results" beginning on page 20 of this Form 10-K.

ITEM 1.    BUSINESS

GENERAL

StockerYale, Inc. (the Company) is an independent designer and manufacturer of structured light lasers, light emitting diodes, (LEDs), fiber optic, and fluorescent illumination technologies as well as specialty optical fiber, phase masks, and advanced optical sub-components for use in a wide range of markets and industries including the machine vision, telecommunications, aerospace, defense and security, utilities, industrial inspection, and medical markets.

 DEVELOPMENTS DURING FISCAL 2002

In 2002, StockerYale adjusted its business plans to a challenging economic environment by significantly reducing its cost structure, curtailing capital expenditures and ceased funding two research and development joint ventures. The key goals were to focus research and development on projects which could produce revenue in the short-term and adjust operating expenses to compensate for a declining revenue plan. As part of that adaptation the Company:

• Completed a private placement of 1,242,600 shares at $7.76 per share, in March 2002, which resulted in net proceeds to the Company of approximately $9.7 million;
• Completed an eighteen-month, $26 million plant and equipment investment program during the first quarter;
• Invested a record $6.2 million in research and product development, resulting in significant new product introductions beginning in the fourth quarter;
• Reduced annual manufacturing and operating costs by approximately 40%, including a reduction of year-end headcount from 255 in 2001 to 175 in  2002;
• Ceased funding two joint ventures and a major research initiative due to prolonged weakness in the fiber optic equipment market;
• Acquired CIENA's specialty optical fiber assets, strengthening the Company's position as a leading independent designer and manufacturer of specialty fibers for both industrial and telecom equipment markets;
• Announced key new OEM design wins for illumination products, including military specification lasers for BAE Systems and LED illuminators for security recognition systems for Elsag, s.p.a.; and
• Secured $5.0 million in additional debt financing with a three-year Term Note secured by the Company's Salem Headquarters in December.

2  /  STKR 2002 FORM 10-K

 Part I 

Item 1

COMPANY HISTORY

StockerYale, Inc. was incorporated on March 27, 1951 under the laws of the Commonwealth of Massachusetts. In December 1995, the Company completed the registration of its Common Stock with the U.S. Securities and Exchange Commission and its stock now trades on the NASDAQ National Market under the trading symbol "STKR".

On May 13, 1998, the Company acquired StockerYale Canada, Inc., formerly known as Lasiris, Inc., a Canadian manufacturer of industrial lasers and other illumination and photonics products. The acquisition of StockerYale Canada provided the Company with the capability to manufacture laser-based illumination products and phase masks, which are used to manufacture fiber Bragg gratings for telecommunication applications.

The Company acquired StockerYale Canada through Lasiris Holdings, Inc., a newly formed New Brunswick corporation ("LHI") and a wholly owned subsidiary of the Company.  StockerYale Canada is operated as a wholly owned Canadian subsidiary of LHI. In connection with this transaction, the former stockholders of StockerYale Canada received shares of capital stock in LHI, which are exchangeable into shares of the Company's common stock on a one-for-one basis at any time at the option of the holder.

In addition to Lasiris Holdings, Inc., the Company has two active subsidiaries. On June 16, 2000, the Company acquired StockerYale (IRL) Ltd., formerly known as CorkOpt Ltd, which is a wholly owned Irish subsidiary and StockerYale Asia PTE Ltd., formerly known as Radiant Asiatec Pte, Ltd., a Singapore corporation that was formed in December 1997 and is an 80% owned subsidiary of the Company. The acquisition of StockerYale (IRL) Ltd. provided the Company with the capability to manufacture and sell light-emitting diodes, or LEDs, for industrial applications. StockerYale Asia PTE Ltd. is the entity through which the Company sells its illumination products in Southeast Asia.

As of February 28, 2003, the authorized capital stock of the Company was 100,000,000 shares of Common Stock of which 12,696,633 shares were issued and outstanding. Additionally, 2,308,981 shares of Common Stock were reserved for issuance upon the exercise of outstanding options or warrants to purchase Common Stock and upon the exchange of 85,290 shares of Lasiris Holdings, which are exchangeable into Company Common Stock on a one-for-one basis.

FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

The Company operated within two segments, namely illumination and optical components. Illumination products include structured light lasers, specialized fiber optic, fluorescent, and light-emitting diode (LED) products for the machine vision, industrial inspection, and defense and security industries. The optical components segment includes communication and sub-component and specialty optical fiber for the telecommunications, aerospace, utility and medical markets.

PRODUCTS

ILLUMINATION PRODUCTS

StockerYale is a leading developer and manufacturer of specialized illumination products for the inspection, machine vision, medical, and military markets and continues to be the only company with design and manufacturing competencies in four illumination disciplines: fiber optic, fluorescent, structured light laser, and light emitting diode (LED) technologies. The Company also differentiates itself from many of its competitors by delivering custom designed lighting solutions that can operate as a stand-alone illumination source or as an integral component of a larger OEM system.

The Company's fiber optic illumination products provide shadow-free, glare-free, cool illumination by way of a halogen light source (i.e., fiber optic illuminator) and the components (i.e., fiber optic light guide) that carry the illumination output to the intended location.

3  /  STKR 2002 FORM 10-K

 Part I 

Item 1

StockerYale manufactures high output, 0.66 and 0.55 numerical aperture (N.A.) glass fiber, in addition to polymer clad fused silica (quartz) fiber that is used in its fiber optic components, providing customers with the lighting solution that best fits their application. StockerYale's illumination fiber is internally produced in its Salem drawing facility rather than outsourced. This ensures that a higher quality of light demanded by increasingly sophisticated imaging systems and advanced quality assurance processes is delivered.

StockerYale has over twenty years experience designing and manufacturing high-quality fluorescent illumination products that are primarily used in microscopy and machine vision applications. The Company's fluorescent illuminators provide the critical lighting needs for a diversity of microscopes and cameras that are widely used for inspection in the semiconductor and disk drive manufacturing industries as well as machine vision applications. StockerYale has the most comprehensive line of fluorescent products available and believes that its Model 9 circular fluorescent microscope illuminator (CFMI) is one of the world's leading microscope illuminators. The Company also custom designs fluorescent illumination systems to meet a customer's exact lighting requirements.

For customers looking for a compact, long lasting illumination source, StockerYale offers LED lighting systems. The Company's patented, state-of-the-art, chip-on-board LED units draw less power and are not subject to the influences of oxidation that other lighting technologies endure, resulting in a life span of over 60,000 hours. Furthermore, because of the intrinsic characteristics of LEDs, which can be engineered into virtually any geometric configuration, StockerYale's LED's are ideal for specialized illumination applications within the semiconductor and electronics and also the medical industries that require the properties and benefits that only this lighting technology can deliver.

StockerYale's Lasiris^TM brand laser pattern projectors are used in the industrial inspection and 3-D machine vision industries and have most recently been introduced into the medical and military industries for specialized applications. The Company's patented optical lens produces a non-Gaussian (evenly illuminated) distinct laser line or a more complex laser light pattern that maintains a consistent intensity along the length and height of the projection. StockerYale's lasers are electrostatic discharge (ESD) protected, feature interchangeable head patterns, and most meet Class II eye safety ratings. By applying nearly 15 years of electro-optic R&D experience, the Company offers custom designed laser pattern projectors that meet even the most stringent requirements.

Lasers can be useful for contour mapping of parts, surface defect detection, depth measurements, guidelines, edges detection, and alignment. For example, in machine vision applications, structured light lasers may be used on systems recording the gap and flushness between car body components. In industrial inspection applications, these products may draw attention to parts that do not conform to specifications, such as defective parts.

OPTICAL COMPONENTS

StockerYale is an independent designer and manufacturer of specialty optical fiber and phase masks that are primarily used by fiber optic sensor, fiber optic gyroscope and telecommunication equipment manufacturers around the world.

Today, the Company is a leading supplier of phase masks, which are high precision phase diffraction gratings used as both a key enabling technology for the production of fiber Bragg gratings (FBGs) and for biomedical applications. FBGs offer a passive fiber-based means of filtering and stabilizing wavelengths to improve the performance of optical components used in various telecommunication and sensor applications. The Company also has the technical expertise and R&D facilities to optimize or custom design a phase mask that supports a special wavelength operation or tailor the mask dimensions to satisfy a customer's specific application.

The phase mask product line is sold by a direct sales force in North America and Europe and through distributor channels in Asia.

StockerYale designs and produces high-quality specialty optical fiber for both industry standard and custom applications.

4  /  STKR 2002 FORM 10-K

 Part I 

Item 1

StockerYale's specialty optical fiber fall into five broad categories: rare-earth doped fibers, polarization maintaining fibers, photosensitive fibers, bend insensitive fibers and custom designed fibers. These specialty optical fibers support a diverse range of applications, including erbium-doped fiber amplifiers, (EDFAs), fiber Bragg gratings, (FBGs), high-voltage current sensors, gyroscopes, and other applications related to optical fiber sensors and telecommunications.

StockerYale introduced many new specialty optical fibers in late 2002 including erbium doped fiber, polarization maintaining fiber, cladding mode suppression fiber and select cut-off single mode fiber. The specialty optical fiber is sold by a direct sales force in North America and Europe and through distributor channels in Asia. The Company is focusing a significant amount of its specialty optical fiber development resources outside of the telecommunications market due to a significant downturn in the industry. Many of the products are targeted at the defense sector and oil exploration industries and have longer qualification periods due to the nature of the applications. The Company expects additional opportunities in the telecommunications sectors as existing industry inventories are depleted and when the market returns to more favorable conditions.

SALES DATA

Specialized illumination and optical sub-component products represent 83% and 9% respectively of 2002 revenues, 69% and 23%, respectively in 2001 and 74% and 16%, respectively in 2000. Printer and recorder product sales represented 8% of revenues in 2002 and 2001 and 10% in 2000.

DOMESTIC AND FOREIGN REVENUE

Sales to unaffiliated customers in foreign countries represented 40%, 38% and 40% of net revenues in 2002, 2001and 2000, respectively.

MARKETING AND DISTRIBUTION

The Company's products are sold to over 10,000 customers, primarily in North America, Europe and the Pacific Rim. The Company sells directly to, and works with, a group of approximately 50 distributors and machine vision integrators to sell its specialized illumination products. Optical components are sold directly to OEM customers by the Company's sales organization.

COMPETITION AND COMPETITIVE POSITION

The Company competes with a number of firms in the design and manufacture of its specialized illumination, optical fiber and sub-component products. Some competitors have greater resources than the Company, and as a result, may have competitive advantages in the research and development and sales and distribution.

In the industrial fluorescent lighting market, the Company has two primary competitors. MicroLite markets a product similar in appearance to the Company's circular fluorescent microscope illuminator. Techni-Quip Corporation offers industrial fluorescent lighting as part of its product line but as a whole, its lighting product line is limited and represents a small percentage of that company's total business.

The Company has five primary competitors in the fiber optic illumination market. The most established segment of this market relates to illumination for microscopes. Within that market, Volpi Manufacturing USA, Inc. and Dolan-Jenner Industries, Inc. compete directly with the Company's products. Both of these companies have been producing fiber optic products for more than thirty years and offer a complete line of fiber optic illumination systems for microscopy applications. A third company, Cuda Products, Inc., also supplies fiber optic lighting for microscopy; however, its primary market is medical. The value-oriented segment of the microscopy market is dominated by Chiu Technical Corp, which offers an inexpensive, "no-frills", fiber optic lighting system. A newer segment in the fiber optic lighting market relates to automated imaging and inspection equipment for machine vision. Schott-Fostec, Inc. is the leading provider of fiber optic lighting for the machine vision industry.

5  /  STKR 2002 FORM 10-K

 Part I 

Item 1

The Company has developed the in-house capability to draw its own glass fiber in variable dimensions to suit customer needs. Although some of the above-named competitors also have this capability, the Company believes that its proprietary manufacturing techniques result in fiber that has increased reliability. Since mid-1996, the Company has invested in developing its in-house design and research capabilities, including the hiring of personnel trained in optical, chemical, mechanical and electrical engineering and related disciplines, and the purchase of computers and laboratory equipment necessary to support these personnel. Further, the Company has succeeded in designing and developing a complete line of fiber optic lighting products for both the machine vision and microscopy markets.

Over the last eighteen months, the Company completed a program to expand its specialty optical fiber capability to include specialty optical fibers (SOF) for the defense and security, utility and telecommunication industries. The Company made substantial capital investments in plant and equipment in connection with its development of a complete line of specialty optical fibers (SOF). The Company's major competitors in this area include OFS, formally Lucent's Optical Fiber Solutions division, Corning, and 3M. With OFS (now owned by Furukawa), Corning and 3M consuming the majority of their SOF products internally, the Company believes it is positioned to be a leading independent supplier of SOF.

BACKLOG

The Company maintains an inventory of standard materials and components and generally manufactures standard illumination product configurations within one to five days after receipt of a customer order. The optical components and specialty optical products are generally manufactured to specifications of the customer order with a one to four week turnaround between order and shipment. Although such rapid response is, and historically has been, a selling advantage for the Company, some orders are placed for future delivery. At December 31, 2002, the Company had a backlog of orders for future delivery of approximately $2,258,000, compared to approximately $2,858,000 as of December 31, 2001. The principal reason for the backlog decline was a "last-time buy" for a portion of the printer and recorder business which represented approximately $700,000 of the $2,858,000 backlog as of December 31, 2001.

RAW MATERIALS

The raw materials and components used in the Company's products are purchased from a number of different suppliers and are generally available from several sources.

DEPENDENCE ON ONE OR A FEW MAJOR CUSTOMERS

The Company's customer base consists of more than 10,000 customers in various industries worldwide. Sales to the Company's largest single customer represented 16% of the Company's total net sales in fiscal 2002. The Company's top ten customers represented approximately 32% of total net sales in fiscal 2002, 32% in 2001 and 38% in 2000.

PATENTS AND TRADEMARKS

The Company holds patents in the United States and Ireland and has filed additional patent applications in the United States, Canada, Europe and Japan. StockerYale (IRL), Ltd holds a patent on a method for attaching semiconductor chips and has applied for two patents in the United States, Canada and Europe on new LED ring light and line light technologies. StockerYale Canada holds exclusive rights to three patents in the United States and one patent in Canada through licensing agreements. A wholly-owned subsidiary of the Company, Innovative Specialty Optical Fiber Components LLC, has applied for a patent in the United States on a fiber optic technology for depolarizing light. A 49% owned joint venture of the Company, Optune Technologies, Inc. has applied for two patents in the United States on a tunable optical filter for optical communications.

6  /  STKR 2002 FORM 10-K

 Part I 

Item 1

The Company has four patents relating to fundamental technological devices and methodologies used to achieve low-cost fluorescent light dimming; these patents expire on August 18, 2009, August 24, 2010, September 6, 2011 and September 13, 2011. StockerYale Canada's material patents consist of four patents for lenses, which expire on May 2, 2006, November 27, 2007, June 4, 2013 and December 15, 2015. The Company believes that patents are an effective way of protecting its competitive technological advantages, and considers its patents to be a strong deterrent against unauthorized manufacture, use and sale of its products and key product attributes. There can be no assurance, however, that a patent will be issued with respect to the Company's pending patent applications or whether the Company's patents or license rights will provide meaningful protection for the Company.

The Company also relies upon trade secret protection for its confidential and proprietary information. There can be no assurance that others will not independently develop substantially equivalent proprietary information and techniques, or otherwise gain access to and use or disclose the Company's trade secrets or that the Company can meaningfully protect its trade secrets.

The Company holds rights in certain trademarks to protect its brand name recognition in various markets. Because of the Company's long history and reputation for designing and manufacturing high quality products, trademark protection enhances the Company's position in the market.

Although the Company believes that its products and other proprietary rights do not infringe the proprietary rights of third parties, there can be no guarantee that infringement claims will not be asserted against the Company in the future or that any such claims will not require the Company to enter into royalty arrangements or result in costly litigation.

RESEARCH AND DEVELOPMENT

The Company intends to continue to invest significant amounts in research and development for new products and for enhancements to existing products. Research and development expenditures for the Company were $6,203,000 or 48% of net sales in 2002 and $5,465,000 or 35% of net sales in 2001. The increase was primarily a result of the strategic decision to focus on the development of the Company's optical communication sub-component product line.

On-going research and development expenses were greatly reduced in the second half of 2002 and as of February 28, 2003, the Company employed 55 full-time scientists and engineers compared to 85 as of February 28, 2002. Outside firms and consultants are selectively engaged to develop or assist with the development of new products when opportunities exist.

COMPLIANCE WITH ENVIRONMENTAL LAWS

The Company is subject to evolving Federal, state and local environmental laws and regulations. Compliance with such laws and regulations in the past has had no material effect on the capital expenditures, earnings or competitive position of the Company. The Company believes that it complies in all material respects with existing environmental laws and regulations applicable to it. However, the Company's Salem, New Hampshire headquarters are currently the subject of environmental testing and monitoring relating to soil and groundwater contamination that occurred under prior ownership. The costs incurred to date for such testing and for remediation planning have been paid by third parties. The Company believes that the costs of any required remediation will be covered by an environmental indemnity obtained from the seller, John Hancock Mutual Life Insurance Company. In addition, it is management's understanding that in April 1996, the Massachusetts Department of Environmental Protection circulated notices to parties identified as "potentially responsible parties" with respect to the Company's Salem, New Hampshire headquarters. The Company did not receive such notice. Compliance with environmental laws and regulations in the future may require additional capital expenditures, and the Company expects that in the foreseeable future such capital expenditures will be financed by cash flow from operations.

7  /  STKR 2002 FORM 10-K

 Parts I & II 

Items 2 - 4

EMPLOYEES

As of February 28, 2003, the Company employed approximately 175 people, of whom six were part‑time employees. None of the Company's employees are represented by a labor union and the Company believes that it has good relations with its employees.

ITEM 2.     PROPERTIES

The Company conducts its business at two Company owned facilities and in two leased facilities. The Company's headquarters are located in a 95,000 square foot facility in Salem, New Hampshire, which also houses research and development, manufacturing, sales and distribution capacities for the Company's specialized lighting and specialty optical fiber products. In December 2000, the Company purchased a 65,000 square foot building and property located in Dollard-des-Ormeaux, Quebec for research and development, manufacturing and sales and distribution by its Canadian subsidiary, StockerYale Canada. StockerYale Asia Pte, Ltd. operates out of an approximately 2,733 square foot leased office space in Singapore. StockerYale (IRL), Ltd leases approximately 5,500 square feet in Cork, Ireland.

The Company's Salem facility is owned by the Company subject to a mortgage granted to TJJ Corporation, which secures obligations of the Company to such party. The Company's Canadian facility in Dollard-des-Ormeaux is owned by the Company subject to a mortgage granted to Toronto Dominion Bank, which secures obligations of the Company to such party. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS-Liquidity and Capital Resources."

The Company's facilities are generally operated on the basis of one shift per day, five days per week. Management considers the facilities to be in generally good condition, to be adequately maintained and insured, and sufficient to satisfy the Company's needs for the foreseeable future.

ITEM 3.     LEGAL PROCEEDINGS

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

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of stockholders during the fourth quarter of fiscal 2002.

8  /  STKR 2002 FORM 10-K

 Part II 

 Items 5, 6 

ITEM 5.     MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

The Company's common stock is traded on The NASDAQ Stock Market under the symbol STKR. On February 28, 2003, there were 2,377 registered holders of record of the Company's common stock. The Company has not paid and does not intend to pay cash dividends on its common stock. The high and low common stock prices per share were as follows:

Quarter Ended	Mar. 31		June 30		Sept. 30		Dec. 31		Year
Fiscal 2001
Common stock price per share:
High	$	19.88	$	14.95	$	15.08	$	12.30	$	19.88
Low		7.75		8.50		6.79		4.91		4.91
Fiscal 2002
Common stock price per share:
High	$	11.00	$	7.65	$	2.84	$	3.00	$	11.00
Low		6.42		2.02		0.69		0.53		0.53

Equity Compensation Plan Information
Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted average exercise price of outstanding options, warrants and rights	Number of securities remaining available for future issuance
Equity compensation plans approved by security holders	3,202,043	$6.95	431,731
Equity compensation plans not approved by security holders	None	None	None
Total	3,202,043	$6.95	431,731

In connection with entering into a Term Note secured by its Salem facility with TJJ Corporation, on December 27, 2002, the Company issued warrants to purchase 250,000 shares of its common stock at an exercise price of $1.35 per share, which expire December 27, 2007. The Company did not engage an underwriter or agent in connection with this transaction. The issuance of the warrants was exempt for registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.

9  /  STKR 2002 FORM 10-K

 Part II 

Items 6, 7

ITEM 6.     SELECTED FINANCIAL DATA

The following selected consolidated financial data are derived from the Company's audited consolidated financial statements. The data should be read in conjunction with the related notes and other information included herein.

In thousands, except earnings per share
Year Ended December 31	2002		2001		2000		1999		1998
Statement of Operations Data
Revenue	$	12,992	$	15,581	$	18,366	$	11,483	$	9,273
Operating loss from continuing operations		(15,508)		(14,156)		(1,200)		(609)		(8,212)
Operating loss from discontinued operations		0		0		43		6		100
Loss from continuing operations		(15,508)		(13,671)		(1,533)		(895)		(5,672)
Loss from discontinued operations		0		(191)		(1,862)		(163)		(4,334)
Loss per share from continuing operations--basic and diluted		(1.22)		(1.28)		(0.18)		(0.12)		(0.92)
Loss per share from discontinued operations--basic and diluted		0		(0.02)		(0.21)		(0.02)		(0.70)
Balance Sheet Data
Total assets		41,320		43,360		36,981		16,679		15,997
Net assets of discontinued operations		0		0		1,100		2,092		2,046
Long-term obligations, net of current portion		96		2,807		3,708		4,376		4,256
Total liabilities		16,358		13,335		9,082		12,925		13,356
Stockholders' equity		24,962		30,025		27,899		3,754		4,654

ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

RESULTS OF OPERATIONS FOR 2002 AND 2001

Management Discussion and Analysis contains statements that are forward-looking. These statements are based on expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of factors discussed in "Certain Factors Affecting Future Operating Results." As further discussed in the following Liquidity and Capital Resources section, the Company is experiencing liquidity problems and is in default of its loan agreements.

 NET SALES

Net sales were $13.0 million in 2002 compared to $15.6 million in 2001, a decrease of 17% or $2.6 million.

Net sales from the Company's specialized illumination products were $10.9 million in 2002 compared to $10.8 million in 2001, an increase of $0.1 million or 1%. Sales of fluorescent and fiber optic illumination products manufactured in the Company's Salem facility declined $0.6 million or 14% primarily due to a reduction in demand as a result of a general slow down in the semiconductor, disk drive inspection and electronic assembly markets. Sales of laser illumination products manufactured in the Company's Montreal facility increased $0.7 million or 14% as new products and new applications, especially in the defense industry gained acceptance. Sales from its Irish and Singapore subsidiaries in 2002 were level with 2001. The majority of the Company's sales of specialized illumination products are made for companies in industries who use specialized lighting for industrial inspection and machine vision applications; however, the Company recently made significant inroads in the military and medical markets.

10  /  STKR 2002 FORM 10-K

 Part II 

Item 7

Net sales from the Company's optical fiber and sub-component products were $1.1 million in 2002 compared to $3.6 million in 2001, a decrease of $2.5 million or 67%. A sharp decline in phase masks, which are principally sold to the telecommunications industry, accounted for 95% of the revenue decline in this product line. Revenue from our printer and recorder product line declined from $1.2 million in 2001 to $1.0 million in 2002. A portion of this product line was transferred to an outside distributor on consignment in the fourth quarter of 2002. The Company will be reimbursed beginning in 2003 for inventory transferred to this distributor plus a 5% royalty on future revenues.

COST OF SALES

Cost of sales was $11.2 million in 2002 compared to $11.3 million in 2001, a decrease of 1.3% or $0.1 million. The decrease in cost of sales resulted primarily from a sharp reduction in material cost related to the decline in phase mask revenue, which was offset by higher manufacturing overhead costs and increased obsolete inventory charges related to the printer and recorder product line.

GROSS PROFIT

Approximately $1.2 million of the $2.5 million gross profit decline was a result of the reduced phase mask revenue. The remaining $1.3 million erosion was the result of increased obsolete inventory costs related to the printer and recorder product line and increased depreciation and incremental overhead costs associated with the fiber and optical component product lines in both Salem and Montreal.

OPERATING EXPENSES

Operating expenses decreased $1.3 million from $18.4 million in 2001 to $17.1 million in 2002.

Selling expenses declined $1.0 million or 22% from $4.5 million in 2001 to $3.5 million in 2002. Salaries and fringe benefits remained level despite a 20% reduction in year-end headcount between fiscal 2001 and 2002 as increased staffing in the second half of 2001 was offset by reduced personnel in the second half of 2002. Commission expenses and bad debt expenses declined approximately $0.4 million due to lower revenues and tighter credit controls. Travel and trade show expenses declined approximately $0.2 million as the Company reduced staff and the number of events attended. The remaining $0.4 million in savings was realized through reduced administrative sales support cost, including: postage, telephone, office supplies, and recruiting costs.

Research and development expenses increased $0.7 million or 13% from $5.5 million in 2001 to $6.2 million in 2002. Salaries and fringe benefits increased $0.3 million or 12% as the cost reductions implemented in the second half of 2002 only partially offset the ramp up of staff in the second half of 2001 that continued through the second quarter of 2002. Depreciation expense increased $0.6 million as the equipment investments made in 2001 became operational in 2002.

General and administrative expenses declined $2.3 million or 30% from $7.8 million in 2001 to $5.5 million in 2002. Salaries and fringe benefit costs declined $0.7 million as a result of reduced headcount and salary reductions for both senior and middle management. Professional fees were reduced $0.5 million as the Company undertook a large portion of services previously outsourced. Travel expenses declined $0.3 million as a result of reduced staff and the use of alternative methods to conduct business with investors, customers, and vendors. Reduced support expenses, including training and recruiting, office supplies, and investor relations materials represented the majority of the remaining savings.

Management reviewed the requirements of SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets, which became effective for financial statements issued for the fiscal years beginning after December 15, 2001. Based upon this review and analysis, the Company recorded a $1.6 million asset impairment charge primarily related to a reduction in the carrying value of internal and joint venture research and development projects in Montreal.

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The Company terminated further capital expenditures on an internally developed capital project in the second quarter of 2002. At the time, the Company was considering selling the equipment to a third party, based upon the third party receiving funding to purchase the equipment. The Company was informed in the fourth quarter of 2002 that the third party was not successful in obtaining the funding and therefore the Company recorded an impairment charge in the fourth quarter of 2002.

The Company ceased funding a joint venture in the second quarter of 2002. At the time, the joint venture was soliciting additional funding from several venture capital firms. The joint venture was informed in the fourth quarter of 2002 that these venture capitalists were not interested in providing additional funding to the joint venture and therefore the Company recorded an impairment charge in the fourth quarter of 2002.

INTEREST AND OTHER INCOME

Interest and other income was $142,000 in 2002 compared to $441,000 in 2001. Interest and other income was comprised primarily of $103,000 of interest income for 2002.

INTEREST EXPENSE

Interest expense was $417,000 in 2002 compared to $757,000 in 2001 as lower interest rates offset a higher level of borrowings.

PROVISION (BENEFIT) FOR INCOME TAXES

The Company has not recorded an income tax benefit during 2002. The Company has recorded a valuation allowance against its net deferred tax assets after concluding that it is more likely than not that such deferred tax assets will not be recoverable.

RESULTS OF OPERATIONS FOR 2001 AND 2000

NET SALES

Net sales were $15.6 million in 2001 compared to $18.4 million in 2000, a decrease of 15% or $2.8 million. 

Net sales from the Company's specialized illumination products were $10.8 million in 2001 compared to $13.6 million in 2000, a decrease of 21% or $2.8 million. The decrease was primarily caused by a reduction in demand due to a general slow down in the semi-conductor, disk drive inspection and electronic assembly markets. The majority of the Company's sales of specialized illumination products are made to companies in industries who use specialized lighting for industrial inspection and machine vision applications.

Net sales from the Company's optical sub-component products were $3.6 million in 2001 compared to $3.0 million in 2000, an increase of 21% or $0.6 million. Net sales from the Company's other products, largely printers and recorders, decreased from $1.8 million in 2000 to $1.2 million in 2001.

COST OF SALES

Cost of sales were $11.3 million in 2001 compared to $11.5 million in 2000, a decrease of 1% or $157,000. The decrease in cost of sales resulted primarily from the decrease in net sales.

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GROSS PROFIT

Gross profit was $4.3 million or 28% in 2001 compared to $6.9 million or 38% in 2000. Gross margin declined primarily due to unabsorbed fixed overhead costs related to the decrease in revenue in the illumination business as well as increased depreciation and incremental management costs related to the implementation of specialty optical fiber and optical components manufacturing capacity in anticipation of revenues in 2002. The Company also recorded a charge of approximately $0.4 million related to inventory obsolescence related to its printer and recorder product line.

OPERATING EXPENSES

Operating expenses increased $10.3 million from $8.1 million in 2000 to $18.4 million 2001. The increase is directly related to the Company's new business strategy to invest in the optical components market.

Research and development expenses rose $4.2 million from $1.3 million in 2000 to $5.5 million in 2001. Salaries and benefits increased $2.7 million as the scientific and engineering staff evolved from 24 at December 31, 2000 to 85 at December 31, 2001. The increase in professional staff completed the Company's substantial intellectual capital investment in the optical components and specialty optical fiber markets. Prototype material expenses and higher depreciation costs accounted for $1.1 million of the higher research and development expenses.

Selling expenses increased $2.3 million as a result of staff doubling from 12 to 24 representing a $1.0 million growth in salaries, benefits, commissions and traveling expenses. In addition, advertising, promotion and trade show costs increased from $0.4 million to $1.0 million. The majority of these higher expenses were in support of the Company's strategic initiative into the specialty optical fiber market.

General and administrative expenses more than doubled from $3.6 million in 2000 to $7.8 million in 2001. Salaries and associated costs, including benefit and travel expenses, rose $0.9 million as headcount grew from 27 to 35. Occupancy and professional fees rose $1.6 million while Information Technology costs increased $0.5 million. The full year impact of the June 2001 acquisition of CorkOpt Ltd. also represented a $0.5 million increase in general and administrative expenses. The Company believes these incremental costs were necessary to provide the infrastructure to support the new complexity of the Company.

The increase in operating expenses in 2001 versus 2000 was based upon a strategic decision of the Company to invest in the optical component and specialty optical fiber markets.

INTEREST AND OTHER INCOME

Interest and other income was $441,000 in 2001 compared to $394,000 in 2000. Interest and other income were comprised primarily of $425,000 of interest income for 2001.

INTEREST EXPENSE

Interest expense was $757,000 in 2001 compared to $475,000 in 2000. The increase in interest expense resulted primarily from an increase in borrowings to fund working capital.

PROVISION (BENEFIT) FOR INCOME TAXES

The tax benefit recorded in 2001 relates primarily to net operating losses ($465,000) and research and development tax credits ($236,000) being benefited in the Canadian tax jurisdiction. In accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes, the deferred tax assets were recognized up to the amount offsetting deferred tax liabilities in the applicable tax jurisdiction.

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LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2002, the Company was out of compliance with the financial covenants of the Toronto Dominion Credit Agreement and as a result triggered the cross default provisions of all other borrowing agreements as described under Borrowing Agreements.

Three years ago the Company made a strategic decision to utilize its optics and manufacturing expertise in phase masks and fiber optic illumination to expand into specialty optical fiber and optical components. This was based on high growth expectations for the telecommunications infrastructure in order to facilitate the rapid growth in Internet traffic. Given management's expectations of the optical component industry's rapid growth and the communications industry's growing demand for advanced telecommunications equipment, the Company over the following three years invested significant equity capital in plant and equipment, research and development and commercialization expenses.

However, as the original equipment manufacturers (OEMs) in the telecommunication sector continued to curtail purchases in the first half of 2002, the Company realized that while the telecom equipment market still offered long-term growth potential, near-term revenue opportunities for optical components would be adversely affected. This change in market conditions required the Company to significantly modify its expectations for specialty fiber and component revenue in the foreseeable future.

In May of 2002, the Company began to significantly reduce its overall operating expenses, and most importantly, its investment in research and development expenses related to optical components. The Company ceased funding two joint ventures and reduced its headcount in research and development, as well as selling and general and administration expenses.

Since the Company has not been immune to the difficulties of raising capital in the current equity markets, it shifted its short-term goals to financing operations based upon a revised business plan. The Company leveraged its asset investments in both real estate and equipment to obtain debt financing rather than issuing additional equity capital to support its short-term cash requirements.

Over the past year, the Company has significantly reduced its cash requirements by adjusting its operating expenses to a reduced revenue forecast. Incremental capital expenditures have been eliminated. The Company closely monitors its on-going cash requirements and is prepared to implement additional cost reductions as necessary.

Based upon our current forecast for 2003, the Company is pursuing various options to raise additional funds to finance operations through the end of 2003. The Company can give no assurances to the timing or terms of such arrangements, assuming it is able to consummate one or more of these options. If the Company is unable to raise sufficient funds through these options by the end of the second quarter of 2003, it will need to implement further cost reduction strategies, and the Company may not have adequate capital to sustain its current operations. Financing options in process or under consideration include: a new Canadian bank revolving credit facility that would refinance the existing Toronto Dominion facility, a Canadian government development loan, sale of real estate and/or a private placement of equity/debt securities. The Company expects to close several of these financing options by the end of the second quarter of 2003.

Historically, the Company has financed operations through private equity placements, third-party credit facilities and cash from operations. During the year ended December 31, 2002, the Company completed a private placement transaction selling an aggregate of 1,242,600 shares of common stock resulting in net proceeds of approximately $9.7 million. In addition, the Company obtained additional funding of $6.6 million primarily through the proceeds from the TJJ Note of $4.0 million and utilization of $3.4 million from the Merrill Lynch credit facility. This was partially offset by the repayment of the $1.2 million mortgage note with Granite Bank. The Company has used the proceeds from the private placement and bank debt primarily to fund operating losses, capital expenditures and for general working capital purposes. As of December 31, 2002, unrestricted cash and cash equivalents were $3.1 million.

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Cash used in operating activities was $12.8 million in 2002, as a result of a net loss of $15.5 million and a decrease in accounts payable of $1.7 million partially offset by depreciation and amortization of $2.7 million, a decrease in inventories of $0.7 million and an asset impairment charge of $0.9 million. Cash used in investing activities was $1.8 million principally due to an increase in property, plant and equipment of $1.5 million. Included in property, plant and equipment was approximately $0.5 million of fixed assets purchased from CIENA Corporation in the second quarter of 2002. Cash provided by financing activities was $16 million in 2002 principally as a result of the Company's sale of common stock through a private placement transaction with net proceeds of $9.7 million as well as an increase in net proceeds from bank debt of $6.4 million.

BORROWING AGREEMENTS

TJJ Corporation

On December 27, 2002, the Company entered into a Term Note agreement with TJJ Corporation. The Term Note is a $5 million, three-year note due December 26, 2005, secured by the Company's Salem headquarters and bears an interest rate of 8.5%. The note allows the Company to initially draw down $4,000,000 subject to a 2% commitment fee. The Company had the option to draw down the additional $1,000,000 subject to a 1.25% commitment fee in increments of $250,000 which was subsequently exercised in full in March of 2003. In addition, the Company issued warrants to purchase 250,000 shares of the Company's common stock. The warrants can be exercised over a five-year period and each warrant can be exchanged for one share of common stock at a purchase price of $1.35 per share. As of December 31, 2002, $4,000,000 was outstanding under the Term Note agreement. The Term Note was issued together with warrants. The aggregate purchase price of the Term Note and the warrants ($4,000,000) was allocated between the Term Note and the warrants based upon their relative fair market values. The purchase price assigned to the Term Note and warrants was $3,731,000 and $269,000 respectively. The difference between the face amount of the Term Note, and the aggregate purchase price allocated to the Term Note $3,731,000 was recorded as debt discount, and is being amortized over the life of the Term Note. As of December 31, 2002, the Company was not in compliance with the covenants of the Term Note due to cross default provisions related to the Toronto Dominion Bank credit facility.

Merrill Lynch Financial Services

On May 19, 2001, the Company entered into a credit agreement with Merrill Lynch Financial Services, Inc. providing total borrowing availability up to $6,000,000. Initial proceeds were used to pay off the credit agreement between the Company and Wells Fargo Business Credit, Inc. The initial credit facility with Merrill Lynch consisted of a line of credit of up to $2,500,000 and a reducing revolver in the amount of $3,500,000. On April 24, 2002, the Company entered into the first amendment of the credit agreement, which increased the borrowing availability up to $7,000,000 by increasing the line of credit to $3,500,000 and maintaining the reducing revolver at $3,500,000.

On December 27, 2002, the Company entered into a second amendment of the credit agreement, which decreased the borrowing availability to $6,000,000 by decreasing the line of credit to $2,500,000 and maintaining the revolver at $3,500,000. The line of credit is subject to review and renewal as of July 31, 2003. As of December 31, 2002, $2,886,995 was outstanding under the reducing revolver and $3,500,000 was outstanding under the line of credit. The outstanding principal balance of all advances under this credit facility bears interest at 2.5% over the one month LIBOR rate. As of December 31, 2002 the interest rate was approximately 3.9%. The Company's obligations under this credit facility are secured by substantially all the Company's Salem assets, excluding real property, plus a pledge of restricted cash in the amount of $2,000,000. In addition, the Company is required to maintain a $7.8 million tangible net worth. The Company was not in compliance with all provisions of the credit agreement due to cross default provisions related to the Toronto Dominion Bank credit facility. The reducing revolver is a seven-year loan with monthly principal and interest payments.

Toronto Dominion Bank

On December 5, 2000, StockerYale Canada amended its credit agreement with Toronto Dominion Bank. The credit agreement provided for (a) a $3,500,000 CDN operating line of credit of which $1,000,000 CDN must be offset by credit balances; (b) two mortgage loans for $2,020,000 CDN and (c) four term notes totaling up to $1,049,000 CDN. The line of credit bore an interest rate of 1% over Toronto Dominion's prime rate, and required monthly payments of interest only, and was payable on demand. 

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In November 2002, Toronto Dominion Bank reduced the line of credit $1,500,000 CDN to $2,000,000 CDN and increased the interest rate from 1% over Toronto Dominion's prime rate to 3% over Toronto Dominion's prime rate for both short and long-term debt obligations. As of December 31, 2002, $1,385,698 CDN ($877,424 US) was outstanding under the line of credit and approximately $614,302 CDN ($399,296 US) was available for additional borrowings. The mortgage requires monthly principal payments of $10,797 CDN (approximately $7,200 US) and $1,111 CDN (approximately $698 US) plus interest at prime rate plus 3%. As of December 31, 2002, the outstanding balance on the mortgage loans was $1,865,480 CDN ($1,181,222 US). The four term loans require monthly principal payments of approximately $36,125 CDN ($22,694 US) plus interest of prime rate plus 3%. On December 31, 2002, the outstanding aggregate balance on the term loans was $590,706 CDN ($374,035 US). As of December 31, 2002, the Company was not in compliance with the debt covenants and the bank demanded payment by April 30, 2003. As of April 14, 2003, based upon the offer of a credit facility from National Bank of Canada and the Company's commitment to close this facility and to repay all of Toronto Dominion Bank's outstanding loans, Toronto Dominion Bank extended full repayment until May 31, 2003.

The Company's headquarters in Salem, New Hampshire was subject to a mortgage and note issued to Granite Bank on August 26, 1996 (the "Granite Note"). The Granite Note, in an initial principal amount of $1,500,000 was due August 29, 2011. The Granite Note bore interest at a rate of 5.75% per annum and was reviewed annually in August. The principal and interest were repayable in 180 equal monthly installments. In accordance with the terms of the Granite Note, the Company could prepay amounts outstanding there under, in whole or in part, at any time without premium or penalty. As of December 31, 2002, the Granite note was paid in full from the proceeds of the TJJ Corporation Term Note.

Corporate Borrowing Summary

In summary, as of March 31, 2003, the Company has made repayments to Merrill Lynch and Toronto Dominion Bank of $850,000 and $352,000 respectively, resulting in outstanding balances of $5,537,000 and $2,080,000 respectively, as of March 31, 2003.

However, the long-term portion of debt outstanding to TJJ Corporation of $4,000,000 and Toronto Dominion Bank of $1,555,000 as of December 31, 2002 has been reclassified from long-term to short-term debt due to cross default provisions in the debt covenants with both institutions. Although Toronto Dominion Bank has extended repayment  until May 31, 2003, under SFAS No. 78, Classification of Obligations that are Callable by the Creditor, the Company is required to reclassify all long-term obligations as current.

Therefore, all long-term obligations due both TJJ Corporation and Toronto Dominion Bank are considered current liabilities as of December 31, 2002. The cross default covenants will be cured upon the closing of the National Bank of Canada credit facility, which will replace the entire Toronto Dominion Bank credit facility (see Note 22 for additional information). Subsequent to the replacement of the Toronto Dominion Bank credit facility with the new National Bank of Canada credit facility, the Company expects the TJJ Corporation Term Note of $4,000,000 as of December 31, 2002 ($5,000,000 as of March 31, 2003) and the National Bank of Canada mortgage of $885,000 to be classified in accordance with their scheduled repayment terms. The Company can give no assurance to the timing or its ability to secure financing with the National Bank of Canada.

Optune Technologies, Inc.

On October 12, 2000, the Company entered into a joint venture with Dr. Nicolae Miron and formed Optune Technologies, Inc., a Quebec corporation, to develop a new class of tunable optical filters. Under the terms of this joint venture arrangement, the Company owns a 49% equity interest in Optune and the Company agreed to contribute an aggregate of $4,000,000 toward all operating costs of the joint venture including salaries, equipment and facility costs. The contributions were to be made over a two-year period pursuant to a fixed milestone schedule. The Company has recorded 100% of the losses associated with the research and development joint venture in the accompanying statement of operations as research and development expense. The Company provided approximately $936,000 CDN ($600,000 USD) through December 31, 2001 and recorded $400,000 USD of research and development expenses related to the joint venture. For the twelve months ended December 31, 2002, the Company has provided $394,000 CDN ($260,000 USD) and $70,000 CDN ($46,000 USD) of funding to the joint venture and recorded approximately $287,000 of research and development expenses related to the operating losses.

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The Board of Directors of the joint venture, which includes Dr. Nicolae Miron and representatives of StockerYale, (the Joint Venture Board), held four meetings during 2002 to discuss product development progress as well as the market for tunable optical filters in light of the economic conditions that had negatively impacted the telecommunications market.

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

In the fourth quarter of 2002, the Company determined based upon a lack of funding from the Company and the joint venture's inability to raise additional capital from other sources that the joint venture was impaired. The Company recorded a $474,000 CDN ($308,000 US) asset impairment to write off the Company's remaining investment in the joint venture.

Innovative Specialty Optical Fiber Components LLC

In April 2001, the Company entered into a research and development joint venture agreement to form Innovative Specialty Optical Fiber Components LLC (iSOFC) with Dr. Danny Wong to develop specialty optical fiber products. In exchange for a 60% ownership interest in Innovative Specialty Optical Fiber Components LLC, the Company committed to fund up to $7.0 million over a two-year period to cover all operating costs of the majority owned subsidiary, including salaries, equipment and facility costs. Innovative Specialty Optical Fiber Components LLC has been consolidated by the Company and the Company has recorded 100% of the losses associated with Innovative Specialty Optical Fiber Components LLC as research and development expense in the accompanying income statements. The Company provided approximately $418,000 of funding through December 31, 2001. During the twelve months ending December 31, 2002, the Company has provided $298,000 and recorded $565,000 of research and development expenses relating to the operating losses for the twelve months ending December 31, 2002.

Dr. Wong resigned from iSOFC on May 22, 2002. In a letter sent to Dr. Wong on August 19, 2002, iSOFC exercised its right under the Limited Liability Company Agreement to repurchase Dr. Wong's entire equity interest in the joint venture for fair market value. Although he had the right to dispute the repurchase price within ten business days, Dr. Wong did not respond to the exercise notice and the repurchase was effective as of August 29, 2002. The purchase price for all outstanding shares owned by Dr. Wong was $10,000.

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

From time to time, the Company contemplates raising additional capital by the issuance of equity securities, the proceeds of which may be used, among other things, to fund working capital needs and capital expenditures. As of March 8, 2002, the Company raised an additional $9.7 million through a private placement of 1,242,600 shares. In addition, the Company obtained additional funding of $6.6 million through proceeds from the TJJ Corporation Term Note of $4.0 million and utilization of $3.4 million from the Merrill Lynch credit facility. This was partially offset by the pay off of the $1.2 million mortgage note with Granite Bank.

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CONTRACTUAL OBLIGATIONS

The following table summarizes the Company's contractual obligations at December 31, 2002, and the effect such obligations are expected to have on its liquidity and cash flow in future periods:

Year	OPERATING LEASES		DEBT OBLIGATIONS (1)		TOTAL
2003	$	180	$	13,082	$	13,262
2004		10		78		88
2005		1		18		19
2006		-		-		-
2007		-		-		-
Thereafter		-		-		-
Total	$	191	$	13,178	$	13,369

(1)       Includes approximately $4.6 million of credit lines, which expire during 2003. 

RECENT ACCOUNTING PRONOUNCEMENTS

In June, 2002, FASB issued SFAS No. 146, Accounting for Cost Associated with Exit or Disposal Activities. SFAS No. 146 nullifies previous guidance on accounting for costs associated with exit or disposal activities and requires a liability for these costs to be recognized and measured at its fair value in the period in which the liability is incurred. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure. This Statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. This standard is effective for financial statements for fiscal years ending after December 15, 2002. The disclosure requirements of SFAS No. 148 have been implemented in Note 3 and the interim disclosure reporting requirements will be adopted by the Company in the first interim period.

CRITICAL ACCOUNTING POLICIES

StockerYale's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires StockerYale to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, StockerYale evaluates its estimates, including, accounts receivable, inventories, property, plant and equipment and goodwill and intangible assets. StockerYale develops its estimates based on historical experience as well as assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

StockerYale believes the following critical policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

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ACCOUNTS RECEIVABLE

The Company reviews the financial condition of all new customers prior to granting credit. After completing the credit review, the Company establishes a credit line for each customer. Periodically, the Company reviews the credit line for all major customers and adjusts the credit limit based upon an updated financial condition of the customer, historical sales and payment information and expected future sales. The Company has a large number of customers; therefore, material credit risk is limited to only a small number of customers. Sales to the Company's largest customer accounted for 16% of consolidated revenue in 2002. No other customer accounted for more than 10% of revenue in 2002. The Company periodically reviews the collectibility of its accounts receivable. Provisions are established for accounts that are potentially uncollectible. Determining adequate reserves for accounts receivable requires management's judgment. Conditions impacting the collectibility of the Company's receivables could cause actual write-offs to be materially different than the reserved balances as of December 31, 2002.

REVENUE RECOGNITION

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

INVENTORY OBSOLESCENCE

The Company values inventories at the lower of cost or market using the first in, first-out ("FIFO") method. The Company specifically evaluates historical and forecasted demand of the illumination product line to determine if the carrying value of both finished goods and raw materials is recoverable through future sales. The Company also estimates the impact of increased revenues for new products versus the potential obsolescence of older products on a case-by-case basis. As a result of this analysis, the Company reduces the carrying amount of inventory. The Company has not established an inventory reserve for the optical components product line since these products are primarily manufactured based upon a customer order. Actual results could be different from management's estimates and assumptions.

INTANGIBLE ASSETS

The Company's intangible assets consist of goodwill, which is not being amortized commencing in 2002 and beyond and amortizing intangibles, which consist of patents, trademarks and purchased patented technologies, which are being amortized over their useful lives. All intangible assets are subject to impairment tests on a periodic basis.

Note 8 describes the impact of accounting for the adoption of SFAS No. 142, Goodwill and Intangible Assets, and the annual impairment methodology that the Company will employ on January 1st of each year in calculating the recoverability of goodwill. This same impairment test will be performed at other times during the course of the year should an event occur which suggests that the recoverability of goodwill should be challenged. Amortizing intangibles are currently evaluated for impairment using the methodology set forth in SFAS No. 144, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of. Recoverability of these assets is assessed only when events have occurred that may give rise to an impairment. When a potential impairment has been identified, forecasted undiscounted cash flows of the operations to which the asset relates are compared to the current carrying value of the long-lived assets present in that operation. If such cash flows are less than such carrying amounts, long-lived assets, including such intangibles, are written down to their respective fair values.

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LONG-LIVED ASSETS

The Company reviews the recoverability of its long-lived assets, primarily property, plant and equipment, when events or changes in circumstances occur that indicate that the carrying value of the assets may not be recoverable. This review is based on the Company's ability to recover the carrying value of the assets from expected undiscounted future cash flows. If an impairment is indicated, the Company measures the loss based on the fair value of the asset using various valuation techniques. If an impairment loss exists, the amount of the loss will be recorded in the consolidated statements of operations. It is possible that future events or circumstances could cause these estimates to change.

INCOME TAXES

The Company accounts for income taxes under the liability method. Under this method the Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax basis of the assets and liabilities using currently enacted tax rates. Valuation allowances are established when necessary to reduce deferred tax assets to the amount that is more likely than not to be realized.

CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS

Statements, other than historical facts, made herein may constitute forward-looking statements. Such forward-looking statements are subject to risks and uncertainties, which may cause actual results to differ materially from those, anticipated in such statements. The factors that could cause actual results to differ materially from anticipated results include, without limitation, the Company's ability to, (i) compete with entities that have greater financial, technical and marketing resources than the Company, (ii) develop and market new products in its various business lines, (iii) gain sufficient market acceptance for its fiber products (iv) obtain financing on favorable terms or refinance indebtedness prior to maturity or (v) raise capital through equity or debt to fund anticipated expenditures and (vi) risks inherent with international operations. In addition, general economic conditions worldwide may affect the Company's results.

The Company may not be able to obtain sufficient capital to fund its operating losses.

The Company has historically experienced operating losses over the last several years and may continue to incur losses. The Company cannot predict the size or duration of any future losses. These operating losses have historically been financed through debt or by the sale of equity in the Company.

The Company's future capital requirements will depend on a number of factors, including its profitability, growth rate, working capital requirements, expenses associated with protection of the Company's patents and other intellectual property, and costs of future research and development activities. Future operating results will depend, in part, on the Company's ability to obtain and manage capital sufficient to finance its business. To the extent that funds currently available or expected to be generated from operations are not sufficient to meet current or planned operating requirements, the Company will seek to obtain additional funds through bank credit facilities, equity or debt financing, collaborative or other arrangements with corporate partners and from other sources. Additional funding may not be available when needed or on acceptable terms, which could have a material adverse effect on the Company's business, financial condition and results of operations. If adequate funds are not available, the Company may be required to delay or to eliminate certain expenditures; or license or sell a product line or intellectual property; or scale back or cease operations. In addition, in the event that the Company obtains any additional funding, such financing may have a substantially dilutive effect on the holders of the Company's securities.

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Item 7

The Company may not accomplish its new business strategy; its photonics products may not gain sufficient market acceptance to result in the number of orders for the Company to achieve profitability.

The Company's business strategy is to shift away from its historical lines of businesses and direct the Company's resources to develop, manufacture and market specialty optical fiber and optical sub-component products for use in industrial inspection, machine vision, defense and security, utility,  telecommunication and medical markets. The Company's specialty optical fiber and optical sub-component products may not achieve market acceptance with commercial and industrial purchasers. Without market acceptance, the Company may not receive a sufficient number of orders for its specialty optical fiber and optical sub-component products to achieve profitability. In addition, even if the Company's specialty optical fiber, and optical sub-component products achieve market acceptance, should these products not prove to be cost-effective and reliable, or offer advantages over comparable products sold by the Company's competitors, they may lose that acceptance.

The Company may face delays, difficulties or unanticipated costs in expanding its sales and distribution capabilities necessary to gain market acceptance for its products.

The Company is working to expand its sales, distribution and marketing capabilities for the Company's specialty optical fiber, optical subcomponent and illumination products in the United States and abroad. To market its products directly, the Company must develop an effective marketing and sales force with technical expertise and a supporting distribution capability. The Company may choose or find it necessary to enter into strategic partnerships on uncertain but potentially unfavorable terms to sell, market and distribute its products.

The Company has many competitors in its field and its technologies may not remain competitive.

The Company participates in a rapidly evolving field in which technological developments are expected to continue at a rapid pace. The Company has many competitors in the United States and abroad, including various fiber optic component manufacturers, universities and other private and public research institutions. The Company's success depends upon its ability to develop and maintain a competitive position in the product categories and technologies on which the Company focuses. The introduction of new products incorporating new technologies or the emergence of new industry standards could make it more difficult for the Company's existing products to compete in terms of pricing or functionality. Many of the Company's competitors have greater capabilities, experience and financial resources than the Company. Competition is intense and is expected to increase as new products enter the market and new technologies become available. 

If the Company fails to maintain acceptable manufacturing yields, the Company may need to delay product shipments and its gross margins could be impaired.

The manufacture of the Company's products involves highly complex and labor intensive processes. If production facilities or personnel are not adequate for these demands, the Company's manufacturing yields, which is the percentage of its products that meet customer specifications, could decline, resulting in product shipment delays, possible lost revenue opportunities, and impaired gross margins. In response to changes in product specifications and customer needs, the Company's manufacturing process may experience changes that could significantly reduce manufacturing yields. The Company's production yields could also be lower if the Company receives or inadvertently uses defective materials from its suppliers. The Company cannot be sure that its manufacturing facilities will achieve or maintain acceptable yields in the future.

The Company's customers are not obligated to buy material amounts of its products and may cancel or defer purchases on short notice.

The Company's customers typically purchase its products under individual purchase orders and may cancel 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 the Company, particularly if the Company does not anticipate them.

21  /  STKR 2002 FORM 10-K

 Part II 

Item 7A

The Company faces risks associated with its international operations.

The Company distributes and sells certain of its products internationally. As a result, the Company is subject to risks associated with operating in a foreign country, including fluctuations in foreign currency exchange rates, imposition of limitations on conversion of foreign currencies into dollars or 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. Such risks may have a material adverse effect on the Company's business, results of operations and financial condition in the future.

ITEM 7A:    QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

FOREIGN CURRENCY EXCHANGE RISK

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

INTEREST RATE RISK

The Company is exposed to market risk from changes in interest rates, which may adversely affect its financial position, results of operations and cash flows. In seeking to minimize the risks from interest rate fluctuations, the Company manages exposures through its regular operating and financing activities. The Company is exposed to interest rate risk primarily through its borrowings under its $2.5 million credit line and $3.5 million Reducing Revolver with Merrill Lynch with an interest rate at 2.5% over the one month LIBOR and its $2.0 million CDN line of credit with Toronto Dominion bank with an interest rate at 3% over Toronto Dominion's prime rate. As of December 30, 2002 the fair market value of the Company's outstanding debt approximates its carrying value due to the short-term maturities and variable interest rates. A 1% change in interest rates could increase or decrease interest expense by approximately $90,000 on an annual basis.

The information required by Item 8 is presented on pages 23 through 49 of this Form 10-K.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Item	Page
Independent Auditors' Report	23
Consolidated Balance Sheets at December 31, 2002 and 2001	26
Consolidated Statements of Operations for the Years Ended December 31, 2002, 2001 and 2000	27
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2002, 2001 and 2000	28
Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000	29
Notes to Consolidated Financial Statements	30

22  /  STKR 2002 FORM 10-K

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of StockerYale, Inc.:

We have audited the accompanying consolidated balance sheet of StockerYale, Inc. and subsidiaries as of December 31, 2002, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year then ended. Our audit also included the 2002 financial statement schedule listed in the Index at Item 15(a) 2. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the 2002 financial statements and financial statement schedule based on our audit. The financial statements and financial statement schedule as of December 31, 2001, and for each of the years in the two-year period then ended, before the inclusion of the goodwill disclosures discussed in Note 8 to the financial statements, were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements and stated that such 2001 and 2000 financial statement schedules, when considered in relation to the 2001 and 2000 basic financial statements taken as a whole, presented fairly, in all material respects, the information set forth therein, in their report dated February 25, 2002 (except with respect to the matter discussed in Note 18, as to which the date was March 8, 2002).

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the 2002 consolidated financial statements present fairly, in all material respects, the financial position of StockerYale, Inc. and subsidiaries as of December 31, 2002, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the 2002 financial statement schedule, when considered in relation to the 2002 basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed above, the financial statements of StockerYale Inc. and subsidiaries as of December 31, 2001, and for the years ended December 31, 2001 and 2000, were audited by other auditors who have ceased operations. As described in Note 8, these financial statements have been revised to include the transitional disclosures required by Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142), which was adopted by the Company as of January 1, 2002. Our audit procedures with respect to the disclosures in Note 8 with respect to 2001 and 2000 included (1) comparing the previously reported net loss to the previously issued financial statements and the adjustments to reported net loss representing amortization expense (including any related tax effects) recognized in those periods related to goodwill, intangible assets that are no longer being amortized, deferred credits related to an excess over cost, equity method goodwill, and changes in amortization periods for intangible assets that will continue to be amortized as a result of initially applying SFAS 142 (including any related tax effects) to the Company's underlying analysis obtained from management, and (2) testing the mathematical accuracy of the reconciliation of adjusted net loss to reported net loss and the related loss-per-share amounts. In our opinion, the disclosures for 2001 and 2000 in Note 8 are appropriate. However, we were not engaged to audit, review, or apply any procedures to the 2001 and 2000 financial statements of the Company other than with respect to such disclosures and, accordingly, we do not express an opinion or any other form of assurance on the 2001 and 2000 financial statements taken as a whole.

As discussed in Note 8, in the year ended December 31, 2002 the Company changed its method of accounting for goodwill and intangible assets to conform to the provisions of SFAS 142.

23  /  STKR 2002 FORM 10-K

 Part II 

Item 8

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Notes 1 and 13 to the financial statements, at December 31, 2002, the Company was not in compliance with the covenants of their loan agreements, which has resulted in certain banks demanding repayment and/or a reduction in their loan commitments. The Company is attempting to renegotiate the terms and covenants of the loan agreements and also is seeking other sources of long-term financing. The Company's difficulties in meeting its loan agreements covenants and financing needs, its recurring losses from operations, and its negative working capital position discussed in Note 1 raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ DELOITTE & TOUCHE LLP

Deloitte & Touche LLP

Boston, Massachusetts

March 7, 2003

(Except for Notes 2, 13 and 22 as to which the date is April 14, 2003)

24  /  STKR 2002 FORM 10-K

 Part II 

Item 8

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

Note:

The following audit report of Arthur Andersen LLP (Andersen) is a copy of the report previously issued by Arthur Andersen on February 25, 2002 (and on March 8, 2002 with respect to other matters) in connection with StockerYale, Inc.'s filing on Form 10-K for the year ended December 31, 2001. This audit report has not been reissued by Arthur Andersen LLP in connection with this filing on Form 10-K.

To the Directors and Stockholders of StockerYale, Inc.:

We have audited the accompanying consolidated balance sheets of StockerYale, Inc. (a Massachusetts corporation) and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of StockerYale, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States.

/s/ Arthur Andersen LLP

Arthur Andersen LLP

Boston, Massachusetts

February 25, 2002

25 /  STKR 2002 FORM 10-K

 Part II 

Item 8

ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CONSOLIDATED BALANCE SHEETS

In thousands
Year Ended December 31	2002		2001
Assets
Current assets:
Cash and cash equivalents	$	3,070	$	1,576
Restricted cash		2,000		2,000
Accounts receivable, less reserves of approximately $155 in 2002 and $128 in 2001		2,200		2,091
Inventories		4,478		5,224
Prepaid expenses and other current assets		747		1,078
Total current assets		12,495		11,969
Property, plant and equipment, net		23,650		25,813
Goodwill, net of accumulated amortization		2,677		2,677
Identified intangible assets, net		1,785		2,115
Officer note receivable		249		-
Other long-term assets		464		786
Total assets	$	41,320	$	43,360
Liabilities and stockholders' equity
Current liabilities:
Current portion of long-term debt, including obligations in default, net of unamortized discount of $269 in 2002	$	5,306	$	339
Short-term debt		7,446		3,621
Accounts payable		2,050		3,791
Accrued expenses		1,399		1,438
Short-term portion of capital lease obligation		61		147
Total current liabilities		16,262		9,336
Long-term debt and capital lease obligations		96		2,807
Other long-term liabilities		-		929
Deferred income taxes		-		263
Commitments and contingencies (See Note 19)
Stockholders' equity:
Common stock, par value $0.001-shares authorized 100,000,000; Shares issued and outstanding 12,771,524 and 11,391,825 at December 31, 2002 and 2001, respectively		13		11
Paid-in capital		68,637		58,309
Accumulated other comprehensive loss		(266)		(381)
Accumulated deficit		(43,422)		(27,914)
Total stockholders' equity		24,962		30,025
Total liabilities and stockholders' equity	$	41,320	$	43,360

See the notes to consolidated financial statements.

26  /  STKR 2002 FORM 10-K

 Part II 

Item 8

CONSOLIDATED STATEMENT OF OPERATIONS

In thousands, except earnings per share
Year Ended December 31	2002			2001			2000
Revenue	$	12,992		$	15,581		$	18,366
Cost of sales		11,159			11,303			11,460
Gross profit		1,833			4,278			6,906
Operating expenses:
Selling expenses		3,451			4,466			2,152
General and administrative		5,513			7,825			3,615
Amortization expense		329			678			604
Research and development		6,203			5,465			1,333
Asset Impairment		1,570			-			-
In-process research and development		-			-			402
Total operating expenses		17,066			18,434			8,106
Operating loss		(15,233	)		(14,156	)		(1,200	)
Interest and other income		142			441			394
Interest expense		(417	)		(757	)		(475	)
Loss from continuing operations before income tax provision (benefit)		(15,508	)		(14,472)			(1,281	)
Income tax expense (benefit)		-			(801)			252
Loss from continuing operations		(15,508	)		(13,671	)		(1,533	)
Loss from discontinued operations		-			(191	)		(1,862	)
Net loss	$	(15,508	)	$	(13,862	)	$	(3,395	)
Basic and diluted loss per share:
Loss per share from continuing operations	$	(1.22	)	$	(1.28	)	$	(0.18	)
Loss per share from discontinued operations		-			(0.02	)		(0.21	)
Net loss per share	$	(1.22	)	$	(1.30	)	$	(0.39	)
Weighted average shares outstanding:
Basic and diluted		12,685			10,683			8,711

See the notes to consolidated financial statements.

27 /  STKR 2002 FORM 10-K

 Part II 

Item 8

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

		Common Stock
				$0.001 Par Value						Accumulated Other Comprehensive Income (Loss)			Total Shareholders Equity			Comprehensive Income (Loss)
		Shares			Paid-in Capital		Accumulated (Deficit)
Balance, December 31, 1999		7,606	$	8	$	14,421	$	(10,657	)	$	(18	)	$	3,754		$	(1,133)
	Sale of common stock net of issuance costs of $1.1 million	1,289		1		24,106		-			-			24,107			-
	Conversion of subordinated debt to common stock	366		-		1,350		-			-			1,350			-
	Issuance of common stock for acquisition of CorkOpt Ltd.	125		-		2,194		-			-			2,194			-
	Cumulative translation adjustment	-		-		-		-			(111	)		(111	)		(111)
	Net loss	-		-		-		(3,395	)		-			(3,395	)		(3,395)
	Comprehensive net loss for the year ended December 31, 2000															$	(3,506)
Balance, December 31, 2000		9,386	$	9	$	42,071	$	(14,052	)	$	(129	)	$	27,899		$	-
	Sale of common stock net of issuance costs of $1.4 million	1,700	$	2	$	15,904	$	-		$	-		$	15,906		$	-
	Issuance of common stock to employees	306	$	-	$	334	$	-		$	-		$	334		$	-
	Cumulative translation adjustment	-	$	-	$	-	$	-		$	(252	)	$	(252	)	$	(252)
	Net loss	-	$	-	$	-	$	(13,862	)	$	-		$	(13,862	)	$	(13,862)
	Comprehensive net loss for the year ended December 31, 2001															$	(14,114)
Balance, December 31, 2001		11,392	$	11	$	58,309	$	(27,914	)	$	(381	)	$	30,025		$	-
	Sale of common stock net of issuance costs of $0.11 million	1,243		2		9,534		-			-			9,536			-
	Issuance of common stock to employees	103		-		324		-			-			324			-
	Issuance of common stock for acquisition of CIENA Group	34		-		200		-			-			200			-
	Warrants to purchase common stock	-		-		270		-			-			270			-
	Cumulative translation adjustment	-		-		-		-			115			115			115
	Net loss	-		-		-		(15,508	)		-			(15,508	)		(15,508)
	Comprehensive net loss for the year ended December 31, 2002															$	(15,393)
Balance, December 31, 2002		12,772	$	13	$	68,637	$	(43,422	)	$	(266	)	$	24,962

See the notes to consolidated financial statements.

28 /  STKR 2002 FORM 10-K

 Part II 

Item 8

CONSOLIDATED CASH FLOWS STATEMENTS

In thousands
Year Ended December 31	2002			2001			2000
Operations
Net loss	$	(15,508	)	$	(13,862	)	$	(3,395	)
Less: net loss on discontinued operations		-			(191)			(1,862	)
		(15,508	)		(13,671	)		(1,533	)
Adjustments to reconcile net loss to net cash used in operating activities:
Acquired in process research and development		-			-			402
Depreciation and amortization		2,695			2,066			1,025
Deferred income taxes and other charges		(9	)		(696	)		(130	)
Loss on investment in joint venture		317			380			-
Asset impairment		933			-			-
Other changes in assets and liabilities:
Accounts receivable, net		(109	)		580			(819	)
Officer note receivable		(249	)		-			-
Inventories		746			(28	)		(138	)
Prepaid expenses and other current assets		337			(216	)		(210	)
Accounts payable		(1,741	)		2,155			(1,302	)
Accrued expenses		(178	)		106			264
Net cash used in operating activities, continuing operations		(12,766	)		(9,324	)		(2,441	)
Net cash used in operating activities, discontinued operations		-			-			(870	)
Net cash used in operations		(12,766	)		(9,324	)		(3,311	)
Financing
Proceeds from sale of common stock		9,860			16,240			24,107
Borrowings (repayments) of bank debt		3,459			2,688			(2,159	)
Repayment of mortgage		(1,195	)			-		-
Proceeds from term note		4,000				-		-
Restricted cash under credit facility		-			(1,500	)		(500	)
Debt acquisition costs		(244	)		-			-
Net cash provided by  financing activities		15,880			17,428			21,448
Investing
Purchases of property, plant and equipment		(1,509	)		(18,912	)		(5,404	)
Net investment in joint venture		(330	)		(600	)		-
Net proceeds from sale of discontinued operations		-			659			-
Long-term investment		-			-			(250	)
Proceeds from note receivable		104			90			10
Business acquired, net of cash acquired		-			-			(2	)
Net cash used for investing		(1,735	)		(18,763	)		(5,646	)
Effect of exchange rates		115			(252	)		(89	)
Net change in cash and equivalents		1,494			(10,911	)		12,402
Cash and equivalents, beginning of year		1,576			12,487			85
Cash and equivalents, end of year	$	3,070		$	1,576		$	12,487
Supplemental disclosure of cash flow information:
Interest paid		417			757			577
Taxes paid		-			-			42
Stock issued in CIENA acquisition		225			-			-
Supplemental disclosure of noncash financing activities:
Conversion of subordinated debt to common stock		-			-			1,350
Fair value of shares used for acquisition of CorkOpt Ltd.		-			-			2,194
Liabilities assumed in acquisition		-			-			717

See the notes to consolidated financial statements. 

29  /  STKR 2002 FORM 10-K

 Part II 

Item 8

NOTES TO FINANCIAL STATEMENTS

December 31, 2002

(1) ORGANIZATION AND BASIS OF PRESENTATION

StockerYale, Inc. (the Company) was incorporated in 1951, and is primarily engaged in the design, manufacture and distribution of structured light lasers, specialized fiber optic and fluorescent illumination products used in a wide range of markets and industries, including: machine vision, telecommunications, aerospace, defense and security, utilities, industrial inspection and medical markets.

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the consolidated financial statements, during the years ended December 31, 2002, 2001 and 2000, the Company incurred net losses of $15,508,000, $13,862,000 and $3,395,000, respectively, and, as of December 31, 2002, the Company's current liabilities exceeded its current assets by $3,767,000. These factors among others may indicate that the Company will be unable to continue as a going concern for a reasonable period of time.

The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. As described in Note 13, the Company is not in compliance with several provisions of its loan agreements, including certain financial covenants and cross default provisions. Since the lenders have refused to waive these provisions for the year ended December 31, 2002 and some have demanded repayment and/or a reduction in their loan commitments, the loans have been classified as current liabilities as of December 31, 2002. The Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to comply with the terms and covenants of its financing agreements, to obtain additional financing or refinancing as may be required, and ultimately to attain successful operations. Management is continuing its efforts to obtain additional funds so that the Company can meet its obligations and sustain operations from sources that are described in Note 2 to the consolidated financial statements.

(2) MANAGEMENT PLAN

Three years ago the Company made a strategic decision to utilize its optics and manufacturing expertise in phase masks and fiber optic illumination to expand into specialty optical fiber and optical components. This was based on high growth expectations for the telecommunications infrastructure in order to facilitate the rapid growth in Internet traffic. Given management's expectations of the optical component industry's rapid growth and the communications industry's growing demand for advanced telecommunications equipment, the Company over the following three years invested significant equity capital in plant and equipment, research and development and commercialization expenses.

However, as the original equipment manufacturers (OEMs) in the telecommunication sector continued to curtail purchases in the first half of 2002, the Company realized that while the telecom equipment market still offered long-term growth potential, near-term revenue opportunities for optical components would be adversely affected. This change in market conditions required the Company to significantly modify its expectations for specialty fiber and component revenue in the foreseeable future.

In May of 2002, the Company began to significantly reduce its overall operating expenses, and most importantly, its investment in research and development expenses related to optical components. The Company ceased funding two joint ventures and reduced its headcount in research and development, as well as selling and general and administration expenses.

Since the Company has not been immune to the difficulties of raising capital in the current equity markets, it shifted its short-term goals to financing operations based upon a revised business plan.

30  /  STKR 2002 FORM 10-K

 Part II

Item 8

Since the Company has not been immune to the difficulties of raising capital in the current equity markets, it shifted its short-term goals to financing operations based upon a revised business plan. The Company leveraged its asset investments in both real estate and equipment to obtain debt financing rather than issuing additional equity capital to support its short-term cash requirements.

Over the past year, the Company has significantly reduced its cash requirements by adjusting its operating expenses to a reduced revenue forecast. Incremental capital expenditures have been eliminated. The Company closely monitors its on-going cash requirements and is prepared to implement additional cost reductions as necessary.

Based upon our current forecast for 2003, the Company is pursuing various options to raise additional funds to finance operations through the end of 2003. The Company can give no assurances to the timing or terms of such arrangements, assuming it is able to consummate one or more of these options. If the Company is unable to raise sufficient funds through these options by the end of the second quarter of 2003, it will need to implement further cost reduction strategies, and the Company may not have adequate capital to sustain its current operations. Financing options in process or under consideration include: a new Canadian bank revolving credit facility that would refinance the existing Toronto Dominion facility, a Canadian government development loan, sale of real estate and/or a private placement of equity/debt securities. The Company expects to close several of these financing options by the end of the second quarter of 2003.

(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying consolidated financial statements reflect the application of certain significant accounting policies as described in this note and elsewhere in the accompanying consolidated financial statements and notes.

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned and majority owned subsidiaries, StockerYale (IRL) Ltd, Lasiris Holdings, Inc., which holds all of the outstanding shares of StockerYale Canada, Innovative Specialty Optical Fiber Components LLC and StockerYale Asia PTE Ltd. All significant intercompany balances and transactions have been eliminated. The Company has a 49% ownership interest in Optune Technologies, Inc. that has been accounted for under the equity method.

CASH AND CASH EQUIVALENTS

Cash equivalents consist of highly liquid investments with original maturities of three months or less.

RESTRICTED CASH

The Company maintains certain levels of restricted cash required as collateral under the borrowings agreement with Merrill Lynch. The agreement requires that $2,000,000 be held in escrow as long as there is an outstanding balance under the agreement. The Company maintains the restricted cash in highly liquid investments with original maturities of three months or less.

ACCOUNTS RECEIVABLE

The Company reviews the financial condition of all new customers prior to granting credit. After completing the credit review, the Company establishes a credit line for each customer. Periodically, the Company reviews the credit line for all major customers and adjusts the credit limit based upon an updated financial condition of the customer, historical sales and payment information and expected future sales. The Company has a large number of customers; therefore, material credit risk is limited.

31 /  STKR 2002 FORM 10-K

 Part II

Item 8

The Company periodically reviews the collectibility of its accounts receivable. Provisions are established for accounts that are potentially uncollectible. Determining adequate reserves for accounts receivable requires management's judgment. Conditions impacting the collectibility of the Company's receivables could change causing actual write-offs to be materially different than the reserved balances.

INVENTORY OBSOLESCENCE

The Company values inventories at the lower of cost or market using the first in, first-out ("FIFO") method. The Company specifically evaluates historical and forecasted demand of the illumination product line to determine if the carrying value of both finished goods and raw materials is recoverable through future sales. The Company also estimates the impact of increased revenues for new products versus the potential obsolescence of older products on a case-by-case basis. As a result of this analysis, the Company reduces the carrying value amount of the inventory. The Company has not established an inventory reserve for optical components since these products are primarily manufactured to the customer's order. Actual results could be different from management's estimates and assumptions.

INTANGIBLE ASSETS

The Company's intangible assets consist of goodwill, which is not being amortized commencing in 2002 and beyond and amortizing intangibles, which consist of patents, trademarks and purchased patented technologies, which are being amortized over their useful lives. All intangible assets are subject to impairment tests on a periodic basis.

Note 8 describes the impact of accounting for the adoption of SFAS No. 142, Goodwill and Intangible Assets, and the annual impairment methodology that the Company will employ on January 1st of each year in calculating the recoverability of goodwill. This same impairment test will be performed at other times during the course of the year should an event occur which suggests that the recoverability of goodwill should be challenged. Amortizing intangibles are evaluated for impairment using the methodology set forth in SFAS No. 144, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of. Recoverability of these assets is assessed only when events have occurred that may give rise to an impairment. When a potential impairment has been identified, forecasted undiscounted cash flows of the operations to which the asset relates are compared to the current carrying value of the long-lived assets present in that operation. If such cash flows are less than such carrying amounts, long-lived assets, including such intangibles, are written down to their respective fair values.

LONG-LIVED ASSETS

The Company reviews the recoverability of its long-lived assets, primarily property, plant and equipment, when events or changes in circumstances occur that indicate that the carrying value of the assets may not be recoverable. This review is based on the Company's ability to recover the carrying value of the assets from expected undiscounted future cash flows. If an impairment is indicated, the Company measures the loss based on the fair value of the asset using various valuation techniques. If an impairment loss exists, the amount of the loss will be recorded in the consolidated statements of operations. It is possible that future events or circumstances could cause these estimates to change.

During the fourth quarter of 2002, the Company recorded a $1,570,000 asset impairment charge. The impairment charge is primarily attributed to the reduction in the carrying value of fixed assets and equity investments in joint ventures for selective research and development projects. The Company has determined that they will not continue to fund these projects and the joint venture was not able to raise additional outside funding. The Company has reduced the carrying value of the assets based on various cash flow techniques including discounted cash flow and market analysis.

32  /  STKR 2002 FORM 10-K

 Part II 

Item 8

LOSS PER SHARE

Loss per share, basic and diluted, is calculated by dividing the net loss by the weighted average number of common shares outstanding. For the years ended December 31, 2002, 2001, and 2000, 3,202,043, 2,329,231, 1,475,857 options, respectively, were excluded from the calculation of diluted shares, as their effects were anti-dilutive.

REVENUE RECOGNITION

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

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is valued at the lower of cost or estimated carrying values. The Company provides for depreciation on a straight-line basis over the assets estimated useful lives or lease terms, if shorter. The following table summarizes the estimated useful lives by asset classification:

Asset Classification	Estimated Useful Life
Building and building improvements	10 to 40 years
Computer equipment	3 to 5 years
Machinery and equipment	5 to 10 years
Furniture and fixtures	3 to 10 years

Total depreciation expense of property, plant and equipment was approximately $2.4 million in 2002, $1.4 million in 2001, and $0.4 million in 2000. Maintenance and repairs are expensed as incurred.

INCOME TAXES

The Company accounts for income taxes under the liability method. Under this method the Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax basis of the assets and liabilities using currently enacted tax rates. Valuation allowances are established when necessary to reduce deferred tax assets to the amount that is more likely than not to be realized.

STOCK-BASED COMPENSATION

The Company accounts for employee stock options and share awards under the intrinsic-value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, (APB 25), with pro-forma disclosures of net earnings and earnings per share, as if the fair value method of accounting defined in Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation, "SFAS No. 123" was used. SFAS No. 123 establishes a fair value based method of accounting for stock-based employee compensation plans. Under the fair value method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period.

33  /  STKR 2002 FORM 10-K

 Part II 

Item 8

Had the Company determined the stock-based compensation expense for the Company's stock options under the provisions of SFAS No. 123, the Company's net loss and net loss per share based upon the fair value at the grant date for stock options awards in 2002, 2001, and 2000, would have increased the pro-forma amounts as indicated below:

	For the Year Ended December 31,
(in thousands)	2002	2001	2000
Net loss
As reported	$     (15,508)	$     (13,862)	$       (3,395)
Additional compensation expense	(4,877)	(3,848)	(1,142)
Pro forma	$     (20,385)	$     (17,710)	$       (4,537)
Net loss per share (basic and diluted)
As reported	$         (1.22)	$         (1.30)	$         (0.39)
Pro forma	$         (1.60)	$         (1.66)	$         (0.52)

TRANSLATION OF FOREIGN CURRENCIES

The balance sheet accounts of non-U.S. operations, exclusive of stockholders' equity, are translated at year-end exchange rates, and income statement accounts are translated at weighted-average rates in effect during the year; any translation adjustments related to the balance sheet accounts are recorded as a component of stockholders' equity. Foreign currency transaction gains and losses are recorded in the statements of operations and have not been material.

 COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) is defined as net income plus change in net assets of a business enterprise during a period from transactions generated from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Accumulated other comprehensive income (loss) included in the accompanying balance sheets consists of foreign currency translation adjustments.

FAIR VALUES OF FINANCIAL INSTRUMENTS

The Company's financial instruments consist mainly of cash and cash equivalents, accounts receivable, short-term debt, accounts payable and long-term debt. The estimated fair value of these financial instruments approximates their carrying value due to the short term maturity of certain instruments and the variable interest rates associated with certain instruments which have the effect of repricing such instruments regularly.

CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade receivables. The risk is limited due to the relatively large number of customers composing the Company's customer base and their dispersion across many industries and geographic areas within the United States, Europe and Asia. The Company also insures approximately 90% of export receivables from its Canadian subsidiary and performs ongoing credit evaluations of existing customers' financial condition. One customer accounted for 16% of sales in 2002. No other customer accounted for more than 10% of sales in 2002, 2001 or 2000.

34 /  STKR 2002 FORM 10-K

 Part II 

Item 8

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.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure. This Statement amends SFAS No. 123, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. This standard is effective for financial statements for fiscal years ending after December 15, 2002. The disclosure requirements of SFAS No. 148 have been implemented in Note 3 and the interim disclosure reporting requirements will be adopted by the Company in the first interim period.

RECLASSIFICATION

Certain amounts reported for prior periods have been reclassified to be consistent with the current period presentation.

(4) 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:

	December 31,
(in thousands)	2002			2001
Finished goods	$	1,028		$	1,224
Work in-process	$	101		$	121
Raw materials	$	4,584		$	4,916
Reserve for obsolescence	$	(1,235	)	$	(1,037	)
Net inventories	$	4,478		$	5,224

Management performs quarterly reviews of inventory and disposes of items not required by their manufacturing plan and reduces the carrying cost of inventory to the lower of cost or market. The Company recorded a charge of $0.7 million in 2002 and $0.4 million in 2001 related to the discontinuance of the printer and recorder product line.

(5) OFFICER NOTE RECEIVABLE

On May 31, 2002, Mark W. Blodgett, the chairman and chief executive officer of the Company, issued a promissory note to the Company in the principal amount of $250,000. The note is a full recourse note and is payable upon demand with interest on the unpaid principal accruing at a rate per annum equal to 4.5%. As of December 31, 2002 the principal amount of $248,750 remains outstanding. The Board of Directors of the Company approved this loan transaction.

35  /  STKR 2002 FORM 10-K

 Part II 

Item 8

(6) NOTE RECEIVABLE

On September 19, 2001, the Company sold its machine components and accessories division for $850,000 in cash and a note receivable of $250,000 from the buyer. The note demands payment of interest at a rate of 6.25% only for the first six months with interest and principal payable over the following twelve months. The balance due as of December 31, 2002 is $145,834.

(7) PROPERTY, PLANT AND EQUIPMENT

Major classes of property, plant and equipment were as follows:

	December 31,
(in thousands)	2002		2001
Land	$	962	$	955
Buildings and improvements	$	11,801	$	12,558
Machinery and equipment	$	15,125	$	14,081
Furniture and fixtures	$	1,557	$	1,649
	$	29,445	$	29,243
Less: Accumulated depreciation	$	5,795	$	3,430
	$	23,650	$	25,813

(8) GOODWILL

In June 2001, the FASB issued SFAS No. 142, Goodwill and other Intangible Assets. SFAS No. 142 addresses financial accounting and reporting for goodwill and other intangible assets acquired individually or with a group of other assets at acquisition. The statement also addresses financial accounting and reporting for goodwill and other intangibles subsequent to their acquisition. SFAS No. 142 supercedes APB Opinion No. 17, Intangible Assets, (APB 17). Under SFAS No. 142, the amortization of goodwill ceased beginning January 1, 2002 and the the Company assesses the realizability of this asset annually and whenever events or changes in circumstances indicate they might be impaired. The Company estimates the fair value of its reporting units by using forecasts of discounted cash flows. In applying SFAS No. 142, the Company performed the transitional assessment and impairment test required and determined that there was no impairment of goodwill. The Company completed another test for impairment in the fourth quarter of 2002 and determined that goodwill was not impaired. At December 31, 2002, the carrying value of goodwill was approximately $2.7 million.

The transitional disclosure for reported loss for the fiscal years ended December 31, 2002, 2001 and 2000 as adjusted is presented in the table below:

		2002			2001			2000
Net loss as reported	$	(15,508	)	$	(13,862	)	$	(3,395	)
Add back amortization of goodwill, net of tax		-			326			246
Adjusted net loss	$	(15,508	)	$	(13,536	)	$	(3,149	)
Loss per share, basic and diluted:
Net loss as reported	$	(1.22	)	$	(1.30	)	$	(0.39	)
Add back amortization of goodwill, net of tax		-			0.03			0.03
Adjusted net loss per share	$	(1.22	)	$	(1.27	)	$	(0.36	)

36 /  STKR 2002 FORM 10-K

(9) INTANGIBLE ASSETS

Intangible assets consist primarily of acquired patented technology and trademarks. Intangible assets are amortized over their estimated useful lives which range from two to five years. The Company has no intangible assets with indefinite lives. The Company reviews intangible assets when indications of potential impairment exists, such as a significant reduction in cash flows associated with the assets. Intangible assets as of December 31, 2002 and 2001 are as follows:

	December 31,
(in thousands)	2002		2001
Other identified intangible assets	$	3,549	$	3,549
Less: accumulated amortization	$	1,764	$	1,434
	$	1,785	$	2,115

Amortization of intangible assets was $329,000, $358,000 and $337,000, respectively in fiscal 2002, fiscal 2001 and fiscal 2000.

The estimated future amortization expense of intangible assets, in thousands,  is as follows:

2003		2004		2005		2006		2007 and thereafter
$	318	$	318	$	318	$	318	$	513

(10) ACQUISITIONS

CorkOpt Acquisition

On June 16, 2000, the Company acquired all of the outstanding voting shares of CorkOpt Ltd for approximately $3.2 million, consisting of approximately $256,000 in cash, 125,382 shares of the Company's common stock with an approximate fair value of $2.2 million and assumed liabilities of approximately $735,000. The Company accounted for the acquisition under the purchase method of accounting and accordingly, the operating results of CorkOpt Ltd. from the date of acquisition have been included in the accompanying consolidated statement of operations. The Company has allocated the purchase price based on estimates of the fair market value of the assets acquired, which consist of approximately $830,000 of identifiable tangible assets including approximately $270,000 of cash, identified intangible assets of approximately $424,000, goodwill of approximately $1.5 million and approximately $402,000 of in-process research and development, which was charged to operations in the second quarter of fiscal 2000. The purchase price allocations represent the fair values determined in part by an independent appraisal. In-process research and development was comprised of two projects, which we estimated to be 70% complete and 40% complete, respectively, at the time of the acquisition. The in-process R&D was valued under the income approach, which represents the estimated fair value based on the risk adjusted cash flows related to the in-process R&D projects. Financial projections utilized in the valuation were based on historical results and comparable technologies and the risk-adjusted discount rates were 35% and 50% based on specific projects. At the date of the acquisition, the development of these projects had not yet reached technological feasibility and the R&D in process had no alternative future uses. Accordingly, these costs were expensed in the second quarter of fiscal 2000.

CIENA Acquisition

On May 13, 2002, the Company announced the acquisition of CIENA Corporation's specialty optical fiber (SOF) assets. StockerYale entered into the transaction take advantage of distressed prices for capital assets, to expand its current product line of specialty optical fibers and become an independent supplier to a major OEM in the telecommunications sector. The acquisition included CIENA's specialty fiber manufacturing equipment and related test and measurement assets, intellectual property related to CIENA's specialty optical fiber technology, a fully developed SOF product line, and a three-year primary supply agreement between CIENA and the Company. The purchase price of $575,000 included $350,000 of cash and 33,613 shares of common stock with an approximate market value of $225,000 of stock which has been allocated to the fiber manufacturing equipment and the related test measurement assets in the accompanying 2002 balance sheet.

37  /  STKR 2002 FORM 10-K

 Part II 

Item 8

(11) DISCONTINUED OPERATIONS

During 2000, the Company decided to discontinue its machine components and accessories division ("Stilson Die-Draulic"). On March 6, 2001, the Company signed a letter of intent to sell the net assets of the division for $1.1 million. Accordingly, the Company reported the results of the operations of the machine tool and accessories division and the associated impairment charges as discontinued operations. As of December 31, 2000, the assets and liabilities of the division remaining on the balance sheet consisted of receivables, inventory, property, plant and equipment, accounts payable, accrued liabilities and lease obligations. The net loss from discontinued operations was $1.9 million in fiscal 2000 which includes a $1.2 million charge for impairment, principally related to goodwill and net assets of $0.7 million of $0.4 million, respectively. The Company has provided a full valuation allowance on the loss from discontinued operations. In September 2001, the Company completed the sale of Stilson Die-Draulic for $1.1 million, which resulted in an additional loss of $191,000, which has been recorded in the accompanying 2001 statement of operations.

Certain information with respect to discontinued operations is summarized as follows:

(in thousands)	Year Ended December 31, 2001			Year Ended December 31, 2000
Statement of Operations:
Net sales	$	1,453		$	2,903
Cost of sales		1,284			2,422
Selling, general and administrative		177			987
Goodwill amortization		-			95
Other expense (income)		(8	)		109
Cost and expenses		1,453			3,613
Loss from discontinued operations		-			(710	)
Loss on disposal of discontinued operations		191			1,152
Net loss from discontinued operations	$	(191	)	$	(1,862	)

(12) TAXES

The components of the provision (benefit) for income taxes are as follows:

(in thousands)	For the Years Ended December 31,
		2002			2001			2000
Current
Federal	$	-		$	-		$	(67	)
State		-			-			(12	)
Foreign		263			(186	)		252
		263			(186	)		173
Deferred
Federal		-			-			67
State		-			-			12
Foreign		(263	)		(615	)		-
		(263	)		(615	)		79
Total	$	-		$	(801	)	$	252

38 /  STKR 2002 FORM 10-K

 Part II 

Item 8

The following is a reconciliation of the federal income tax (benefit) provision calculated at the statutory rate of 34% to the recorded amount:

(in thousands)	For the Year Ended December 31,
		2002			2001			2000
Applicable statutory federal income tax benefit	$	(5,273	)	$	(4,923	)	$	(435	)
State income taxes, net of federal income tax benefit		(857	)		(629	)		(58	)
Non-deductible amortization and impairment charge		177			64			544
Foreign tax rate differential		154			239			(242	)
Other, net		338			(19	)		-
Valuation allowance		5,461			4,467			443
Net federal income tax (benefit)	$	0		$	(801	)	$	252

The significant items comprising the deferred tax asset and liability at December 31, 2002 and 2001 are as follows:

in thousands)	For the Year Ended December 31,
		2002			2001
Net operating loss carry forwards	$	11,978		$	6,049
Financial reporting reserves not yet deductible for tax purpose		967			1,004
Accelerated depreciation and property-basis differences		(779	)		(608	)
Identified intangible assets		(710	)		(815	)
Other		265			367
Valuation allowance		(11,721	)		(6,260	)
	$	0		$	(263	)

As of December 31, 2002, the Company had net operating loss carry forwards (NOLs) of approximately $28.9 million available to offset future taxable income, if any. These carry forwards expire through 2022 and are subject to review and possible adjustment by the Internal Revenue Service. The Company's historical operating losses raise doubt as to the realizability of the deferred tax assets. As a result, management has provided a valuation allowance for the net deferred tax assets that may not be realized.

The tax benefit recorded in 2001 relates primarily to net operating losses and research and development tax credits being benefited in the Canadian tax jurisdiction. In accordance with SFAS No. 109, Accounting for Income Taxes, the deferred tax assets were recognized up to the amount offsetting deferred tax liabilities in the applicable tax jurisdiction. 

39 /  STKR 2002 FORM 10-K

 Part II 

Item 8

(13) DEBT AND CAPITAL LEASE OBLIGATIONS

As of December 31, 2002 the Company has classified certain debt and capital lease obligations as current due to violation of provisions within the underlying debt agreements. Debt and capital lease obligations consisted of the following:

	December 31,
(in thousands)	2002		2001
Borrowings under Credit Agreement with Merrill Lynch (1)	$   6,387		$  2,986
Borrowings under Line of Credit Agreement with Toronto Dominion Bank (1)	877		525
Borrowings under Term Loans with Toronto Dominion Bank	374		563
Mortgage note payable to Granite Bank (Salem facility), maturing August 29, 2011, with an interest rate of bank's prime rate plus 1%	-		1,195
Note Payable to TJJ Corporation maturing on December 28, 2005, with an interest rate of 8.50%, net of unamortized discount of $269 as of December 31, 2002	3,731		-
Borrowings under equipment line of credit	85		197
Mortgage notes payable to Toronto Dominion bank, maturing December 2015 and July 2016, with an interest rate of bank's prime plus 0.875%.	1,181		1,269
Term loan with the Bank of Ireland, maturing on December 31, 2003, with an interest rate of 6.5%	2		25
Revolving line of credit, maturing on demand, payable to the Bank of Ireland, with interest rate of 9.45% (1)	33		55
Revolving line of credit, maturing on demand, payable to a Singapore bank, with interest of prime plus 2% (1)	149		55
Machinery & equipment capital lease obligation, maturing from December 18, 2002 -- April 8, 2005	90		44
Sub-total debt and capital lease obligations	12,909		6,914
Less -- Short-term (1)	(7,446	)	(3,621	)
-- Short-term portion of capital lease obligations	(61	)	(147	)
-- Current portion of long-term debt, including obligations in default, net of unamortized discount of $269 in 2002	(5,306	)	(339	)
Total long-term debt and capital leases	$       96		$  2,807

BORROWING AGREEMENTS

TJJ Corporation

On December 27, 2002, the Company entered into a Term Note agreement with TJJ Corporation. The Term Note is a $5 million, three-year note due December 26, 2005, secured by the Company's Salem headquarters and bears an interest rate of 8.5%. The note allows the Company to initially draw down $4,000,000 subject to a 2% commitment fee. The Company had the option to draw down the additional $1,000,000 subject to a 1.25% commitment fee in increments of $250,000 which was subsequently exercised in full in March of 2003. In addition, the Company issued warrants to purchase 250,000 shares of the Company's common stock. The warrants can be exercised over a five-year period and each warrant can be exchanged for one share of common stock at a purchase price of $1.35 per share. As of December 31, 2002, $4,000,000 was outstanding under the Term Note agreement. The Term Note was issued together with warrants. The aggregate purchase price of the Term Note and the warrants ($4,000,000) was allocated between the Term Note and the warrants based upon their relative fair market values. The purchase price assigned to the Term Note and warrants was $3,731,000 and $269,000 respectively. The difference between the face amount of the Term Note, and the aggregate purchase price allocated to the Term Note $3,731,000 was recorded as debt discount, and is being amortized over the life of the Term Note. As of December 31, 2002, the Company was not in compliance with the covenants of the Term Note due to cross default provisions related to the Toronto Dominion Bank credit facility.

40 /  STKR 2002 FORM 10-K

 Part II 

Item 8

Merrill Lynch Financial Services

On May 19, 2001, the Company entered into a credit agreement with Merrill Lynch Financial Services, Inc. providing total borrowing availability up to $6,000,000. Initial proceeds were used to pay off the credit agreement between the Company and Wells Fargo Business Credit, Inc. The initial credit facility with Merrill Lynch consisted of a line of credit of up to $2,500,000 and a reducing revolver in the amount of $3,500,000. On April 24, 2002, the Company entered into the first amendment of the credit agreement, which increased the borrowing availability up to $7,000,000 by increasing the line of credit to $3,500,000 and maintaining the reducing revolver at $3,500,000.

On December 27, 2002, the Company entered into a second amendment of the credit agreement, which decreased the borrowing availability to $6,000,000 by decreasing the line of credit to $2,500,000 and maintaining the revolver at $3,500,000. The line of credit is subject to review and renewal as of July 31, 2003. As of December 31, 2002, $2,886,995 was outstanding under the reducing revolver and $3,500,000 was outstanding under the line of credit. The outstanding principal balance of all advances under this credit facility bears interest at 2.5% over the one month LIBOR rate. As of December 31, 2002 the interest rate was approximately 3.9%. The Company's obligations under this credit facility are secured by substantially all the Company's Salem assets, excluding real property, plus a pledge of restricted cash in the amount of $2,000,000. In addition, the Company is required to maintain a $7.8 million tangible net worth. The Company was not in compliance with all provisions of the credit agreement due to cross default provisions related to the Toronto Dominion Bank credit facility. The reducing revolver is a seven-year loan with monthly principal and interest payments.

Toronto Dominion Bank

On December 5, 2000, StockerYale Canada amended its credit agreement with Toronto Dominion Bank. The credit agreement provided for (a) a $3,500,000 CDN operating line of credit of which $1,000,000 CDN must be offset by credit balances; (b) two mortgage loans for $2,020,000 CDN and (c) four term notes totaling up to $1,049,000 CDN. The line of credit bore an interest rate of 1% over Toronto Dominion's prime rate, and required monthly payments of interest only, and was payable on demand. In November 2002, Toronto Dominion Bank reduced the line of credit $1,500,000 CDN to $2,000,000 CDN and increased the interest rate from 1% over Toronto Dominion's prime rate to 3% over Toronto Dominion's prime rate for both short and long-term debt obligations. As of December 31, 2002, $1,385,698 CDN ($877,424 US) was outstanding under the line of credit and approximately $614,302 CDN ($399,296 US) was available for additional borrowings. The mortgage requires monthly principal payments of $10,797 CDN (approximately $7,200 US) and $1,111 CDN (approximately $698 US) plus interest at prime rate plus 3%. As of December 31, 2002, the outstanding balance on the mortgage loans was $1,865,480 CDN ($1,181,222 US). The four term loans require monthly principal payments of approximately $36,125 CDN ($22,694 US) plus interest of prime rate plus 3%. On December 31, 2002, the outstanding aggregate balance on the term loans was $590,706 CDN ($374,035 US). As of December 31, 2002, the Company was not in compliance with the debt covenants and the bank demanded payment by April 30, 2003. Based upon the offer of a credit facility from National Bank of Canada and the Company's commitment to close this facility and to repay all of Toronto Dominion Bank's outstanding loans, Toronto Dominion Bank extended full repayment until May 31, 2003.

 The Company's headquarters in Salem, New Hampshire was subject to a mortgage and note issued to Granite Bank on August 26, 1996 (the "Granite Note"). The Granite Note, in an initial principal amount of $1,500,000 is due August 29, 2011. The Granite Note bears interest at a rate of 5.75% per annum and is reviewed annually in August. The principal and interest are repayable in 180 equal monthly installments. In accordance with the terms of the Granite Note, the Company may prepay amounts outstanding there under, in whole or in part, at any time without premium or penalty. As of December 31, 2002, the Granite note was paid in full from the proceeds of the TJJ Corporation Term Note.

41 /  STKR 2002 FORM 10-K

 Part II 

Item 8

On May 20, 1997 the Company entered into an equipment line of credit agreement with Granite Bank to finance capital equipment related to new product development. The line of credit provides that equipment purchases will be converted quarterly into a series of five-year notes, not to exceed $500,000 in the aggregate, bearing interest at the prime rate plus .75%.

Scheduled future maturities of debt and capital lease obligations for the next five years. without giving affect to obligations classified as current in connection with the defaults, are as follows:

Year Ending December 31,		(in thousands)
2003	$	9,082
2004	$	78
2005	$	4,018
2006	$	-
2007	$	-
Thereafter	$	-
	$	13,178

(14) STOCKHOLDERS' EQUITY

On February 18, 2000, the Company announced that all of the holders of its $1.35 million 7.25% Convertible Subordinated Notes due May 1, 2001 had elected to convert their Notes. The Notes were converted into 366,092 shares of common stock based on a conversion price of $3.6875 per share. 

On March 3, 2000, the Company completed a private placement of 710,000 common shares at a price of $13.00 per share, which resulted in net proceeds of approximately $8.8 million.

On June 16, 2000, the Company acquired all of the outstanding voting shares of CorkOpt Ltd for approximately $3.2 million, consisting of approximately $256,000 in cash, 125,382 shares of the Company's common stock with a fair value of $2.2 million and the assumption of approximately $735,000 of liabilities.

On October 5, 2000, the Company completed a private placement of 409,132 common shares at a price of $30.00 per share, which resulted in net proceeds to the Company of approximately $11.7 million.

On November 2, 2000, the Company completed another private placement of 150,000 common shares at a price of $24.4375 per share, which resulted in net proceeds to the Company of approximately $3.6 million.

In connection with the private placements, the Company issued 19,957 warrants to purchase shares of the Company's common stock at $45.00 per share expiring on October 4, 2004. The Company has determined the fair value of these options to be $723,000 which is netted against the proceeds in additional paid in capital.

 

42  /  STKR 2002 FORM 10-K

 Part II 

Item 8

On May 31, 2001, the Company completed a private placement of 1,700,000 shares of its common stock, par value $.001 per share. The Company offered these shares to eighteen purchasers at $10.25 per share. The Company did not engage any underwriters in connection with the private placement, but the Company did enter into an agreement with William Blair & Company to act as exclusive placement agent for the shares. The Company paid a commission of $1,219,750 to William Blair & Company. The private placement resulted in net proceeds to the Company of approximately $16 million. Proceeds were used for facility expansion, capital expenditures and working capital.

On March 8, 2002, the Company completed a private placement of 1,242,600 common shares at a price of $7.76 per share, which resulted in net proceeds to the Company of approximately $9.7 million. The Company did not engage any underwriters in connection with the private placement.

(15) STOCK OPTION PLANS

In March 1996, the Company adopted the 1996 Stock Option and Incentive Plan (the 1996 Option Plan) for the purpose of issuing both Incentive Options and Nonqualified Options to officers, employees and directors of the Company. A total of 300,000 shares of common stock were reserved for issuance under this plan. 

In May 1998, the Company increased the total shares reserved for issuance under this plan by 300,000 shares for a total of 600,000 shares. In May 1999, the Company increased the total shares reserved for issuance under this plan by 600,000 shares for a total of 1,200,000 shares available for issuance.

Options may be granted under the Option Plan on such terms and at such prices as determined by the Board of Directors, except that the options cannot be granted at less than 100%, or in certain circumstances not less than 110%, of the fair market value of the common stock on the date of the grant. Each option will be exercisable after the period or periods specified in the option agreement, but no option may be exercised after the expiration of 10 years from the date of grant.

In May 2000, the Company adopted the 2000 Stock Option and Incentive Plan (the 2000 Option Plan) for the purpose of issuing both Incentive Options and Nonqualified Options to officers, employees and directors of the Company. A total of 2,800,000 shares of common stock were reserved for issuance under this plan. Options may be granted under the Option Plan on such terms and at such prices as determined by the Board of Directors, except that the options cannot be granted at less than 100%, or in certain circumstances not less than 110%, of the fair market value of the common stock on the date of the grant. Each option will be exercisable after the period or periods specified in the option agreement, but no option may be exercised after the expiration of 10 years from the date of grant.

43  /  STKR 2002 FORM 10-K

 Part II

Item 8

The following is a summary of the activity for the Company's stock options:
									Weighted
		Number							Average
		of shares		Price Range					Shares
Outstanding at December 31, 1999		846,810		$	0.66	-	$	0.97	$	0.81
	Granted	567,300		$	3.78	-	$	38.00	$	10.48
	Forfeited/cancelled	(18,210	)	$	0.81	-	$	3.78	$	1.00
	Exercised	-			-			-		-
Outstanding at December 31, 2000		1,395,900		$	0.66	-	$	38.00	$	4.75
Exercisable at December 31, 2000		16,000		$	0.88	-	$	0.88	$	0.88
	Granted	1,273,010		$	6.60	-	$	18.13	$	11.59
	Forfeited/cancelled	(68,450	)	$	0.84	-	$	32.38	$	7.67
	Exercised	(291,186	)	$	0.66	-	$	0.88	$	0.78
Outstanding at December 31, 2001		2,309,274		$	0.69	-	$	38.00	$	8.92
Exercisable at December 31, 2001		559,464		$	0.69	-	$	38.00	$	2.03
	Granted	1,356,147		$	0.73	-	$	11.06	$	4.67
	Forfeited/cancelled	(387,978	)	$	3.78	-	$	28.88	$	11.38
	Exercised	(75,400	)	$	0.75	-	$	3.78	$	2.88
Outstanding at December 31, 2002		3,202,043		$	0.69	-	$	38.00	$	6.95
Exercisable at December 31, 2002		1,183,617		$	0.69	-	$	38.00	$	6.31

						Options Outstanding					Options Exercisable
Range of Exercise Prices						Number Outstanding at December 31, 2002	Weighted Average Remaining Contractual Life (in Years)		Weighted Average Exercise Price		Number Exercisable at December 31, 2002		Weighted Average Exercise Price
	$	0.00	-	$	3.80	1,141,664		7.6	$	1.45		731,764	$	1.76
	$	3.80	-	$	7.60	861,972		9.3	$	6.14		19,725	$	6.62
	$	7.60	-	$	11.40	58,874		7.6	$	9.57		19,124	$	9.64
	$	11.40	-	$	15.20	1,009,383		8.0	$	12.15		302,117	$	12.35
	$	15.20	-	$	19.00	66,875		6.6	$	16.61		49,812	$	16.64
	$	19.00	-	$	22.80	47,875		4.9	$	20.27		47,875	$	20.27
	$	22.80	-	$	26.60	12,000		7.6	$	24.96		10,000	$	24.95
	$	26.60	-	$	30.40	3,200		0.5	$	28.75		3,100	$	28.81
	$	30.40	-	$	38.00	200		7.8	$	38.00		100	$	38.00
						3,202,043		8.1	$	6.95		1,183,617	$	6.31

The Company had 431,371 and 1,399,540 shares available for grant as of December 31, 2002 and 2001, respectively.

During 2002 and 2001, the weighted average fair value of options granted was $4.67 and $8.91 respectively.

44 /  STKR 2002 FORM 10-K

 Part II 

Item 8

(16) STOCK-BASED COMPENSATION

The Company elected to account for its stock-based compensation plan under APB 25. However, the Company has computed, for pro forma disclosure purposes, the value of all options granted during 2002, 2001 and 2000 using the Black-Scholes option pricing model as prescribed by SFAS No. 123, using the following weighted-average:

	2002	2001	2000
Risk-free interest rate	3.38% - 5.19%	3.65% - 5.19%	5.17% - 6.69%
Expected dividend yield	-	-	-
Expected life	5 years	5 years	5 years
Expected volatility	115%	101%	185%

The total value of options granted during 2002, 2001, and 2000 would be amortized on a pro forma basis over the vesting period of the options. Options generally vest equally over two or four years.

(17) EMPLOYEE STOCK PURCHASE PLAN

In May 2000, the Company adopted the 2000 Employee Stock Purchase Plan (the "Stock Purchase Plan"), which permits the eligible employees of the Company and its subsidiaries to purchase shares of the Company's common stock, at a discount, through regular monthly payroll deductions of up to 10% of their pre-tax gross salary. Subject to adjustment for stock splits, stock dividends and similar events, a maximum of 100,000 shares of common stock may be issued under the Stock Purchase Plan. For the year ended December 31, 2002 and 2001, there were 28,086 and 9,380 shares issued respectively under the Stock Purchase Plan.

(18) EMPLOYEE BENEFIT PLANS

On January 17, 1994, the Company established the StockerYale 401(k) Plan (the Plan). Under the Plan, employees are allowed to make pretax retirement contributions. In addition, the Company may make matching contributions, not to exceed 100% of the employee contributions, and profit sharing contributions at its discretion. The Company made matching contributions of $62,000, $57,000, and $38,000 in fiscal years 2002, 2001, and 2000, respectively. The Company incurred costs of approximately $2,000, $12,000, and $5,000 in 2002, 2001, and 2000, respectively, to administer the Plan.

(19) COMMITMENTS AND CONTINGENCIES

The Company leases facilities and equipment under operating leases. The future minimum lease payments as of December 31, 2002 are as follows (in thousands):

For the Year Ending December 31,	Amount
2003	$	180
2004		10
2005		1
Total minimum lease payments	$	191

Total rent expense for operating leases charged to operations was $256,000, $207,000 and $164,000 in 2002, 2001 and 2000, respectively.

45  /  STKR 2002 FORM 10-K

 Part II 

Item 8

The Company is party to various legal proceedings generally incidental to its business. Although the disposition of such 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 financial condition.

(20) JOINT VENTURES

Giant Loop Corporation

In June 2000, the Company purchased 75,075 shares for $250,000 to obtain a less than 1% interest in the Giant Loop Corporation. The investment is accounted for on the cost basis and is adjusted for any other than temporary impairment in value. No impairment was recorded in 2001. In the fourth quarter of 2002, the Company determined that the investment in Giant Loop was impaired and recorded a $250,000 impairment charge.

Optune Technologies, Inc.

On October 12, 2000, the Company entered into a joint venture with Dr. Nicolae Miron and formed Optune Technologies, Inc., a Quebec corporation, to develop a new class of tunable optical filters. Under the terms of this joint venture arrangement, the Company owns a 49% equity interest in Optune and the Company agreed to contribute an aggregate of $4,000,000 toward all operating costs of the joint venture including salaries, equipment and facility costs. The contributions are to be made over a two-year period pursuant to a fixed milestone schedule. The Company is recording 100% of the losses associated with the research and development joint venture in the accompanying statement of operations as research and development expense. The Company provided approximately $936,000 CDN ($600,000 USD) through December 31, 2001 and recorded $400,000 USD of research and development expenses related to the joint venture. For the twelve months ended December 31, 2002, the Company has provided $394,000 CDN ($260,000 USD) and $70,000 CDN ($46,000 USD) of funding to the joint venture and recorded approximately $287,000 of research and development expenses related to the operating losses.

The Board of Directors of the joint venture, which includes Dr. Nicolae Miron and representatives of StockerYale, (the Joint Venture Board), held four meetings during 2002 to discuss product development progress as well as the market for tunable optical filters in light of the economic conditions that had negatively impacted the telecommunications market. The Joint Venture Board concluded that although the potential demand for the tunable optical filters was promising, that material product and/or license revenue from the technology in the short term was unlikely.

Therefore, the Joint Venture Board on August 8, 2002 unanimously approved an amendment to the original joint venture agreement, whereby StockerYale would cease funding the joint venture and was no longer obligated to fund up to the $4,000,000 as originally contemplated in the joint venture. Both Dr. Miron and StockerYale will continue to own 51% and 49%, respectively of the joint venture.

In the fourth quarter of 2002, the Company determined based upon a lack of funding from the Company and the joint venture's inability to raise additional capital from other sources that the net investment in the joint venture was impaired. The Company recorded a $474,000 CDN ($308,000 US) asset impairment to write off the Company's remaining investment in the joint venture.

Innovative Specialty Optical Fiber Components LLC

In April 2001, the Company entered into a research and development joint venture agreement to form Innovative Specialty Optical Fiber Components LLC (iSOFC) with Dr. Danny Wong to develop specialty optical fiber products. In exchange for a 60% ownership interest in Innovative Specialty Optical Fiber Components LLC, the Company committed to fund up to $7.0 million over a two-year period toward all operating costs of the majority owned subsidiary, including salaries, equipment and facility costs. Innovative Specialty Optical Fiber Components LLC has been consolidated by the Company and the Company has recorded 100% of the losses associated with Innovative Specialty Optical Fiber Components LLC as research and development expense in the accompanying statement of operations. The Company provided approximately $418,000 of funding through December 31, 2001. During the twelve months ending December 31, 2002, the Company has provided $298,000 and recorded $565,000 of research and development expenses relating to the operating losses for the twelve months ending December 31, 2002.

46  /  STKR 2002 FORM 10-K

 Part II 

Item 8

Dr. Wong resigned from iSOFC on May 22, 2002. In a letter sent to Dr. Wong on August 19, 2002, iSOFC exercised its right under the Limited Liability Company Agreement to repurchase Dr. Wong's entire equity interest in the joint venture for fair market value. Although he had the right to dispute the repurchase price within ten business days, Dr. Wong did not respond to the exercise notice and the repurchase was effective as of August 29, 2002. The purchase price for all outstanding shares owned by Dr. Wong was $10,000.

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

(21) SEGMENT INFORMATION

The Company has adopted the SFAS No. 131, Disclosures About Segments of an Enterprise and Related information. SFAS No. 131 requires financial and supplementary information to be disclosed on an annual and interim basis of each reportable segment of an enterprise. SFAS No. 131 also establishes standards for related disclosures about product and services, geographic areas and major customers. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief decision-making group, in making decisions how to allocate resources and assess performance. The Company's chief decision-maker is the chief executive officer.

Prior to January 1, 2002, the Company operated in a single segment. In 2002 the Company began to operate in two segments, Illumination and Optical Components.

The illumination segment develops and manufactures specialized illumination products for the inspection, machine vision, medical and military markets. Illumination products are sold both through distributors as well as directly to original equipment manufacturers (OEM's), the optical components segment develops and manufactures specialty optical fibers and phase masks used primarily in sensor, gyroscope and telecommunication equipment. Optical component products are sold primarily to original equipment manufacturers (OEM's).

The Company evaluates performance and allocates resources based on revenues and operating income (loss). The operating loss for each segment includes selling, research and development and expenses directly attributable to the segment. In addition, the operating loss includes amortization of acquired intangible assets, including any impairment of these assets and of goodwill. The Company's non-allocable overhead costs, which include corporate general and administrative expenses, are allocated between the segments based upon an estimate of costs associated with each segment. Segment assets include accounts receivable, inventory, machinery and equipment, goodwill and intangible assets directly associated with the product line segment.

47  /  STKR 2002 FORM 10-K

 Part II 

Item 8

The Corporate assets include cash and cash equivalents, buildings and furniture and fixtures.

	Year Ended December 31, 2002
Statement of Operations	Illumination			Optical Components			Total
Revenues	$	11,851		$	1,141		$	12,992
Gross Margin		2,974			(1,141	)		1,833
Operating Loss		(4,193	)		(11,040	)		(15,233	)

	Year Ended December 31, 2002
Assets	Illumination		Optical Components		Corporate		Total
Total current assets	$	6,301	$	404	$	5,790	$	12,495
Property, plant and equipment		777		9,699		13,174		23,650
Intangible assets		1,785						1,785
Goodwill		2,677						2,677
Other assets		405		59		249		713
	$	11,945	$	10,162	$	19,213	$	41,320

The Company's export sales are denominated in U.S. dollars. These sales are as follows:

Year Ended			(in thousands)
December 31,	USA	Canada	Europe	Asia	Total
2002	$     7,758	$     1,119	$    2,869	$    1,246	$    12,992

The Company's long-lived assets consist of property, plant and equipment located in the following geographic locations:

Year Ended			(in thousands)
December 31,	USA	Canada	Europe	Asia	Total
2002	$    16,756	$     6,568	$      277	$    49	$    23,650

(22) SUBSEQUENT EVENTS

In April 2003, the TJJ Corporation Note was amended reducing the stockholders' equity default covenant from $24,000,000 to $22,000,000. This amendment was principally the result of the $1,570,000 impairment charge recorded in the fourth quarter of 2002.

As of April 14, 2003, Toronto Dominion Bank extended full repayment of its outstanding debt obligations until May 31, 2003. Toronto Dominion Bank's decision to extend repayment is based upon the Company's commitment to close the credit facility offered by National Bank of Canada and to fully repay all outstanding debt to Toronto Dominion Bank.

48 /  STKR 2002 FORM 10-K

 Part III 

Items 8 - 14

The credit facility offered by National Bank of Canada will provide StockerYale Canada, Inc. with aggregate financing of $5,550,000 CDN ($3,660,000 US). The facility includes a $2,500,000 CDN ($1,650,000 US) line of credit secured by accounts receivable and inventory; a $2,300,000 CDN ($1,520,000 US) ten-year term note secured by the Company's Montreal building; and a $750,000 CDN ($500,000 US) five-year term note. The line of credit is subject to a 30% net loss guarantee from La Financiere du Quebec (Investment Quebec). Investment Quebec is a government agency which provides financing to companies located in the Province of Quebec. The five-year term not is subject to an 80% net loss guarantee from La Financiere du Quebec (Investment Quebec). The Company fully expects to secure the respective loan guarantees from La Financiere du Quebec (Investment Quebec). The line of credit is renewable as of April 2004 and bears an interest rate of 1.50% over prime. The ten year term note requires a $1,000,000 CDN ($660,000 US) holdback, which will be released at a rate of $125,000 CDN ($80,000 US) per quarter based upon StockerYale Canada, Inc. achieving 90% of its forecasted Earnings Before Interest Taxes Depreciation and Amortization (EBITDA). The term note bears an interest rate of 2.25% over prime. The new credit facility with the National Bank of Canada is subject to a due diligence review of accounts receivable and inventory; an appraisal value of at least $3,800,000 CDN ($2,300,000 US) for the Company's Montreal facility; and appropriate environmental reviews. The Company expects to complete the due diligence process and close the new credit facility by May 31, 2003. However, the Company can give no assurances to the timing or its ability to secure financing from the National Bank of Canada.

ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURES

In June 2002, the Company changed its independent accountants as reported in its Current Report on Form 8-K dated July 25, 2002.

The Company's consolidated financial statements for each of the two fiscal years ended December 29, 2001, and December 30, 2000, were audited by Arthur Andersen LLP, independent accountants. On August 31, 2002, Arthur Andersen ceased practicing before the SEC. Therefore, Arthur Andersen did not participate in the preparation of this Form 10-K, did not reissue its audit report with respect to the financial statements included in this Form 10-K, and did not consent to the inclusion of its audit report in this Form 10-K. As a result, holders of the Company's securities may have no effective remedy against Arthur Andersen in connection with a material misstatement or omission in the financial statements to which its audit report relates. In addition, even if such holders were able to assert such a claim, because it has ceased operations, Arthur Andersen may fail or otherwise have insufficient assets to satisfy claims made by holders of the Company's securities that might arise under Federal securities laws or otherwise with respect to Arthur Andersen's audit report.

ITEM 10.     DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information pertaining to directors and executive officers of the Company is set forth under "Election of Directors" in the Company's Proxy Statement for the Special Meeting in Lieu of an Annual Meeting of Stockholders to be held on May 22, 2003 (the "Proxy Statement"). Such information is incorporated herein by reference.

The information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934 by the directors, executive officers and beneficial owners of more than 5% of the Company's Common Stock required by this item is set forth under "Compliance with Section 16(a) of the Exchange Act" in the Company's Proxy Statement and is incorporated herein by reference.

ITEM 11.     EXECUTIVE COMPENSATION

Information pertaining to executive compensation is set forth under "Compensation of Executive Officers and Directors" in the Company's Proxy Statement and is incorporated herein by reference.

49 /  STKR 2002 FORM 10-K

 Part III 

Item 15

ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information pertaining to security ownership of management and certain beneficial owners of Company Common Stock is set forth under "Voting Securities and Principal Holders Thereof" in the Company's Proxy Statement and is incorporated herein by reference.

ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information set forth under "Certain Relationships and Related Transactions" in the Company's Proxy Statement is incorporated herein by reference.

ITEM 14.    CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures.

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

(b) Changes in internal controls

None

50  /  STKR 2002 FORM 10-K

 Part IV 

Item 15

ITEM 15.     EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES

Note:

The following audit report of Arthur Andersen LLP (Andersen) is a copy of the report previously issued by Arthur Andersen on February 25, 2002 (and on March 8, 2002 with respect to other matters) in connection with StockerYale, Inc.'s filing on Form 10-K for the year ended December 31, 2001. This audit report has not been reissued by Arthur Andersen LLP in connection with this filing on Form 10-K.

To StockerYale, Inc.:

We have audited in accordance with accounting standards generally accepted in the United States, the consolidated financial statements included in StockerYale, Inc.'s Form 10-K and have issued our report thereon dated February 25, 2002 (except with respect to the matter discussed in Note 18, as to which the date is March 8, 2002). Our audit was made for the purpose of forming an opinion on those statements taken as a whole. Schedule II is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.

/s/ Arthur Andersen LLP

Arthur Andersen LLP

Boston, Massachusetts

February 25, 2002

STOCKERYALE, INC
SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2002, 2001 and 2000

			(Credit)
	Balance at		Charge to		Other		Balance at
	Beginning		Costs and		Charges		End
(in thousands)	of Period		Expenses		Deductions (1)		of Period
2002  Allowance for doubtful accounts	$	128	$	51	$	(24)	$	155
2001  Allowance for doubtful accounts	$	134	$	143	$	(149)	$	128
2000  Allowance for doubtful accounts	$	72	$	64	$	(2)	$	134

(1) Reflects uncollectible accounts written off.

51  /  STKR 2002 FORM 10-K

QUARTERLY RESULTS (UNAUDITED)

	Quarter Ending
(in thousands, except per share amounts)	Q4'02	Q3'02	Q2'02	Q1'02	Q4'01	Q3'01	Q2'01	Q1'01
Net Revenues	$     3,105	$     3,456	$     3,523	$     2,908	$     3,398	$     3,663	$     3,602	$    4,925
Cost of Sales	2,911	2,758	2,907	2,584	3,580	2,692	2,355	2,701
Gross Margin	194	698	616	324	(182)	971	1,247	2,224
Operating Expenses
Selling Expenses	844	704	869	1,034	1,344	1,178	1,004	764
General & Administrative Expenses	1,280	1,094	1,524	1,945	1,996	2,397	2,703	1,507
Research & Development Expenses	962	1,488	1,987	1,764	2,480	1,293	1,139	611
Asset Impairment	1,570	0	0	0	0	0	0	0
Total Operating Expenses	4,656	3,286	4,380	4,743	5,820	4,868	4,846	2,882
Operating Loss	(4,462)	(2,588)	(3,764)	(4,419)	(6,002)	(3,897)	(3,599)	(658)
Other Income/(Expense)
Interest and Other Income/(Expense)	(122)	75	180	9	(6)	222	(13)	236
Interest Expense	152	95	85	85	244	224	178	110
Total Other Income/(Expense)	(274)	(20)	95	(76)	(250)	(2)	(191)	126
Loss from Continuing Operations Before Taxes	(4,736)	(2,608)	(3,669)	(4,495)	(6,252)	(3,899)	(3,790)	(532)
Provision (Benefit) for Income Taxes	0	0	0	0	(704)	(30)	(158)	93
Loss from Continuing Operations	($   4,736)	($   2,608)	($   3,669)	($   4,495)	($   5,548)	($   3,869)	($   3,632)	($     625)
Loss from Disposal of Discontinued Operations	0	0	0	0	0	(191)	0	0
Net Loss	($   4,736)	($  2,608)	($   3,669)	($   4,495)	($   5,548)	($   4,060)	($   3,632)	($     625)
Net loss per share from Continuing Operations-Basic and Diluted	($0.37)	($0.20)	($0.29)	($0.36)	($0.49)	($0.34)	($0.34)	($0.07)
Net loss from Discontinued Operations	0	0	0	0	0	(0.02)	0	0
Net income/(loss) per share from Discontinued Operations-Basic and Diluted	($0.37)	($0.20)	($0.29)	($0.36)	($0.49)	($0.36)	($0.34)	($0.07)
Weighted average shares outstanding basic and diluted	12,771,524	12,771,524	12,721,153	12,475,382	11,391,825	11,336,592	10,598,939	9,404,561

52  /  STKR 2002 FORM 10-K

 Part IV 

Item 15

 FINANCIAL STATEMENTS AND SCHEDULES

The financial statements are set forth under Item 8 of this report on Form 10-K. Financial statement schedules have been omitted since they are either not required, not applicable, or the information is otherwise included.

REPORTS ON FORM 8-K

The Company filed no reports on Form 8-K during the quarter ended December 31, 2002.

EXHIBIT LISTING

Number	Description
3.1(a)	Amended and Restated Articles of Organization of StockerYale, Inc., incorporated by reference to Exhibit 3.1 of StockerYale, Inc.'s Form 10‑KSB for the fiscal year ended December 31, 2000.
3.1(b)	Amendment, dated May 24, 2001, to the Amended and Restated Articles of Organization of StockerYale, Inc., incorporated by reference to Exhibit 3.1 of StockerYale, Inc.'s Form 10 QSB for the fiscal quarter ended June 30, 2001.
3.2	Amended and Restated Bylaws of StockerYale, Inc., incorporated by reference to Exhibit 3.2 of StockerYale, Inc.'s Form 10-SB, as amended, filed on November 2, 1995.
10.1(a)	1996 Stock Option and Incentive Plan, incorporated by reference to Exhibit 99.1 of the Form S-8 filed by StockerYale, Inc. on June 9, 2000 (No. 333-39080).
10.1(b)	Form of Incentive Option Agreement for employees under the 1996 Stock Option and Incentive Plan, incorporated by reference to exhibit 10.1(b), 10.1(c) and 10.1(d) of Form 10-K for the year ended December 31, 2001.
10.1(c)	Form of Nonqualified Option Agreement for employees under the 1996 Stock Option and Incentive Plan, incorporated by reference to exhibit 10.1(b), 10.1(c) and 10.1(d) of Form 10-K for the year ended December 31, 2001.
10.1(d)	Form of Nonqualified Option Agreement for non-employee directors under the 1996 Stock Option and Incentive Plan, incorporated by reference to exhibit 10.1(b), 10.1(c) and 10.1(d) of Form 10-K for the year ended December 31, 2001.
*10.15(a)	TJJ Corporation Term Note.
*10.15(b)	TJJ Corporation Mortgage.
*10.13(d)	Amendment to TD Bank credit facility.
*10.14(d)	Amendment to Merrill Lynch Line of Credit.
*10.14(e)	Merrill Lynch Term Note.
10.2	Form of Option Agreement for Outside Directors outside the Amended and Restated 1994 Stock Option Plan, incorporated by reference to Exhibit 10.9 of StockerYale, Inc.'s Form 10-SB, as amended, filed on November 2, 1995.
10.3(a)	2000 Stock Option and Incentive Plan, incorporated by reference to Exhibit 99.1 to the Form S-8 filed by StockerYale, Inc. on June 9, 2000 (No. 333-39082).
10.3(b)	Amendment No. 1 to the 2000 Stock Option and Incentive Plan, incorporated by reference to Exhibit 10.3(e) of StockerYale, Inc.'s Form 10 QSB for the fiscal quarter ended June 30, 2001.
10.3(c)	Amended Form of Incentive Stock Option Agreement for employees under the 2000 Stock Option and Incentive Plan, incorporated by reference to Exhibit 10.3(f) of StockerYale, Inc.'s Form 10 QSB for the fiscal quarter ended June 30, 2001.

53  /  STKR 2002 FORM 10-K

 Part IV 

Item 17

10.3(d)	Amended Form of Nonqualified Stock Option Agreement for employees under the 2000 Stock Option and Incentive Plan, incorporated by reference to Exhibit 10.3(g) of StockerYale, Inc.'s Form 10 QSB for the fiscal quarter ended June 30, 2001.
10.3(e)	Amended Form of Nonqualified Stock Option Agreement for Outside Directors under the 2000 Stock Option and Incentive Plan, incorporated by reference to Exhibit 10.3(h) of StockerYale, Inc.'s Form 10 QSB for the fiscal quarter ended June 30, 2001.
10.4(a)	2000 Employee Stock Purchase Plan, incorporated by reference to Exhibit 99.1 to the Form S-8 filed by StockerYale, Inc. on June 9, 2000 (No. 333-39082).
10.4(b)	Amendment No. 1 to 2000 Employee Stock Purchase Plan, dated June 26, 2001, incorporated by reference to exhibit 10.4(b) of Form 10-K for the year ended December 31, 2001.
10.5	Voting, Support and Exchange Agreement between Lasiris Holding, Inc., StockerYale, Inc. and the stockholders' of Lasiris, Inc. and certain other parties named therein, dated May 13, 1998, incorporated by reference to Exhibit 10.16(a) of StockerYale, Inc.'s Form 10-QSB, as amended, for the fiscal quarter ended June 30, 1998
10.6	Employment Agreement by and among Lasiris, Inc., StockerYale, Inc. and Alain Beauregard, dated as of May 13, 1998, incorporated by reference to Exhibit 10.16(b) of StockerYale, Inc.'s Form 10-QSB, as amended, for the fiscal quarter ended June 30, 1998.
10.7	Lasiris, Inc. Executive Incentive Compensation Plan, incorporated by reference to Exhibit 10.16(d) of StockerYale, Inc.'s Form 10-QSB, as amended, for the fiscal quarter ended June 30, 1998.
10.8(a)	Stock Purchase Agreement by and among StockerYale, Inc., CorkOpt Ltd., W.M. Kelly, Gary Duffy and Thomas Meade, incorporated by reference to Exhibit 2.1 of StockerYale, Inc.'s Form 8-K, filed on June 30, 2000.
10.8(b)	Stock Purchase Agreement between University College Cork - National University of Ireland, Cork and StockerYale, Inc., incorporated by reference to Exhibit 2.2 of StockerYale, Inc.'s Form 8-K, filed on June 30, 2000.
10.8(c)	Stock Purchase Agreement between Anne Kelly and StockerYale, Inc., incorporated by reference to Exhibit 2.3 of StockerYale, Inc.'s Form 8-K, filed on June 30, 2000.
10.8(d)	Stock Purchase Agreement between Gerard Conlon and StockerYale, Inc., incorporated by reference to Exhibit 2.4 of StockerYale, Inc.'s Form 8-K, filed on June 30, 2000.
10.8(e)	Stock Purchase Agreement between Enterprise Ireland and StockerYale, Inc., incorporated by reference to Exhibit 2.5 of StockerYale, Inc.'s Form 8-K, filed on June 30, 2000.
10.8(f)	Deed of Tax Indemnity by and among StockerYale, Inc., CorkOpt Ltd., W.M. Kelly, Gary Duffy and Thomas Meade., incorporated by reference to Exhibit 2.6 of StockerYale, Inc.'s Form 8-K, filed on June 30, 2000.
10.8(g)	Deed of Indemnity by Liam Kelly in favor of CorkOpt Ltd. and StockerYale, Inc., incorporated by reference to Exhibit 2.7 of StockerYale, Inc.'s Form 8-K, filed on June 30, 2000.
10.8(i)	Assignment of certain inventions by William Kelly to CorkOpt Ltd., incorporated by reference to Exhibit 10.2 of StockerYale, Inc.'s Form 8-K, filed on June 30, 2000.
10.8(j)	License Agreement between William Kelly and CorkOpt Ltd., incorporated by reference to Exhibit 10.3 of StockerYale, Inc.'s Form 8-K, filed on June 30, 2000.
10.9(a)	Subscription Agreement, dated November 17, 2000, between StockerYale, Inc. and Optune Technologies, Inc., incorporated by reference to Exhibit 10.5(a) of StockerYale, Inc.'s Form 10 KSB for the fiscal year ended December 31, 2000.

54  /  STKR 2002 FORM 10-K

 Part IV 

Item 17

10.9(b)	Stockholders Agreement, dated November 17, 2000, by and among Optune Technologies, Inc., StockerYale, Inc. and Nicolae Miron, incorporated by reference to Exhibit 10.5(b) of StockerYale, Inc.'s Form 10 KSB for the fiscal year ended December 31, 2000
10.10	Limited Liability Company Agreement of Innovative Specialty Optical Components, LLC, dated as of April 26, 2001, incorporated by reference to Exhibit 10.7 of StockerYale, Inc.'s Form 10-QSB for the fiscal quarter ended June 30, 2001.
10.11	Purchase and Sale Agreement, dated as of August 28, 1995, by and between the Company and John Hancock Mutual Life Insurance Company, incorporated by reference to Exhibit 10.6 of StockerYale, Inc.'s Form 10-SB, as amended, filed on November 2, 1995.
10.12(a)	Promissory Note, due August 29, 2011, issued by StockerYale, Inc. to Granite Bank, incorporated by reference to Exhibit 10.14(a) of StockerYale, Inc.'s Form 10-KSB for the fiscal year ended December 31, 1996.
10.12(b)	Mortgage Deed and Security Agreement, dated August 29, 1996, granted by StockerYale, Inc. to Granite Bank, incorporated by reference to Exhibit 10.14(b) of StockerYale, Inc.'s Form 10-KSB for the fiscal year ended December 31, 1996
10.12(c)	Collateral Assignment of Leases and Rents, dated August 29, 1996, granted by StockerYale, Inc. to Granite Bank, incorporated by reference to Exhibit 10.14(c) of StockerYale, Inc.'s Form 10-KSB for the fiscal year ended December 31, 1996.
10.13(a)	Credit Agreement, dated as of May 13, 1998, by and between Toronto-Dominion Bank and Lasiris, Inc., incorporated by reference to Exhibit 10.17(a) of StockerYale, Inc.'s Form 10-QSB, as amended, for the fiscal quarter ended June 30, 1998
10.13(b)	Guarantee and Postponement of Claim, dated as of May 13, 1998, by StockerYale, Inc., incorporated by reference to Exhibit 10.17(b) of StockerYale, Inc.'s Form 10-QSB, as amended, for the fiscal quarter ended June 30, 1998.
10.13(c)	Amendment to Toronto Dominion Credit Facility dated December 5, 2000, incorporated by reference to Exhibit 10.13(c) of StockerYale, Inc.'s Form 10-K405 for the fiscal year ended December 31, 2001.
10.14(a)	Reducing Revolver Loan and Security Agreement, dated as of May 3, 2001, by and between Merrill Lynch Financial Services Inc. and StockerYale, Inc., as amended by letter dated May 16, 2001, incorporated by reference to Exhibit 10.8(a) of StockerYale, Inc.'s Form 10-QSB for the fiscal quarter ended June 30, 2001
10.14(b)	Loan and Security Agreement, dated as of May 3, 2001, by and between Merrill Lynch Financial Services Inc. and StockerYale, Inc., as amended by letter dated May 16, 2001, incorporated by reference to Exhibit 10.8(b) of StockerYale, Inc.'s Form 10-QSB for the fiscal quarter ended June 30, 2001.
10.14(c)	Financial Asset Security Agreement, dated as of May 1, 2001, by and between Merrill Lynch Financial Services Inc. and StockerYale, Inc., incorporated by reference to Exhibit 10.8(c) of StockerYale, Inc.'s Form 10 QSB for the fiscal quarter ended June 30, 2001.
10.16	Separation Plan for Executive Officers
21.1	Subsidiaries of the Company, incorporated by reference to exhibit 21.1 of Form 10-K for the year ended December 31, 2001.
*23.2	Consent of Deloitte & Touche LLP
99.1	Letter to the Securities and Exchange Commission pursuant to Temporary Note T3 regarding Arthur Andersen LLP, incorporated by reference to Exhibit 99.1 of StockerYale, Inc.'s Form 10-K405 for the fiscal year ended December 31, 2001.
*99.2	Certification of Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2003
*99.3	Certification of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2003
* Filed herewith

55  /  STKR 2002 FORM 10-K

 Part IV 

Item 17

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned; thereunto duly authorized, in the City of Salem, State of New Hampshire, on April 15, 2003.

STOCKERYALE, INC

By /s/ FRANCIS J. O'BRIEN

Francis J. O'Brien,

Senior Vice President, Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Registrant and in the capacities indicated on April 15, 2003.

	Signature	Title
/s/   Mark W. Blodgett		Chairman of the Board of Directors, Chief Executive Officer and President
	Mark W. Blodgett
/s/   Clifford Abbey		Director
	Clifford Abbey
/s/   Lawrence W. Blodgett		Director
	Lawrence W. Blodgett
/s/   Dr. Herbert Cordt		Director
	Dr. Herbert Cordt
/s/   Steve E. Karol		Director
	Steve E. Karol
/s/   Ray J. Oglethorpe		Director
	Ray J. Oglethorpe
/s/   Francis J. O'Brien		Senior Vice President, Chief Financial Officer
	Francis J. O'Brien

CERTIFICATIONS

I, Mark W. Blodgett, certify that:

1. I have reviewed this annual report on Form 10-K of StockerYale, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact nor omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report.

56  /  STKR 2002 FORM 10-K

 Part IV 

Item 17

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

1. Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including it consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared.
2. Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report )the "Evaluation Date"); and
3. Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date.

5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function:

1. All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
2. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

/s/    MARK W. BLODGETT

Mark W. Blodgett,
Chief Executive Officer
April 15, 2003

I, Francis J. O'Brien, certify that:

1. I have reviewed this annual report on Form 10-K of StockerYale, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact nor omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report.

57  /  STKR 2002 FORM 10-K

 Part IV 

Item 17

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

1. Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including it consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared.
2. Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report )the "Evaluation Date"); and
3. Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date.

5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function:

1. All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
2. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

/s/    FRANCIS J. O'BRIEN

Francis J. O'Brien,
Chief Financial Officer
April 15, 2003

58  /  STKR 2002 FORM 10-K

EX-1

Monday, April 14, 2003

StockerYale: TD Bank Credit Facility


Based on the recent Offer of Financing from National Bank of Canada which indicates that there will be sufficient funds to fully repay our advances, we are in agreement to extend the pay out date of all our credit facilities to May 31, 2003.

Annie Demlakian
Toronto Dominion Bank

Exhibit 10.13(d)  /  STKR 2002 FORM 10-K

EX-2

Private Client Group

Merrill Lynch Business

Financial Services Inc.

222 North LaSalle Street

17th Floor

Chicago, Illinois 60601

(312) 499-3058

FAX: (312)499-3256

December 27, 2002

Mr. Frank O'Brien

StockerYale, Inc.

32 Hampshire Road

Salem, NH 03079

Re: Loan Documents Amendment and Extension

Dear Mr. O'Brien,

This Letter Agreement will serve to confirm certain agreements of Merrill Lynch Business Financial Services Inc. ("MLBFS") and StockerYale, Inc. ("Customer") with respect to: (i) that certain WCMA LOAN AND SECURITY AGREEMENT NO. 794-07F01 between MLBFS and Customer (including any previous amendments and extensions thereof) (the "Loan Agreement"), and (ii) all other agreements between MLBFS and Customer in connection therewith (collectively, the "Loan Documents"). Capitalized terms used herein and not defined herein shall have the meaning set forth in the Loan Documents.

Subject to the terms hereof, effective as of the "Effective Date" (as defined below), the Loan Agreement is hereby amended as follows:

(a) The "Maturity Date" of the WCMA Line of Credit is hereby extended to July 31, 2003.

(b) The term "Maximum WCMA Line of Credit" shall mean $2,500,000.00.

(c) The "Line Fee" for the period ending July 31, 2003, shall be $26,250. Customer hereby authorizes and directs MLBFS to charge said amount to WCMA Account No. 794-07F01 on or at any time after the Effective Date.

(d) The "Collateral" of the Loan Documents will be amended to read as follows:

"Collateral" shall mean all Accounts, Chattel Paper, Contract Rights, Inventory, Equipment, General Intangibles, Deposit Accounts, Documents, Instruments, Investment Property and Financial Assets of Customer, howsoever arising, whether now owned or existing or hereafter acquired or arising, and wherever located; together with all parts thereof (including spare parts), all accessories and accessions thereto, all books and records (including computer records) directly related thereto, all proceeds thereof (including, without limitation, proceeds in the form of Accounts and insurance proceeds), and the additional collateral described in Section 3.6 (b) hereof.

(e) The term "Certificate of Compliance" shall mean, as applicable, that duly executed certificate, substantially the same form as Exhibit B attached hereto to the extent such certificate shall be applicable, of the president, chief financial officer or chief executive officer of Customer, certifying as to the matters set forth in such certificate.

(f) The term "Minimum Tangible Net Worth" as of December 31, 2000 and at all times thereafter, Customer's "tangible net worth", defined and calculated as set forth in Exhibit B attached hereto shall at all times exceed $7,750,000.00.

(g) The term "Quarterly Certificate of Compliance" Within 45 days after the close of each calendar quarter, a Certificate of Compliance, duly executed by the president, chief financial officer or chief executive officer of the Customer, in the form of Exhibit B attached hereto, or such other form as reasonably required by MLBFS from time to time.

Except as expressly amended hereby, the Loan Documents shall continue in full force and effect upon all of their terms and conditions.

Customer acknowledges, warrants and agrees, as a primary inducement to MLBFS to enter into this Agreement, that: (a) no Default or Event of Default has occurred and is continuing under the Loan Documents; (b) each of the warranties of Customer in the Loan Documents are true and correct as of the date hereof and shall be deemed remade as of the date hereof; (c) Customer does not have any claim against MLBFS or any of its affiliates arising out of or in connection with the Loan Documents or any other matter whatsoever; and (d) Customer does not have any defense to payment of any amounts owing, or any right of counterclaim for any reason under, the Loan Documents.

Provided that no Event of Default, or event which with the giving of notice, passage of time, or both, would constitute an Event of Default, shall then have occurred and be continuing under the terms of the Loan Documents, and the condition specified above shall have been met to our satisfaction, the amendments and agreements in this Letter Agreement will become effective on the date (the "Effective Date") upon which: (a) Customer shall have executed and returned the duplicate copy of this Letter Agreement enclosed herewith; and (b) an officer of MLBFS shall have reviewed and approved this Letter Agreement as being consistent in all respects with the original internal authorization hereof.

Notwithstanding the foregoing, if Customer does not execute and return the duplicate copy of this Letter Agreement within 14 days from the date hereof, or if for any other reason (other than the sole fault of MLBFS) the Effective Date shall not occur within said 14-day period, then all of said amendments and agreements will, at the sole option of MLBFS, be void.

Very truly yours,

Merrill Lynch Business Financial Services Inc.

By:                                                      

Jessica Schultz

Senior Credit Manager

Accepted:

StockerYale, Inc.

By:                                                      

Printed Name:                                                      

Title:                                                      

COMPLIANCE CERTIFICATE

To: Merrill Lynch Business Financial Services Inc. ("MLBFS")
      222 North LaSalle Street
      17th Floor
      Chicago, IL 60601

The undersigned, on behalf of STOCKERYALE, INC. ("Customer"), hereby certifies to MLBFS that: (i) he/she is an officer authorized to execute and deliver this certificate on behalf of Customer, and is familiar with the business and financial condition of the Customer; (ii) the financial statements delivered with this Certificate fairly present in all material respects the results of operations and financial condition of Customer; and (iii) to the best of my knowledge and belief, after reasonable investigation, each of the following statements is true and correct as of the date hereof: (a) no Event of Default, or event which with the giving of notice, passage of time, or both, would constitute and Event of Default, has occurred or is continuing, (b) no material adverse change in the financial condition of Customer has occurred or is continuing, and (c) the attached annexations, which are hereby incorporated herein by reference, are accurate, true and correct, and do not fail to state any material fact known (or should have been known) to Customer which would, but for the lapse of time, make any such statement or calculation false in any respect.

Date: ___________________

Signature:                                                      

Printed Name:                                                      

Title:                                                      

INSTRUCTIONS: IN ACCORDANCE WITH THE TERMS OF THE LOAN AGREEMENT (TO WHICH THIS ORIGINAL FORM OF COMPLIANCE CERTIFICATE IS ATTACHED AS EXHIBIT B), THIS COMPLIANCE CERTIFICATE AND THE ATTACHED ANNEXATIONS MUST BE COMPLETED BY YOU WITHIN 45 DAYS AFTER THE CLOSE OF EACH CALENDAR QUARTER. MLBFS EXPECTS YOU TO MAKE COPIES OF THIS ORIGINAL FORM OF COMPLIANCE CERTIFICATE AND SEND THEM QUARTERLY TO MLBFS WITHOUT NOTIFICATION OR REMINDER. ADDITIONAL COPIES WILL BE PROVIDED TO YOU UPON REQUEST.

MINIMUM TANGIBLE NET WORTH ANNEX TO COMPLIANCE CERTIFICATE (Exhibit B to Loan Agreement)

Customer's "Tangible Net Worth" shall at all times exceed $7,750,000.00. For the purposes hereof, the term "Tangible Net Worth" shall mean Customer's net worth as shown on Customer's regular financial statements prepared in accordance with GAAP, but excluding an amount equal to: (i) any Intangible Assets, and (ii) any amounts now or hereafter directly or indirectly owing to Customer by officers, shareholders or affiliates of Customer. "Intangible Assets" shall mean the total amount of goodwill, patents, trade names, trade or service marks, copyrights, experimental expense, organization expense, unamortized debt discount and expense, the excess of cost of shares acquired over book value of related assets, and such other assets as are properly classified as "intangible assets" of the Customer determined in accordance with GAAP.

As of _________________ (insert Quarterly end date):

Beginning Total Net Worth	$
Distributions/advances/loans to Shareholders, officers and affiliates (-)	$
Intangible Assets (-)	$
Tangible Net Worth (=)	$

In Compliance? Yes / No

Merrill Lynch Business

Financial Services Inc.

222 North LaSalle Street

17th Floor

Chicago, Illinois 60601

(312) 499-3058

FAX: (312)499-3256

December 27, 2002

Mr. Frank O'Brien

StockerYale, Inc.

32 Hampshire Road

Salem, NH 03079

Re: Loan Documents Amendment and Extension

Dear Mr. O'Brien,

Enclosed herewith is a Letter Agreement amending the documents evidencing our loans or extensions of credit.

Please note that, among other conditions in said Letter Agreement, in order for this amendment to become effective, one copy of the enclosed Letter Agreement must be fully executed and returned to me within 14 days from the date hereof.

If you have any questions, please call me at (312) 499-3058.

Very truly yours,

Merrill Lynch Business Financial Services Inc.

By:                                                      

Jessica Schultz

Senior Credit Manager

Exhibit 10.14(d)  /  STKR 2002 FORM 10-K

EX-3

TERM LOAN AND SECURITY AGREEMENT

TERM LOAN AND SECURITY AGREEMENT dated as of December 27, 2002, between STOCKERYALE, INC., a corporation organized and existing under the laws of the State of Massachusetts having its principal office at 32 Hampshire Road, Salem, NH 03079 ("Customer"), and MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC., a corporation organized and existing under the laws of the State of Delaware having its principal office at 222 North LaSalle Street, Chicago, IL 60601 ("MLBFS").

In consideration of the mutual covenants of the parties hereto, Customer and MLBFS hereby agree as follows:

Article I. DEFINITIONS

1.1 Specific Terms. In addition to terms defined elsewhere in this Loan Agreement, when used herein the following terms shall have the following meanings:

"Bankruptcy Event" shall mean any of the following: (i) a proceeding under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, liquidation, winding up or receivership law or statute shall be commenced, filed or consented to by any Credit Party; or (ii) any such proceeding shall be filed against any Credit Party and shall not be dismissed or withdrawn within sixty (60) days after filing; or (iii) any Credit Party shall make a general assignment for the benefit of creditors; or (iv) any Credit Party shall generally fail to pay or admit in writing its inability to pay its debts as they become due; or (v) any Credit Party shall be adjudicated a bankrupt or insolvent; or (vi) any Credit Party shall take advantage of any other law or procedure for the relief of debtors or shall take any action for the purpose of or with a view towards effecting any of the foregoing; or (vii) a receiver, trustee, custodian, fiscal agent or similar official for any Credit Party or for any substantial part of any of their respective property or assets shall be sought by such Credit Party or appointed.

"Business Day" shall mean any day other than a Saturday, Sunday, federal holiday or other day on which the New York Stock Exchange is regularly closed.

"Business Guarantor" shall mean every Guarantor that is not a natural person.

"Certificate of Compliance" shall mean, as applicable, that duly executed certificate, substantially the same form as Exhibit B attached hereto to the extent such certificate shall be applicable, of the president, chief financial officer or chief executive officer of Customer, certifying as to the matters set forth in such certificate.

"Closing Date" shall mean the date upon which all conditions precedent to MLBFS' obligation to make the Loan shall have been met to the satisfaction of MLBFS.

"Collateral" shall mean all Accounts, Chattel Paper, Contract Rights, Inventory, Equipment, General Intangibles, Deposit Accounts, Documents, Instruments, Investment Property and Financial Assets of Customer, howsoever arising, whether now owned or existing or hereafter acquired or arising, and wherever located; together with all parts thereof (including spare parts), all accessories and accessions thereto, all books and records (including computer records) directly related thereto, all proceeds thereof (including, without limitation, proceeds in the form of Accounts and insurance proceeds), and the additional collateral described in Section 3.6 (b) hereof.

"Commitment Expiration Date" shall mean January 3, 2003.

"Commitment Fee" shall mean a fee of $1,250.00 due to MLBFS in connection with this Loan Agreement.

"Credit Party" and "Credit Parties" shall mean, individually or collectively, the Customer, all Guarantors, and all Pledgors.

"Default" shall mean either an "Event of Default" as defined in Section 3.5 hereof, or an event which with the giving of notice, passage of time, or both, would constitute such an Event of Default.

"Default Rate" shall mean an annual interest rate equal to the lesser of: (i) two percentage points over the Interest Rate; or (ii) the highest interest rate allowed by applicable law.

"Event of Loss" shall mean the occurrence whereby any tangible Collateral is damaged beyond repair, lost, totally destroyed or confiscated.

"GAAP" shall mean the generally accepted accounting principles in effect in the United States of America from time to time.

"General Funding Conditions" shall mean each of the following conditions to each loan or advance by MLBFS hereunder: (i) no Default or Event of Default shall have occurred and be continuing or would result from the making of any such loan or advance hereunder by MLBFS; (ii) there shall not have occurred and be continuing any material adverse change in the business or financial condition of any Credit Party; (iii) all representations and warranties of all of the Credit Parties herein or in any of the Loan Documents shall then be true and correct in all material respects; (iv) MLBFS shall have received this Loan Agreement and all of the other Loan Documents, duly executed and filed or recorded where applicable, all of which shall be in form and substance satisfactory to MLBFS; (v) the Commitment Fee shall have been paid in full; (vi) MLBFS shall have received, as and to the extent applicable, copies of invoices, bills of sale, loan payoff letters and/or other evidence satisfactory to it that the proceeds of the Loan will satisfy the Loan Purpose; (vii) MLBFS shall have received evidence satisfactory to it as to the ownership of the Collateral and the perfection and priority of MLBFS' liens and security interests thereon, as well as the ownership of and the perfection and priority of MLBFS' liens and security interests on any other collateral for the Obligations furnished pursuant to any of the Loan Documents; (viii) MLBFS shall have received evidence satisfactory to it of the insurance required hereby or by any of the Loan Documents; and (ix) any additional conditions specified in the "Term Loan Approval" letter executed by MLBFS with respect to the transactions contemplated hereby shall have been met to the satisfaction of MLBFS.

"Guarantor" shall mean each Person obligated under a guaranty, endorsement or other undertaking by which such Person guarantees or assumes responsibility in any capacity for the payment or performance of any of the Obligations.

"Loan" shall mean a six month term installment loan in an amount equal to the lesser of: (A) 100% of the amount required by Customer to satisfy or fulfill the Loan Purpose, (B) the aggregate amount which Customer shall request be advanced by MLBFS on account of the Loan Purpose, or (C) $250,000.00.

"Loan Agreement" shall mean this agreement as titled in the initial paragraph hereof and shall specifically include that number to be designated by MLBFS as the Customer's "Loan No" in reference to this Loan Agreement, and which number and designation MLBFS shall provide to Customer upon the initial invoice generated by MLBFS. At all times thereafter, such numerical loan number shall be included and be deemed to be a part of the title of this Loan Agreement.

"Loan Documents" shall mean this Loan Agreement, any indenture, any guaranty of any of the Obligations and all other security and other instruments, assignments, certificates, certifications and agreements of any kind relating to any of the Obligations, whether obtained, authorized, authenticated, executed, sent or received concurrently with or subsequent to this Loan Agreement, or which evidence the creation, guaranty or collateralization of any of the Obligations or the granting or perfection of liens or security interests upon any Collateral or any other collateral for the Obligations, including any modifications, amendments or restatements of the foregoing.

"Loan Purpose" shall mean the purpose for which the proceeds of the Loan will be used; to wit: to term out a portion of WCMA Line of Credit No. 794-07F01.

"Location of Tangible Collateral" shall mean the address of Customer set forth at the beginning of this Loan Agreement, together with any other address or addresses set forth on an exhibit hereto as being a Location of Tangible Collateral.

"Obligations" shall mean all liabilities, indebtedness and obligations of Customer to MLBFS, howsoever created, arising or evidenced, whether now existing or hereafter arising, whether direct or indirect, absolute or contingent, due or to become due, primary or secondary or joint or several, and, without limiting the generality of the foregoing, shall include principal, accrued interest (including without limitation interest accruing after the filing of any petition in bankruptcy), all advances made by or on behalf of MLBFS under the Loan Documents, collection and other costs and expenses incurred by or on behalf of MLBFS, whether incurred before or after judgment, and all present and future liabilities, indebtedness and obligations of Customer under the Note and the Loan Documents.

"Permitted Liens" shall mean with respect to the Collateral: (i) liens for current taxes not yet due and payable, other non-consensual liens arising in the ordinary course of business for sums not due, and, if MLBFS' rights to and interest in the Collateral are not materially and adversely affected thereby, any such liens for taxes or other non-consensual liens arising in the ordinary course of business being contested in good faith by appropriate proceedings; (ii) liens in favor of MLBFS; (iii) liens which will be discharged with the proceeds of the Loan; and (iv) any other liens expressly permitted in writing by MLBFS.

"Person" shall mean any natural person and any corporation, partnership (general, limited or otherwise), limited liability company, trust, association, joint venture, governmental body or agency or other entity having legal status of any kind.

"Pledgor" shall mean each Person who at any time provides collateral, or otherwise now or hereinafter agrees to grants MLBFS a security interest in any assets as security for Customer's Obligations.

"UCC" shall mean the Uniform Commercial Code of Illinois as in effect in Illinois from time to time.

1.2 Other Terms. Except as otherwise defined herein, all terms used in this Loan Agreement which are defined in the UCC shall have the meanings set forth in the UCC; and (iii) accounting terms not defined herein shall have the meaning ascribed to them in GAAP.

1.3 UCC Filing. Customer hereby authorizes MLBFS to file a record or records (as defined or otherwise specified under the UCC), including, without limitation, financing statements, in all jurisdictions and with all filing offices as MLBFS may determine, in its sole discretion, are necessary or advisable to perfect the security interest granted to MLBFS herein. Such financing statements may describe the Collateral in the same manner as described herein or may contain an indication or description of collateral that describes such property in any other manner as MLBFS may determine, in its sole discretion, is necessary, advisable or prudent to ensure the perfection of the security interest in the Collateral granted to the MLBFS herein.

Article II. THE LOAN

2.1 Commitment. Subject to the terms and conditions hereof, MLBFS hereby agrees to make the Loan to Customer for the Loan Purpose, and Customer agrees to borrow all amounts borrowed to satisfy the Loan Purpose from MLBFS. The entire proceeds of the Loan shall be disbursed on the Closing Date either directly to the applicable third party or parties on account of the Loan Purpose or to reimburse Customer for amounts directly expended by it; all as directed by Customer in a Closing Certificate to be executed by Customer and delivered to MLBFS prior to the Closing Date.

2.2 Note. The Loan will be evidenced by and repayable in accordance with that certain Collateral Installment Note made by Customer payable to the order of MLBFS and issued pursuant to this Loan Agreement (the "Note"). The Note is hereby incorporated as a part hereof as if fully set forth herein.

2.3 Conditions of MLBFS' Obligation. The Closing Date and MLBFS' obligation to make the Loan on the Closing Date are subject to the prior fulfillment of each of the following conditions: (a) MLBFS shall have received a written request from Customer that the Loan be funded in accordance with the terms hereof, together with a written direction from Customer as to the method of payment and payee(s) of the proceeds of the Loan, which request and direction shall have been received by MLBFS not less than two Business Days prior to any requested funding date; (b) MLBFS shall have received a copy of invoices, bills of sale, payoff letters or other applicable evidence reasonably satisfactory to it that the proceeds of the Loan will satisfy or fulfill the Loan Purpose; (c) the Commitment Expiration Date shall not then have occurred; and (d) each of the General Funding Conditions shall then have been met or satisfied to the reasonable satisfaction of MLBFS.

2.4 Use of Loan Proceeds. The proceeds of the Loan shall be used by Customer solely for a Loan Purpose, or, with the prior written consent of MLBFS, for other lawful business purposes of Customer not prohibited hereby. Customer agrees that under no circumstances will the proceeds of the Loan be used: (a) for personal, family or household purposes of any person whatsoever, or (b) to purchase, carry or trade in securities, or repay debt incurred to purchase, carry or trade in securities, or (c) unless otherwise consented to in writing by MLBFS, to pay any amount to Merrill Lynch and Co., Inc. or any of its subsidiaries, other than Merrill Lynch Bank USA, Merrill Lynch Bank & Trust Co. or any subsidiary of either of them (including MLBFS and Merrill Lynch Credit Corporation).

2.5 Commitment Fee. In consideration of the agreement by MLBFS to extend the Loan to Customer in accordance with and subject to the terms hereof, Customer has paid or shall, on or before the Closing Date pay, the Commitment Fee to MLBFS. Customer acknowledges and agrees that the Commitment Fee has been fully earned by MLBFS, and that it will not under any circumstances be refundable.

Article III. GENERAL PROVISIONS

3.1 REPRESENTATIONS AND WARRANTIES

Customer represents and warrants to MLBFS that:

(a) Organization and Existence. Customer is a corporation, duly organized and validly existing in good standing under the laws of the State of Massachusetts and is qualified to do business and in good standing in each other state where the nature of its business or the property owned by it make such qualification necessary.

(b) Execution, Delivery and Performance. Each Credit Party has the requisite power and authority to enter into and perform the Loan Documents. The Customer holds all necessary permits, licenses, certificates of occupancy and other governmental authorizations and approvals required in order to own or operate the Customer's business. The execution, delivery and performance by Customer of this Loan Agreement and by each of the other Credit Parties of such of the other Loan Documents to which it is a party: (i) have been duly authorized by all requisite action, (ii) do not and will not violate or conflict with any law, order or other governmental requirement, or any of the agreements, instruments or documents which formed or govern any of the Credit Parties, and (iii) do not and will not breach or violate any of the provisions of, and will not result in a default by any of the Credit Parties under, any other agreement, instrument or document to which it is a party or is subject.

(c) Notices and Approvals. Except as may have been given or obtained, no notice to or consent or approval of any governmental body or authority or other third party whatsoever (including, without limitation, any other creditor) is required in connection with the execution, delivery or performance by any Credit Party of such of this Loan Agreement, the Note and the other Loan Documents to which it is a party.

(d) Enforceability. The Loan Documents to which any Credit Party is a party are the respective legal, valid and binding obligations of such Credit Party, enforceable against it or them, as the case may be, in accordance with their respective terms, except as enforceability may be limited by bankruptcy and other similar laws affecting the rights of creditors generally or by general principles of equity. (e) Collateral. Except for priorities afforded to any Permitted Liens: (i) Customer has good and marketable title to the Collateral, (ii) none of the Collateral is subject to any lien, encumbrance or security interest, and (iii) upon the filing of all Uniform Commercial Code financing statements authenticated or otherwise authorized by Customer with respect to the Collateral in the appropriate jurisdiction(s) and/or the completion of any other action required by applicable law to perfect its liens and security interests, MLBFS will have valid and perfected first liens and security interests upon all of the Collateral.

(f) Financial Statements. Except as expressly set forth in Customer's or any Business Guarantor's financial statements, all financial statements of Customer and each Business Guarantor furnished to MLBFS have been prepared in conformity with generally accepted accounting principles, consistently applied, are true and correct in all material respects, and fairly present the financial condition of it as at such dates and the results of its operations for the periods then ended (subject, in the case of interim unaudited financial statements, to normal year-end adjustments); and since the most recent date covered by such financial statements, there has been no material adverse change in any such financial condition or operation. All financial statements furnished to MLBFS of any Guarantor other than a Business Guarantor are true and correct in all material respects and fairly represent such Guarantor's financial condition as of the date of such financial statements, and since the most recent date of such financial statements, there has been no material adverse change in such financial condition.

(g) Litigation; Compliance With All Laws. No litigation, arbitration, administrative or governmental proceedings are pending or, to the knowledge of Customer, threatened against any Credit Party, which would, if adversely determined, materially and adversely affect (i) such Credit Party's interest in the Collateral or the liens and security interests of MLBFS hereunder or under any of the Loan Documents, or (ii) the financial condition of such Credit Party or its continued operations. Each Credit Party is in compliance in all material respects with all laws, regulations, requirements and approvals applicable to such Credit Party.

(h) Tax Returns. All federal, state and local tax returns, reports and statements required to be filed by any Credit Party have been filed with the appropriate governmental agencies and all taxes due and payable by any Credit Party have been timely paid (except to the extent that any such failure to file or pay will not materially and adversely affect (i) either the liens and security interests of MLBFS hereunder or under any of the Loan Documents, (ii) the financial condition of any Credit Party, or (iii) its continued operations).

(i) Collateral Location. All of the tangible Collateral is located at a Location of Tangible Collateral.

(j) No Default. No "Default" or "Event of Default" (each as defined in this Loan Agreement or any of the other Loan Documents) has occurred and is continuing.

(k) No Outside Broker. Except for employees of MLBFS, Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") or one of their affiliates, Customer has not in connection with the transactions contemplated hereby directly or indirectly engaged or dealt with, and was not introduced or referred to MLBFS by, any broker or other loan arranger. Each of the foregoing representations and warranties: (i) has been and will be relied upon as an inducement to MLBFS to make the Loan, and (ii) is continuing and shall be deemed remade by Customer on the Closing Date.

3.2 FINANCIAL AND OTHER INFORMATION

(a) Customer shall furnish or cause to be furnished to MLBFS during the term of this Loan Agreement all of the following:

(i) Annual Financial Statements. Within 120 days after the close of each fiscal year of Customer, a copy of the annual audited financial statements of Customer, including in reasonable detail, a balance sheet and statement of retained earnings as at the close of such fiscal year and statements of profit and loss and cash flow for such fiscal year;

(ii) Quarterly Certificate of Compliance. Within 45 days after the close of each calendar quarter, a Certificate of Compliance, duly executed by the president, chief financial officer or chief executive officer of the Customer, in the form of Exhibit B attached hereto, or such other form as reasonably required by MLBFS from time to time;

(iii) Interim Financial Statements. Within 45 days after the close of each fiscal quarter of Customer, a copy of the interim financial statements of Customer for such fiscal quarter (including in reasonable detail both a balance sheet as of the close of such fiscal period, and statement of profit and loss for the applicable fiscal period);

(iv) A/R Agings. Within 45 days after the close of each fiscal quarter of Customer, a copy of the Accounts Receivable Aging of Customer as of the end of such fiscal quarter;

(v) Inventory Reports. Within 45 days after the close of each fiscal quarter of Customer, a copy of the Inventory Report (as and to the extent applicable, breaking out Inventory by location, and separately reporting any work in process) of Customer as of the end of such fiscal quarter; and

(vi) Other Information. Such other information as MLBFS may from time to time reasonably request relating to Customer, any Credit Party or the Collateral.

(vii) General Agreements With Respect to Financial Information. Customer agrees that except as otherwise specified herein or otherwise agreed to in writing by MLBFS: (i) all annual financial statements required to be furnished by Customer to MLBFS hereunder will be prepared by either the current independent accountants for Customer or other independent accountants reasonably acceptable to MLBFS, and (ii) all other financial information required to be furnished by Customer to MLBFS hereunder will be certified as correct in all material respects by the party who has prepared such information, and, in the case of internally prepared information with respect to Customer, certified as correct by its chief financial officer.

3.3 OTHER COVENANTS

Customer further agrees during the term of this Loan Agreement that:

(a) Financial Records; Inspection. Each Credit Party (other than any Individual Guarantor) will: (i) maintain at its principal place of business complete and accurate books and records, and maintain all of its financial records in a manner consistent with the financial statements heretofore furnished to MLBFS, or prepared on such other basis as may be approved in writing by MLBFS; and (ii) permit MLBFS or its duly authorized representatives, upon reasonable notice and at reasonable times, to inspect its properties (both real and personal), operations, books and records.

(b) Taxes. Each Credit Party will pay when due all of its respective taxes, assessments and other governmental charges, howsoever designated, and all other liabilities and obligations, except to the extent that any such failure to file or pay will not materially and adversely affect either the liens and security interests of MLBFS hereunder or under any of the Loan Documents, the financial condition of any Credit Party or its continued operations.

(c) Compliance With Laws and Agreements. No Credit Party will violate (i) any law, regulation or other governmental requirement, any judgment or order of any court or governmental agency or authority; (ii) any agreement, instrument or document which is material to its operations or to the operation or use of any Collateral, in each case as contemplated by the Loan Documents; or (iii) any agreement, instrument or document to which it is a party or by which it is bound, if any such violation will materially and adversely affect either the liens and security interests of MLBFS hereunder or under any of the Loan Documents , the financial condition of any Credit Party, or its continued operations.

(d) No Use of Merrill Lynch Name. No Credit Party will directly or indirectly publish, disclose or otherwise use in any advertising or promotional material, or press release or interview, the name, logo or any trademark of MLBFS, MLPF&S, Merrill Lynch and Co., Incorporated or any of their affiliates.

(e) Notification By Customer. Customer shall provide MLBFS with prompt written notification of: (i) any Default; (ii) any material adverse change in the business, financial condition or operations of any Credit Party; (iii) any information which indicates that any financial statements of any Credit Party fail in any material respect to present fairly the financial condition and results of operations purported to be presented in such statements; (iv) any threatened or pending litigation involving any Credit Party; (v) any casualty loss, attachment, lien, judicial process, encumbrance or claim affecting or involving $25,000 or more of any Collateral; and (vi) any change in Customer's outside accountants. Each notification by Customer pursuant hereto shall specify the event or information causing such notification, and, to the extent applicable, shall specify the steps being taken to rectify or remedy such event or information.

(f) Entity Organization. Each Credit Party which is an entity will (i) remain (A) validly existing and in good standing in the state of its organization and (B) qualified to do business and in good standing in each other state where the nature of its business or the property owned by it make such qualification necessary, and (ii) maintain all governmental permits, licenses and authorizations. Customer shall give MLBFS not less than 30 days prior written notice of any change in name (including any fictitious name) or chief executive office, place of business, or as applicable, the principal residence.

(g) Merger, Change in Business. Except upon the prior written consent of MLBFS, Customer shall not cause or permit any Credit Party to: (i) be a party to any merger or consolidation with, or purchase or otherwise acquire all or substantially all of the assets of, or any material stock, partnership, joint venture or other equity interest in, any Person, or sell, transfer or lease all or any substantial part of its assets; (ii) engage in any material business substantially different from its business in effect as of the date of application by Customer for credit from MLBFS, or cease operating any such material business; or (iii) cause or permit any other Person to assume or succeed to any material business or operations of such Credit Party.

(h) Minimum Tangible Net Worth. As of December 31, 2000 and at all times thereafter, Customer's "tangible net worth", defined and calculated as set forth in Exhibit B attached hereto shall at all times exceed $7,750,000.00.

3.4 COLLATERAL

(a) Pledge of Collateral. To secure payment and performance of the Obligations, Customer hereby pledges, assigns, transfers and sets over to MLBFS, and grants to MLBFS first liens and security interests in and upon all of the Collateral, subject only to priorities afforded to Permitted Liens.

(b) Liens. Except upon the prior written consent of MLBFS, Customer shall not create or permit to exist any lien, encumbrance or security interest upon or with respect to any Collateral now owned or hereafter acquired other than Permitted Liens.

(c) Performance of Obligations. Customer shall perform all of its obligations owing on account of or with respect to the Collateral; it being understood that nothing herein, and no action or inaction by MLBFS, under this Loan Agreement or otherwise, shall be deemed an assumption by MLBFS of any of Customer's said obligations.

(d) Sales and Collections. Customer shall not sell, transfer or otherwise dispose of any Collateral, except that so long as no Event of Default shall have occurred and be continuing, Customer may in the ordinary course of its business: (i) sell any Inventory normally held by Customer for sale, (ii) use or consume any materials and supplies normally held by Customer for use or consumption, and (iii) collect all of its Accounts.

(e) Account Schedules. Upon the request of MLBFS, which may be made from time to time, Customer shall deliver to MLBFS, in addition to the other information required hereunder, a schedule identifying, for each Account and all Chattel Paper subject to MLBFS' security interests hereunder, each account debtor by name and address and amount, invoice or contract number and date of each invoice or contract. Customer shall furnish to MLBFS such additional information with respect to the Collateral, and amounts received by Customer as proceeds of any of the Collateral, as MLBFS may from time to time reasonably request.

(f) Alterations and Maintenance. Except upon the prior written consent of MLBFS, Customer shall not make or permit any material alterations to any tangible Collateral which might materially reduce or impair its market value or utility. Customer shall at all times (i) keep the tangible Collateral in good condition and repair, reasonable wear and tear excepted, (ii) protect the Collateral against loss, damage or destruction and (iii) pay or cause to be paid all obligations arising from the repair and maintenance of such Collateral, as well as all obligations with respect to any Location of Tangible Collateral (e.g., all obligations under any lease, mortgage or bailment agreement), except for any such obligations being contested by Customer in good faith by appropriate proceedings.

(g) Location. Except for movements required in the ordinary course of Customer's business, Customer shall give MLBFS 30 days' prior written notice of the placing at or movement of any tangible Collateral to any location other than a Location of Tangible Collateral. In no event shall Customer cause or permit any material tangible Collateral to be removed from the United States without the express prior written consent of MLBFS. Customer will keep its books and records at its principal office address specified in the first paragraph of this Loan Agreement. Customer will not change the address where books and records are kept, or change its name or taxpayer identification number. Customer will place a legend acceptable to MLBFS on all Chattel Paper that is Collateral in the possession or control of Customer from time to time indicating that MLBFS has a security interest therein.

(h) Insurance. Customer shall insure all of the tangible Collateral under a policy or policies of physical damage insurance for the full replacement value thereof against such perils as MLBFS shall reasonably require and also providing that losses will be payable to MLBFS as its interests may appear pursuant to a lender's or mortgagee's long form loss payable endorsement and containing such other provisions as may be reasonably required by MLBFS. Customer shall further provide and maintain a policy or policies of commercial general liability liability insurance naming MLBFS as an additional party insured. Customer and each Business Guarantor shall maintain such other insurance as may be required by law or is customarily maintained by companies in a similar business or otherwise reasonably required by MLBFS. All such insurance policies shall provide that MLBFS will receive not less than 10 days prior written notice of any cancellation, and shall otherwise be in form and amount and with an insurer or insurers reasonably acceptable to MLBFS. Customer shall furnish MLBFS with a copy or certificate of each such policy or policies and, prior to any expiration or cancellation, each renewal or replacement thereof.

(i) Event of Loss. Customer shall at its expense promptly repair all repairable damage to any tangible Collateral. In the event that there is an Event of Loss and the affected Collateral had a value prior to such Event of Loss of $25,000.00 or more, then, on or before the first to occur of (i) 90 days after the occurrence of such Event of Loss, or (ii) 10 Business Days after the date on which either Customer or MLBFS shall receive any proceeds of insurance on account of such Event of Loss, or any underwriter of insurance on such Collateral shall advise either Customer or MLBFS that it disclaims liability in respect of such Event of Loss, Customer shall, at Customer's option, either replace the Collateral subject to such Event of Loss with comparable Collateral free of all liens other than Permitted Liens (in which event Customer shall be entitled to utilize the proceeds of insurance on account of such Event of Loss for such purpose, and may retain any excess proceeds of such insurance), or permanently prepay the Obligations by an amount equal to the actual cash value of such Collateral as determined by either the insurance company's payment (plus any applicable deductible) or, in absence of insurance company payment, as reasonably determined by MLBFS; it being further understood that any such permanent prepayment shall cause an immediate permanent reduction in the Loan in the amount of such prepayment and shall not reduce the amount of any future reductions in the Loan that may be required hereunder. Notwithstanding the foregoing, if at the time of occurrence of such Event of Loss or any time thereafter prior to replacement or line reduction, as aforesaid, an Event of Default shall have occurred and be continuing hereunder, then MLBFS may at its sole option, exercisable at any time while such Event of Default shall be continuing, require Customer to either replace such Collateral or prepay the Obligations, as aforesaid.

(j) Notice of Certain Events. Customer shall give MLBFS immediate notice of any attachment, lien, judicial process, encumbrance or claim affecting or involving $25,000.00 or more of the Collateral.

(k) Indemnification. Customer shall indemnify, defend and save MLBFS harmless from and against any and all claims, liabilities, losses, costs and expenses (including, without limitation, reasonable attorneys' fees and expenses) of any nature whatsoever which may be asserted against or incurred by MLBFS arising out of or in any manner occasioned by (i) the ownership, collection, possession, use or operation of any Collateral, or (ii) any failure by Customer to perform any of its obligations hereunder; excluding, however, from said indemnity any such claims, liabilities, etc. arising directly out of the willful wrongful act or active gross negligence of MLBFS. This indemnity shall survive the expiration or termination of this Loan Agreement as to all matters arising or accruing prior to such expiration or termination.

3.5 EVENTS OF DEFAULT

The occurrence of any of the following events shall constitute an "Event of Default" under this Loan Agreement:

(a) Failure to Pay. Customer shall fail to pay when due any amount owing by Customer to MLBFS under the Note or this Loan Agreement, or shall fail to pay when due any other Obligations, and any such failure shall continue for more than five (5) Business Days after written notice thereof shall have been given by MLBFS to Customer.

(b) Failure to Perform. Any Credit Party shall default in the performance or observance of any covenant or agreement on its part to be performed or observed under this Loan Agreement, the Note or any of the other Loan Documents (not constituting an Event of Default under any other clause of this Section), and such default shall continue unremedied for ten (10) Business Days (i) after written notice thereof shall have been given by MLBFS to Customer, or (ii) from Customer's receipt of any notice or knowledge of such default from any other source.

(c) Breach of Warranty. Any representation or warranty made by any Credit Party contained in this Loan Agreement, the Note or any of the other Loan Documents shall at any time prove to have been incorrect in any material respect when made.

(d) Default Under Other ML Agreement. A default or event of default by any Credit Party shall occur under the terms of any other agreement, instrument or document with or intended for the benefit of MLBFS, MLPF&S or any of their affiliates, and any required notice shall have been given and required passage of time shall have elapsed.

(e) Bankruptcy Event. Any Bankruptcy Event shall occur.

(f) Material Impairment. Any event shall occur which shall reasonably cause MLBFS to in good faith believe that the prospect of full payment or performance by the Credit Parties of any of their respective liabilities or obligations under this Loan Agreement, the Note or any of the other Loan Documents or such Guarantor is a party has been materially impaired. The existence of such a material impairment shall be determined in a manner consistent with the intent of Section 1-208 of the UCC.

(g) Default Under Other Agreements. Any event shall occur which results in any default of any material agreement involving any Credit Party or any agreement evidencing any indebtedness of any Credit Party of $100,000.00 or more.

(h) Collateral Impairment. The loss, theft or destruction of any Collateral, the occurrence of any material deterioration or impairment of any Collateral or any material decline or depreciation in the value or market price thereof (whether actual or reasonably anticipated), which causes any Collateral, in the sole opinion of MLBFS, to become unsatisfactory as to value or character, or any levy, attachment, seizure or confiscation of the Collateral which is not released within ten (10) Business Days.

(i) Contested Obligation. (i) Any of the Loan Documents shall for any reason cease to be, or are asserted by any Credit Party not to be a legal, valid and binding obligations of any Credit Party, enforceable in accordance with their terms; or (ii) the validity, perfection or priority of MLBFS' first lien and security interest on any of the Collateral is contested by any Person; or (iii) any Credit Party shall or shall attempt to repudiate, revoke, contest or dispute, in whole or in part, such Credit Party's obligations under any Loan Document.

(j) Judgments. A judgment shall be entered against any Credit Party in excess of $25,000 and the judgment is not paid in full and discharged, or stayed and bonded to the satisfaction of MLBFS.

(k) Change in Control/Change in Management. (i) Any direct or indirect sale, conveyance, assignment or other transfer of or grant of a security interest in any ownership interest of any Credit Party which results, or if any rights related thereto were exercised would result, in any change in the identity of the individuals or entities previously in control of any Credit Party; or (ii) the owner(s) of the controlling equity interest of any Credit Party on the date hereof shall cease to own and control such Credit Party; or (iii) the Person (or a replacement who is satisfactory to MLBFS in its sole discretion) who is the chief executive officer or holds such similar position, or any senior manager of such Credit Party on the date hereof shall for any reason cease to be the chief executive officer or senior manager of the Customer.

(l) Withdrawal, Death, etc. The incapacity, death, withdrawal, dissolution, or the filing for dissolution of: (i) any Credit Party; or (ii) any controlling shareholder, partner, or member of any Credit Party.

3.6 REMEDIES

(a) Remedies Upon Default. Upon the occurrence and during the continuance of any Event of Default, MLBFS may at its sole option do any one or more or all of the following, at such time and in such order as MLBFS may in its sole discretion choose:

(i) Termination. MLBFS may without notice terminate its obligation to extend any credit to or for the benefit of Customer (it being understood, however, that upon the occurrence of any Bankruptcy Event all such obligations shall automatically terminate without any action on the part of MLBFS).

(ii) Acceleration. MLBFS may declare the principal of and interest and any premium on the Note, and all other Obligations to be forthwith due and payable, whereupon all such amounts shall be immediately due and payable, without presentment, demand for payment, protest and notice of protest, notice of dishonor, notice of acceleration, notice of intent to accelerate or other notice or formality of any kind, all of which are hereby expressly waived; provided, however, that upon the occurrence of any Bankruptcy Event all such principal, interest, premium and other Obligations shall automatically become due and payable without any action on the part of MLBFS.

(iii) Exercise Other Rights. MLBFS may exercise any or all of the remedies of a secured party under applicable law and in equity, including, but not limited to, the UCC, and any or all of its other rights and remedies under the Loan Documents.

(iv) Possession. MLBFS may require Customer to make the Collateral and the records pertaining to the Collateral available to MLBFS at a place designated by MLBFS which is reasonably convenient to Customer, or may take possession of the Collateral and the records pertaining to the Collateral without the use of any judicial process and without any prior notice to Customer.

(v) Sale. MLBFS may sell any or all of the Collateral at public or private sale upon such terms and conditions as MLBFS may reasonably deem proper, whether for cash, on credit, or for future delivery, in bulk or in lots. MLBFS may purchase any Collateral at any such sale free of Customer's right of redemption, if any, which Customer expressly waives to the extent not prohibited by applicable law. The net proceeds of any such public or private sale and all other amounts actually collected or received by MLBFS pursuant hereto, after deducting all costs and expenses incurred at any time in the collection of the Obligations and in the protection, collection and sale of the Collateral, will be applied to the payment of the Obligations, with any remaining proceeds paid to Customer or whoever else may be entitled thereto, and with Customer and each Guarantor remaining jointly and severally liable for any amount remaining unpaid after such application.

(vi) Delivery of Cash, Checks, Etc. MLBFS may require Customer to forthwith upon receipt, transmit and deliver to MLBFS in the form received, all cash, checks, drafts and other instruments for the payment of money (properly endorsed, where required, so that such items may be collected by MLBFS) which may be received by Customer at any time in full or partial payment of any Collateral, and require that Customer not commingle any such items which may be so received by Customer with any other of its funds or property but instead hold them separate and apart and in trust for MLBFS until delivery is made to MLBFS.

(vii) Notification of Account Debtors. MLBFS may notify any account debtor that its Account or Chattel Paper has been assigned to MLBFS and direct such account debtor to make payment directly to MLBFS of all amounts due or becoming due with respect to such Account or Chattel Paper; and MLBFS may enforce payment and collect, by legal proceedings or otherwise, such Account or Chattel Paper.

(viii) Control of Collateral. MLBFS may otherwise take control in any lawful manner of any cash or non-cash items of payment or proceeds of Collateral and of any rejected, returned, stopped in transit or repossessed goods included in the Collateral and endorse Customer's name on any item of payment on or proceeds of the Collateral.

(b) Set-Off. MLBFS shall have the further right upon the occurrence and during the continuance of an Event of Default to set-off, appropriate and apply toward payment of any of the Obligations, in such order of application as MLBFS may from time to time and at any time elect, any cash, credit, deposits, accounts, financial assets, investment property, securities and any other property of Customer which is in transit to or in the possession, custody or control of MLBFS, MLPF&S or any agent, bailee, or affiliate of MLBFS or MLPF&S. Customer hereby collaterally assigns and grants to MLBFS a continuing security interest in all such property as Collateral and as additional security for the Obligations. Upon the occurrence and during the continuance of an Event of Default, MLBFS shall have all rights in such property available to collateral assignees and secured parties under all applicable laws, including, without limitation, the UCC.

(c) Power of Attorney. Effective upon the occurrence and during the continuance of an Event of Default, Customer hereby irrevocably appoints MLBFS as its attorney-in-fact, with full power of substitution, in its place and stead and in its name or in the name of MLBFS, to from time to time in MLBFS' sole discretion take any action and to execute any instrument which MLBFS may deem necessary or advisable to accomplish the purposes of this Loan Agreement and the other Loan Documents, including, but not limited to, to receive, endorse and collect all checks, drafts and other instruments for the payment of money made payable to Customer included in the Collateral. The powers of attorney granted to MLBFS in this Loan Agreement are coupled with an interest and are irrevocable until the Obligations have been indefeasibly paid in full and fully satisfied and all obligations of MLBFS under this Loan Agreement have been terminated.

(d) Remedies are Severable and Cumulative. All rights and remedies of MLBFS herein are severable and cumulative and in addition to all other rights and remedies available in the Note, the other Loan Documents, at law or in equity, and any one or more of such rights and remedies may be exercised simultaneously or successively.

(e) No Marshalling. MLBFS shall be under no duty or obligation to (i) preserve, protect or marshall the Collateral; (ii) preserve or protect the rights of any Credit Party or any other Person claiming an interest in the Collateral; (iii) realize upon the Collateral in any particular order or manner, (iv) seek repayment of any Obligations from any particular source; (v) proceed or not proceed against any Credit Party pursuant to any guaranty or security agreement or against any Credit Party under the Loan Documents, with or without also realizing on the Collateral; (vi) permit any substitution or exchange of all or any part of the Collateral; or (vii) release any part of the Collateral from the Loan Agreement or any of the other Loan Documents, whether or not such substitution or release would leave MLBFS adequately secured.

(f) Notices. To the fullest extent permitted by applicable law, Customer hereby irrevocably waives and releases MLBFS of and from any and all liabilities and penalties for failure of MLBFS to comply with any statutory or other requirement imposed upon MLBFS relating to notices of sale, holding of sale or reporting of any sale, and Customer waives all rights of redemption or reinstatement from any such sale. Any notices required under applicable law shall be reasonably and properly given to Customer if given by any of the methods provided herein at least 5 Business Days prior to taking action. MLBFS shall have the right to postpone or adjourn any sale or other disposition of Collateral at any time without giving notice of any such postponed or adjourned date. In the event MLBFS seeks to take possession of any or all of the Collateral by court process, Customer further irrevocably waives to the fullest extent permitted by law any bonds and any surety or security relating thereto required by any statute, court rule or otherwise as an incident to such possession, and any demand for possession prior to the commencement of any suit or action.

3.7 MISCELLANEOUS

(a) Non-Waiver. No failure or delay on the part of MLBFS in exercising any right, power or remedy pursuant to this Loan Agreement, the Note or any of the other Loan Documents shall operate as a waiver thereof, and no single or partial exercise of any such right, power or remedy shall preclude any other or further exercise thereof, or the exercise of any other right, power or remedy. Neither any waiver of any provision of this Loan Agreement, the Note or any of the other Loan Documents, nor any consent to any departure by Customer therefrom, shall be effective unless the same shall be in writing and signed by MLBFS. Any waiver of any provision of this Loan Agreement, the Note or any of the other Loan Documents and any consent to any departure by Customer from the terms of this Loan Agreement, the Note or any of the other Loan Documents shall be effective only in the specific instance and for the specific purpose for which given. Except as otherwise expressly provided herein, no notice to or demand on Customer shall in any case entitle Customer to any other or further notice or demand in similar or other circumstances.

(b) Disclosure. Customer hereby irrevocably authorizes MLBFS and each of its affiliates, including without limitation MLPF&S, to at any time (whether or not an Event of Default shall have occurred) obtain from and disclose to each other any and all financial and other information about Customer. Customer further irrevocably authorizes MLBFS to contact, investigate, inquire and obtain consumer reports, references and other information on Customer from consumer reporting agencies and other credit reporting services, former or current creditors, and other persons and sources (including, without limitation, any Affiliate of MLBFS) and to provide to any references, consumer reporting agencies, credit reporting services, creditors and other persons and sources (including, without limitation, Affiliates of MLBFS) all financial, credit and other information obtained by MLBFS relating to the Customer.

(c) Communications. Delivery of an agreement, instrument or other document may, at the discretion of MLBFS, be by electronic transmission. Except as required by law or otherwise provided herein or in a writing executed by the party to be bound, all notices demands, requests, accountings, listings, statements, advices or other communications to be given under the Loan Documents shall be in writing, and shall be served either personally, by deposit with a reputable overnight courier with charges prepaid, or by deposit in the United States mail by certified mail return receipt required. Notices may be addressed to Customer as set forth at its address shown in the preamble hereto, or to any office to which billing or account statements are sent; to MLBFS at its address shown in the preamble hereto, or at such other address designated in writing by MLBFS. Any such communication shall be deemed to have been given upon, in the case of personal delivery the date of delivery, one Business Day after deposit with an overnight courier, two (2) Business Days after deposit in the United States by certified mail (return receipt required), or receipt of electronic transmission (which shall be presumed to be three hours after the time of transmission unless an error message is received by the sender), except that any notice of change of address shall not be effective until actually received.

(d) Fees, Expenses and Taxes. Customer shall upon demand pay or reimburse MLBFS for: (i) all UCC, real property or other filing, recording and search fees and expenses incurred by MLBFS in connection with the verification, perfection or preservation of MLBFS' rights hereunder or in any Collateral or any other collateral for the Obligations; (ii) any and all stamp, transfer, mortgage, intangible, document, filing, recording and other taxes and fees payable or determined to be payable in connection with the borrowings hereunder or the execution, delivery, filing and/or recording of the Loan Documents and any other instruments or documents provided for herein or delivered or to be delivered hereunder or in connection herewith; and (iii) all reasonable fees and out- of-pocket expenses (including reasonable attorneys' fees and legal expenses) incurred by MLBFS in connection with the preparation, execution, administration, collection, enforcement, protection, waiver or amendment of this Loan Agreement, or under any of the other Loan Documents and such other instruments or documents, and the rights and remedies of MLBFS thereunder and all other matters in connection therewith. The obligations of Customer under this paragraph shall survive the expiration or termination of this Loan Agreement and the discharge of the other Obligations.

(e) Right to Perform Obligations. If Customer shall fail to do any act or thing which it has covenanted to do under this Loan Agreement or any of the Loan Documents, or any representation or warranty on the part of Customer contained in this Loan Agreement or any of the Loan Documents shall be breached, MLBFS may, in its sole discretion, after 5 Business Days written notice is sent to Customer (or such lesser notice, including no notice, as is reasonable under the circumstances), do the same or cause it to be done or remedy any such breach, and may expend its funds for such purpose. Any and all reasonable amounts so expended by MLBFS shall be repayable to MLBFS by Customer upon demand, with interest at the "Interest Rate" (as that item is defined in the Note) during the period from and including the date funds are so expended by MLBFS to the date of repayment, and all such amounts shall be additional Obligations. The payment or performance by MLBFS of any of Customer's obligations hereunder shall not relieve Customer of said obligations or of the consequences of having failed to pay or perform the same, and shall not waive or be deemed a cure of any Default.

(f) Late Charge. Any payment required to be made by Customer pursuant to this Loan Agreement or any of the Loan Documents not paid within ten (10) days of the applicable due date shall be subject to a late charge in an amount equal to the lesser of: (i) 5% of the overdue amount, or (ii) the maximum amount permitted by applicable law. Such late charge shall be payable on demand.

(g) Further Assurances. Customer agrees to do such further acts and things and to execute and deliver to MLBFS such additional agreements, instruments and documents as MLBFS may reasonably require or deem advisable to effectuate the purposes of this Loan Agreement, the Note or any of the other Loan Documents, or to establish, perfect and maintain MLBFS' security interests and liens upon the Collateral, including, but not limited to: (i) executing financing statements or amendments thereto when and as reasonably requested by MLBFS; and (ii) if in the reasonable judgment of MLBFS it is required by local law, causing the owners and/or mortgagees of the real property on which any Collateral may be located to execute and deliver to MLBFS waivers or subordinations reasonably satisfactory to MLBFS with respect to any rights in such Collateral.

(h) Binding Effect. This Loan Agreement, the Note and the other Loan Documents shall be binding upon, and shall inure to the benefit of MLBFS, Customer and their respective successors and assigns. MLBFS reserves the right, at any time while the Obligations remain outstanding, to sell, assign, syndicate or otherwise transfer or dispose of any or all of MLBFS' rights and interests under the Loan Documents. MLBFS also reserves the right at any time to pool the Loan with one or more other loans originated by MLBFS or any other Person, and to securitize or offer interests in such pool on whatever terms and conditions MLBFS shall determine. Customer consents to MLBFS releasing financial and other information regarding Credit Parties, the Collateral and the Loan in connection with any such sale, pooling, securitization or other offering. Customer shall not assign any of its rights or delegate any of its obligations under this Loan Agreement, the Note or any of the other Loan Documents without the prior written consent of MLBFS. Unless otherwise expressly agreed to in a writing signed by MLBFS, no such consent shall in any event relieve Customer of any of its obligations under this Loan Agreement, the Note or any of the other Loan Documents.

(i) Interpretation; Construction. (i) Captions and section and paragraph headings in this Loan Agreement are inserted only as a matter of convenience, and shall not affect the interpretation hereof; (ii) no provision of this Loan Agreement shall be construed against a particular Person or in favor of another Person merely because of which Person (or its representative) drafted or supplied the wording for such provision; and (iii) where the context requires: (a) use of the singular or plural incorporates the other, and (b) pronouns and modifiers in the masculine, feminine or neuter gender shall be deemed to refer to or include the other genders.

(j) Governing Law. This Loan Agreement, the Note and, unless otherwise expressly provided therein, each of the other Loan Documents, shall be governed in all respects by the laws of the State of Illinois, not including its conflict of law provisions.

(k) Severability of Provisions. Whenever possible, each provision of this Loan Agreement, the Note and the other Loan Documents shall be interpreted in such manner as to be effective and valid under applicable law. Any provision of this Loan Agreement, the Note or any of the other Loan Documents which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Loan Agreement, the Note and the other Loan Documents or affecting the validity or enforceability of such provision in any other jurisdiction.

(l) Term. This Loan Agreement shall become effective when accepted by MLBFS at its office in Chicago, Illinois, and subject to the terms hereof, shall continue in effect so long thereafter as there shall be any moneys owing hereunder or under the Note, or there shall be any other Obligations outstanding. Customer hereby waives notice of acceptance of this Loan Agreement by MLBFS.

(m) Exhibits. The exhibits to this Loan Agreement are hereby incorporated and made a part hereof and are an integral part of this Loan Agreement.

(n) Counterparts. This Loan Agreement may be executed in one or more counterparts which, when taken together, constitute one and the same agreement.

(o) Jurisdiction; Waiver. Customer acknowledges that this Loan Agreement is being accepted by MLBFS in partial consideration of MLBFS' right and option, in its sole discretion, to enforce the Loan Documents in either the State of Illinois or in any other jurisdiction where Customer or any Collateral may be located. Customer irrevocably submits itself to jurisdiction in the State of Illinois and venue in any state or federal court in the County of Cook for such purposes, and Customer waives any and all rights to contest said jurisdiction and venue and the convenience of any such forum, and any and all rights to remove such action from state to federal court. Customer further waives any rights to commence any action against MLBFS in any jurisdiction except in the County of Cook and State of Illinois. Customer agrees that all such service of process shall be made by mail or messenger directed to it in the same manner as provided for notices to Customer in this Loan Agreement and that service so made shall be deemed to be completed upon the earlier of actual receipt or three (3) days after the same shall have been posted to Customer or Customer's agent. Nothing contained herein shall affect the right of MLBFS to serve legal process in any other manner permitted by law or affect the right of MLBFS to bring any action or proceeding against Customer or its property in the courts of any other jurisdiction. Customer waives, to the extent permitted by law, any bond or surety or security upon such bond which might, but for this waiver, be required of MLBFS. Customer further waives the right to bring any non-compulsory counterclaims.

(p) Jury Waiver. MLBFS and Customer hereby each expressly waive any and all rights to a trial by jury in any action, proceeding or counterclaim brought by either of the parties against the other party with respect to any matter relating to, arising out of or in any way connected with the Loan, the Obligations, this Loan Agreement, any of the other Loan Documents and/or any of the transactions which are the subject matter of this Loan Agreement.

(q) Integration. This Loan Agreement, together with the other Loan Documents, constitutes the entire understanding and represents the full and final agreement between the parties with respect to the subject matter hereof, and may not be contradicted by evidence of prior written agreements or prior, contemporaneous or subsequent oral agreements of the parties. There are no unwritten oral agreements of the parties. Without limiting the foregoing, Customer acknowledges that: (i) no promise or commitment has been made to it by MLBFS, MLPF&S or any of their respective employees, agents or representatives to make any Loan on any terms other than as expressly set forth herein, or to make any other loan or otherwise extend any other credit to Customer or any other party; and (ii) except as otherwise expressly provided herein, this Loan Agreement supersedes and replaces any and all proposals, letters of intent and approval and commitment letters from MLBFS to Customer, none of which shall be considered a Loan Document. No amendment or modification of any of the Loan Documents to which Customer is a party shall be effective unless in a writing signed by both MLBFS and Customer.

(r) Survival. All representations, warranties, agreements and covenants contained in the Loan Documents shall survive the signing and delivery of the Loan Documents, and all of the waivers made and indemnification obligations undertaken by Customer shall survive the termination, discharge or cancellation of the Loan Documents.

(s) Customer's Acknowledgments. The Customer acknowledges that the Customer: (i) has had ample opportunity to consult with counsel and such other parties as deemed advisable prior to signing and delivering this Loan Agreement and the other Loan Documents; (ii) understands the provisions of this Loan Agreement and the other Loan Documents, including all waivers contained therein; and (iii) signs and delivers this Loan Agreement and the other Loan Documents freely and voluntarily, without duress or coercion.

This Loan Agreement and the other Loan Documents are executed under seal and are intended to take effect as sealed instruments.

IN WITNESS WHEREOF, this Loan Agreement has been executed as of the day and year first above written.

STOCKERYALE, INC.

By:                                                                                                                                  

 Signature (1)                                Signature (2)

 Printed Name                               Printed Name

 Title                                             Title

Accepted at Chicago, Illinois:

MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC.

By:                                                                                                             

EXHIBIT A

ATTACHED TO AND HEREBY MADE A PART OF TERM LOAN AND SECURITY AGREEMENT BETWEEN MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC. AND STOCKERYALE, INC.

Additional Locations of Tangible Collateral:

COMPLIANCE CERTIFICATE

To: Merrill Lynch Business Financial Services Inc. ("MLBFS")

      222 North LaSalle Street

      17th Floor

      Chicago, IL 60601

The undersigned, on behalf of STOCKERYALE, INC. ("Customer"), hereby certifies to MLBFS that: (i) he/she is an officer authorized to execute and deliver this certificate on behalf of Customer, and is familiar with the business and financial condition of the Customer; (ii) the financial statements delivered with this Certificate fairly present in all material respects the results of operations and financial condition of Customer; and (iii) to the best of my knowledge and belief, after reasonable investigation, each of the following statements is true and correct as of the date hereof: (a) no Event of Default, or event which with the giving of notice, passage of time, or both, would constitute and Event of Default, has occurred or is continuing, (b) no material adverse change in the financial condition of Customer has occurred or is continuing, and (c) the attached annexations, which are hereby incorporated herein by reference, are accurate, true and correct, and do not fail to state any material fact known (or should have been known) to Customer which would, but for the lapse of time, make any such statement or calculation false in any respect.

Date: ___________________

Signature                                                                                 

Printed Name                                                                           

Title                                                                                         

INSTRUCTIONS: IN ACCORDANCE WITH THE TERMS OF THE LOAN AGREEMENT (TO WHICH THIS ORIGINAL FORM OF COMPLIANCE CERTIFICATE IS ATTACHED AS EXHIBIT B), THIS COMPLIANCE CERTIFICATE AND THE ATTACHED ANNEXATIONS MUST BE COMPLETED BY YOU WITHIN 45 DAYS AFTER THE CLOSE OF EACH CALENDAR QUARTER. MLBFS EXPECTS YOU TO MAKE COPIES OF THIS ORIGINAL FORM OF COMPLIANCE CERTIFICATE AND SEND THEM QUARTERLY TO MLBFS WITHOUT NOTIFICATION OR REMINDER. ADDITIONAL COPIES WILL BE PROVIDED TO YOU UPON REQUEST.

MINIMUM TANGIBLE NET WORTH ANNEX TO COMPLIANCE CERTIFICATE (Exhibit B to Loan Agreement)

Customer's "Tangible Net Worth" shall at all times exceed $7,750,000.00. For the purposes hereof, the term "Tangible Net Worth" shall mean Customer's net worth as shown on Customer's regular financial statements prepared in accordance with GAAP, but excluding an amount equal to: (i) any Intangible Assets, and (ii) any amounts now or hereafter directly or indirectly owing to Customer by officers, shareholders or affiliates of Customer. "Intangible Assets" shall mean the total amount of goodwill, patents, trade names, trade or service marks, copyrights, experimental expense, organization expense, unamortized debt discount and expense, the excess of cost of shares acquired over book value of related assets, and such other assets as are properly classified as "intangible assets" of the Customer determined in accordance with GAAP.

As of _________________ (insert Quarterly end date):

Beginning Total Net Worth	$
Distributions/advances/loans to Shareholders, officers and affiliates (-)	$
Intangible Assets (-)	$
Tangible Net Worth (=)	$

In Compliance? Yes / No

COLLATERAL INSTALLMENT NOTE

FOR VALUE RECEIVED, STOCKERYALE, INC., a corporation organized and existing under the laws of the State of Massachusetts ("Customer") hereby promises to pay to the order of MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC., a corporation organized and existing under the laws of the State of Delaware ("MLBFS"), in lawful money of the United States, the principal sum of Two Hundred Fifty Thousand And 00/100 Dollars ($250,000.00), or if more or less, the aggregate amount advanced by MLBFS to Customer pursuant to the Loan Agreement (the "Loan Amount"); together with interest on the unpaid balance of the Loan Amount, from the Closing Date until payment, at the Interest Rate, as follows:

1. DEFINITIONS.

(a) In addition to terms defined elsewhere in this Note, as used herein, the following terms shall have the following meanings:

(i) "Closing Date" shall mean the date of advancement of funds hereunder.

(ii) "Excess Interest" shall mean any amount or rate of interest (including the Default Rate and, to the extent that they may be deemed to constitute interest, any prepayment fees, late charges and other fees and charges) payable, charged or received in connection with any of the Loan Documents which exceeds the maximum amount or rate of interest permitted under applicable law.

(iii) "Interest Rate" shall mean a variable per annum rate equal to the sum of (i) 2.50% per annum, and (ii) the interest rate from time to time published in the "Money Rates" section of The Wall Street Journal as the one-month London Interbank Offered Rate (the "One-Month LIBOR"). Notwithstanding anything to the contrary, if more than one rate is so published, then the interest rate shall be the highest of such published rates. The Interest Rate will change as of the date of publication in The Wall Street Journal of a One-Month LIBOR that is different from that published on the preceding Business Day. In the event that The Wall Street Journal shall, for any reason, fail or cease to publish the One-Month LIBOR, MLBFS will choose a reasonably comparable index or source to use as the basis for the Interest Rate.

(iv) "Loan Agreement" shall mean that certain TERM LOAN AND SECURITY AGREEMENT dated as of the date hereof between Customer and MLBFS, as the same may have been or may hereafter be amended or supplemented.

(v) "Note" shall mean this COLLATERAL INSTALLMENT NOTE.

(b) Capitalized terms used herein and not defined herein shall have the meaning set forth in the Loan Agreement. Without limiting the foregoing, the terms "Loan Documents", "Bankruptcy Event" and "Event of Default" shall have the respective meanings set forth in the Loan Agreement.

2. PAYMENT AND OTHER TERMS. Customer shall pay the indebtedness under this Note in 6 consecutive monthly installments commencing on February 1, 2003 and continuing on the first day of each calendar month thereafter until this Note shall be paid in full. Each such installment in an amount equal to the sum of (i) accrued interest, and (ii) 1/6th of the Loan Amount (with the first such installment including interest accrued from the date of funding).

Each payment received hereunder shall be applied first to any fees and expenses of MLBFS payable by Customer under the terms of the Loan Agreement (including, without limitation, late charges), next to accrued interest at the Interest Rate, with the balance applied on account of the unpaid principal hereof, or in such other manner as the holder hereof may hereinafter determine from time to time for the allocation of such payments thereof. Any part of the principal hereof or interest hereon or other sums payable hereunder or under the Loan Agreement not paid within ten (10) days of the applicable due date shall be subject to a late charge equal to the lesser of (i) 5% of the overdue amount, or (ii) the maximum amount permitted by law. All interest shall be computed on the basis of actual days elapsed over a 360-day year. All sums payable hereunder shall be payable at 2356 Collections Center Drive, Chicago, Illinois 60693, or at such other place or places as the holder hereof may from time to time appoint in writing.

Customer may prepay this Note at any time in whole or in part without premium or penalty. Any partial prepayment shall be applied to installments of the Loan Amount in inverse order of maturity.

This Note is the Collateral Installment Note referred to in, and is entitled to all of the benefits of the Loan Agreement and any Loan Documents. If Customer shall fail to pay when due any installment or other sum due hereunder, and any such failure shall continue for more than five (5) Business Days after written notice thereof shall have been given by the holder hereof to Customer, or if any other Event of Default shall have occurred and be continuing, then at the option of the holder hereof (or, upon the occurrence of any Bankruptcy Event, automatically, without any action on the part of the holder hereof), and in addition to all other rights and remedies available to such holder under the Loan Agreement, any Loan Documents, and otherwise, the entire Loan Amount at such time remaining unpaid, together with accrued interest thereon and all other sums then owing by Customer under the Loan Agreement, may be declared to be and thereby become immediately due and payable.

It is expressly understood, however, that nothing contained in the Loan Agreement, any other agreement, instrument or document executed by Customer, or otherwise, shall affect or impair the right, which is unconditional and absolute, of the holder hereof to enforce payment of all sums due under this Note at or after maturity, whether by acceleration or otherwise, or shall affect the obligation of Customer, which is also unconditional and absolute, to pay the sums payable under this Note in accordance with its terms. Except as otherwise expressly set forth herein or in the Loan Agreement, Customer hereby waives presentment, demand for payment, protest and notice of protest, notice of dishonor, notice of acceleration, notice of intent to accelerate and all other notices and formalities in connection with this Note.

Wherever possible each provision of this Note shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Note shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Note. Notwithstanding any provision to the contrary in this Note, the Loan Agreement or any of the Loan Documents, no provision of this Note, the Loan Agreement or any of the Loan Documents shall require the payment or permit the collection of any Excess Interest. Notwithstanding any provision to the contrary in any of the Loan Documents, no provision of the Loan Documents shall require the payment or permit the collection of Excess Interest. If any Excess Interest is provided for, or is adjudicated as being provided for, in this Note, the Loan Agreement or any of the Loan Documents, then: (a) Customer shall not be obligated to pay any Excess Interest; and (b) If any Excess Interest is provided for, or is adjudicated as being provided for, in, then: (i) Customer shall not be obligated to pay any Excess Interest; and (ii) any Excess Interest that MLBFS may have received under any of the Loan Documents shall, at the option of MLBFS, be applied as a credit against the then unpaid principal balance of this Note, or accrued interest hereon not to exceed the maximum amount permitted by law or refunded to the payor thereof,.

Upon the occurrence and during the continuance of any Default, but without limiting the rights and remedies otherwise available to MLBFS hereunder or waiving such Default, the interest payable by Customer hereunder shall at the option of MLBFS accrue and be payable at the Default Rate. The Default Rate, once implemented, shall continue to apply to the Obligations under this Note, the Loan Agreement or any of the Loan Documents and be payable by Customer until the date MLBFS gives written notice (which shall not be unreasonably delayed or withheld) that such Default has been cured to the satisfaction of MLBFS.

This Note shall be construed in accordance with the laws of the State of Illinois and may be enforced by the holder hereof in any jurisdiction in which the Loan Agreement may be enforced.

IN WITNESS WHEREOF, this Note has been executed by Customer as of the day and year first above written.

the day and year first above written.

STOCKERYALE, INC.

By:                                                                                                                                  

 Signature (1)                                Signature (2)

 Printed Name                               Printed Name

 Title                                             Title

SECRETARY'S CERTIFICATE

The undersigned hereby certifies to MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC. that the undersigned is the duly appointed and acting Secretary (or Assistant Secretary) of STOCKERYALE, INC., a corporation duly organized, validly existing and in good standing under the laws of the State of Massachusetts; and that the following is a true, accurate and compared transcript of resolutions duly, validly and lawfully adopted on the _______ day of ____________________, 2002 by the Board of Directors of said Corporation acting in accordance with the laws of the state of incorporation and the charter and by-laws of said Corporation:

"RESOLVED, that this Corporation is authorized and empowered, now and from time to time hereafter, to borrow and/or obtain credit from, and/or enter into other financial arrangements with, MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC. ("MLBFS"), and in connection therewith to grant to MLBFS liens and security interests on any or all property belonging to this Corporation; all such transactions to be on such terms and conditions as may be mutually agreed from time to time between this Corporation and MLBFS; and

"FURTHER RESOLVED, that the President, any Vice President, Treasurer, Secretary or other officer of this Corporation, or any one or more of them, be and each of them hereby is authorized and empowered to: (a) execute and deliver to MLBFS on behalf of this Corporation any and all loan agreements, promissory notes, security agreements, pledge agreements, financing statements, mortgages, deeds of trust, leases and/or all other agreements, instruments and documents required by MLBFS in connection therewith, and any present or future extensions, amendments, supplements, modifications and restatements thereof; all in such form as any such officer shall approve, as conclusively evidenced by his or her signature thereon, and (b) do and perform all such acts and things deemed by any such officer to be necessary or advisable to carry out and perform the undertakings and agreements of this Corporation in connection therewith; and any and all prior acts of each of said officers in these premises are hereby ratified and confirmed in all respects; and

"FURTHER RESOLVED, that MLBFS is authorized to rely upon the foregoing resolutions until it receives written notice of any change or revocation from an authorized officer of this Corporation, which change or revocation shall not in any event affect the obligations of this Corporation with respect to any transaction conditionally agreed or committed to by MLBFS or having its inception prior to the receipt of such notice by MLBFS."

The undersigned further certifies that: (a) the foregoing resolutions have not been rescinded, modified or repealed in any manner, are not in conflict with any agreement of said Corporation and are in full force and effect as of the date of this Certificate, and (b) the following individuals are now the duly elected and acting officers of said Corporation and the signatures set forth below are the true signatures of said officers:

President:                                                                                                                                            

Vice President:                                                                                                                                     

Treasurer:                                                                                                                                             

Secretary:                                                                                                                                             

_________________:                                                                                                                              

Additional Title

IN WITNESS WHEREOF, the undersigned has executed this Certificate and has affixed the seal of said Corporation hereto, pursuant to due authorization, all as of this ________ day of _________________, 2002.

(Corporate Seal)
	Secretary
	Printed Name

Exhibit 10.14(e)  /  STKR 2002 FORM 10-K

EX-4

TERM NOTE

Boston, Massachusetts December 27, 2002

FOR VALUE RECEIVED, the undersigned (the "Borrower"), a corporation formed and duly existing and in good standing under the laws of the Commonwealth of Massachusetts, and having its principal place of business at 32 Hampshire Road, Salem NH 03079, hereby unconditionally promises to pay to the order of TJJ Corporation, having an address at 50 Salem Street, Lynnfield, Massachusetts 01940 (the "Lender"), the principal sum of

FIVE MILLION DOLLARS ($5,000,000.00)

or so much as may have been advanced according to the terms hereof, on the dates and in the manner required herein, together with interest on the unpaid principal balance hereunder from the date hereof until payment in full, at the rate of eight and one-half percent (8.5%) per annum. All such payments shall be made in lawful money of the United States of America to the Lender at the address shown above (or as otherwise directed by the holder in writing) in immediately available funds. Interest shall be computed on the basis of a 360-day year, but shall be payable on the actual number of days actually elapsed.

Payments on account of interest only, at the interest rate set above, shall be paid in arrears, commencing on January 2, 2003, and on the first day of each calendar month thereafter until December 1, 2005. On December 27, 2005 (the "Maturity Date") all principal then outstanding, together with any accrued but unpaid interest, shall be due and payable in full. It is understood and agreed that the principal balance hereof may be advanced in more than one installment, at the Borrower's election namely, that the Borrower may elect to have two advances of the principal amount hereof. The first such advance in an amount of not less than Four Million Dollars ($4,000,000) shall be made on the date hereof. So long as (i) (at the time of each such request and again at the time of each corresponding advance), there exists no Event of Default, nor any event or circumstance which, with the passage of time or the giving of notice, or both, would constitute an Event of Default hereunder, and (ii) at the time of each such advance, the Borrower shall have delivered an endorsement to the lender's policy of title insurance increasing the coverage by the amount of the requested advance (and reflecting no adverse change in the state of title), the Borrower may request subsequent advances of the remaining principal amount, not to exceed One Million Dollars ($1,000,000) in the aggregate, each such request to be made in writing to the Holder not less than ten (10) days prior to the date on which such advance is desired. Any such request shall be irrevocable, and shall specify the amount desired (provided that no advance shall be less than $250,000.00). Holder shall be entitled to deduct, and is hereby instructed to deduct from any amount so advanced (after the initial advance), a commitment fee equal to one and one-quarter percent (1.25%) of the advance. Notwithstanding such deduction, the entire amount requested shall be deemed to have been advanced to the Borrower, shall bear interest and shall repaid at maturity, all as provided herein.

The Borrower shall be entitled to prepay all or any portion of the principal indebtedness evidenced hereby at the time of any regularly scheduled interest payment without penalty or premium and, in the event of any such partial prepayment, subsequent payments of interest shall be recomputed using the remaining principal amount and the interest rate aforesaid. Notwithstanding the foregoing, unless and until the Loan Amount is prepaid in full, in no event (except for mandatory prepayment in the case of a casualty or taking, as provided in the Mortgage (as hereinafter defined)) shall the principal balance of this Note be less than One Million Five Hundred Thousand Dollars ($1,500,000). The Borrower, for itself and its legal representatives, successors and assigns, hereby expressly waives presentment, demand, protest, notice of protest, presentment for the purpose of accelerating maturity, diligence in collection, and the benefit of any exemption under the homestead exemption laws, if any, any other exemption or insolvency laws, and consent that the Holder may release or surrender, exchange or substitute any real or personal property or other collateral security now held or which may hereafter be held as security for the payment of this Note, and may extend the time for payment or otherwise modify the terms of payment of any part or the whole of the debt evidenced hereby, without in any way affecting the liability of the Borrower hereunder.

If (i) there occurs any delinquency in the payment of any amount due hereunder, whether interest, principal or otherwise, which delinquency continues for five (5) days after the giving of written notice of such delinquency from the holder hereof to the Borrower, or (ii) there shall exist any Event of Default under the Mortgage or any other instrument or document executed and/or delivered in connection herewith, then an Event of Default shall exist hereunder, and the holder shall have the right and option, without further notice or demand, to declare the entire indebtedness evidenced hereby, with interest accrued thereon, and such other charges payable thereon as determined under the provisions of this Note, forthwith due and payable, and no omission on the part of the holder hereof to exercise such option when entitled to do so shall be construed as a waiver of such right. The Borrower acknowledges that no payments of principal are required hereunder prior to the Maturity Date, and that the entire amount of principal and unpaid interest will be due and payable at that time. The Holder has made (and makes) no commitment to refinance the amount hereof or grant any other extension or indulgence in the event that Borrower is for any reason unable to pay the amounts due hereunder. With respect to any payment due hereunder or under any of the other Loan Documents which is not paid within five (5) days after the due date, such payment shall bear interest at a default rate equal to five percent (5%) per annum over the base interest rate set forth herein.

This Note is the Note referred to in, and is entitled to the benefits of, that certain First Mortgage, Security Agreement and Fixture Filing of even date herewith (including the Schedules and Exhibits thereto) granted by Borrower to Lender, encumbering certain property located in part in Methuen, Massachusetts and in part in Salem, New Hampshire (the "Mortgage") and all other instruments and agreements evidencing and/or securing the indebtedness hereunder. The occurrence of the Maturity Date or the occurrence and continuance of an Event of Default shall entitle the Holder to accelerate the entire indebtedness hereunder and to take such other action as may be provided for in the Mortgage or any other instrument or agreement evidencing and/or securing this Note.

Notwithstanding anything to the contrary contained herein, in no event shall the amount of interest paid or agreed to be paid hereunder exceed the maximum amount of interest which the Holder is permitted to receive under applicable law. If, from any circumstances whatsoever, fulfillment of any provision hereof or of the Mortgage shall require a payment exceeding such maximum amount, then the obligation to be fulfilled shall automatically be reduced to the limit of such validity and if, from any circumstances, the Holder should ever receive as interest an amount which would exceed such maximum amount, such amount which would be excessive interest shall be applied to the reduction of the principal balance evidenced hereby and not the payment of interest.

No failure or delay on the part of the Holder in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy hereunder. The remedies of the Holder hereunder are cumulative and not exclusive of any remedies provided by law or otherwise available to the Holder. This Note may not be amended, waived, discharged or terminated orally, but only by a statement in writing signed by the party against whom enforcement of the amendment, waiver, discharge or termination is sought. Any waiver or consent shall be effective only in the specific instance and for the specific purpose for which given.

Borrower shall not be personally liable for payment of the principal of this Note or interest thereon, and in the event of failure by Borrower to pay any portion of such principal or interest, the holder of this Note will look, with respect to the then outstanding balance of such principal and interest, solely to the Mortgaged Property and such other collateral as has been, or hereafter shall be, given to secure payment of this Note. The foregoing limitation on liability shall not impair or otherwise affect the validity or enforceability of (a) the debt evidenced by this Note or of any other obligations evidenced by the Loan Documents or (b) the liens, security interests, rights and remedies (including, without limitation, the remedies of foreclosure and/or sale) in favor of, or available to, the holder of this Note with respect to the Mortgaged Property or any other property, security, collateral and/or assets (including the proceeds thereof) encumbered, pledged or assigned by the Mortgage or any other security for the Loan. In addition, the foregoing limitation on recourse shall not limit any obligations or be applicable with respect to: (i) liability under any guaranty(ies) or indemnity(ies) delivered or afforded to the holder of this Note, including without limitation that certain Environmental Indemnification Agreement of even date herewith made by Borrower in favor of Lender; (ii) any fraud, misrepresentation or breach of trust; (iii) taxes of any kind (whether characterized as transfer, gains or other taxes) payable in connection with the foreclosure sale of the Mortgaged Property, irrespective of who pays such taxes; (iv) the application of any insurance or condemnation proceeds or other funds or payments other than strictly in accordance with the Loan Documents; (v) any waste in respect of the Mortgaged Property; (vi) any failure to pay or discharge any real estate tax, other tax, assessment, fine, penalty or lien against the Mortgaged Property; (vii) liability to said holder for the reimbursement to said holder, together with interest as provided in the Loan Documents, of all sums advanced or expended by said holder after or in respect of any default under the Loan Documents; (vii) liability to pay for the premiums on and keep in full force and effect insurance in respect of the Mortgaged Property in accordance with the Loan Documents; (viii) liability for Hazardous Substances (as defined in the Mortgage) that may exist upon or be discharged from the Mortgaged Property; or (ix) any failure to comply with any other obligation to be complied with by Borrower pursuant to the Loan Documents (except the obligation to pay the principal of this Note and the interest thereon), provided that Borrower shall be entitled to any notice and cure rights applicable to such obligation as set forth in the applicable Loan Documents(s). Borrower shall in any event be and shall remain personally liable for each of the matters to which reference is made in the preceding sentence and the holder of this Note may seek, obtain and enforce one or more money judgments in any appropriate proceeding(s) with respect thereto. The limitation on personal liability contained in this paragraph shall become automatically null and void and shall be of no further force or effect, and Borrower shall be and remain personally liable for payment of the principal and interest thereon, in the event that Borrower, or anyone acting on behalf of Borrower, shall (A) file a petition or answer seeking any relief of any kind under the bankruptcy or insolvency laws of the United States or any state, or (B) assert in writing or in any legal proceedings of any kind that any provisions of any of the Loan Documents are in whole or in part unenforceable, invalid or not legally binding. Notwithstanding any provision hereof or of any other Loan Document to the contrary, no officer, director, shareholder, employee or agent of Borrower shall have any personal liability for the payment of the indebtedness evidenced by the Note or for the performance of Borrower's other obligations under the Loan Documents.

The Borrower agrees to pay on demand all costs and expenses (including, without limitation, the reasonable fees and expenses of legal counsel) incurred by the Holder in connection with preserving, enforcing or exercising any rights or remedies under this Note, whether or not legal action is instituted. Any fees, expenses or other charges which the Holder is entitled to receive from the Borrower hereunder shall constitute an obligation of the Borrower pursuant to this Note and secured by the Mortgage, and shall, to the extent actually paid by the holder, bear interest until paid at a rate per annum equal to the maximum rate in effect and permitted hereunder. As used herein, the word "Holder" shall mean Lender as payee of this Note, or any endorsee of this Note in possession hereof, or the bearer hereof if this Note is at the time payable to the bearer.

The Borrower irrevocably submits to the non-exclusive jurisdiction of any Massachusetts court or any federal court sitting within The Commonwealth of Massachusetts over any suit, action or proceeding arising out of or relating to this Note. The Borrower irrevocably waives, to the fullest extent permitted by law, any objection which they may now or hereafter have to the laying of venue of any such suit, action or proceeding brought in such a court and any claim that any such suit, action or proceeding has been brought in an inconvenient forum.

This Note shall be governed by, and construed in accordance with, the laws of The Commonwealth of Massachusetts, without regard to its principles of conflicts of laws.

THE BORROWER HEREBY EXPRESSLY, KNOWINGLY AND VOLUNTARILY WAIVE ALL BENEFIT AND ADVANTAGE OF ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION ARISING OUT OF OR IN CONNECTION WITH THIS NOTE, AND AGREE THAT IT WILL NOT AT ANY TIME INSIST UPON, OR PLEAD OR IN ANY MANNER WHATSOEVER, CLAIM OR TAKE THE BENEFIT OR ADVANTAGE OF, A TRIAL BY JURY IN ANY ACTION ARISING OUT OF OR IN CONNECTION WITH THIS NOTE.

Exhibit 10.15(a) /  STKR 2002 FORM 10-K

EX-5

September 30, 2002

StockerYale, Inc.
39 Hampshire Road
Salem, New Hampshire 03079

Re: Retention Letter

Dear _____:

You are a highly valuable employee of StockerYale, Inc. StockerYale wishes to retain you as an employee, and is therefore willing to make certain commitments in order to induce you to remain an employee. This letter will confirm the agreement between you and StockerYale (the "Agreement") in that regard. The Agreement is as follows:

Severance. In the event your employment is terminated by StockerYale for other than Cause, or by you for Good Reason, or as a result of Change in Control, as defined below, then, within five (5) days following the termination, StockerYale will make a one-time, lump-sum payment to you equal to twelve months(1) of your then-current base salary.

Withholding. All payments made by StockerYale under this Agreement will be reduced by any tax or other amounts required to be withheld under applicable law.

Benefits. Your medical and/or dental coverage through StockerYale's group medical and dental plans will be continued throughout your severance period. You may then elect to continue your participation in the Plans under COBRA at your own expense.

Assignment. You shall not make any assignment of this Agreement or any interest in it, by operation of law or otherwise, without the prior written consent of StockerYale. StockerYale may assign its rights and obligations under this Agreement without your consent. This Agreement shall inure to the benefit of and be binding upon you and StockerYale, and each of our respective successors, executors, administrators, heirs and permitted assigns.

Severability. If any portion or provision of this Agreement shall to any extent be declared illegal or unenforceable by a court of competent jurisdiction, then the remainder of this Agreement, or the application of such portion or provision in circumstances other than those as to which it is so declared illegal or unenforceable, shall not be affected thereby, and each portion and provision hereof shall be valid and enforceable to the fullest extent permitted by law.

No Employment Contract. This Agreement is not a contract of employment for a specific term, and your employment is "At Will" and may be terminated by StockerYale at any time.

Definitions. For this Agreement, the following definitions apply:
(a) "Cause" for termination means: (i) your commission of an act of fraud or misrepresentation in connection with your employment; or (ii) your conviction of or plea of nolo contendere to a felony or a crime involving moral turpitude.

(b) "Good Reason" means: (i) the failure of StockerYale, without Cause, to continue to employ you in your current position, or a substantially similar position (i.e., one involving no material reduction in your duties, responsibilities or compensation); or (ii) an unconsented-to relocation of your primary place of employment more than 20 miles from your current site of employment.

(c) "Change of Control" occurs when (a) any individual or organization becomes the owner of 50% or more of the Common Stock of StockerYale or (b) an agreement of acquisition, merger, or consolidation is executed by StockerYale, and becomes effective (and such agreement has been approved by the shareholders to the extent required) which contemplates that after the effective date provided in such agreement, all or substantially all of the business or assets of StockerYale shall be owned or otherwise controlled by another individual or organization. In no event shall a change of control of any subsidiary of StockerYale be deemed to cause a Change of Control of StockerYale.

9. Miscellaneous. This Agreement sets forth the entire agreement between you and StockerYale in connection with the subject matter hereof, and replaces all prior and contemporaneous communications, agreements and understandings, written or oral, with respect to the subject matter hereof. This Agreement may not be modified or amended, and no breach shall be deemed to be waived, unless agreed to in writing by you and an expressly authorized representative of StockerYale. The headings and captions in this Agreement are for convenience only, and in no way define or describe the scope or content of any provision of this Agreement. This Agreement may be executed in two or more counterparts, each of which shall be an original and all of which together shall constitute one and the same instrument. This Agreement shall be governed by the laws of the Commonwealth of Massachusetts, without regard to the conflicts of laws principles thereof, and all disputes hereunder shall be adjudicated in the courts of the Commonwealth of Massachusetts, to whose personal jurisdiction you hereby consent.

If the foregoing is acceptable to you, please sign both copies of this letter in the space provided, at which time this letter will take effect as a binding agreement between you and StockerYale on the basis set forth above. Please keep one original for your records and return one original to me.

Very truly yours,

By:
Raymond J. Oglethorpe
Compensation Committee
StockerYale, Inc.

Accepted and Agreed:

Name: _____________________

Date: ______________________

(1)  Mark W. Blodgett's payment would equal twelve months salary; Francis J. O'Brien's payment would equal six months salary; and George A. Fryburg's payment would equal six months salary.

Exhibit 10.16  /  STKR 2002 FORM 10-K

EX-6

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in Registration Statement Nos. 333-83762, 333-67434, 333-65714, 333-50408, 333-39082, 333-39078, 333-39080, 333-60717, 333-14757 of StockerYale, Inc. on Form S-8 of our report dated March 7, 2003 ( April 14, 2003 as to Notes 2, 13 and 22), relating to the consolidated financial statements and supplemental schedule listed in Item 15a(2) of StockerYale Inc. as of and for the year ended December 31, 2002 (which report expresses an unqualified opinion and includes explanatory paragraphs relating to (1) the substantial doubt about the Company's ability to continue as a going concern, and (2) the change in 2002 in the method of accounting for goodwill and intangible assets and the application of procedures relating to certain disclosures of financial statement amounts related to the 2001 and 2000 financial statements that were audited by other auditors who have ceased operations and for which we have expressed no opinion or other form of assurance other than with respect to such disclosures) appearing in this Annual Report on Form 10-K of StockerYale, Inc. for the year ended December 31, 2002.

/s/ DELOITTE & TOUCHE LLP

Deloitte & Touche LLP

Boston, Massachusetts

April 15, 2003

Exhibit 23.2  /  STKR 2002 FORM 10-K

EX-7

The undersigned officer of StockerYale, Inc. (the "Company") hereby certifies that the Company's annual report on Form 10-K for the year period ended December 31, 2002 (the "Report"), as filed with the Securities and Exchange Commission on the date hereof, fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended, and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. This certification is provided solely pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.   A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

Date: April 15, 2003	Name:	/s/ Mark W. Blodgett
		Mark W. Blodgett
	Title:	Chairman and Chief Executive Officer

Exhibit 99.2  /  STKR 2002 FORM 10-K

EX-8

FIRST MORTGAGE, SECURITY AGREEMENT AND FIXTURE FILING

Article I

Definitions and Security Interests

A.	Definitions

	The terms used below shall have the meanings there indicated. All capitalized terms not
	otherwise defined in this Mortgage shall have the meaning ascribed to them in the other
	Loan Documents.


Date:	December 27, 2002

Lender:	TJJ Corporation, a Massachusetts corporation
	c/o CRES Development Company, Inc.
	50 Salem Street
	Lynnfield, MA 01940

Borrower: StockerYale, Inc.
	  32 Hampshire Road
	  Salem NH 03079

Loan Amount:	$5,000,000.00 plus all amounts in excess thereof advanced by Lender under the
Loan Documents and interest and other charges provided in the Note.

Note:	The Term Note from Borrower to the order of Lender of even date herewith evidencing
the debt secured hereby.

Obligations:	(a)	The payment of the Loan Amount and the performance of all provisions of the
Note, including without limitation all interest and other charges and payments;

	(b)	The payment and performance of all provisions of all extensions, refinancings and
	amendments of the Note and all notes issued in substitution therefor;

	(c)	The payment and performance of all provisions of the other Loan Documents; and

	(d)	The payment and performance of all other indebtedness, obligations and liabilities of
	Borrower existing on the date of this Mortgage or arising hereafter, absolute or contingent,
	matured or unmatured, secured or unsecured, arising in connection with the Loan Documents.

Mortgaged
Property:	The Premises and all fixtures (as defined in the Uniform Commercial Code in effect
in the State of New Hampshire) now or hereafter used in connection with or attached to and
serving the Premises, including but not limited to all heating, ventilation and air conditioning
equipment, plumbing and electrical equipment and fixtures now or hereafter located in or
serving the Improvements, and other fixtures now or hereafter attached to, located on or used
in connection with the Improvements; all fixtures shall to the extent possible be deemed a
part of the real estate.

Premises:	(a)	The fee simple estate in the real property located in part in Salem, Rockingham
County, New Hampshire and in part in Methuen, Essex County (north), Massachusetts, and
having an address at 32 Hampshire Road, Salem, New Hampshire (the "Property") described in
Exhibit A, and any structures and improvements ("Improvements") now or hereafter
located on the Property, together with all appurtenances thereto and interests therein now or
hereafter owned by Borrower, including all leases, occupancy agreements, and rents and
profits thereof;

	(b)	All materials intended for construction, reconstruction, alteration or repair of the
	Property or the Improvements;

	(c)	All contracts, agreements, licenses, permits and approvals for the construction,
	ownership, maintenance and operation of the Property or the Improvements;

	(d)	All warranties and guarantees of construction contractors and subcontractors and of
	suppliers and manufacturers of equipment and material or other property incorporated into
	the Improvements or otherwise constituting part of the Property or the Improvements;

	(e)	All replacements of and additions to all of the property described above as Property
	or Improvements;

	(f)	The proceeds of any insurance for damage to the property described above; and

	(g)	The proceeds of all judgments, awards of damages and settlements for, or in lieu of, the
	taking by eminent domain of any part of the property described above.

Article II

Grant of Mortgage and Security Interest

2.1	Grant of Mortgage

	For good and valuable consideration paid, the receipt and sufficiency of which is hereby
	acknowledged, Borrower GRANTS to Lender, with MORTGAGE COVENANTS the Mortgaged
	Property as security for the Obligations.

2.2	Grant of Security Interest; Fixture Filing

	If and to the extent that any of the Premises constitutes fixtures, Borrower grants Lender a
	first priority security interest in such fixtures under the Uniform Commercial Code in effect
	in the state(s) in which such fixtures are located.  Neither this grant of a security interest nor
	the filing of a financing statement shall, however, be deemed to impair the intention that to
	the extent possible all property included in the Mortgaged Property is a part of the real
	estate.  It is the Borrower's intention that this First Mortgage, Security Agreement and
	Fixture Filing shall serve as a financing statement as to such fixtures, as provided in the
	Uniform Commercial Code as now or hereafter in effect in the state(s) in which the same
	are located.

Article III

Representations Warranties, and Agreements

3.1	General

	Borrower hereby represents, warrants and agrees with Lender that:

	a)	Borrower is duly authorized to make and enter into the Loan Documents and to carry out
	the transactions contemplated therein, and the Loan Documents have each been duly executed
	and delivered on behalf of Borrower;

	b)	Borrower will pay and perform all of the Obligations;

	c)	Borrower agrees to correct any defects in the construction or condition of the Improvements,
	and to pursue diligently any remedies or recourse which Borrower may have under agreements,
	warranties and guarantees related to the construction thereof.  Upon Lender's request, Borrower
	shall collaterally assign any such agreements, warranties and guarantees to Lender;

	d)	Borrower shall, at its expense, cause this Mortgage and each amendment thereof and
	appropriate financing and continuation statements to be recorded and filed in order to establish
	and preserve the priority and perfection of the liens and security interests of Lender;

	e)	Without limiting the other provisions hereof or of any other Loan Document, there are no
	Hazardous Materials (as that term is defined in the Environmental Indemnification Agreement
	of even date) on the Mortgaged Property except those previously disclosed in writing to Lender
	or for which Lender has given prior written approval, and then only to the extent that the
Hazardous Materials are licensed and approved in accordance with all applicable laws and
regulations and are in compliance with the terms of Lender's written approval; and

f)	Borrower will strictly comply with the requirements of the Environmental Laws (as defined
in the Environmental Indemnification Agreement of even date) and promptly notify Lender of
any Hazardous Materials in or on the Mortgaged Property which are not in compliance with all
applicable laws, indemnify and defend the Lender from and against any loss, cost, damage or
expense (including without limitation the costs of investigation and cleanup) suffered as a result
of any violation or alleged violation of any such laws.

3.2	Title to Property; Other Liens

		Borrower represents, warrants and agrees that:

	(a)	Borrower owns good clear record and marketable fee simple absolute title to the
	Mortgaged Property, free of all encumbrances except those specifically described in
	Exhibit B hereto. As of the date hereof, there are no leases or other occupancy agreements
	(written or otherwise) in effect with respect to any portion of the Mortgaged Property.
	Borrower shall not permit or suffer to be created, and shall promptly discharge, any
	mortgage, lien, attachment, lis pendens, or other encumbrance on the Mortgaged Property
	or any part thereof or interest therein, other than this Mortgage and those matters
	enumerated in Exhibit B;

	(b)	To the extent permitted by applicable law, Borrower will prevent the recording of any
	notice of contract, notice of subcontract, or materialman's or mechanic's lien relating to the
	Mortgaged Property or the construction or alteration of the Improvements.  Borrower will
	take all steps necessary, including bonding, to discharge or remove the same promptly from
	the record; and

	(c) 	Borrower, in good faith and at Borrower's sole cost and expense and after Lender shall
	have received written notice thereof from Borrower, may contest the amount or the validity of
	any imposition by appropriate legal proceedings, provided that (i) Borrower shall prosecute
	such proceedings diligently; (ii) no Event of Default shall exist during the pendency of any such
	proceedings; (iii) such proceedings shall operate to suspend the collection of any such
	Imposition or other realization thereon and neither the Mortgaged Property nor any part thereof
	nor interest therein nor any income derived therefrom would, by reason of such suspension, be
	forfeited or lost, or subjected to any lien, other encumbrance or charge and neither Borrower
	nor Lender would, by reason thereof, be subject to civil or criminal liability; (iv) during such
	contest Borrower shall, at the option of Lender, provide security satisfactory to Lender assuring
	the payment of the contested imposition and of any additional charge, fine, penalty or
	expense arising from or incurred as a result of such contest and any costs or expenses incurred
	or to be incurred by Lender in connection with or as a consequence of Borrower's contest;
	and (v) if at any time nonpayment of any imposition would result in the delivery of a tax deed
	or similar instrument to the Mortgaged Property or any portion thereof or any forfeiture with
	respect to the Mortgaged Property, then Borrower shall pay such Imposition (together with all
	applicable fines, penalties and other governmental charges and any interest or costs with
	respect thereto) in time to prevent the delivery of such deed or instrument or the effectuation
	of such forfeiture.

3.3	Restrictions on Transfers

	Borrower will not without the prior written approval of Lender in each instance:

	(a)	Convey, assign, further mortgage or encumber or permit the conveyance, assignment,
	further mortgaging or encumbrance of all or any part of any legal or beneficial interest in
	the Mortgaged Property; or

	(b)	To the extent that any lease or occupancy agreement may be approved by Lender as
	provided herein, collect funds for the occupancy or use of the Mortgaged Property or any
	part thereof from any tenant or other occupant or user in excess of one month's rent, plus
	any common area charges as the same may become due and payable pursuant to any
	leases affecting the Premises.

3.4	Leases and Contracts

	Borrower will:

	(a)	Without the prior written consent of Lender, which shall not be unreasonably withheld
	or delayed, not enter into any lease or any agreement of any kind permitting present or
	future occupancy or use of the Mortgaged Property or any part thereof;

	(b)	Without the prior written consent of Lender, not to materially amend, terminate or take
	any action which would adversely affect Borrower's rights under, or cause permit a
	termination of, any future leases or agreements for which Lender's consent was
	initially required;

	(c)	Assign to Lender all of Borrower's rights under the contracts, permits, licenses and
	approvals now or hereafter in effect for use and operation of the Mortgaged Property (as
	distinguished from contracts or agreements to which Borrower may be a party in the course
	of its business, but which do not directly affect the use, occupancy or operation of the
	Mortgaged Property or the improvements thereon (such as, but not limited to, product licenses,
	agreements for sale of inventory, intellectual property contract rights and the like)), and
	under any leases and agreements and the rents and profits therefrom that may hereafter be
	approved by Lender as herein required.  Such assignments shall be in form satisfactory
	to Lender;

	(d)	Not permit any occupant of the Mortgaged Property to use any part thereof for the use,
	generation, treatment, storage, or disposal of Hazardous Materials, except as may be
	expressly permitted in the other Loan Documents, and then only in strict accordance with
	all applicable laws, codes, ordinances and regulations.

3.5	Payments

	Borrower will pay when due:

	(a)	All principal, interest and other charges, if any, due under the Loan Documents;

	(b)	All charges and expenses relating to the Mortgaged Property, including without
	limitation all taxes, betterments, assessments and other governmental levies, water and
	sewer charges, insurance premiums, and other charges, to whomever and whenever
	assessed, whether on the Mortgaged Property or any interest therein, on the Loan Documents,
	or on any debt secured thereby; and

	(c)	All federal, state, municipal and other taxes of whatever kind and nature which could, if
	unpaid, result in a lien on the Mortgaged Property or on any interest therein.

3.6	Operation of the Mortgaged Property

Borrower will:

	(a)	Make such repairs and replacements and take such other steps as may be necessary to
	maintain the Mortgaged Property and any abutting grounds, sidewalks, roadways and
	parking and landscaped areas under Borrower's control in good and serviceable condition
	and repair, comparable to the current condition, while this Mortgage is outstanding,
	deterioration incidental to reasonable wear and tear and eminent domain takings only
	excepted, it being understood, however, that the foregoing exception for reasonable wear
	and tear shall not relieve Borrower from the obligation to repair or replace worn out,
	inoperative, obsolete or otherwise deficient elements of the Mortgaged Property;

	(b)	Observe all federal, state and local laws, ordinances, rules and regulations relating to
	the Mortgaged Property or the use, operation and maintenance thereof; and

	(c)	Not, except as expressly approved by Lender, make or permit any material alteration or
	addition to, any removal or demolition of, or any strip or waste of, the Mortgaged Property.

3.7 	Taxes

	Borrower shall furnish Lender with the receipted real estate tax and assessments bills for the
	Mortgaged Property not later than ten (10) days prior to the date from which interest or
	penalty would accrue for nonpayment thereof.

3.8	Notices

	Borrower will deliver to Lender promptly upon receipt of the same, copies of all notices,
	certificates and documents received by Borrower which could affect the Mortgaged Property
	or its use or which make a claim or assertion which, if true, could cause Borrower to be in
	default under the Loan Documents (without regard to any notice or grace periods).

3.9 	Representations re Fixtures; Security Agreement

	The fixtures now or hereafter located at or serving the Premises shall be maintained in good
	and serviceable condition, and shall be properly maintained, repaired and, when necessary,
	replaced with like fixtures of equal or higher quality. To the extent that a security agreement
	is required to create a security interest in fixtures under the Uniform Commercial Code in
	Massachusetts or New Hampshire, it is the intent of the Mortgagor that this Mortgage shall
	constitute such a security agreement, as well as a fixture filing. When requested by Lender,
	and to the extent reasonably necessary to protect the Lender's interest and lien upon fixtures
	hereunder, Borrower will: (a) provide Lender with an inventory of all fixtures in form
	reasonably satisfactory to Lender; and (b) execute and deliver to Lender, in form reasonably
	acceptable to Lender, a separate security agreement relating to the fixtures.

3.11	Borrower's Obligation to Report Defaults

	Borrower will promptly notify Lender of any event which would constitute an Event of
	Default hereunder (without regard to any notice or grace periods), or which would constitute
	an Event of Default hereunder if notice were given or if it were to continue after any grace
	period required.

3.12	Borrower's Obligation to Restore and Rebuild

	If all or any portion of the Mortgaged Property is damaged or destroyed by any cause
	whatsoever, Borrower shall, at its expense, as soon as practicable, repair or rebuild the same,
	whether insurance proceeds or taking awards are available or not, except that Borrower shall
	not be required to expend more than the difference between the cost to repair or rebuild the
	Mortgaged Property and the amount of insurance proceeds or taking awards actually retained
	by Lender and applied to the Loan Amount.

Article IV

Insurance

4.1	Coverage

	Borrower shall obtain and keep in force the following insurance as to the Mortgaged
	Property all insurance of whatever type or nature as may be required under applicable law
	or regulation, but in any event, at least the following types and coverages shall be carried:

	(a)	Borrower shall keep the Mortgaged Property insured for the benefit of Lender for one
	hundred percent (100%) of full replacement cost in so called "all risk" form.  The applicable
	policies shall include (i) coverage against loss or damage by fire, flood, earthquake,
	underground hazards, collapse and explosion and such other hazards as may be specified
	at any time by Lender, (ii) replacement cost and agreed amount endorsements or the
	equivalent thereof (with no reduction for depreciation), an endorsement covering the costs
	of  demolition and the increased costs of construction attributable to the enforcement of laws,
	building codes and/or ordinances, and (iii) "time element" coverage, which shall ensure
	payment to Lender of all moneys due Lender under the Loan Documents and
	"extra expense" (i.e. soft costs) coverage;

	(b)	Borrower shall also maintain (i) policies that provide boiler and machinery comprehensive
	coverage for all mechanical and electrical equipment at the Premises insuring against
	breakdown or explosion of such equipment on a replacement cost value basis; such policies
	shall provide the coverage specified in clause (iii) of the preceding paragraph (a); (ii) business
	interruption or loss of rental income insurance for a period of not less than one year in
	connection with all policies of property and boiler and machinery insurance; (iii) commercial
	general liability insurance (including contractual liability) covering the Premises and
	Borrower's operations in an amount not less than One Million Dollars ($1,000,000) per
	occurrence and Two Million Dollars ($2,000,000) in the aggregate per location; (iv) commercial
	automobile liability insurance with a limit of not less than One Million Dollars ($1,000,000)
	combined single limit and endorsed to cover owned, hired and non owned automobiles; (v)
	worker's compensation insurance covering all of Borrower's employees situated at the
	Premises in accordance with statutory requirements of the state in which the Premises are
	located and including an endorsement for employer's liability coverage; and (vi) umbrella
	liability insurance in excess of the foregoing liability coverage with a limit of not less than
	Five Million Dollars ($5,000,000) or such higher limits as Lender may specify.  The foregoing
	commercial general liability and umbrella liability policies shall also contain a so called
	"products completed operations endorsement." To the extent applicable, special coverages
	must also be furnished for other operations of Borrower or any tenants at the Premises,
	including garage operations, asbestos removal and such other operations as may be
	designated by Lender from time to time.  In addition, if any underground fuel storage tank is
	situated at the Premises, then Borrower shall maintain, in such amounts as Lender may
	specify, "Environmental Impairment Liability Insurance" covering the cost of clean up and/or
	removal (on or off the Premises) associated with a spill or a leak emanating from such tank.

	(c)	If the Mortgaged Property is located in an area that has been, or at any time is, identified
	by the Secretary of Housing and Urban Development as a flood hazard area, Borrower shall
	keep the Mortgaged Property insured against loss by flood in such amount as Lender shall
	require. All proceeds of any such insurance shall be payable to Lender and may be applied
	as set forth below.

4.2	Co-Insurance Provision

	The terms of all insurance policies shall be such that no co-insurance provisions apply.

4.3	Insurers

	All insurance shall be written by insurers qualified to do business in the State of New
	Hampshire and having at least A-VII ratings given by Best's Insurance Guide.  All evidence
	of insurance shall be deposited with Lender.

4.4	Expiration of Insurance

	Not fewer than fifteen (15) days prior to the expiration dates of the expiring policies,
	Borrower shall deliver to Lender Evidence of Insurance replacing the expiring policies
	bearing notations evidencing the payment of premiums or accompanied by other evidence
	of such payment satisfactory to Lender.

4.5	Policy Provisions

	All insurance shall be in form reasonably acceptable to Lender, shall provide that any
	proceeds shall be first payable to Lender, as its interest may appear, pursuant to a
	non-contributory standard Lender endorsement, and shall provide that thirty (30) days' written
	notice must be given to Lender before any such policy can be cancelled, modified or renewal
	thereof refused. Lender will be named as an additional insured on each such policy.
	Borrower shall perform all the conditions of all insurance policies covering the Mortgaged
	Property and, in case of any loss or damage, Borrower will give immediate notice to Lender,
	who may make proof of loss or claim. Each insurance company is hereby authorized and
	directed to make payment for such loss directly to Lender instead of to Borrower.

4.6	Application of Proceeds

	All insurance proceeds shall be adjusted by and paid to Lender and otherwise treated as
	provided in this section. Following any casualty, and so long as there exists no event or
	circumstance which, with the passage of time or the giving of notice (or both), would
	constitute an Event of Default hereunder, Lender may deduct from any proceeds all costs
	and expenses, including reasonable attorneys' fees incurred by Lender in connection
	therewith, and thereafter Lender shall release such portion of the proceeds to Borrower as
	is necessary to restore the Mortgaged Property to its prior condition insofar as is practicable,
	upon such terms and conditions as Lender deems appropriate in light of the nature and
	extent of the reconstruction or repair. If at any time there does exist any event or circumstance
	which, with the passage of time or the giving of notice (or both), would constitute an
	Event of Default hereunder, Lender may at its sole election apply any or all of such proceeds
	to Lender's costs and expenses and then to reduction of the Loan Amount.  If any insurer of
	the Mortgaged Property denies liability, Borrower shall not be relieved of its obligation to
	restore the Mortgaged Property.  If at any time Lender determines that the amount of
	proceeds is insufficient to complete restoration, Borrower shall deposit the amount of such
	deficiency with Lender within ten (10) days after notice from Lender (and, at Lender's
	election, prior to Lender's advance of such proceeds). Borrower shall have obtained any
	and all necessary permits, license or approvals required for such restoration, and all plans
	and specifications for the restoration shall be approved by Lender prior to commencement
	of the restoration.  Except to the extent insurance proceeds are actually retained by Lender
	and applied to the Loan Amount, nothing herein shall be deemed to relieve Borrower from
	the obligation to restore all damage and destruction to the Mortgaged Property, regardless
	of whether or not sufficient proceeds are available.  No such retention and application shall
	be deemed a cure or waiver of any Event of Default under this Mortgage.

Article V

Intentionally Omitted

5.1	Intentionally Omitted


Article VI

Eminent Domain

6.1	Taking

	In case of any condemnation for public use of, or any damage by reason of the action of any
	governmental entity or authority to, all or any part of the Mortgaged Property
	(a "Taking"), or the commencement of any proceedings or negotiations which
	might result in a Taking or a settlement in lieu thereof, Borrower shall promptly give written
	notice thereof to Lender, describing the nature and extent of the Taking or the nature of such
	proceedings or negotiations.  Lender may, at its option, appear in any such proceedings or
	negotiations, and Borrower shall promptly give Lender copies of all notices, pleadings,
	determinations and other papers.  Borrower shall in good faith and with due diligence file
	and prosecute Borrower's claim for any award or payment on account of any Taking.
	Borrower shall not settle any such claim without Lender's prior written consent.

6.2	Application of Award

	Borrower hereby assigns to Lender all of Borrower's rights in any award received in
	connection with a Taking or any settlement received in lieu thereof and authorizes such
	awards and settlements to be paid directly to Lender.  Any such award, after deducting
	therefrom all costs and expenses, including reasonable attorneys' fees incurred by Lender
	in connection therewith, shall be applied as follows:

	(a)	In the case of a partial Taking, if no Event of Default exists and Lender determines that
	the Mortgaged Property can be economically restored and operated in accordance with the
	Loan Documents, Lender shall release to Borrower on terms and conditions satisfactory to
	Lender so much of such award, reduced as provided above, as may be necessary to restore
	the Mortgaged Property, and the balance, if any, shall be applied to the Loan Amount; and

	(b)	In the case of a complete Taking, or in the case of a partial taking, if an Event of Default
	exists or if Lender determines that the Mortgaged Property cannot be economically restored
	and operated in accordance with the Loan Documents, Lender may, at its option, apply such
	award, reduced as provided above, to the reduction of balance to be paid to Borrower.

Article VII

Defaults and Remedies

7.1	Events of Default

	The occurrence of any one or more of the following events while this Mortgage shall remain
	in effect shall constitute an "Event of Default:"

	(a)	An Event of Default under any other Loan Document;

	(b)	Failure by Borrower to make any payment due under the Note, this Mortgage or any
	other Loan Document, other than payment of insurance premiums, which failure continues
	for five (5) days after the due date;

	(c)	Failure by Borrower to perform any term or condition of this Mortgage other than failure
	to make a payment due, which failure shall continue for thirty (30) days after written notice
	thereof from Lender or for such longer period as may be necessary provided that Borrower
	promptly commences and diligently pursues such case;

	(d)	Failure by Borrower to keep the Mortgaged Property insured as required by the Loan
	Documents (including without limitation any failure to pay premiums when due, and
	regardless of whether Lender pays the same as a result of Borrower's failure), whether or
	not Borrower has had notice thereof or an opportunity to cure;

	(e)	[Intentionally Omitted];

	(f)	Any statement, representation or warranty made by Borrower or any endorser or Guarantor
	of the Obligations in connection with the Loan secured by this Mortgage, or in any supporting
	financial statement, shall be found to have been false or misleading in any material respect
	when given;

	(g)	The Borrower or any Guarantor of the Obligations shall suffer a material adverse change
	in its financial condition or shall generally not pay its debts as they become due or shall
	admit in writing its inability to pay its debts generally as they come due, or shall make a
	general assignment for the benefit of creditors; the Borrower or any Guarantor shall
	commence or consent to or acquiesce in the commencement of any case, proceeding or
	other action seeking reorganization, arrangement, adjustment, liquidation, dissolution or
	composition of its corporate structure or its debts under any law relating to bankruptcy,
	insolvency, reorganization or relief of debtors, or seeking appointment of a receiver, trustee,
	custodian or other similar official for it or for any substantial part of its property; or Borrower
	or any Guarantor shall take any corporate action to authorize any of the actions set forth
	above; or any case, proceeding or other action against Borrower or Guarantor shall be
	commenced seeking to have an order for relief entered against it as debtor, or seeking
	reorganization, arrangement, adjustment, liquidation, dissolution or composition of its
	corporate structure or its debts under any law relating to bankruptcy, insolvency,
	reorganization or relief of debtors, or seeking appointment of a receiver, trustee, custodian
	or other similar official for it or for all or any substantial part of its property, and such case,
	proceeding or other action (i) results in the entry of an order for relief against it which is not
	fully stayed within seven (7) business days after the entry thereof or (ii) remains undismissed
	for a period of sixty (60) days. Without limiting the foregoing, it shall be an Event of Default
	hereunder if, at any time while any or all of the Loan Amount remains unpaid, the Borrower's
	"Stockholders' Equity," as reported by Borrower to the Securities and Exchange Commission
	on Form 10Q or 10K, as applicable, shall at any time be less than Twenty-four Million Dollars
	($24,000,000.00).

	(h)	Any Hazardous Materials become present in or on the Mortgaged Property in violation of
	applicable laws;

	(i)	If at any time there is an unlawful discharge, deposit, injection, dumping, spilling, leaking,
	incineration or placing of any Hazardous Materials into or on the Mortgaged Property in
	violation of applicable laws; and

	(j)	If at any time, the use, generation, treatment, storage or disposal of any Hazardous
	Materials on the Mortgaged Property is in violation of the Environmental Laws.

7.2	Remedies

	After an Event of Default, Lender may, at its option and without notice, and without obligation
	to do any or all of the following:

	(a)	Exercise any of Lender's remedies provided in any of the Loan Documents;

	(b)	Declare the Loan Amount immediately due and payable;

	(c)	Apply to the Loan Amount any deposits or other sums credited by or due from Lender to
	Borrower;

	(d)	Take possession of the Mortgaged Property and operate the Mortgaged Property as a
	Lender in possession with all the same powers as could be exercised by a receiver;

	(e)	Make any payments required to be made by Borrower under the Loan Documents.  The
	amount of all such payments shall be immediately due and payable by Borrower, and until
	paid, shall be added to the Loan Amount and secured by the Loan Documents with the same
	priority as the face amount.  Such payments may include, but are not limited to, payments for
	taxes and other governmental levies, water rates, insurance premiums, maintenance,
	repairs or improvements of the Mortgaged Property;

	(f)	Perform any and all obligations of Borrower under the Loan Documents, including,
	without limitation, completing construction of the Improvements, as provided in the Loan
	Agreement, all without waiving any rights or releasing Borrower from any obligations
	thereunder;

	(g)	As to the fixtures, if and to the extent Lender deems such action to be necessary or
	appropriate, Lender may exercise any of the rights and remedies of a Secured Party under
	the Uniform Commercial Code in effect in the state(s) in which the fixtures are located;

	(h)	Exercise the STATUTORY POWER OF SALE; and

	(i)	Take such other actions or proceedings as Lender deems necessary or advisable to
	protect its interest in the Mortgaged Property.

	In the event of any foreclosure, at the option of Lender, the interest of the Borrower in the
	Premises may be sold together with any fixtures as a single unit pursuant to NH RSA
	Sections 479.27-a and 382-A:9-504.

Borrower shall not be personally liable for payment of the principal of the Note or interest thereon,
or performance of any obligation hereunder, and in the event of failure by Borrower to make
any such payment or perform any such obligation, the Lender will look solely to the Mortgaged
Property and such other collateral as has been, or hereafter shall be, given to secure payment
of the Note.  The foregoing limitation on liability shall not impair or otherwise affect the validity
or enforceability of (a) the debt evidenced by the Note or of any other obligations evidenced by
the Loan Documents or (b) the liens, security interests, rights and remedies (including, without
limitation, the remedies of foreclosure and/or sale) in favor of, or available to, the holder of the
Note with respect to the Mortgaged Property or any other property, security, collateral and/or
assets (including the proceeds thereof) encumbered, pledged or assigned by this Mortgage or
any other security for the Loan.  In addition, the foregoing limitation on recourse shall not limit
any obligations or be applicable with respect to: (i) liability under any guaranty(ies) or
indemnity(ies) delivered or afforded to the holder of this Note, including without limitation that
certain Environmental Indemnification Agreement of even date herewith made by Borrower in
favor of Lender; (ii) any fraud, misrepresentation or breach of trust; (iii) taxes of any kind (whether
characterized as transfer, gains or other taxes) payable in connection with the foreclosure sale
of the Mortgaged Property, irrespective of who pays such taxes; (iv) the application of any
insurance or condemnation proceeds or other funds or payments other than strictly in accordance
with the Loan Documents; (v) any waste in respect of the Mortgaged Property; (vi) any failure to
pay or discharge any real estate tax, other tax, assessment, fine, penalty or lien against the
Mortgaged Property; (vii) liability to said holder for the reimbursement to said holder, together
with interest as provided in the Loan Documents, of all sums advanced or expended by said
holder after or in respect of any default under the Loan Documents; (vii) liability to pay for the
premiums on and keep in full force and effect insurance in respect of the Mortgaged Property
in accordance with the Loan Documents; (viii) liability for Hazardous Substances (as defined in
the Mortgage) that may exist upon or be discharged from the Mortgaged Property; or (ix) any
failure to comply with any other obligation to be complied with by Borrower pursuant to the
Loan Documents (except the obligation to pay the principal of the Note and the interest thereon),
provided that Borrower shall be entitled to any notice and cure rights applicable to such
obligation as set forth in the applicable Loan Documents(s). Borrower shall in any event be and
shall remain personally liable for each of the matters to which reference is made in the
preceding sentence and the Lender may seek, obtain and enforce one or more money judgments
in any appropriate proceeding(s) with respect thereto.  The limitation on personal liability
contained in this paragraph shall become automatically null and void and shall be of no further
force or effect, and Borrower shall be and remain personally liable for payment of the principal
and interest thereon, in the event that Borrower, or anyone acting on behalf of Borrower, shall
(A) file a petition or answer seeking any relief of any kind under the bankruptcy or insolvency
laws of the United States or any state, or (B) assert in writing or in any legal proceedings of any
kind that any provisions of any of the Loan Documents are in whole or in part unenforceable,
invalid or not legally binding. Notwithstanding any provision hereof or of any other Loan
Document to the contrary, no officer, director, shareholder, employee or agent of Borrower shall
have any personal liability for the payment of the indebtedness evidenced by the Note or for the
performance of Borrower's other obligations under the Loan Documents.

7.3	Statutory Power of Sale

	This Mortgage is on the STATUTORY CONDITION and upon the further condition that all
	agreements of the Borrower contained in the Loan Documents be fully performed for any
	breach of which Lender shall have the STATUTORY POWER OF SALE.  In the event of the
	exercise of the STATUTORY POWER OF SALE, Lender may foreclose on and sell all or any
	part of the Mortgaged Property, and thereafter Lender shall continue to have the STATUTORY
	POWER OF SALE so long as any portion of the Mortgaged Property remains subject to this
	Mortgage.

7.4	No Waiver of Release

	No delay or omission on the part of Lender in exercising any right hereunder or under the
	Loan Documents shall operate as a waiver of such right or of any other right, and a waiver
	of any such right on any one occasion shall not be construed as a bar to or a waiver of any
	such right on any other occasion.  No sale of any of the Mortgaged Property, no forbearance
	on the part of Lender, no release or partial release of any of the Mortgaged Property, and
	no extension, whether oral or in writing, of the time for he payment of the whole or any part
	of the Loan Amount or any other indulgence given by Lender to Borrower or any other person
	or entity, shall operate to release or in any manner affect the lien of the Mortgage or the
	liability of Borrower, notice of any such extensions or indulgences being hereby waived by
	Borrower.

7.5	Cumulative Rights and Remedies

	Lender shall have the right to exercise any and all remedies under the Loan Documents
	until all Events of Default have been cured, and such remedies may be exercised individually,
	sequentially or in concert, all such remedies being cumulative, the exercise of one not being
	deemed a waiver of any of the others or a cure of any default.

7.6	Borrower's Waiver of Certain Rights

	Borrower waives any rights it may have to receive notice of any action or proceeding to
	enforce Lender's rights under any Loan Document other than the notices herein provided for.
	In the event of foreclosure, Borrower will not claim the benefit of any law now or hereafter
	in force providing for any appraisal, stay, extension or redemption.  Borrower waives all
	rights of redemption, appraisal, stay of execution, notice of acceleration and marshaling.

7.7	Effect of Exercise of Rights

	Any action taken or sums paid, and any costs or expenses incurred by Lender, including
	attorneys' fees, pursuant to Lender's exercise of its rights, shall as between the parties be
	deemed valid, so that in no event shall the necessity or validity of any such action or
	payments, costs or expenses be disputed.

7.8	Change in Law

	If any law as hereafter enacted changes in any way the laws applicable to mortgages or the
	taxation thereof or the manner of collection of any such taxes, so as to affect adversely and
	materially any rights of Lender or any provisions hereof, the Loan Amount hereby secured
	shall, at the election of the Lender, become due and payable on not less than 60 days prior
	written notice; provided, however, that if the Borrower can lawfully pay any amount or
	promptly perform any obligation, and forthwith pays or performs the same, so that any such
	change in law does not adversely and materially affect the rights of the Lender, the Loan
	Amount shall not be accelerated.


Article VIII

General

8.1	Lender's Expenses

	To the extent permitted by law, if Lender retains an attorney to collect any sums due under
	this Mortgage, enforce any of the provisions hereof, or otherwise protect Lender's interests,
	Borrower agrees to pay Lender, on demand, all costs and expenses in connection therewith,
	including all court costs and reasonable attorney's fees, whether or not suit is brought or
	prosecuted to completion, together with interest thereon at the rate applicable under the
	Note to amounts past due.

8.2	Indemnification

	Borrower agrees to hold harmless and indemnify Lender from all liability, loss, cost, damage,
	and expense from any claim for damage to property or death or injury to persons which may
	arise in connection with the construction, use, or occupancy of the Mortgaged Property,
	including any liability, loss, cost, damage or expense arising from a violation of the
	Environmental Laws.

8.3	Decisions of Lender

	Wherever in this Mortgage it is provided that (a) as a condition precedent to Borrower's
	undertaking certain action, Borrower shall be required to obtain Lender's consent or approval
	or (b) Lender shall have the right to make a determination (including, without limitation, a
	determination as to whether a matter is satisfactory to Lender), or if Borrower shall request
	that Lender take any action, then, unless expressly provided to the contrary in the applicable
	provision of this Mortgage, the decision whether to grant such consent or approval or to take
	the requested action, or the determination in question, shall be in the sole and exclusive
	discretion of Lender and shall be final and conclusive.  Wherever in this Mortgage it is stated
	that any consent or approval shall not be unreasonably withheld or that a determination to
	be made by Lender shall be subject to a specified standard, then, if a court of competent
	jurisdiction determines, without right to further appeal, that the consent or approval has been
	unreasonably withheld or that such specified standard has been met, the consent or approval
	shall be deemed granted or the standard shall be deemed met, as the case may be, and
	Lender, at the request of Borrower, shall deliver to Borrower written confirmation thereof.
	The obtaining of such consent or approval or determination that such standard has been met
	shall be Borrower's sole and exclusive remedy with respect to the subject matter of this
	section, and under no circumstance shall Lender, Lender's counsel or anyone else acting or
	purporting to act on Lender's behalf having any liability (whether in damages or otherwise)
	with respect thereto.  In any instance in which Borrower requests, or any Loan Document
	provides, that Lender shall consider granting its consent or approval or making a
	determination or taking some other action, Borrower shall, upon demand, pay all costs,
	expenses and attorneys' fees incurred by Lender in connection therewith.

8.4	Joint and Several Liability

	If more than one party executes this Mortgage the term Borrower shall mean all of them, and
	each of them shall be jointly and severally liable hereunder.

8.5	Captions

	Captions are used for convenience of reference only and are not to be construed as part of
	the terms of this Mortgage.

8.6	Severability

	The invalidity of any provisions of this Mortgage shall no way affect the validity of any other
	provision.

8.7	Singular and Plural

	Where required by the context the singular shall include the plural and the plural shall
	mean the singular.

8.8	Gender

	The masculine, feminine and neuter forms shall be interpreted interchangeably wherever
	the text requires.

8.9	Successors and Assigns

	This Mortgage is binding upon and shall insure to the benefit of the parties hereto and their
	heirs, successors, personal representatives, and assigns.

8.10	Notices

	All notices given hereunder shall be in writing and shall be deemed effective at the earlier
	of when delivered in hand or on the second business day after the same have been deposited
	in the United States mails, postage prepaid, certified or registered mail, return receipt
	requested (or, if sent by express delivery service, on the date delivered or tendered for
	delivery), addressed to Borrower and Lender at their addresses appearing on the first page
	hereof, or to such other address or addresses as the parties may from time to time specify by
	notice so given. In the case of any notice given to Lender, a copy of such notice shall be
	simultaneously be given to Stephen T. Langer, Esq., 40 Court Street, Suite 700,
	Boston, MA 02108, and in the case of any notice given to Borrower, a copy of such notice
	shall be simultaneously be given to John Haggerty, Esq., Goodwin Procter, LLP, Exchange
	Place, Boston, MA 02109.

8.11	Governing Law

	With respect to that portion of the Mortgaged Property located in the State of New Hampshire,
	the creation, perfection and enforcement of the lien created by this Mortgage shall be
	governed by, and construed and interpreted in accordance with, the laws of the State of New
	Hampshire, without reference to the principles of conflicts of laws, and with respect to that
	portion of the Mortgaged Property located in the Commonwealth of Massachusetts, the
	creation, perfection and enforcement of the lien created by this Mortgage shall be governed
	by, and construed and interpreted in accordance with, the laws of the Commonwealth of
	Massachusetts, without reference to the principles of conflicts of laws. Wherever possible,
	each provision of this Mortgage shall be interpreted in such a manner as to be effective and
	valid under applicable law, but if any provisions of this Mortgage shall conflict with, be
	prohibited by or invalid under, applicable law, such provision shall be ineffective to the
	extent of such prohibition or invalidity, without invalidating the remainder of such provision
	or the remaining provisions of this Mortgage. In the even that any provision or clause of this
	Mortgage conflicts with applicable law, such conflict shall not affect other provisions that
	can be given effect without the conflicting provision, and to this end, the provisions of this
	Mortgage are declared to be severable.

8.12	Jurisdiction

	Borrower agrees service of process may be made and personal jurisdiction obtained by
	serving Borrower at the address stated on the first page hereof. The Borrower irrevocably
	submits to the non-exclusive jurisdiction of any Massachusetts court or any federal court
	sitting within The Commonwealth of Massachusetts over any suit, action or proceeding arising
	out of or relating to this Note.  The Borrower irrevocably waives, to the fullest extent
	permitted by law, any objection which they may now or hereafter have to the laying of
	venue of any such suit, action or proceeding brought in such a court and any claim that any
	such suit, action or proceeding has been brought in an inconvenient forum.

8.13	Changes in Writing

	This Mortgage may not be changed, waived, or terminated except in a writing signed by the
	party against whom enforcement of the change, waiver, or termination is sought.


8.14	Other Representations and Warranties

	All statements contained in any loan application, certificate or other instrument delivered by
	Borrower to Lender or Lender's representatives in connection with the Loan secured by this
	Mortgage shall constitute representations and warranties made by Borrower hereunder.


EXECUTED under seal as of the date first above written.


				BORROWER:


				STOCKERYALE, INC.



				  By:
				       Name:
				       Title:  



STATE OF NEW HAMPSHIRE	)
COUNTY OF ROCKINGHAM 	) SS.

On this 27th day of December 2002, before me personally appeared _____________________,
who acknowledged himself to be the _________________________________ of StockerYale, Inc.,
a Massachusetts corporation, and in said capacity signed the foregoing instrument on behalf
StockerYale, Inc. for the purposes therein contained.
In witness whereof I hereunto set my hand and official seal.


___________________________
        Notary Public





CRES Stocker Mortgage v4.doc

EXHIBIT A

Description of the Mortgaged Property

A certain tract or parcel of land, with the buildings thereon, situated in Salem, Rockingham
County, State of New Hampshire and Methuen, Essex County, Commonwealth of Massachusetts,
as shown on a plan of land entitled "Property Survey Plan of Land of
Stocker & Yale, Inc."; 32 Hampshire Road, Town of Salem, Rockingham County,
New Hampshire, Town of Methuen, Essex County, Massachusetts, prepared by Sandford
Surveying and Engineering, dated 12/29/00 and recorded at the Rockingham County (NH)Registry
of Deeds as Plan # _____ and the Essex County  (MA) Registry of Deeds as Plan #_______, and
more particularly described as follows:

Beginning at the southwesterly corner of the granted premises by the intersection of Garabedian
Drive, a public way, and Hampshire Road, a public way, at an iron pipe set in the ground on the
Northerly side of said Hampshire Road as shown on said plan;

Thence running N 64° 12' 05"; W, 58.24 feet, along the northerly side of Hampshire Road to an
iron pipe set in the ground on the northerly side of Hampshire Road;

Thence running N 53° 38' 15" W, 265.76 feet, along the northerly side of Hampshire Road to an
iron pipe set in the ground on the northerly side of Hampshire Road;

Thence running on an arch with a radius of 830 feet, 219.70 feet along the northerly side of
Hampshire Road to an iron pipe set in the ground at the intersection of the northerly side of
Hampshire Road and the Massachusetts/New Hampshire boundary line as shown on said plan;

Thence running N 38° 28' 17" W, 27.33 feet by the northerly side of said Hampshire Road to the
point where the northerly side of Hampshire Road intersects with the center line of the ditch as
shown on said plan;

Thence turning and running S 31° 35' 10" W, 82.10 feet along the center of the ditch to a point
shown on said plan;

Thence running S 28° 30' 05" E, 762.90 feet along the center of the ditch to a point shown on the
said plan at the northeasterly corner of the premises;

Thence turning and running S 61° 20' 07" E, 503.90 feet, along land now or formerly of
Construction Industries, Inc. to an pipe set in the ground by a fire hydrant on the easterly side
of Garabedian Drive as shown on said plan;

Thence running on an arch with the radius of 750 feet, 261.32 feet, along the easterly side of the
said Garabedian Drive, to an iron pipe set in the ground on the easterly side of Garabedian Drive;

Thence proceeding along the easterly side of Garabedian Drive, N 47° 31' 15" E, 100.26 feet to a
nail set in the ground on the easterly side of Garabedian Drive;

Thence proceeding on an arch with a radius of 700 feet, 269.46 feet along the easterly side of
Garabedian Drive to an iron pipe set in the ground on the easterly side of Garabedian Drive;

Thence running along the easterly side of Garabedian Drive, N 25° 47' 35" E, 80.09 feet to an
iron pipe set in the ground on the easterly side of Garabedian Drive;

Thence running on an arch with the radius of 50 feet 78.54 feet to the point of beginning.




EXHIBIT B

Permitted Encumbrances

1. 	Liens for real estate taxes, assessments and any municipal charges not yet due and payable
as of the date hereof;

2. 	Utility Easement granted by Raymond C. Caron and Genevieve A. Caron to Granite State
Electric Company, recorded with the Rockingham County Registry of Deeds in Book 1564,
Page 374;

3. 	Covenant of Trustees of the M&D Realty Trust in favor of the Town of Salem dated
May 22, 1970, recorded with the Rockingham County Registry of Deeds in Book 2021, Page 1; and

4. 	Notice of Inclusion within the Groundwater Monitoring Zone recorded with the Rockingham
County Registry of Deeds in Book 3396, Page 741.



CRES Stocker Mortgage v4.doc

Exhibit 10.15(b)  /  STKR 2002 FORM 10-K

EX-9

The undersigned officer of StockerYale, Inc. (the "Company") hereby certifies that the Company's annual report on Form 10-K for the year period ended December 31, 2002 (the "Report"), as filed with the Securities and Exchange Commission on the date hereof, fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended, and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. This certification is provided solely pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.   A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

Date: April 15, 2003	Name:	/s/ Francis J. O'Brien
		Francis J. O'Brien
	Title:	Chief Financial Officer and Treasurer

Exhibit 99.3  /  STKR 2002 FORM 10-K