UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~June~~September 30, 2009

¨	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: 000-27372

StockerYale, Inc.

(Exact name of registrant as specified in its charter)

Massachusetts	04-2114473
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

32 Hampshire Road Salem, New Hampshire	03079
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (603) 893-8778

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 ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨	Accelerated filer ¨	Non-accelerated filer ¨	Smaller reporting company x
		(Do not check if a smaller reporting company)

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

As of ~~July~~October 2426, 2009, there were 44,~~870~~868,~~932~~432 shares of the registrant’s common stock issued and outstanding.

STOCKERYALE, INC.

INDEX TO FORM 10-Q

		~~Page~~	Page
PART I - FINANCIAL INFORMATION
Item 1	Financial Statements	3	3
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22	20
Item 3	Quantitative and Qualitative Disclosures About Market Risk	25	23
Item 4	Controls and Procedures	25
Item 4T	Controls and Procedures		23
PART II - OTHER INFORMATION
Item 1	Legal Proceedings	25	24
Item 1A	Risk Factors	26	24
Item 5	Other Information	26	24
Item 6	Exhibits	27	24

Item 1.

Financial Statements.

STOCKERYALE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

In thousands except share and per share data

Unaudited

	June 30, 2009			December 31, 2008
	September 30, 2009			December 31, 2008
Assets
Current assets:
Cash and cash equivalents	$	1,~~165~~223		$	1,635
Restricted cash		8			7
Accounts receivable less allowances of $70 at June 30, 2009 and $115 at December 31, 2008		3,425			3,859
Accounts receivable less allowances of $14 at September 30, 2009 and $39 at December 31, 2008		1,169			1,673
Inventories		31,~~945~~415			31,~~851~~418
Prepaid expenses and other current assets		~~476~~422			~~395~~114
Total current assets		9,019			9,747
Current assets-discontinued operations		4,696			4,900
Net property, plant and equipment		8,317			8,496
Total current assets		8,933			9,747
Goodwill		7,138			6,588
Net property, plant and equipment		3,929			4,241
Acquired intangible assets, net		1,774			1,963
Goodwill		4,799			4,410
Other long-term assets		227			648
Acquired intangible assets, net		1,391			1,795
Total assets	$	26,475		$	27,442
Other long-term assets		2			436
Long-term assets-discontinued operations		6,432			6,813
Total assets	$	25,486		$	27,442
Liabilities and Stockholders’ Equity
Current liabilities:
Revolving lines of credit	$	34,~~592~~018		$	43,~~118~~869
Current portion of long-term debt, net of unamortized discount of $720 at June 30, 2009 and $856 at December 31, 2008		6,723			3,869
Current portion of long-term debt, net of unamortized discount of $604 at September 30, 2009 and $856 at December 31, 2008		6,934			4,118
Current portion of capital and financing lease obligations		~~561~~530			~~576~~563
Accounts payable		32,~~603~~235			32,~~874~~829
Accrued expenses		41,~~015~~715			~~2,496~~916
Total current liabilities		18,494			14,933
Current liabilities-discontinued operations		3,379			2,638
Long-term debt, net of unamortized discount of $360 at June 30, 2009 and $658 at December 31, 2008		3,809			6,372
Total current liabilities		18,811			14,933
Capital and financing lease obligations, net of current portion		3,302			3,372
Long-term debt, net of unamortized discount of $268 at September 30, 2009 and $658 at December 31, 2008		3,789			6,372
Warrant liability		146			—
Capital and financing lease obligations, net of current portion		3,224			3,320
Deferred income taxes, net		364			486
Warrant liability		199			—
Total liabilities		26,115			25,163
Deferred income taxes, net		151			486
Stockholders’ equity:
Long-term liabilities-discontinued operations		43			52
Common stock, par value $0.001; 100,000,000 shares authorized; 44,871,081 shares issued and outstanding at June 30, 2009 and 43,464,413 at December 31, 2008		45			43
Total liabilities		26,217			25,163
Paid-in capital		102,621			103,270
Stockholders’ equity (deficit):
Accumulated other comprehensive income		2,367			2,518
Common stock, par value $0.001; 100,000,000 shares authorized; 44,868,432 shares issued and outstanding at September 30, 2009 and 43,464,413 shares issued and outstanding at December 31, 2008		45			43
Accumulated deficit		(104,673	)		(103,552	)
Paid-in capital		102,720			103,270
Total stockholders’ equity		360			2,279
Accumulated other comprehensive income		2,628			2,518
Total liabilities and stockholders’ equity	$	26,475		$	27,442
Accumulated deficit		(106,124	)		(103,552	)
Total stockholders’ equity (deficit)		(731	)		2,279
Total liabilities and stockholders’ equity (deficit)	$	25,486		$	27,442

See notes to unaudited condensed consolidated financial statements.

STOCKERYALE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Unaudited

	Three Months Ended June 30,						Six Months Ended June 30,
	Three Months Ended September 30,						Nine months Ended September 30,
	2009			2008			2009			2008
	In thousands except per share data
Revenue	$	62,~~017~~347		$	83,~~547~~723		$	127,~~336~~801		$	1611,~~609~~493
Cost of sales		31,~~987~~628			52,~~643~~378			75,~~916~~588			117,~~246~~882
Gross profit		~~2,030~~719			21,~~904~~345			42,~~420~~213			53,~~363~~611
Operating expenses:
Selling expenses		~~691~~386			~~920~~436			1,~~485~~199			21,~~055~~498
General and administrative		~~1,335~~943			21,~~433~~953			23,~~910~~233			45,~~194~~062
Research and development		~~714~~155			~~827~~136			~~1,440~~424			~~1,587~~388
Amortization of intangibles		~~209~~198			~~295~~228			~~405~~559			~~625~~809
Loss from operations		(~~919~~963	)		(1,~~571~~408	)		(13,~~820~~202	)		(34,~~098~~146	)
Other (income) and expense, net		~~(1,390~~412	)		83688			(~~1,286~~930	)		~~230~~953
Amortization of debt discount and financing costs		~~708~~207			~~392~~1,377			1,~~173~~382			~~646~~2,024
Interest expense		~~317~~47			~~303~~42			~~634~~121			~~622~~115
Loss from continuing operations before income tax benefit		(~~554~~1,629	)		(23,~~349~~515	)		(23,~~341~~775	)		(47,~~596~~238	)
Income tax provision / (benefit)		164			(62	)		(9	)		(122	)
Income tax benefit		(205	)		(80	)		(214	)		(203	)
Loss from continuing operations		(~~718~~1,424	)		(23,~~287~~435	)		(23,~~332~~561	)		(47,~~474~~035	)
Income from discontinued operations, net of tax		-			2			7			23
Income / (loss) from discontinued operations, net of tax		(26	)		336			(214	)		(514	)
Net loss	$	(~~718~~1,450	)	$	(23,~~285~~099	)	$	(23,~~325~~775	)	$	(47,~~451~~549	)
Basic and diluted net loss per share from continuing operations	$	(0.0203	)	$	(0.0609	)	$	(0.0508	)	$	(0.1219	)
Basic and diluted net income per share from discontinued operations	$	0.00		$	0.00		$	0.00		$	0.00
Basic and diluted net income (loss) per share from discontinued operations	$	0.00		$	0.01		$	(0.01	)	$	(0.01	)
Basic and diluted net loss per share	$	(0.0203	)	$	(0.0608	)	$	(0.0509	)	$	(0.1220	)
Basic and diluted weighted average shares outstanding:		4344,~~693~~109			3739,~~585~~189			43,~~166~~480			37,~~156~~834

See notes to unaudited condensed consolidated financial statements.

STOCKERYALE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

In thousands

Unaudited

	Six Months Ended June 30
	Nine months Ended
	September 30
	2009			2008
	In thousands
Operations
Net loss	$	(23,~~325~~775	)	$	(47,~~451~~549	)
Income from discontinued operations, net of tax		7			23
Loss from discontinued operations, net of tax		214			514
Loss from continuing operations		(23,~~332~~561	)		(47,~~474~~035	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Stock based compensation		427			~~563~~732
Depreciation and amortization		~~1,323~~970			1,~~661~~291
Asset Impairment		—			36
Amortization of debt discount and financing costs		1,382			2,024
Amortization of debt discount and financing costs		1,173			646
Non cash interest expense		201			214
Non cash interest expense		136			143
Change in fair value of warrants		(92	)		—
Change in fair value of warrants		(146	)		—
Provision for inventories		39			28
Provision for inventories		185			17
(Gain) loss on disposal of assets		(32	)		103
Provision for bad debts		~~(29~~15	)		3424
Deferred income taxes		(9214	)		(~~123~~190	)
Other change in assets and liabilities:
Accounts receivable		~~563~~609			(65454	)
Inventories		~~(58~~81	)		~~(246~~147	)
Prepaid expenses and other current assets		(56306	)		(96115	)
Accounts payable		(~~302~~706	)		~~354~~1,392
Accrued expenses		~~645~~356			~~(196~~38	)
Other assets and liabilities		1112			1413
Net cash provided by (used in) continuing operations		1,531			(1,732	)
Net cash used in continuing operations		(819	)		(1,788	)
Net cash used in discontinued operations		—			(5	)
Net cash provided by (used in) discontinued operations		1,508			(1,092	)
Net cash provided by (used in) operating activities		~~1,531~~689			(12,~~737~~880	)
Investing
Payments of financing obligation.		(164	)		(127	)
Proceeds from sale of assets		—			38
Purchases of plant and equipment		(356	)		(105	)
Payments of financing obligation		(246	)		(191	)
Net cash used in continuing investing activities		(520	)		(232	)
Purchases of property, plant and equipment		(36	)		(55	)
Net cash provided by discontinued operations		7			28
Net cash used in continuing investing activities		(282	)		(208	)
Net cash used in investing activities		(513	)		(204	)
Net cash used in discontinued operations		(157	)		(94	)
Net cash used in investing activities		(439	)		(302	)
Financing
Net proceeds from sale of common stock		12			—
Proceeds from issuance of notes payable		500			~~500~~1,959
Borrowings/(Repayments) of revolving credit facilities, net		(377	)		1,678
Borrowings of revolving credit facilities, net		78			1,881
Principal repayment of long-term debt		(~~600~~686	)		(~~995~~1,411	)
Debt issuance costs		—			(1121	)
Net cash provided by (used in) financing activities		(465	)		1,172
Restricted cash related to credit facilities		(1	)		1
Effect of exchange rate on cash		(1,023	)		39
Net cash provided by (used in) continuing financing activities...		(97	)		2,409
Net change in cash and equivalents.		(470	)		(730	)
Net cash used in discontinued operations		(8	)		(6	)
Net cash provided by (used in) financing activities...		(105	)		2,403
Effect of exchange rate on cash		(557	)		725
Net change in cash and equivalents		(412	)		(54	)
Cash and equivalents, beginning of period		1,635			1,577
Cash and equivalents, end of period	$	1,~~165~~223		$	~~847~~1,523
Supplemental disclosure of cash flow information
Cash paid for interest	$	~~577~~137		$	~~584~~123
Assets acquired under lease arrangements	$	~~276~~371		$	—
Issuance of restricted stock	$	—		$	114
Issuance of common stock to settle liabilities	$	370		$	~~202~~214
Common stock issued with financing	$	—		$	1,~~012~~013
Fair value of warrant modifications and issuances (in connection with financing)	$	38		$	~~477~~816

See notes to unaudited condensed consolidated financial statements.

STOCKERYALE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1) ORGANIZATION AND BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared by StockerYale, Inc. (the “Company”) and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary for a fair statement of ~~(i)~~ the results of operations for the three and ~~six~~nine month ~~periods~~ periods ended ~~June~~September 30, 2009 and 2008~~, (ii)~~; the financial position at ~~June~~ September 30, 2009 and December 31, 2008, and ~~(iii)~~ the cash flows for the ~~six month~~nine month periods ended ~~June~~September 30, 2009 and 2008. These interim results are not necessarily indicative of results for a full year or any other interim period.

The accompanying consolidated financial statements and notes are condensed as permitted by Form 10-Q and do not contain certain information included in the annual financial statements and notes of the Company. These statements are prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company’s continuation as a going concern is dependent on its ability to generate sufficient cash flow to meet its obligations on a timely basis through improved operations and/or additional financing. These unaudited condensed consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 ~~and the unaudited condensed consolidated financial statements and notes thereto included in the Company’s quarterly report on Form 10-Q for the quarter ended March 31, 2009~~.

The Company took a number of actions during 2008 and the first ~~half~~nine months of 2009 to to restructure its debt, improve its operational efficiency and its overall ~~financial~~ ~~performance. In~~financial addition, in response to the general economic slowdown that began in late 2008, management initiated a number of actions to improve cash flow and liquidity recognizing that the economy could negatively impact the future performance ~~of the Company~~. ~~These actions include:~~

·On October ~~Customer-driven~~13, ~~new~~2009, the Company and its wholly owned subsidiary, StockerYale Canada, Inc. (“SYC”), sold substantially all North American assets and rights of SYC and the Company's specialty optical fiber product ~~development~~line to ~~provide~~Coherent ~~our~~Inc. ~~customers~~The sale price consisted of a cash payment of $15,000,000 and ~~potential~~the ~~customers~~assumption of certain liabilities, including approximately $3,400,000 of accounts payable, accrued expenses and other obligations associated with anthe ~~array~~sold assets. Proceeds from the transaction were used to pay off in full all obligations owed to Laurus Master Fund, Ltd. and its related entities (approximately $7,900,000 including fees), fees related to the transaction of approximately ~~leading~~$850,000, ~~edge~~the ~~products;~~settlement of various obligations of approximately $950,000, and for working capital and general corporate purposes for the Company's ongoing and future operations. The Company expects to record a gain in the fourth quarter relating to the consummated transaction. In addition, the current and previous financial statements have been restated to present the entities sold as discontinued operations (see Note 15).

·The Company ~~Reduction~~will incontinue ~~our~~to ~~overall~~operate ~~cost~~its ~~structure~~LED systems and Photonic Products businesses, which are based in aIreland ~~variety~~and ofthe ~~ways~~United ~~including:~~Kingdom. ~~reduction~~In ofthe ~~work~~past, ~~force~~the Company reported three segments: lasers, ~~salary~~Photonic ~~reductions~~Products, ~~improvements~~and inoptical components. All ~~supply~~of ~~chain~~the ~~management~~optical component segment and ~~material~~a ~~costs;~~portion of the laser segment were sold.

·As ~~Improvements~~a result inof ~~working~~the ~~capital~~Company's ~~through~~reduced ~~focused~~debt levels and its focus on two core business segments, management ofbelieves ~~inventory~~that ~~and~~it ~~accounts~~has ~~receivable;~~adequate ~~and~~capital to sustain current operations.

·On October ~~Further~~7, ~~cost reductions~~2009, asthe ~~necessary~~Company and ~~able~~its wholly owned subsidiary, inStockerYale ~~order~~UK Limited, amended the bonds held by the former shareholders of Photonic Products Ltd. which were originally scheduled to ~~improve~~mature ~~cash~~on ~~flow~~October 31, 2009. The amendment deferred principal amounts originally due October 31, 2009 to a monthly payment schedule over the period from November 1, 2009 through October 31, 2010 and increased the interest rate. See footnote (14).

The Company is considering different ways to raise additional capital including the sale of our equity securities, offerings of debt securities, or borrowings from financial institutions. The Company is in discussions with potential lenders to refinance the North American revolving credit facility as well as potential lenders to refinance portions of its term debt. However, there can be no assurance that such activities will result in refinancing, and if we were able to refinance our indebtedness, such terms may be less favorable to the Company than the current terms. The Company has engaged Needham & Company, LLC to assist us in reviewing and evaluating our financial and strategic alternatives.

The Company intends to pursue various options to finance and fund operations, as necessary, through the end of 2009. The Company cannot be sure of the timing or terms of any borrowing arrangements or equity offerings, or that the Company will be able to consummate one or more of these options. If the Company does not achieve these goals in 2009, it would implement contingency plans for additional cost reductions; however, there is a possibility that it would not have adequate capital to sustain our current operations.

The Company’s common stock trades on the OTC Bulletin Board under the ticker symbol “STKR.OB.”

(2) USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) 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.

(3) RECENT ACCOUNTING PRONOUNCEMENTS

~~FSP~~Revenue Recognition. In NoOctober 2009, the Financial Accounting Standards Board (FASB) issued amended revenue recognition guidance for arrangements with multiple deliverables. ~~FAS~~The ~~115-2~~new guidance eliminates the residual method of revenue recognition and ~~FAS~~allows ~~124~~the use of management’s best estimate of selling price for individual elements of an arrangement when vendor specific objective evidence (VSOE), vendor objective evidence (VOE) or third-2party evidence (TPE) is unavailable. For the company, ~~Recognition~~this ~~and~~guidance ~~Presentation~~is effective for all new or materially modified arrangements entered into on or after January 1, 2011 with earlier application permitted as of the beginning of a fiscal year. Full ~~Other-Than-Temporary~~retrospective ~~Impairments~~application of the new guidance is optional. The company is currently assessing its implementation of this new guidance, but does not expect a material impact on the Consolidated Financial Statements.

Business Combinations. In ~~April 2009~~December 2007, the Financial Accounting Standards Board (“FASB”) issued ~~FSP~~new Noguidance on business combinations. This ~~FAS~~guidance establishes ~~115-2~~principles and ~~FAS~~requirements ~~124-2,~~for ~~"Recognition~~how ~~and~~the Company: ~~Presentation~~(1) recognizes ofand ~~Other-Than-Temporary~~measures ~~Impairments."~~in ~~FSP~~its ~~No.~~financial ~~FAS~~statements ~~115-2~~the identifiable assets acquired, the liabilities assumed, and ~~FAS~~any noncontrolling interest in the ~~124-~~acquiree; (2) recognizes ~~amends~~and measures the ~~other-than-temporary~~goodwill ~~impairment~~acquired ~~guidance~~in ~~for~~the ~~debt~~business combination ~~securities~~or ~~to make~~a ~~the~~gain ~~guidance~~from ~~more~~a ~~operational~~bargain purchase; and (3) determines what information to ~~improve~~disclose ~~the~~to ~~presentation~~enable ~~and disclosure~~users of ~~other-than-temporary~~the ~~impairments~~financial onstatements ~~debt~~to evaluate the nature and ~~equity~~financial ~~securities~~effects in of the ~~financial~~business ~~statements~~combination. The ~~This~~business combinations guidance ~~does~~also ~~not~~requires ~~amend~~acquisition-related ~~existing~~transaction ~~recognition~~ and ~~measurement~~restructuring ~~guidance~~costs ~~related~~ to ~~other-~~be expensed rather than~~-temporary~~ ~~impairments~~treated as part of ~~equity~~the cost of ~~securities~~the acquisition. This ~~The~~guidance ~~provisions~~applies ofprospectively ~~FSP~~to ~~No.~~business combinations ~~FAS~~for ~~115-2~~which ~~and~~the ~~FAS~~acquisition ~~124-2~~date ~~are~~is ~~effective~~on ~~for interim~~or ~~and~~after the beginning of the first annual reporting ~~periods~~period ~~ending~~beginning ~~after~~on ~~June~~or after December 15, ~~2009~~ 2008. The Company adopted ~~FSP~~the ~~No.~~business ~~FAS~~combination ~~115-2~~guidance ~~and FAS 124-2~~ on ~~April~~ January 1, 2009, and ~~which~~will ~~did~~only ~~not~~impact ~~have~~the ~~a material~~Company ~~effect~~if onany ~~its~~acquisitions are ~~consolidated~~completed ~~financial statements~~subsequently.

~~FSP~~In April No2009, the FASB issued guidance relating to accounting for assets acquired and liabilities assumed in a business combination that arise from contingencies. This ~~FAS~~pronouncement ~~107-1~~amends the guidance on business combinations to clarify the initial and ~~APB~~subsequent Norecognition, subsequent accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. This 28pronouncement requires that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value, as determined in accordance with the fair value measurements guidance, if the acquisition-date fair value can be reasonably estimated. If the acquisition-date fair value of an asset or liability cannot be reasonably estimated, the asset or liability would be measured at the amount that would be recognized in accordance with the accounting guidance for contingencies. This pronouncement became effective for the Company as of January 1, ~~Interim~~2009, ~~Disclosures~~and ~~about~~the ~~Fair~~provisions ~~Value~~of the pronouncement are applied prospectively to business combinations with an acquisition date on or after the date the guidance became effective. The adoption of this pronouncement did not have a material impact on the Company’s ~~Financial~~financial ~~Instruments~~position or results of operations.

Fair Value Measurements and Disclosures. In April 2009, the FASB issued ~~FSP~~additional ~~No.~~guidance ~~FAS~~on fair ~~107-1~~value measurements and ~~APB No~~disclosures. Fair ~~28-1,~~value ~~"Interim~~is ~~Disclosures~~defined as the ~~about~~price ~~Fair~~that ~~Value~~would ofbe ~~Financial~~received ~~Instruments"~~to ~~which~~sell ~~amends~~an ~~SFAS~~asset ~~No.~~or ~~107, Disclosures~~paid ~~about~~to ~~Fair~~transfer ~~Value~~a ofliability ~~Financial~~in an ~~Instruments,~~orderly totransaction ~~require~~between ~~disclosures~~market participants under current market ~~about~~conditions. The ~~fair~~new ~~value~~guidance requires an evaluation of ~~financial~~whether ~~instruments~~there ~~for~~has been ~~interim~~a ~~reporting~~significant ~~periods~~decrease in the volume and level of ~~publicly~~ ~~traded~~activity ~~companies,~~for asthe ~~well~~asset asor liability in ~~annual~~relation ~~financial~~to ~~statements.~~normal ~~This~~market ~~FSP also~~activity ~~amends~~for ~~APB~~the ~~Opinion~~asset Noor liability. If ~~28,~~there ~~Interim~~has ~~Financial~~been ~~Reporting~~a significant decrease in activity, transactions or quoted prices may not be indicative of fair value and a significant adjustment may need to ~~require~~be made to those prices to estimate fair ~~disclosures~~value. Additionally, inan ~~summarized~~entity ~~financial~~must ~~information~~consider atwhether ~~interim~~the ~~reporting~~observed transaction ~~periods~~was orderly (that is, not distressed or forced). If the ~~FSP~~transaction ~~FAS~~was ~~107-1~~orderly, ~~and~~the ~~APB~~obtained ~~28-1~~price ~~are~~can ~~effective~~be considered a relevant, observable input for ~~interim~~determining ~~reporting~~fair ~~periods~~value. If ~~ending after~~the ~~June~~transaction 15is not orderly, ~~2009.~~other ~~The~~valuation ~~Company~~techniques ~~adopted~~must ~~FSP~~be Noused when estimating fair value. This ~~FAS~~guidance, ~~107-1~~which ~~and~~was ~~APB~~applied ~~No.~~by ~~28-1~~the ~~on April~~Company 1prospectively as of June 30, 2009, ~~which~~ did not ~~have~~impact athe ~~material~~Company’s ~~effect~~results onof ~~its~~operations, cash flows or financial ~~statement disclosures~~position.

~~EITF~~In August ~~07-05~~2009, ~~Determining~~the ~~Whether~~FASB anissued ~~Instrument~~additional ~~(or~~guidance ~~Embedded~~on ~~Feature)~~the Isfair ~~Indexed~~value tomeasurement of liabilities. The new guidance provides clarification on the measurement and reporting of a liability in circumstances in which a quoted price in an ~~Entity's~~active ~~Own~~market ~~Stock~~for the identical liability is not available. This guidance is effective for the reporting period beginning October 1, 2009.

InDerivatives ~~June~~and Hedging. In March 2008, the ~~Emerging~~FASB ~~Issues~~issued ~~Task~~new ~~Force~~disclosure ~~ratified Consensus No. 07-05 Determining~~requirements ~~Whether~~for anderivative instruments ~~Instrument~~and ~~(or~~hedging ~~Embedded~~activities. The ~~Feature)~~new Isdisclosure ~~Indexed~~requirements towill anprovide ~~Entity's~~users ~~Own Stock for periods beginning~~of ~~after~~financial ~~December~~statements ~~15,~~with ~~2008.~~an ~~EITF~~enhanced ~~07-05~~understanding ~~applies~~of: (1) how ~~to any freestanding financial~~and ~~instrument~~why oran ~~embedded~~entity ~~features~~uses ~~that~~derivative ~~have~~instruments; ~~the~~(2) how ~~characteristics of a~~ derivative, instruments asand ~~defined~~related byhedged ~~SFAS~~items ~~No. 133,~~are ~~“Accounting~~accounted for; ~~Derivative~~and ~~Instruments~~(3) how ~~and~~derivative ~~Hedging~~instruments ~~Activities,”~~ and torelated ~~any~~hedged ~~freestanding~~items ~~financial~~affect ~~instruments that are potentially settled in~~ an entity’s ~~own~~financial ~~common~~position, financial ~~stock. The~~performance ~~Company adopted~~and ~~EITF~~cash ~~07-05~~flows. This onguidance ~~January~~requires 1,qualitative disclosures ~~2009~~about objectives and ~~determined~~strategies ~~that~~for ~~certain~~using ~~warrants~~derivatives, ~~that~~quantitative ~~are~~disclosures ~~contractually~~about ~~indexed~~fair tovalue ~~2,375,000~~amounts ~~shares~~ of ~~Common~~and ~~Stock~~gains and ~~that~~losses ~~were previously~~on ~~treated as stockholders’ equity under the~~ derivative ~~treatment~~ ~~exemption~~instruments ~~were~~and nodisclosures ~~longer~~about ~~eligible~~credit-risk-related ~~for~~contingent ~~equity~~features ~~treatment. These~~in ~~warrants~~derivative ~~have~~instruments. This anstatement ~~exercise~~applies ~~price~~to ofall ~~$1.15~~entities and ~~expire~~all derivative ~~in October 2016~~instruments. ~~Effective~~ This ~~January~~guidance 1,is ~~2009~~effective ~~the~~for ~~fair value of these common stock purchase~~financial ~~warrants,~~statements ~~which~~issued ~~have~~for ~~exercise~~fiscal ~~price~~years ~~reset~~and ~~features,~~interim ~~was~~periods ~~reclassified~~beginning ~~from equity~~after toNovember 15, ~~liability~~2008. The ~~status~~Company asadopted ifthis ~~these~~guidance ~~warrants were treated as a derivative liability~~on ~~since their date of issue in October 2006. On~~ January 1, 2009, ~~the Company reclassified from additional paid-in capital, as a cumulative effect adjustment, $1.2 million to beginning retained earnings~~ and ~~$0.3 million~~it todid ~~a long-term~~not ~~warrant~~impact ~~liability. The~~the Company’s ~~recognized~~results ~~a gain~~ of ~~approximately~~ ~~$145~~operations,~~000 from the change in fair value of these warrants for the~~ ~~six~~cash ~~months~~flows ~~ended~~or ~~June~~financial ~~30, 2009~~position.

The common stock purchase warrants were not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign operation. The warrants do not qualify for hedge accounting, and all future changes in the fair value of these warrants will be recognized currently in earnings until the warrants are exercised or expire.

These common stock purchase warrants do not trade in an active securities market, and we estimated the fair value of these warrants using the Black-Scholes option pricing model using the following assumptions:

	June 30, 2009			January 1, 2009
Volatility		104.8	%		101.4	%
Expected option life	7.3 years			7.8 years
Interest rate (risk free)		3.33	%		2.46	%
Dividends	$	0.0		$	0.0

SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities”, an Amendment of FASB Statement No. 133

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”), an amendment of FASB Statement No. 133, which requires additional disclosures about the objectives of the derivative instruments and hedging activities, the method of accounting for such instruments under SFAS No. 133 and its related interpretations, and a tabular disclosure of the effects of such instruments and related hedged items on our financial position, financial performance, and cash flows. The Company adopted SFAS 161 on January 1, 2009, and the adoption did not have a material impact on its consolidated financial statements.

~~SFAS~~ In ~~160~~June 2008, ~~“Noncontrolling~~the ~~Interests~~FASB inratified ~~Consolidated~~the ~~Financial~~consensus ~~Statements”,~~reached by the Emerging Issues Task Force (EITF) which clarifies the determination of whether an instrument (or an ~~Amendment~~embedded feature) is indexed to an entity’s own stock, which would qualify as a scope exception to derivative accounting. The Company adopted this guidance as of ~~ARB~~January 511, 2009 and it did not have a material impact on the Company’s consolidated financial statements.

InFinancial ~~December~~Instruments. In ~~2007~~April 2009, the FASB issued ~~SFAS~~guidance ~~160,~~to ~~Noncontrolling~~require ~~Interests~~disclosures ~~in Consolidated~~about ~~Financial~~fair ~~Statements,~~value ~~an amendment~~ of ~~ARB~~financial ~~51, Consolidated Financial~~instruments ~~Statements.~~in ~~SFAS~~interim ~~160~~financial ~~provides guidance for the accounting~~statements, ~~reporting~~in ~~and disclosure~~addition ofto ~~noncontrolling interests, also called minority interest. A minority interest represents~~ the ~~portion~~annual offinancial ~~equity (net assets) in a subsidiary~~statements ~~not~~as ~~attributable,~~already ~~directly~~required. This ~~or indirectly~~guidance, towhich awas ~~parent.~~applied ~~The~~by ~~Company~~the ~~adopted SFAS~~Company ~~160~~prospectively onas ~~January~~of June 130, 2009, ~~and the adoption~~ did not have a material impact on the ~~its~~Company’s ~~consolidated~~results of operations, cash flows or financial ~~statements~~position.

~~SFAS~~Subsequent NoEvents. In May 2009, the FASB issued guidance on subsequent events which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This guidance is based on the same principles as currently exist in auditing standards and was issued by the FASB to include accounting guidance that originated as auditing standards into the body of authoritative literature issued by the FASB. The standard addresses the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The Company adopted this guidance during the quarterly period ended June ~~141(R)~~30, ~~“Business~~2009. For ~~Combinations”~~the quarter ended September 30, 2009, the Company evaluated subsequent events through November 19, 2009, which was the date the accompanying financial statements were available to be issued.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, which replaces SFAS No. 141, Business Combinations. SFAS 141(R) (i) requires the acquiring entity in a business combination to record all assets acquired and liabilities assumed at their acquisition-date fair values, (ii) changes the recognition of assets acquired and liabilities assumed arising from contingencies, (iii) requires contingent consideration to be recognized at its fair value on the acquisition date and, for certain arrangements, requires changes in fair value to be recognized in earnings until settled, (iv) requires companies to revise any previously issued post-acquisition financial information to reflect any adjustments as if they had been recorded on the acquisition date, (v) requires the reversals of valuation allowances related to acquired deferred tax assets and changes to acquired income tax uncertainties to be recognized in earnings, and (vi) requires the expensing of acquisition-related costs as incurred. SFAS 141(R) also requires additional disclosure of information surrounding a business combination to enhance financial statement users’ understanding of the nature and financial impact of the business combination. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, with the exception of accounting for changes in a valuation allowance for acquired deferred tax assets and the resolution of uncertain tax positions accounted for under FIN 48, which is effective on January 1, 2009 for all acquisitions. The Company adopted SFAS 141(R) on January 1, 2009 and it will have an impact on accounting, but the impact is dependent upon the acquisitions made after adoption.

FSP No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or the Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly

In April 2009, the FASB issued FSP No. FAS 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or the Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly," ("FSP No. 157-4"). FSP No. FAS 157-4 amends Statement No. 157 to provide additional guidance on (i) estimating fair value when the volume and level of activity for an asset or liability have significantly decreased in relation to normal market activity for the asset or liability, and (ii) circumstances that may indicate that a transaction is not orderly. FSP No. FAS 157-4 also requires additional disclosures about fair value measurements in interim and annual reporting periods. FSP No. FAS 157-4 is effective for interim and annual reporting periods ending after June 15, 2009. The Company adopted FSP No. FAS 157-4 on April 1, 2009 which did not have a material effect on its consolidated financial statements.

SFAS No. 157, Defining Fair Value Measurements, and FASB Staff Position 157-2

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. In February 2008, the FASB deferred the effective date of SFAS 157 by one year for certain non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). On January 1, 2008, the Company adopted the provisions of SFAS 157, except as it applies to those nonfinancial assets and nonfinancial liabilities for which the effective date has been delayed by one year, which was adopted on January 1, 2009. The adoption of SFAS 157 did not have a material effect on our financial position or results of operations. 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 re-pricing such instruments regularly. As of June 30, 2009, the Company estimated the fair value of long term fixed rate debt to be approximately $8,659,000 compared to its carrying value of $7,972,000.

The fair value hierarchy distinguishes between assumptions based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs). The hierarchy consists of three levels:

• Level one — Quoted market prices in active markets for identical assets or liabilities; • Level two — Inputs other than level one inputs that are either directly or indirectly observable; and • Level three — Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use.

Determining which category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each quarter. Liabilities measured at fair value on a recurring basis are summarized as follows (unaudited):

In Thousands
							June 30,
	Level 1		Level 2		Level 3		2009
Fair value of warrants	$	-	$	146	$	-	$	146
Total	$	-	$	146	$	-	$	146

(4) LOSS PER SHARE

InThe ~~accordance~~Company ~~with~~calculates ~~Statement of Financial Accounting Standards (“SFAS”) No. 128, Earnings per Share,~~ basic and diluted net loss per common share ~~for the three and six months ended June 30, 2009 and 2008, respectively, is calculated~~ by dividing the net loss applicable to common stockholders by the weighted average number of ~~vested~~ shares of common stock outstanding. Common stock equivalents that were outstanding as of ~~June~~ September 30, 2009 and 2008, but were considered anti-dilutive securities and excluded from the diluted net income per share calculations, were as presented below:

	June 30,
	September 30,
	2009		2008
Options outstanding		5,~~384~~203,~~759~~159		4,~~338~~167,~~976~~189
Warrants outstanding		8,522,850		67,~~712~~349,~~979~~383
Unvested restricted stock grants		1760,~~145,971~~221		1,~~862~~457,978
Total potentially dilutive common stock equivalents		1514,~~053~~486,~~580~~230		12,~~914~~974,~~933~~550

(5) REVENUE RECOGNITION

The Company recognizes revenue from sales of products and funded research and development and product development for commercial companies and government agencies. The Company recognizes revenue infrom 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 collectability is reasonably assured. The Company’s custom products are supplied to original equipment manufacturers and produced in accordance with ~~SEC~~a ~~Staff~~customer-approved ~~Accounting~~design. Custom product revenue is recognized ~~Bulletin~~when Nothe criteria for acceptance has been met. ~~101,~~Title ~~“Revenue~~to ~~Recognition~~the ~~in Financial~~product ~~Statements”~~generally ~~(“SAB~~passes ~~101”)~~upon shipment, as ~~updated~~products byare ~~Staff~~generally ~~Accounting~~shipped ~~Bulletin~~FOB ~~(“SAB”)~~shipping ~~104~~point. In certain limited situations, ~~Revenue~~distributors have the right to return ~~Recognition~~products. ~~and~~Such ~~Emerging~~rights ~~Issues~~of ~~Task~~return ~~Force~~have ~~(“EITF”)~~not ~~00-21,~~precluded ~~Revenue~~revenue ~~Arrangements~~recognition because the Company has a long history with ~~Multiple~~such returns and accordingly is able to ~~Deliverables~~estimate a reserve for their cost.

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 collectability is reasonably assured. The Company’s custom products are supplied to original equipment manufacturers and produced in accordance with a customer-approved design. Custom product revenue is recognized when the criteria for acceptance has been met. Title to the product generally passes upon shipment, as products are generally shipped FOB shipping point. In certain limited situations, distributors have the right to return products. Such rights of return have not precluded revenue recognition because the Company has a long history with such returns and accordingly is able to estimate a reserve for their cost.

Revenues from funded research and development and product development is recognized based on contractual arrangements, which may be based on cost reimbursement or fixed fee-for-service models. Revenue from reimbursement contracts is recognized as services are performed and collectability is reasonably assured. On fixed-price contracts, revenue is generally recognized on a percentage-of completion basis based on proportion of costs incurred to the total estimated costs of the contract or under the proportional method. Over the course of a fixed-price contract, the Company routinely evaluates whether revenue and profitability should be recognized in the current period. The Company estimates the proportional performance on their fixed-price contracts on a monthly basis utilizing hours incurred to date as a percentage of total estimated hours to complete the project. If the Company does not have a sufficient basis to measure progress toward completion, revenue is recognized upon completion of performance. This method is used because reasonably dependable estimates of costs and revenue earned can be made, based on historical experience and milestones identified in any particular contract. When the current estimates of total contract revenue and contract costs indicate a loss, a provision for the entire loss on the contract is recorded.

If a contract involves the provision of multiple elements and the elements qualify for separation under EITF 00-21, total estimated contract revenue is allocated to each element based on the relative fair value of each element provided. The amount of revenue allocated to each element is limited to the amount that is not contingent upon the delivery of another element in the future. Revenue is then recognized for each element as described above.8

If a contract involves the provision of multiple elements and the elements qualify for separation, total estimated contract revenue is allocated to each element based on the relative fair value of each element provided. The amount of revenue allocated to each element is limited to the amount that is not contingent upon the delivery of another element in the future. Revenue is then recognized for each element as described above.

(6) WARRANTY

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

Warranty Reserves:

Six Months Ended June 30	2009			2008
	Nine months Ended September 30
	2009			2008
	In thousands
Balance at December 31	$	~~253~~116		$	~~302~~98
Charges to costs and expenses		3325			9841
Account write-offs and other deductions		(2237	)		(7312	)
Balance at June 30	$	264		$	327
Balance at September 30	$	104		$	127

(7) ~~INVENTORIES~~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 re-pricing such instruments regularly. As of September 30, 2009, the Company estimated the fair value of long term fixed rate debt to be approximately $12,033,000 compared to its carrying value of $11,272,000.

(8) FAIR VALUE OF WARRANT LIABILITIES

On October 26, 2006, the Company issued warrants for the purchase of 2,375,000 shares of the Company’s common stock, which have exercise price reset features. These warrants have an exercise price of $1.15 and expire in October 2016. The Company adopted FASB guidance on January 1, 2009 under which certain warrants that were previously treated as stockholders’ equity under the derivative treatment exemption were no longer eligible for equity treatment. Effective January 1, 2009, the fair value of these common stock purchase warrants was reclassified from equity to liability status as if these warrants were treated as a derivative liability since their date of issue in October 2006. On January 1, 2009, the Company reclassified from additional paid-in capital, as a cumulative effect adjustment, $1.2 million to beginning retained earnings and $0.3 million to a long-term warrant liability. The Company recognized a gain of approximately $92,000 from the change in fair value of these warrants for the nine months ended September 30, 2009.

These common stock purchase warrants do not trade in an active securities market, and the Company estimated the fair value of these warrants using the Black-Scholes option pricing model using the following assumptions:

	September 30, 2009			January 1, 2009
Volatility		106.7	%		101.4	%
Expected option life	7.1 years			7.8 years
Interest rate (risk free)		3.22	%		2.46	%
Dividends	$	0.0		$	0.0

The Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. These tiers include: Level 1, defined as quoted market prices in active markets for identical assets or liabilities; Level 2, defined as inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, model-based valuation techniques for which all significant assumptions are observable in the market, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and Level 3, defined as unobservable inputs that are not corroborated by market data.

The warrant liabilities are the Company’s only liabilities measured at fair value on a recurring basis and are summarized as follows (unaudited):

In Thousands

							September 30,
	Level 1		Level 2		Level 3		2009
Fair value of warrants	$	-	$	199	$	-	$	199

Total	$	-	$	199	$	-	$	199

Determining which category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each quarter.

(9) 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:

	June 30, 2009		December 31, 2008
	September 30, 2009		December 31, 2008
	In thousands
Finished goods	$	~~952~~220	$	~~931~~198
Work-in-process		~~460~~44		~~369~~130
Raw materials		21,~~533~~151		21,~~551~~090
Net inventories	$	31,~~945~~415	$	31,~~851~~418

(810) ~~STOCK~~ STOCK BASED COMPENSATION PLANS AND STOCK-BASED COMPENSATION EXPENSE

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

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

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

The Company estimates the fair value of stock options using the Black-Scholes option pricing model, consistent with the provisions of Statement of Financial Accounting Standards No. 123(R), Share Based Payment, (“SFAS 123(R)”) and the Securities and Exchange Commission Staff Accounting Bulletin No. 107, Share Based Payments, (“SAB 107”).

Stock Option Awards

The fair value of each option grant is estimated using the Black-Scholes option pricing model at the date of the grant. The fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. Use of a valuation model requires management to make certain assumptions with respect to selected model inputs. Expected volatility was calculated based on the historical volatility of the Company’s stock, at the time of the award. The average expected option term was estimated using atthe 5simplified ~~years~~method for estimating purposes. The risk-free interest ~~rate~~ rate is based on U.S. Treasury zero-coupon issues assumed at the date of grant and no dividends were assumed in the calculation. The compensation expense ~~recognized~~ recognized for all equity-based awards is net of estimated forfeitures for the ~~six~~ ~~months~~nine months ending ~~June~~September 30, 2009 and 2008. Forfeitures are estimated based on the historical trends. ~~The fair value of options at the date of grant was estimated using the Black-Scholes option pricing model.~~ There were 2,906,996 options granted during the ~~six~~nine months ended ~~June~~September 30, 2009. There were 2,046,572 options granted in the ~~six~~ nine months ended ~~June~~September 30, 2008.

On January 16, 2009, the GNCC adopted a stock option incentive program for 2009. The GNCC adopted a policy of granting performance-based options to purchase shares of the Company’s common stock to various executive officers and key employees. All options shall vest and become exercisable on the date the Company publicizes its earnings press release regarding fiscal 2009 results, if the stated performance goal is met. The Company records the related expense, if any, over the requisite service period, and assesses the probability of attaining the performance goals at each reporting date. If the performance goals are not met, the options will terminate. Options for a total of 1,865,000 shares of common stock were granted under this performance-based program on January 16, 2009. Management has assessed the likelihood of meeting the performance target, and in its opinion it is unlikely that they will do do so. AsThe aCompany ~~result,~~did ~~management~~not ~~has~~incur ~~reversed~~any ~~the~~ stock compensation expense related ~~booked~~to ~~during~~this ~~the~~plan ~~first~~in ~~quarter~~the ofthree ~~approximately~~or ~~$52,000,~~nine ~~during~~month ~~the three~~periods ~~months~~ ended ~~June~~September 30, 2009.

On March 17, 2008, the GNCC adopted a stock option incentive program for 2008. Options to purchase a total of 1,522,300 shares of common stock were granted under this performance-based program on March 17, 2008, all of which were forfeited when the performance goals were not met. As the performance goals were not met, the options immediately terminated and the previously accrued compensation cost of approximately $490,000 was reversed in the fourth quarter of 2008, resulting in no net compensation recorded in 2008 related to the program.

The fair value of options at the date of grant was estimated using the Black-Scholes option pricing model. The assumptions for grants during the ~~six~~nine months ended ~~June~~September 30, 2009 and 2008 were as follows:

	Six Months Ended June 30, 2009			Six Months Ended June 30, 2008
	Nine months Ended September 30, 2009			Nine months Ended September 30, 2008
Volatility		101.4%-104.8	%		98.88	%
Expected option life	6.08 years			5.65 years
Interest rate (risk free)		1.54%-2.86	%		2.54	%
Dividends		N/A			N/A
Weighted average grant date fair value	$	0.12		$	0.4241

A summary of option activity as of ~~June~~September 30, 2009 and changes during the first ~~six months~~nine months of 2009 is presented below:

	Options Outstanding			Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (in Years)		Aggregate Intrinsic Value (in thousands)
Balance at December 31, 2008		2,987,889		$	3.45		4.58	$	—
Granted		2,906,996			0.15		—		—
Exercised		—			—		—		—
Cancelled		(691,726	)		1.73		—		—
Balance at September 30, 2009		5,203,159		$	1.88		7.28	$	16
Vested and Exercisable at September 30, 2009		1,743,651		$	4.77		3.33	$	—

	Options Outstanding			Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (in Years)		Aggregate Intrinsic Value (in thousands)
Balance at December 31, 2008		2,987,889		$	3.45		4.58	$	—
Granted		2,906,996			0.15		—		—
Exercised		—			—		—		—
Cancelled		(510,126	)		0.81		—		—
Balance at June 30, 2009		5,384,759		$	1.82		7.38	$	6
Vested and Exercisable at June 30, 2009		1,925,251		$	4.73		3.54	$	—

As of September 30, 2009, there was a total unrecognized compensation cost related to continuing operations of approximately $141,000 related to non-vested stock options outstanding, excluding performance options. The cost is expected to be recognized over the next 1.48 years. There were no options exercised in the nine months ended September 30, 2009 and September 30, 2008.

As of June 30, 2009, there was a total unrecognized compensation cost of approximately $202,000 related to non-vested stock options outstanding. The cost is expected to be recognized over the next 1.53 years. There were no options exercised in the six months ended June 30, 2009 and June 30, 2008.

Restricted Share Awards (“RSAs”)

The Company has awarded to a number of employees restricted shares of the Company’s common stock. The RSAs vest in equal annual installments over a period of four years. The fair market value of the RSAs is based on the fair market value per share of the Company’s common stock on the date of grant and is ~~amortized~~expensed over the vesting period. During the quarter ended ~~June~~September 30, 2009, ~~there were~~ no shares of of restricted stock were issued and 96522,~~837~~834 shares of ~~restricted~~previously issued restricted stock vested. During the ~~six~~nine months ended ~~June~~September 30, ~~2009~~2008, ~~there were~~ no shares of restricted stock were issued and ~~139~~600,~~584~~020 shares of ~~restricted~~previously issued restricted stock vested.

A summary of the status of the Company’s RSAs as of ~~June~~September 30, 2009 and changes during ~~the~~ the first ~~six~~nine months is presented below:

	Shares			Weighted Average Grant-Date Fair Value
Non-vested at December 31, 2008		1,368,394		$	1.17
Granted		-			-
Vested		(~~139~~522,~~584~~834	)		01.9213
Cancelled		(8285,~~839~~339	)		1.35
Non-vested at June 30, 2009		1,145,971		$	1.19
Non-vested at September 30, 2009		760,221		$	1.19

As of ~~June~~September 30, 2009, there was a total unrecognized compensation cost related to continuing operations of approximately $~~885~~541,000, related to non-vested RSAs. The Company expects to recognize the costs over the next 1.8053 years.

(911) COMPREHENSIVE LOSS

~~SFAS No. 130, Reporting~~ Comprehensive ~~Income, requires disclosure of all components of~~ ~~comprehensive~~ income (loss) ~~on an annual and interim basis. Comprehensive income (loss)~~ is defined as the change in equity of a business enterprise during a a period from transactions and other events and circumstances from non-owner sources. The following table summarizes all components of the Company’s ~~total~~ comprehensive ~~loss~~income ~~is as follows:~~(loss).

	Three Months Ended June 30,						Six Months Ended June 30,
	Three Months Ended September 30,						Nine months Ended September 30,
	2009			2008			2009			2008
	In thousands
Net loss	$	(~~718~~1,450	)	$	(23,~~285~~099	)	$	(23,~~325~~775	)	$	(47,~~451~~549	)
Other comprehensive income (loss):		—			—			—			—
Cumulative translation adjustment		~~(127~~261	)		40(186	)		~~(151~~110	)		(56242	)
Comprehensive loss	$	(~~845~~1,189	)	$	(23,~~245~~285	)	$	(23,~~476~~665	)	$	(47,~~507~~791	)

(1012) GOODWILL

The changes in the carrying amount of goodwill for the ~~six~~nine months ended ~~June~~ September 30, 2009 are as follows:

	June 30, 2009
	September 30, 2009
	In thousands
Balance at January 1, 2009	$	64,~~588~~410
Effect of exchange rate		~~550~~389
Balance at June 30, 2009	$	7,138
Balance at September 30, 2009	$	4,799

There were no goodwill impairment losses recorded during the three months or ~~six~~nine months ended ~~June~~September 30, 2009.

(1113) INTANGIBLE ASSETS

Intangible assets consist of trademarks, acquired patents and patented technologies, distributor and customer relationships and related contracts, trade and brand names and associated logos, technology design and programs, non-compete agreements and other intangible assets. There are no intangible assets with indefinite lives. Acquired patented technologies and trademarks are amortized over their estimated useful lives of between 3 - 16 years.

Gross carrying amounts and accumulated amortization of intangible assets were as follows as of ~~June~~September 30, 2009 for each intangible asset class.

	Gross Carrying Amount		Accumulated Amortization			Carrying Value
			(in thousands)
Acquired patents, patented technology and purchased technology	$	3,~~360~~034	$	(32,~~180~~994	)	$	~~180~~40
Trademarks		471		(471	)		—
Acquired trade name		500		(166	)		334
Acquired customer contracts and relationships		2,030		(1,117	)		913
Acquired non-compete agreement		657		(584	)		73
Acquired technology design and programs		343		(114	)		229
Other		118		(73	)		45
Total	$	7,~~479~~021	$	(5,~~705~~630	)	$	1,~~774~~391

Gross carrying amounts and accumulated amortization of intangible assets were as follows as of December 31, 2008 for each intangible asset class.

	Gross Carrying Amount		Accumulated Amortization			Carrying Value
			(in thousands)
Acquired patents, patented technology and purchased technology	$	3,~~353~~039	$	(32,~~123~~977	)	$	~~230~~62
Trademarks		471		(471	)		-
Acquired trade name		438		(118	)		320
Acquired customer contracts and relationships		1,779		(796	)		983
Acquired non-compete agreement		576		(416	)		160
Acquired technology design and programs		301		(82	)		219
Other		104		(53	)		51
Total	$	76,~~022~~708	$	(54,~~059~~913	)	$	1,~~963~~795

Amortization expense from continuing operations of intangible assets was approximately $~~209~~198,000 and $~~295~~228,000 for the three months ended ~~June~~ September 30, 2009 and 2008, and approximately $~~405~~559,000 and $~~625~~809,000 for the ~~six~~nine months ended ~~June~~ September 30, 2009 and 2008.

As of September 30, 2009, the estimated future amortization expense of intangible assets, in thousands, is as follows:

		2009				2010				2011				2012				2013				2014 & thereafter
Amortization expense of intangible assets		$	132			$	400			$	334			$	186			$	186			$	153

~~As of~~(14) ~~June 30, 2009, the estimated future amortization expense of intangible assets, in thousands, is as follows:~~DEBT

	Estimated Future Expense In thousands
	2009		2010		2011		2012		2013		2014 & thereafter
Amortization expense of intangible assets	$	380	$	486	$	347	$	194	$	194	$	173

(12) DEBT

A summary of the Debt Obligations of the Company is as follows:

	June 30,			December 31,
	September 30,			December 31,
	2009			2008
	In thousands
Acquired note payable to Barclay’s Bank, maturing on November 16, 2009 and having an interest rate of 2.5% above Barclay’s base rate (3.0% at June 30, 2009).	$	9		$	22
Acquired note payable to Barclay’s Bank, maturing on November 16, 2009 and having an interest rate of 2.5% above Barclay’s base rate (3.0% at September 30, 2009).	$	2		$	22
Borrowings under Revolving Credit facility with Barclay’s Bank Sales Financing, due on demand, with an interest rate of 2.65% above Barclay’s base rate (3.15% as of June 30, 2009).		278			710
Borrowings under Revolving Credit facility with Barclay’s Bank Sales Financing, due on demand, with an interest rate of 2.65% above Barclay’s base rate (3.15% as of September 30, 2009).		550			710
* Borrowings under line of credit with Laurus Master Fund, Ltd., due on demand, with an interest rate of the prime rate plus 1% (4.25% at June 30, 2009).		3,314			3,159
Borrowings under line of credit with Laurus Master Fund, Ltd., due on demand, with an interest rate of 10% at September 30, 2009.		3,468			3,159
* Notes Payable to Laurus Master Fund, Ltd. and affiliates maturing on June 30, 2010, with an interest rate of prime plus 2%, and a minimum rate of 8.0% (8.0% at June 30, 2009), net of unamortized discount of $269 at June 30, 2009 and $460 at December 31, 2008.		2,656			2,690
Notes Payable to Laurus Master Fund, Ltd. and affiliates maturing on June 30, 2010, with an interest rate 12% at September 30, 2009, net of unamortized discount of $190 at September 30, 2009 and $460 at December 31, 2008.		2,735			2,690
* Note Payable to an affiliate of Laurus Master Fund, Ltd. maturing on June 30, 2010, with an interest rate of 10.5%, net of unamortized discount of $42 at June 30, 2009 and $90 at December 31, 2008.		625			676
Note Payable to an affiliate of Laurus Master Fund, Ltd. maturing on June 30, 2010, with an interest rate of 12%, net of unamortized discount of $27 at September 30, 2009 and $90 at December 31, 2008.		640			676
Senior Fixed Rate Secured Bond to a private investor with an interest rate of 12%, maturing on July 30, 2011 net of unamortized discount of $147 at June 30, 2009 and $166 at December 31, 2008		2,362			1,028
Senior Fixed Rate Secured Bond to a private investor with an interest rate of 12%, maturing on July 30, 2011 net of unamortized discount of $117 at September 30, 2009 and $166 at December 31, 2008		2,383			1,028
Senior Fixed Rate Secured Bond payable to a private investor, maturing on October 31, 2011 with an interest rate of 10%, net of unamortized discount of $622 at June 30, 2009 and $798 at December 31, 2008.		2,480			3,674
Senior Fixed Rate Secured Bond payable to a private investor, maturing on October 31, 2011 with an interest rate of 10%, net of unamortized discount of $539 at September 30, 2009 and $798 at December 31, 2008.		2,563			3,674
Bonds payable to the former stockholders of Photonic Products Ltd. maturing on October 31, 2009, with an interest rate of LIBOR plus 1%, (1.67% at June 30, 2009).		2,400			2,400
Bonds payable to the former stockholders of Photonic Products Ltd. maturing on October 31, 2009, with an interest rate of LIBOR plus 1%, (1.29% at September 30, 2009).		2,400			2,400
Sub-total debt		14,~~124~~741			14,359
Less – lines of credit / revolver		(34,~~592~~018	)		(3,869	)
Less—Current portion of long-term debt, net of discount		(6,~~723~~934	)		(4,118	)
Total long-term debt	$	3,~~809~~789		$	6,372

* See footnote 16 relating to amendments subsequent to June 30, 2009.

Laurus Master Fund

On October 14, 2009, the Company paid in full its obligations to Laurus Master Fund, Ltd. and its affiliates described below. As discussed in Note 1, approximately $7,900,000 of the proceeds from the October 13, 2009 sale were used to repay approximately $7,060,000 ($6,843,000 outstanding as of September 30, 2009) of borrowings under the line of credit and notes payable with Laurus along with $645,000 of related deferred fees and $143,000 of accrued interest on October 14, 2009.

Line of Credit Agreement:

On June 28, 2006, the Company entered into a Security and Purchase Agreement, as amended at various times through October 13, 2009, with Laurus Master Fund, Ltd (“Laurus”)~~. Under the Security and Purchase Agreement~~, aestablishing a three-year revolving line of credit ~~was established. The proceeds~~of ~~from~~up ~~this~~to ~~line~~$4 ofmillion ~~credit~~limited ~~were used~~ to ~~pay~~qualifying inreceivables ~~full the outstanding amount under a previously outstanding credit facility between the Company~~ and ainventories ~~bank. Additional~~as ~~amounts~~defined ~~borrowed under the line of credit from time to time may be~~in ~~used for~~ the ~~Company’s working capital needs~~agreement. The Security and Purchase Agreement ~~provides~~granted ~~for~~ a ~~revolving line of credit not to exceed an aggregate principal amount of $4 million and grants a~~ security interest in and lien upon all of the Company’s assets in favor of Laurus. The ~~Company~~note ~~may borrow a total~~could ~~amount~~be prepaid at any ~~given~~ time upwithout topenalty $4or ~~million limited to qualifying receivables and inventories as defined in the agreement~~premium.

~~The~~On ~~outstanding~~July 28, ~~principal~~2009, ~~under~~ the ~~revolver~~ ~~accrues~~Company ~~interest~~entered atinto ana ~~annual~~Waiver ~~rate~~and ofAmendment 1%with ~~above~~Laurus ~~the~~and ~~prime rate. The~~its ~~interest~~affiliates, ~~rate~~dated ~~was 4.25%~~ as of ~~June~~July 3016, 2009., ~~The Company may elect~~ to ~~prepay~~amend the ~~revolver~~ atline ~~any~~of ~~time,~~credit inunder ~~whole~~the Security orand inPurchase ~~part,~~agreement ~~without~~and ~~penalty~~the orTerm ~~premium~~Note Payable. The ~~All~~Waiver ~~unpaid~~and ~~principal~~Amendment ~~plus~~extended ~~accrued~~the ~~but~~due ~~unpaid~~date ~~interest~~of ~~was~~the ~~due~~line ~~and~~of ~~payable~~credit on from June 28, 2009. Onto October ~~July 28~~15, 2009 ~~Laurus~~and ~~entered~~revised ~~into~~the ainterest ~~Waiver~~rate ~~and~~on ~~Amendment with~~ the ~~Company,~~outstanding ~~dated~~balance asto of10% per ~~July~~annum. ~~16,~~As ~~2009~~discussed above, ~~under~~this ~~which~~obligation ~~Laurus~~was included ~~waived~~in the ~~any~~$7,060,000 ~~default~~of ~~that~~borrowings ~~may~~repaid ~~have arisen~~ on October ~~or before June 28~~14, 2009 ~~and~~from ~~extended~~ the ~~term~~proceeds of the ~~note until~~ October 1513, 2009. ~~(see footnote 16)~~sale.

On March 31, 2008, Laurus granted the Company the ability to borrow up to $500,000 over the limit defined by qualified receivables and inventory for one year, expiring March 31, 2009. In consideration, the Company issued and sold to Laurus 100,000 shares of its common stock at a per share purchase price of $.01, for an aggregate purchase price of $1,000, and extended the term of all outstanding warrants issued to Laurus for an additional 5 years. On April 16, 2009, the Company and Laurus entered into an agreement, effective March 31, 2009, to extend the overadvance by amending the note. The amendment grants a fee, payable in cash, to Laurus of $400,000 on June 30, 2010. This $400,000 has been expensed over the three month period of the extension. On July 28, 2009 Laurus entered into a Waiver and Amendment with the Company, dated as of July 16, 2009, under which Laurus waived any default that may have arisen on or before June 28, 2009 and extended the term of the note until October 15, 2009. (see footnote 16)14

AtOn ~~June~~April 3016, 2009, ~~$3,314,324~~the ~~was~~Company ~~outstanding~~and ~~under~~Laurus ~~the~~entered ~~line~~into ofan ~~credit~~agreement, ~~which~~effective ~~included the~~March ~~$500~~31,~~000 overadvance~~ 2009, ~~and~~to ~~was~~extend ~~classified~~the asoveradvance ~~lines~~by ~~of credit/revolver~~amending the note. The ~~credit~~amendment grants ~~line~~a ~~was~~fee, ~~overdrawn~~payable atin ~~June~~cash, 30to Laurus of $400,000 ~~2009~~on byJune 30, ~~approximately~~2010. This $~~121~~400,000, ~~which~~has isbeen ~~due~~expensed ~~and~~over ~~payable~~the three month period of the extension.

At ~~December 31~~September 30, ~~2008~~2009, $3,~~159~~468,~~324~~007 was outstanding under the line of credit, ~~which~~ which included ~~the~~a $500,000 ~~over draft~~overadvance, and was classified as lines of credit/revolver. The credit line ~~availability~~was overdrawn at ~~December 31~~September 30, ~~2008 was~~2009 by approximately $~~235~~382,000, which was due and payable.

At December 31, 2008, $3,159,324 was outstanding under the line of credit, which included a $500,000 overadvance, and was classified as lines of credit/revolver. The credit line availability at December 31, 2008 was approximately $235,000.

Term Note Payable:

On December 30, 2005, under the terms of a Securities Purchase Agreement, ~~the~~as ~~Company~~amended ~~issued~~at avarious ~~secured~~times ~~term~~through ~~note~~October ~~in the aggregate principal amount of $4 million to Laurus. The note is collateralized by certain assets of the Company. On June 19~~13, ~~2007~~2009, the Company ~~and~~issued ~~Laurus entered into~~ a ~~Note~~ ~~Amendment Agreement to the December 2005~~ secured term note. Inin ~~connection with~~ the ~~amendment,~~aggregate ~~the~~principal ~~Company~~amount ~~entered~~of ~~into a Securities Purchase Agreement with Laurus under which the Company borrowed~~ $~~2,318,180~~4 ~~and~~million ~~issued a Secured Term Note~~ to Laurus. The ~~amendment extended the maturity date of the December 30, 2005~~ note ~~from December 30, 2008 to June 30, 2010.~~ ~~The~~was ~~Company~~collateralized ~~agreed~~by tocertain ~~make~~assets ~~monthly payments~~ of ~~principal and interest on~~ the ~~note~~ ~~beginning on July 1, 2007. The~~ Company ~~may elect to prepay the note provided that if such prepayment occurs during the third year of the date of issuance, the Company shall pay a 5% prepayment penalty~~.

On July ~~December~~ 28, ~~2007~~2009, the Company ~~issued~~entered ~~amended~~into ~~and~~a ~~restated~~Waiver ~~secured~~and ~~term notes~~Amendment towith Laurus and its ~~assignees~~ affiliates, ~~PSource~~dated ~~Structured~~as ~~Debt~~of ~~Limited~~July ~~(“PSource”) and~~16, ~~Valens U.S. SPV I (“Valens”)~~2009, ~~both~~to ~~affiliates~~amend ~~of Laurus. Under~~ the ~~terms~~line of ~~the~~ ~~amended~~credit ~~notes~~under the Security ~~Company~~and ~~borrowed~~Purchase anagreement ~~additional~~and ~~$1.0~~the ~~million~~Term ~~from~~Note ~~Valens~~Payable. The ~~notes amended~~ Waiver and ~~restated~~Amendment allowed the ~~secured~~Company ~~term~~to ~~notes~~defer ~~dated~~principal ~~December 30, 2005~~payments ~~and~~between June 19 1, 2009 ~~2007.~~through ~~The~~October ~~terms~~1, of2009 ~~the~~which ~~note~~was ~~issued~~due toand ~~Valens~~payable ~~are~~on ~~the~~October ~~same~~15, 2009 and asrevised the ~~note~~interest ~~issued~~rate ~~to Laurus~~ on ~~June 19,~~the ~~2007.~~outstanding ~~The~~balances ~~$1.0~~to ~~million~~12% ~~portion~~per ofannum. As ~~the~~discussed ~~Valens~~above, ~~note~~this ~~will~~obligation ~~accrue~~was included ~~interest~~in atthe an$7,060,000 ~~annual rate~~ of ~~10.5%. The monthly~~ ~~principal~~borrowings ~~payments~~repaid ~~are~~on October ~~$108~~14,~~000. Laurus,~~2009 ~~PSource~~from ~~and Valens rights under~~ the ~~notes~~proceeds ~~are secured by a security interest in certain assets~~ of the October 13, ~~Company~~2009 sale.

15At September 30, 2009, $3,591,673 was outstanding under the combined notes, all of which has been classified as short-term debt and reported net of $216,102 of unamortized debt discount.

On July 31, 2008, the Company signed an agreement with Valens and PSource, to defer the principal payments of the term notes in the amount of $108,333 per month, for the period of August 1, 2008 to October 1, 2008. The Company continued to make monthly interest payments during this period.

On November 17, 2008, the Company signed an agreement with Valens and PSource, to defer the principal payments of the term notes in the amount of $108,333 per month, for the period of December 1, 2008 to February 1, 2009. The Company continued to make monthly interest payments during this period.

On July 28, 2009, Laurus, Valens and PSource, entered into a Waiver and Amendment with the Company, dated as of July 16, 2009, under which they deferred the principal payments due during the period commencing on June 1, 2009 through and including October 1, 2009. All amounts deferred during this period are payable in full on October 15, 2009. (see footnote 16)

At June 30, 2009, $3,591,673 was outstanding under the combined notes, all of which has been classified as short-term debt and reported net of $310,722 of unamortized debt discount.

At December 31, 2008, $3,916,671 was outstanding under the combined notes, which was classified as $1,408,326 short-term debt and $2,508,345 long-term debt and reported net of $550,794 of unamortized debt discount, which was classified as $418,176 short-term and $132,618 long-term.

Private Investor Notes and Bonds

Photonic Products Ltd. Financing

On October 31, 2006, StockerYale (UK) Ltd. issued a 10% Senior Fixed Rate Secured Bond, toas ~~the~~amended ~~Eureka~~at ~~Interactive~~various ~~Fund~~times, ~~Ltd. (Eureka)~~ in the original principal amount of $4,750,000 to Eureka Interactive Fund Limited. The bond is due on October 31, 2011. StockerYale (UK) Ltd. agreed to make payments of principal and interest over the term; however, ~~during the first twelve months of the term of the bond, only accrued interest will be required to be paid (no payments of principal will be required) and~~ an amount equal to 50% of the original principal sum of $4,750,000 will be paid on October 31, 2011. The outstanding principal on the bond accrues interest at an annual rate of 10%. StockerYale (UK) Ltd. may prepay the bond at any time, in whole or in part, without penalty or premium. The bond is secured by all of the equity interests of Photonic Products Ltd. owned by StockerYale (UK) Ltd. The Company used the net proceeds to make the cash payment for the acquisition of Photonic Products Ltd. The remaining proceeds were used for transaction fees and working capital. On August 16, 2007, the Eureka Interactive Fund Limited transferred this bond to a private investor.

IfAt ~~StockerYale~~September ~~(UK)~~30, ~~Ltd.~~2009, ~~prepays~~$3,101,881 ~~all~~remained ~~amounts~~ outstanding under the ~~bond~~combined ~~prior to~~note ~~the~~which ~~third~~has ~~anniversary~~been ofclassified ~~the~~as ~~date of issuance~~$740,091 ~~then~~short-term ~~the~~debt ~~number~~and of$2,361,790 ~~shares~~long- ~~of the~~term ~~Company’s~~debt ~~common~~and ~~stock~~reported ~~purchasable~~net ~~upon~~of ~~exercise~~$539,173 of ~~the~~unamortized ~~warrant~~debt ~~issued~~discount, towhich ~~Eureka~~has been ~~shall~~reported beas ~~changed to 2~~$300,~~137,500~~758 ifas ~~the~~short-term ~~bond~~and is$238,415 ~~repaid~~as inlong-term. On September ~~full~~30, ~~prior~~2009, to the ~~third anniversary~~Company ofwas ~~the~~$158,000 ~~date~~(principal ofand ~~issuance~~interest) in arrears.

OnAt ~~August~~December 1631, ~~2007~~2008, ~~Eureka~~$4,471,926 ~~agreed~~remained tooutstanding ~~transfer~~under ~~certain~~the ~~promissory~~combined ~~notes~~note which ~~and~~was ~~the bond~~classified ~~described~~as ~~above~~$740,091 asshort-term ~~well~~debt asand ~~all~~$3,731,835 long- term debt and reported net of ~~the~~$798,251 ~~unexercised~~of ~~warrants~~unamortized ~~previously issued~~debt todiscount, ~~Eureka~~which was reported as $300,758 toas ashort-term ~~private~~and ~~investor~~$238,415 as long-term.

~~On May 27, 2008, the same private investor loaned the company an additional $500,000 payable over the remaining term of the original loan, at the same fixed 10% interest rate.~~15

On October 30, 2008, the private investor agreed to forego principal payments on the combined notes for the months of September 2008 through December 2008. In consideration, the Company agreed to issue to the private investor an aggregate of 616,743 shares of common stock of the Company.

On January 13, 2009, the private investor agreed to forego six monthly principal payments due under the Bond from January 2009 to June 2009 totaling $370,044, with monthly principal payments resuming on July 1, 2009. In consideration, the Company agreed to issue to the private investor an aggregate of 1,480,176 shares of the common stock of the Company.

On June 9, 2009, the private investor and the Company entered into a Transfer Agreement under which they agreed to transfer $1,000,000 of debt (the “Transfer Amount”) from the Bond to the Senior Fixed Rate Secured Bond described below.

At June 30, 2009, $3,101,881 remained outstanding under the combined note which has been classified as $740,091 short-term debt and $2,361,790 long- term debt and reported net of $622,112 of unamortized debt discount, which has been reported as $311,229 as short-term and $310,883 as long-term.

At December 31, 2008, $4,471,926 remained outstanding under the combined note which was classified as $740,091 short-term debt and $3,731,835 long- term debt and reported net of $798,251 of unamortized debt discount, which was reported as $338,595 as short-term and $459,656 as long-term.

StockerYale Ireland Senior Fixed Rate Secured Bond

On July 24, 2008, StockerYale (IRL) Ltd. issued a three-year 12% Senior Fixed Rate Secured Bond, as amended at various times, to a private investor in the original principal amount of €935,000 ($1,472,905 at July 24, 2008) secured by all of the assets of StockerYale (IRL) Ltd. The bond matures on July 30, 2011. StockerYale (IRL) Ltd. agreed to make payments of principal and interest of approximately €31,000 over the term beginning August 30, 2008. The outstanding principal on the bond accrues interest at an annual rate of 12%. StockerYale (IRL) Ltd. may prepay the bond at any time, in whole or in part, without penalty or premium. The Company used the net proceeds for working capital.

~~On June~~At 9September 30, 2009, ~~the same private investor loaned the company an additional~~ $~~500~~2,~~000 payable~~499,840 ~~over~~remained ~~the~~outstanding ~~remaining~~under ~~term of~~ the ~~original loan~~bond, atwhich ~~the same fixed 12%~~has ~~interest~~been ~~rate. As~~classified aas ~~part of the agreement~~$804,222 ~~the Company issued to the private investor additional ten~~short-~~year~~term ~~common~~debt ~~stock~~and ~~warrants to purchase 500~~$1,~~000 shares~~695,618 oflong-term ~~common~~debt ~~stock at an exercise price per share of $0.10. An additional~~and ~~debt~~reported, ~~discount~~net ~~was recorded in the amount~~ of $38117,~~086~~104 ~~and is being amortized over the remaining life~~ of ~~the~~unamortized ~~note.~~debt ~~The~~discount, ~~Company~~which ~~used~~has ~~the~~been ~~Black-Scholes Model to~~reported ~~calculate~~as ~~the~~$86,846 ~~fair value of the warrants. The underlying assumptions included in the Black~~short-~~Scholes~~term ~~Model~~and ~~were:~~$30,258 ~~a risk~~long-~~free~~term. ~~interest~~On ~~rate~~September of30, ~~3.86%~~2009, anthe ~~expected~~Company ~~life~~was ~~of seven years~~$235,000 an(principal ~~expected~~and ~~volatility~~interest) ofin ~~105~~arrears.~~04% and no dividend yield.~~

Also on June 9, 2009, the Company and private investor entered into a Transfer Agreement under which they agreed to transfer $1,000,000 of debt (the “Transfer Amount”) from the StockerYale UK Bond described above to the Senior Fixed Rate Secured Bond. Interest accrues and is payable monthly and the amount is payable on July 30, 2011.

At June 30, 2009, $2,508,705 remained outstanding under the bond, which has been classified as $701,238 short-term debt and $1,807,467 long-term debt and reported, net of $146,670 of unamortized debt discount, which has been reported as $97,603 short-term and $49,067 long-term.

At December 31, 2008, $1,193,829 remained outstanding under the bond, which was classified as $403,817 short-term debt and $790,012 long-term debt and reported, net of $165,810 of unamortized debt discount, which was reported as $100,050 short-term and $65,760 long-term.

Barclay’s Bank, PLC

On February 6, 2008, the Company’s Photonic Products subsidiary entered into a Confidential Invoice Discounting Agreement with Barclay’s Bank Sales Financing (“Barclay’s”). Under the Discounting Agreement, a three-year revolving line of credit was established. The Discounting Agreement provides for a revolving line of credit and grants a security interest in and lien upon all of Photonic Products’ trade receivables in favor of Barclay’s.

The facility requires the maintenance of certain covenants. The Company may elect to prepay amounts due under the facility at any time, in whole or in part, upon 3 months notice. If the prepayment amount comes before the end of the ‘“Minimum Period of the Agreement’”, Barclay’s reserves the right to charge fees in accordance with the terms and conditions of the agreement. On June 26, 2009, Photonic Products agreed to amend the terms of the Agreement with Barclay’s. Under the amended terms, the maximum amount allowed outstanding under the line of credit is £650,000 ($1,070,000 USD). The outstanding principal under the note accrues interest at an annual rate of 2.65% above Barclay’s base rate. The interest rate was 3.15% as of ~~June~~September 30, 2009.

The amount outstanding under the facility was approximately $~~278~~550,000 as of ~~June~~ September 30, 2009 and $710,000 as of December 31, 2008, all of which was classified as ~~short~~ short-term debt under revolving lines of credit.

~~(13)~~Photonic ~~DISCONTINUED~~Products ~~OPERATIONS~~Ltd.

~~During~~StockerYale ~~2005~~(UK) Ltd., a wholly owned subsidiary of the Company’s, ~~management~~issued ~~and~~bonds to each of the former ~~Board~~stockholders of ~~Directors~~Photonic ~~made~~Products aLtd. ~~decision~~with an aggregate initial principal amount equal to $2,400,000. Under the terms of issuance, the ~~discontinue~~outstanding ~~its~~principal ~~Singapore~~accrued ~~operation~~interest asat ~~well~~an annual rate of 1% above the LIBOR rate as ~~its~~determined ~~fiber~~on ~~optic~~the ~~illumination~~first business day of each month. All unpaid principal plus accrued but unpaid interest under the bonds was originally due and payable ~~galvanometer~~on ~~businesses~~October 31, 2009.

~~During~~On ~~2006~~October 7, 2009, the Company ~~completed~~and ~~the~~StockerYale ~~divestitures~~(UK) Ltd. entered into a Deed of Variation ~~these~~with ~~three~~the ~~businesses~~bondholders in which the Company and StockerYale (UK) Ltd. ~~exchange~~agreed: ~~for~~a) ~~aggregate~~to ~~consideration~~make ofprincipal uppayments to one of the bondholders of $~~525~~120,000 inon ~~cash~~October 31, 2009 and ~~notes~~$120,000 on January 8, 2010 plus monthly ~~receivable~~payments ~~and~~of asimple 5interest at an annual rate of 7% ~~royalty~~on the outstanding amounts until paid ; and (b) to make monthly payments to each of the other two bondholders in the aggregate amount of $47,000 on ~~future~~the ~~sales~~last day of each acalendar ~~specific~~month, ~~product~~beginning ~~royalty~~on upNovember 30, 2009 and to continue until and including October 31, 2010 plus monthly payments of simple interest at an annual rate of 7% to be made on the last day of each month beginning on November 30, 2009 through November 30, 2010 when a ~~maximum~~balloon payment of $351,596,000 will be due.

17StockerYale (UK) Ltd. may elect to prepay the bonds at any time, in whole or in part, without penalty or premium. If the former stockholders of Photonic Products Ltd. breach any representation, warranty, covenant or agreement made in the acquisition agreement, StockerYale (UK) Ltd. or the Company may make a claim and the amounts outstanding under the bonds will be reduced by an amount equal to any damages, claims, demands, losses, expenses, costs, obligations and liabilities reasonably and foreseeably arising to the Company and/or StockerYale (UK) Ltd. If StockerYale (UK) Ltd. fails to make any payments under the bonds, the former stockholders of Photonic Products Ltd. will then have the right to require payment from the Company in the form of newly issued shares of the Company’s common stock.

~~Amounts~~As of ~~recorded~~September as30 ~~income~~2009, ~~from~~and ~~discontinued~~December ~~operations~~31, ~~for~~2008, ~~the~~$2,400,000 ~~six~~was ~~months~~outstanding ~~ended~~under ~~June~~the ~~30,~~bonds ~~2009~~issued ~~and~~to ~~2008,~~the ~~primarily~~former ~~resulted~~stockholders ~~from~~of ~~additional~~Photonic ~~cash~~Products ~~consideration~~Ltd., all of which ~~received~~was ~~under~~classified ~~certain~~as ~~notes~~current ~~receivable~~portion of long-term debt.

~~(14) COMMITMENTS AND CONTINGENCIES~~16

(15) DISCONTINUED OPERATIONS

Subsequent to the quarter ended September 30, 2009, on October 13, 2009, the Company and SYC, entered into an agreement and sold substantially all North American assets and rights of SYC and the Company's specialty optical fiber product line to Coherent Inc. The purchase price consisted of a cash payment of $15,000,000 and the assumption of certain liabilities, including approximately $3,400,000 of accounts payable and other obligations associated with the sold assets. A portion of the cash payment, $750,000, was placed in escrow for a one year period. The assets to be sold or disposed of and liabilities to be transferred and the results of those operations are classified and included in discontinued operations for all periods presented. Proceeds from the transaction will be used to pay the Laurus debt in the amount of $7,900,000 (including fees), expenses associated with the transaction and settlement of various obligations of $1,800,000.

Revenues from the discontinued operations for the three months ended September 30, 2009 and 2008 were $3.9 million and $4.8 million. The pre-tax loss from discontinued operations for the three months ended September 30, 2009, was approximately $(26,000) and the pre-tax gain for the three months ended September 30, 2008, was approximately $313,000. All amounts have been reported as net income (loss) from discontinued operations.

Revenues from the discontinued operations for the nine months ended September 30, 2009 and 2008 were $10.8 million and $13.6 million. The pre-tax losses from discontinued operations for the nine months ended September 30, 2009 and 2008 were approximately $214,000 and $515,000. All amounts have been reported as net loss from discontinued operations. Interest expense was also allocated to discontinued operations.

The Company allocated interest expense to the discontinued operations. The Company expects to record a gain on the sale of discontinued operations in the fourth quarter of 2009.

(16) COMMITMENTS AND CONTINGENCIES

Lease obligation treated as financing

On December 30, 2005, the Company closed a sale-leaseback transaction on the Company’s Salem, New Hampshire headquarters with 55 Heritage LLC. The lease agreement grants the Company the option to extend the initial term for a period of five years. Because the transaction did not qualify as a sale for ~~Generally Accepted Accounting Principles (GAAP)~~ reporting purposes ~~under SFAS 66~~, ~~Accounting for Sales of Real Estate and SFAS 98, Accounting for Leases,~~ the net proceeds were classified as a financing lease obligation. This was primarily due to the terms of the lease agreement. Accordingly, the Company continues to carry the value of the building on its balance sheet and record depreciation expense until the criteria to record a sale are met. ~~The Company continues to account for the financing lease in accordance with the provisions of SFAS 98.~~

During the quarter ended ~~June~~September 30, 2009, the Company recorded $6766,000 as non-cash interest expense and $1516,000 as a decrease of the lease obligation due to a reduction in the deposit amount left with the landlord of $29,000 during the ~~second~~third quarter of 2009. ~~For~~During the ~~six~~quarter ended September 30, 2008, the Company recorded $70,000 as non-cash interest expense and $7,000 as an increase of the lease obligation due to a reduction in the deposit amount left with the landlord of $47,500 during the third quarter of 2008. For the nine months ended ~~June~~ September 30, 2009, the Company recorded $~~136~~202,000 as non-cash interest expense and $44,000 as an increase of the lease obligation. For the nine months ended September 30, 2008, the Company recorded $214,000 as non-cash interest expense and $2823,000 as an increase of the lease obligation. At September 30, 2009, $3,625,000 was recorded on the balance sheet as a financing lease obligation, which was classified as $420,375 short-term obligation and $3,204,565 long-term obligation, and has been reported net of a $71,000 deposit. The net book value of the building at September 30, 2009, was approximately $3,183,000.

At ~~June~~ 30December 31, ~~2009~~2008, $3,~~640~~669,000 was recorded on the balance sheet as a financing lease obligation, which ~~was~~has been classified as $~~428~~444,000 short-term obligation and $3,~~212~~225,000 long-term obligation, and has been reported net of a $~~100~~157,~~000~~ 500 deposit. The net book value of the building at ~~June~~December 3031, ~~2009~~2008, was ~~approximately~~ approximately $3,~~259~~410,000.

AtSimultaneously ~~December 31,~~with ~~2008,~~the ~~$3,669,000~~closing ~~was~~of ~~recorded~~the onsale of its North American businesses to Coherent Inc. and subsequent to the ~~balance~~quarter ~~sheet~~end, asthe Company entered into a ~~financing~~ lease ~~obligation,~~amendment with ~~which~~respect ~~has~~to ~~been~~the ~~classified~~Company's ascorporate ~~$444~~headquarters in Salem,~~000~~ ~~short-term~~New Hampshire. ~~obligation~~The ~~and~~amendment $3provides for the reduction of the square footage leased by the Company,~~225,000~~ ~~long-term~~to ~~obligation~~allow for a direct lease between the landlord and Coherent, and revised ~~has~~rent ~~been~~payments ~~reported~~by ~~net~~the Company of a $~~157~~16,~~500~~949 ~~deposit.~~per ~~The~~month ~~net~~for ~~book~~the ~~value~~remainder of 2009 ~~the~~and ~~building~~$12,712 atper ~~December~~month 31for 2010, ~~2008~~with ~~was~~such lease expiring no later than ~~approximately~~December $331,~~410~~ 2010,~~000~~ subject to the landlord's right to recapture such leased space earlier.

Other obligations

~~The~~SYC ~~Company’s~~conducted ~~Canadian subsidiary, StockerYale Canada Inc., conducts~~ research and development, manufacturing, sales and administration from a property located at 275 Kesmark Street, Montreal, Quebec, Canada. ~~StockerYale Canada leases~~SYC ~~approximately~~sub-leases ~~60,000~~portions ~~square feet~~ of the ~~Montreal~~facility ~~property for an initial term of ten years ending December 2015. The rent during the ten-year term ranges from approximately Cdn. $416,031~~ to ~~Cdn.~~PyroPhotonics ~~$469~~Lasers,~~521~~ ~~per year plus all operating costs~~Inc. ~~StockerYale Canada has an option to extend the initial term of the lease for an additional term of five years. StockerYale Canada sub-leases portions of the facility~~

~~On June~~Simultaneously ~~12,~~with ~~2008,~~the ~~StockerYale~~closing ~~(IRL)~~of ~~Ltd.~~the ~~entered~~sale ~~into~~of aits ~~lease~~North ~~commitment~~American ~~for~~businesses ~~its~~to Coherent and ~~operations~~subsequent into ~~Cork~~quarter end, ~~Ireland~~SYC executed a lease amendment with the landlord. The Montreal lease amendment shortens the term ~~began~~of onthe Montreal ~~August~~Lease 22from having an expiration date of November 31, ~~2008~~2015 to: (a) with respect to space subleased by Coherent from SYC, the date one year from Closing plus the option by Coherent to extend for up to three additional months; and (b) with respect to space being subleased by an ~~initial~~existing ~~term~~subtenant of ~~five~~SYC, ~~years~~the date of termination of such sublease. In connection with ~~rent~~such amendment, SYC agreed to pay the landlord Cdn $550,000, plus applicable taxes, which includes cash and the ~~service~~forfeiture ~~charges~~by SYC of ~~approximately €102~~prepaid rent of Cdn $260,000. ~~per~~SYC ~~year~~retains the ultimate obligations under the lease. In addition, certain restoration costs, if any, are the obligation of SYC.

~~Photonics~~On June ~~Products~~12, 2008, StockerYale (IRL) Ltd. ~~leases~~entered ~~approximately~~into ~~13,000~~a ~~square~~lease ~~feet~~commitment offor ~~space~~its operations in ~~Hatfield Broad Oak~~Cork, ~~Hertfordshire, UK~~Ireland. The lease ~~runs for a~~ term ofbegan ~~nine~~on ~~years~~August ~~ending September 29~~22, ~~2013. It also leases approximately 4~~2008,~~000 square feet in Bishops~~ ~~Stortford,~~for ~~UK,~~an ~~through~~initial ~~September~~term ~~2011,~~of ~~which~~five ~~has~~years ~~been sublet. Photonic~~with ~~Products~~rent ~~Ltd.~~and ~~also~~service ~~leases~~charges ~~sales~~of ~~offices in~~approximately ~~Grobenzell~~€102,000 ~~Germany~~per ~~and Huntington Beach, California~~year.

Photonics Products Ltd. leases approximately 13,000 square feet of space in Hatfield Broad Oak, Hertfordshire, UK. The lease runs for a term of nine years ending September 29, 2013. ~~(15)~~It also leases approximately 4,000 square feet in Bishops ~~SEGMENT~~Stortford, ~~INFORMATION~~UK, through September 2011. Photonic Products Ltd. also leases sales offices in Grobenzell, Germany and Huntington Beach, California.

~~SFAS No.~~ ~~131~~ (~~“SFAS 131”~~17)~~, Disclosures about Segments of an~~ ~~Enterprise~~SEGMENT and Related information, requires financial and supplementary information to be disclosed on an annual and interim basis of each reportable segment of an enterprise. SFAS 131 also establishes standards for related disclosures about product and services, geographic areas and major customers. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief decision-making group, in making decisions how to allocate resources and assess performance. The Company’s chief decision-maker is the Chief Executive Officer. The Company’s accounting policies and method of presentation for segments is consistent with that used throughout the consolidated financial statements.INFORMATION

18Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief decision-making group, in making decisions how to allocate resources and assess performance. The Company’s chief decision-maker is the Chief Executive Officer. The Company’s accounting policies and method of presentation for segments is consistent with that used throughout the consolidated financial statements.

~~The~~Following the sale to Coherent, the Company operates in ~~three~~two segments: ~~lasers,~~LED’s ~~Photonic~~(light emitting ~~Products,~~diode systems) and ~~optical components~~Photonic Products. In the ~~laser~~LED segment, the Company ~~acts~~designs ~~as an independent designer~~ and ~~manufacturer~~manufactures ~~of Lasiris™ brand lasers and light emitting diode (“~~LED”) systems for the inspection, machine vision, medical and military markets. The Photonic Products segment distributes laser diodes and designs and manufactures custom laser diodes modules for industrial, commercial and medical applications. In its optical component segment, the Company develops and manufactures specialty optical fiber, fiber-based assemblies and diffractive optics such as phase masks used primarily in the telecommunications, defense, and medical markets by original equipment manufacturers. The policies relating to segments are the same as the Company’s corporate policies.

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

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

	Three Months Ended September 30, 2009									Three Months Ended September 30, 2008
	In thousands									In thousands
	LED			Photonic Products			Total			LED			Photonic Products			Total
Net Sales	$	795		$	1,552		$	2,347		$	1,390		$	2,333		$	3,723
Gross Profit		210			509			719			664			681			1,345
Operating Loss		(294	)		(670	)		(963	)		(214	)		(1,194	)		(1,408	)

~~(All amounts in thousands)~~18

	Three Months Ended June 30, 2009												Three Months Ended June 30, 2008
	Nine months Ended September 30, 2009									Nine months Ended September 30, 2008
	Lasers			Photonic Products			Optical Components			Total			Lasers			Photonic Products			Optical Components			Total
	In thousands									In thousands
Net Sales	$	3 ,405		$	1,795		$	817		$	6,017		$	5,026		$	2,714		$	807		$	8,547
	LED			Photonic Products			Total			LED			Photonic Products			Total
Gross Profit		1,424			382			225			2,030			2,030			677			197			2,904
Net sales	$	2,589		$	5,212		$	7,801		$	3,487		$	8,006		$	11,493
Operating Loss		(469	)		(265	)		(186	)		(919	)		(1,094	)		(188	)		(289	)		(1,571	)
Gross Profit		831			1,382			2,213			1,375			2,236			3,611
Operating loss		(964	)		(2,238	)		(3,202	)		(1,103	)		(3,043	)		(4,146	)

	Six months Ended June 30, 2009												Six months Ended June 30, 2008
	September 30, 2009												December 31, 2008
	Laser			Photonic Products			Optical Components			Total			Lasers			Photonic Products			Optical Components			Total
	In thousands												In thousands
Net sales	$	6,892		$	3,659		$	1,785		$	12,336		$	9,141		$	5,747		$	1,721		$	16,609
	LED			Photonic Products			Corporate			Total			LED			PhotonicProducts			Corporate			Total
Gross Profit		2,944			871			605			4,420			3,415			1,464			484			5,363
Total current assets	$	1,152		$	1,854		$	1,231		$	4,237		$	1,156		$	2,049		$	1,642		$	4,847
Operating loss		(1,052	)		(467	)		(301	)		(1,820	)		(2,040	)		(476	)		(582	)		(3,098	)
Property, plant & equipment, net	$	183		$	440		$	3,306		$	3,929		$	189		$	480		$	3,572		$	4,241
Acquired intangible assets, net	$	40		$	1,351			—		$	1,391		$	60		$	1,735			—		$	1,795
Goodwill	$	507		$	4,292			—		$	4,799		$	507		$	3,903			—		$	4,410
Other long-term assets	$	—		$	—		$	2		$	222		$	—		$	133		$	303		$	436
Total	$	1,882		$	7,937		$	4,539		$	14,358		$	1,912		$	8,300		$	5,517		$	15,729

	June 30, 2009										December 31, 2008
	Lasers		Photonic Products		Optical Components		Corporate		Total		Lasers		Photonic Products		Optical Components		Corporate		Total
Total current assets	$	5,539	$	1,759	$	568	$	1,153	$	9,019	$	5,532	$	2,049	$	544	$	1,622	$	9,747
Property, plant & equipment, net	$	2,520	$	487	$	1,910	$	3,400	$	8,317	$	2,271	$	480	$	2,167	$	3,578	$	8,496
Acquired intangible assets, net	$	66	$	1,594	$	114		—	$	1,774	$	70	$	1,735	$	158		—	$	1,963
Goodwill	$	2,677	$	4,453	$	8		—	$	7,138	$	2,677	$	3,903	$	8		—	$	6,588
Other long-term assets	$	225	$	—	$	—	$	2	$	227	$	213	$	133	$	-	$	302	$	648
Total	$	11,027	$	8,293	$	2,600	$	4,555	$	26,475	$	10,763	$	8,300	$	2,877	$	5,502	$	27,442

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

Three Months Ended June 30,

Six Months Ended June 30,

In Thousands

Three Months Ended September 30,

Nine months Ended September 30,

Sales by region

2009

2008

2009

2008

Domestic – United States

~~3,502~~838

31,~~915~~264

63,~~774~~300

74,~~572~~281

Canada

~~420~~-

~~511~~50

~~849~~44

~~1,078~~201

Europe

1,~~779~~285

32,~~033~~070

43,~~059~~851

5,~~904~~595

Asia

~~284~~164

~~844~~137

~~471~~393

1,~~711~~099

Other

3260

~~244~~202

~~183~~213

~~344~~317

Total

62,~~017~~347

83,~~547~~723

127,~~336~~801

1611,~~609~~493

2019

(16) SUBSEQUENT EVENTS

On July 28, 2009, the Company entered into a Waiver and Amendment with Laurus and its affiliates, dated as of July 16, 2009, to amend the line of credit under the Security and Purchase agreement and the Term Note Payable (see footnote 12). The Waiver and Amendment extends the due date of the line of credit from June 28, 2009 to October 15, 2009 and revises the interest rate on the outstanding balance to 10% per annum. In addition, the term notes payable are amended to defer principal payments between June 1, 2009 through October 1, 2009 which shall become payable on October 15, 2009 and revises the interest rate on the outstanding balances to 12% per annum.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion of the consolidated financial condition and results of operations of the Company should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Form 10-Q. Except for the historical information contained herein, the following discussion, as well as other information in this report, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and is subject to the “safe harbor” created by those sections. Some of the forward-looking statements can be identified by the use of forward-looking terms such as “believes,” “expects,” “may,” “will,” “should,” “could,” “seek,” “intends,” “plans,” “estimates,” “anticipates” or other comparable terms. Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those in the forward-looking statements. We urge you to consider the risks and uncertainties described in “Risk Factors” in this report and in our annual report on Form 10-K for the year ended December 31, 2008. We undertake no obligation to update our forward-looking statements to reflect events or circumstances after the date of this report. We caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made.

Overview

~~StockerYale,~~The ~~Inc.~~Company is an independent designer and manufacturer of ~~structured~~laser ~~light~~diode ~~lasers,~~modules ~~LED~~and LED systems, ~~and specialty optical fibers and phase masks~~ for industry-leading original equipment manufacturers (OEMs), as well as a distributor of visible, infrared and blue violet laser diodes. Our ~~illumination~~ products include the ~~Lasiris~~ ~~and~~ Photonic Products ~~brands~~brand of laser diode modules, diodes, and StockerYale LED systems for the machine vision, industrial inspection, defense and security, biomedical and medical markets. Our products are sold to over ~~1,500~~ 800 customers, primarily in North America, Europe and the Pacific Rim. We sell directly to, and work with, a group of distributors and machine vision integrators to sell their specialized illumination products.

RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the attached unaudited condensed consolidated financial statements and notes thereto and with our audited financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2008 ~~and the unaudited condensed consolidated financial statements and notes thereto included in the Company’s quarterly report on Form 10-Q for the quarter ended March 31, 2009~~.

We are a leader in the design, development and manufacturing of low power laser ~~modules~~ ~~and related optics~~modules. In addition, we distribute laser diodes for leading diode manufacturers, and develop and ~~manufacturer~~manufacture LED systems ~~and specialty optical fiber (SOF)~~. Since 1990 we have grown through internal expansion and through strategic acquisitions of technology and complimentary businesses. StockerYale is recognized as the only photonics company that possesses the design and manufacturing know-how in four different photonic technologies: diode-based lasers, LEDs, specialty optical fiber and diffractive optics. We also distribute laser diodes through our Photonic Products subsidiary. Our products serve a wide range of applications and industries including machine vision and industrial inspection, biomedical and medical, defense and security, and other commercial applications. Our advanced technologies are driven by a deep understanding of the needs of our customers and the industries in which they work.

~~Management~~The Company took a number of actions during 2008 and the first ~~half~~nine months of 2009 to restructure its debt, improve ~~the Company’s~~its operational efficiency and ~~to improve~~ its overall ~~financial~~ financial performance. InThe ~~addition~~Company engaged Needham & Company, LLC to assist it in ~~response~~reviewing and evaluating financial and strategic alternatives, and subsequent to the ~~general~~quarter ~~economic~~ended September 30, 2009, we reached an agreement ~~slowdown~~with ~~that~~Coherent ~~began~~to insell ~~late~~substantially ~~2008,~~all ~~management~~of ~~initiated~~the aNorth ~~number~~American assets of ~~actions~~the Company. toThe sale ~~improve~~price consisted of a cash ~~flow~~payment of $15,000,000 and ~~liquidity~~the ~~recognizing~~assumption ~~that~~of ~~the~~certain liabilities, ~~economy~~including ~~could~~approximately ~~negatively~~$3,400,000 of accounts payable and other ~~impact~~obligations. Proceeds from the ~~future~~transaction ~~performance~~were ofused to pay off in full all obligations owed to Laurus and its related entities (approximately $7,900,000 including fees) and for working capital and general corporate purposes for the Company's ongoing and future operations. ~~These~~The ~~actions~~Company ~~include:~~expects to record a net gain related to the transaction in the fourth quarter of 2009.

·On October ~~Customer-driven~~7, ~~new~~2009, ~~product~~the ~~development~~Company toand ~~provide~~its ~~our~~wholly ~~customers~~owned ~~and~~subsidiary, ~~potential~~StockerYale ~~customers~~(UK) Limited, ~~with~~amended anthe ~~array~~bonds held by the former shareholders of ~~leading~~Photonic ~~edge~~Products Ltd. ~~products;~~to amortize and begin principal payments on the bonds that were due and payable October 31, 2009.

~~· Reduction of our overall cost structure in a variety of ways including: reduction of work force, salary reductions, improvements in supply chain management and material costs;~~20

·The Company ~~Improvements~~will incontinue ~~working~~to ~~capital~~operate ~~through~~its ~~focused~~LED ~~management~~systems ofand ~~inventory~~Photonic Products businesses, which are based in Ireland and ~~accounts~~the ~~receivable;~~United Kingdom. In the past, the company reported three segments: lasers, Photonic Products, and optical components. The optical component segment was sold in its entirety.

·The Company’s ~~Further~~common ~~cost~~stock ~~reductions,~~trades ason ~~necessary~~the ~~and~~OTC ~~able,~~Bulletin inBoard ~~order~~under tothe ~~improve~~ticker ~~cash flow~~symbol “STKR.OB.”

22OPERATING RESULTS OF CALENDAR QUARTERS ENDED SEPTEMBER 30, 2009 AND 2008

WeNet ~~are~~Sales ~~considering different ways to raise additional capital including the sale of our equity securities, offerings of debt securities, or borrowings~~ (from ~~financial institutions.~~continuing We are in discussions with potential lenders to refinance the North American revolving credit facility as well as potential lenders to refinance portions of the term debt of the Company. However, there can be no assurance that such activities will result in refinancing. We have engaged Needham & Company, LLC to assist us in reviewing and evaluating our financial and strategic alternatives.operations)

WeNet ~~intend~~sales towere ~~pursue~~$2.3 ~~various~~million ~~options~~for tothe ~~finance~~three ~~and~~months ~~fund~~ended ~~operations~~September 30, ~~as necessary~~2009, ~~through the~~a ~~end~~37% ofdecrease from ~~2009~~$3.7 Wemillion ~~cannot~~for ~~be sure of~~ the ~~timing~~third orquarter ~~terms~~ of ~~any~~2008. Adjusted ~~borrowing~~for the ~~arrangements~~impact orof ~~equity~~foreign ~~offerings~~currency translation, orthe ~~that~~decrease wein ~~will~~sales bewas 30%. The ~~able~~decrease toin ~~consummate~~sales ~~one~~was ~~or more~~due ofto ~~these~~decreased ~~options.~~demand Iffrom wethe doLED segment ~~not~~(46%) ~~achieve~~and ~~these~~Photonic ~~goals~~Products insegment ~~2009,~~(31%). The wedecrease ~~would~~also ~~implement~~includes ~~contingency~~the ~~plans~~negative ~~for~~impact ~~additional~~of ~~cost~~foreign ~~reductions;~~currency ~~however~~translation of approximately $252,000 ~~there~~of which $174,000 is ~~a possibility~~related ~~that~~to wethe ~~would~~decline ~~not~~in ~~have~~the ~~adequate~~British ~~capital~~Pound (“GBP”) tofrom ~~sustain~~the ~~our~~prior ~~current operations~~year.

~~The~~Gross ~~Company’s~~Profit ~~common~~(from ~~stock~~continuing ~~trades on the OTC Bulletin Board under the ticker symbol “STKR.OB”.~~operations)

~~OPERATING~~Gross ~~RESULTS~~profit OFwas ~~CALENDAR~~$0.7 ~~QUARTERS~~million ~~ENDED~~for ~~JUNE~~the three months ended September 30, 2009, ~~AND~~compared to $1.3 million for the third quarter of 2008. During the three months ended September 30, 2009, gross margin was 30.6% compared with 36.1% in the third quarter of 2008, principally due to the decrease in sales in our LED segment of approximately 46% and the resulting impact on gross margin in that segment.

~~Net~~Operating ~~Sales~~Expenses (from continuing operations)

~~Net sales~~Operating ~~were~~expenses totaled $61.05 million for the ~~three~~third ~~months~~quarter ~~ended~~of ~~June 30,~~ 2009, adecreasing 3041% ~~decrease~~ from $82.5 million for the ~~second~~third quarter of 2008. The decrease in ~~sales~~expenses ~~was~~from ~~mainly~~the ~~due~~prior toyear ~~decreased~~result ~~demand~~ from ~~the~~lower ~~laser~~costs ~~segment~~in ~~(34%)~~2009 ~~and~~due ~~Photonic~~to ~~Products segment~~cost ~~(35%). The~~reduction ~~decrease~~initiatives ~~also includes the negative impact~~ of ~~foreign currency translation of~~ approximately $~~520~~426,000, one-time expense of ~~which~~acquisition costs of $~~354~~452,000 isin ~~related~~2008 relating to ~~the~~an ~~Photonic~~acquisition ~~Products~~transaction ~~decrease~~that ~~from~~did ~~the~~not ~~prior~~close ~~year~~and a favorable foreign currency impact in 2009 of approximately $122,000.

~~Gross~~Operating ~~Profit~~loss was $1.0 million compared with an operating loss of $1.4 million for the third quarter of 2008. Operating losses decreased primarily due to the $452,000 of expenses relating to an acquisition transaction that did not close in 2008.

~~Gross~~Non-Operating ~~profit~~Expenses was $2.0 million for the three months ended June 30, 2009, compared to $2.9 million for the second quarter of 2008. During the three months ended June 30, 2009, gross margin was 33.7% compared with 34.0% in the second quarter of 2008. The decline in gross profit results (from ~~lower~~continuing net sales partially offset by lower costs resulting from cost reduction initiatives taken during the past nine months and includes positive impact of foreign currency translation of approximately $251,000 versus the prior year.operations)

~~Operating~~Other ~~Expenses~~expenses, which are comprised primarily of non-cash debt discount and financing costs, resulted in expense of $666,000 for the three months ended September 30, 2009, versus expenses of $2,107,000 in the three months ended September 30, 2008. The decline arose mainly from one-time expenses in 2008 relating to an acquisition transaction that did not close of approximately $961,000, and from translation adjustments due to the weakening of the US dollar against the GBP, and the Euro of approximately $0.6 million.

~~Operating~~Discontinued expenses totaled $2.7 million for the second quarter of 2009, decreasing 34% from $4.1 million for the second quarter of 2008. The decrease in expenses from the prior year was primarily due to acquisition costs for Virtek Vision International, Inc. of $307,000 in 2008, lower costs in 2009 due to cost reduction initiatives of approximately $560,000, and favorable foreign currency impact in 2009 of approximately $400,000.Operations

~~Operating~~The net loss ~~was~~from ~~$0.9~~discontinued ~~million~~operations ~~compared~~for ~~with~~the anthree ~~operating~~months ~~loss~~ended ofSeptember 30, 2009, was approximately $~~1.6~~(26,000) ~~million~~and the net gain for the ~~second~~ ~~quarter~~three ofmonths ~~2008. Operating~~ended September ~~losses~~30, ~~decreased~~2008, ~~due~~was toapproximately ~~actions~~$313,000. ~~taken~~All ~~to decrease~~amounts ~~the~~have ~~Company’s~~been ~~cost~~reported as ~~structure~~net asgain ~~well~~(loss) asfrom adiscontinued $0operations.7 ~~million~~Interest ~~benefit~~expense ~~from~~was also ~~favorable~~allocated ~~foreign~~to ~~currency~~discontinued ~~translations~~operations.

Non-Operating Expenses

Other expenses, which are comprised primarily of non-cash debt discount financing costs and foreign currency translation adjustments, resulted in income of $365,000 for the three months ended June 30, 2009, versus expenses of $778,000 in the three months ended June 30, 2008. The benefit arose from translation adjustments due to the weakening of the US dollar against the British Pound (GBP), Euro and the Canadian dollar (CAD) of approximately $1.4 million, a gain of approximately $109,000 from a valuation reduction of the warrant liability, offset by warrant and debt acquisition expenses of approximately $300,000.

Net Loss

Net loss including discontinued operations was $01.75 million or $0.0203 per share. This compares to net loss of $2.3.1 million or $0.0608 per share for the ~~second~~third quarter of of 2008.

Benefit for Income Taxes (from continuing operations)

Our historical operating losses raise doubt about our ability to realize the benefits of our deferred tax assets. As a result, we provide a valuation allowance for the net deferred tax assets that may not be realized. We recorded a deferred tax ~~provision~~benefit of approximately $~~164~~205,000 in the three months ended ~~June~~September 30, 2009, related to one of our non-U.S. based subsidiaries. We recorded a deferred tax benefit of approximately $6280,000 in the three months ended ~~June~~September 30, 2008, related to the same non-U.S. based subsidiary, which are considered realizable in that tax jurisdiction.

2321

~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, 2009 AND 2008

Net Sales (from continuing operations)

Net sales were $127.38 million for the ~~six~~nine months ended ~~June~~September 30, 2009, a 2632% decrease ~~from~~ from $1611.65 million for the ~~six~~nine months ended ~~June~~September 30, 2008. ~~The~~Adjusted for the impact of foreign currency translation, the decrease in sales was ~~mainly~~20%. The decrease in sales was due to decreased demand from the ~~laser~~ LED segment (2726%) and the Photonic Products segment (3735%). The decrease also includes the negative impact of foreign currency translation of approximately $1.24 million of which $~~838,000~~1.0 million is related to the ~~Photonic~~decline ~~Products~~in GBP ~~decrease~~ from the prior year.

Gross Profit (from continuing operations)

Gross profit was $42.42 million for the ~~six~~nine months ended ~~June~~ September 30, 2009. This represents ana 1839% decrease from $53.46 million for the first ~~six~~nine months of 2008. During the ~~six~~nine months ended ~~June~~ September 30, 2009, gross margin was 3638.4% compared with 3231.4% in the comparable period of 2008, ~~mainly~~principally due to the ~~cost~~decrease ~~reduction~~in ~~actions~~sales ~~taken~~ in ~~late~~our ~~2008~~Photonic ~~and~~Products ~~during~~segment ~~2009. In~~of ~~addition,~~approximately 35% and the ~~gross~~resulting impact on gross margin in that segment. Gross profit was favorably impacted from foreign currency exchange of approximately $~~640~~89,000.

Operating Expenses (from continuing operations)

Operating expenses totaled $54.89 million for the ~~six~~nine months ended ~~June~~ September 30, 2009, versus $76.89 million in the same period of 2008. The decrease in operating expense was mainly due to actions taken to decrease the Company’s cost structure in 2009, ~~acquisition~~one-time ~~related~~ expenses of $~~307~~784,000 ~~related~~relating to ~~the~~an acquisition ~~Virtek~~transaction ~~Vision~~that ~~International,~~did ~~Inc.~~not ~~acquisition~~close ~~activities~~ in 2008, and the favorable impact from foreign currency exchange in 2009 of approximately $~~950~~674,000.

Operating loss was $13.82 million compared with operating losses of $34.1 million for the same period of 2008.

Non-Operating Expenses (from continuing operations)

Other expenses, which are comprised primarily of non-cash debt discount and financing costs ~~and foreign currency translation adjustments~~, showed an expense of $0.5 million for the ~~six~~nine months ended ~~June~~ September 30, 2009, versus an expense of $13.5 1 million during the ~~six~~nine months ended ~~June~~ September 30, 2008. The change in expense was mainly from ~~translation~~one-time ~~adjustments~~expenses in 2008 of approximately $961,000 relating to a acquisition transaction that did not close, a gain due to the weakening of the US U.S. dollar against the British Pound (GBP), ~~Euro~~ and the ~~Canadian~~Euro ~~dollar (CAD),~~ of approximately $12.30 million, a gain on the valuation of the warrant liability of approximately $~~145~~92,000, offset by an ~~increase~~decrease in ~~warrant~~cost ~~and debt acquisition~~of financing expenses of approximately $~~525~~642,000.

~~Net~~Discontinued ~~Income (Loss)~~Operations

~~Net~~The ~~loss~~net ~~including~~losses from discontinued operations ~~was~~for ~~$2.3~~the ~~million~~nine ormonths ~~$0.5~~ended ~~per~~September ~~share.~~30, ~~This~~2009 ~~compares~~and to2008 ~~net~~were ~~loss~~approximately of $~~4.5~~214,000 ~~million~~and or $0515,000.12 All ~~per~~amounts ~~share~~have been ~~for~~reported ~~the~~as ~~first~~net ~~six~~loss ~~months~~from discontinued operations. Interest ofexpense ~~2008~~was also allocated to discontinued operations.

~~Provision~~Net ~~(Benefit) for Income Taxes~~Loss

~~Our historical~~Net ~~operating losses raise doubt about our ability to realize the~~loss ~~benefits~~including ofdiscontinued ~~our~~operations ~~deferred~~was ~~tax assets~~$3.8 Asmillion aor ~~result,~~$0.09 weper ~~provide~~share. ~~a valuation~~This ~~allowance~~compares ~~for~~to ~~the~~ net ~~deferred~~loss ~~tax assets that may not be realized. We recorded a deferred tax benefit~~ of ~~approximately~~ $~~9,000~~7.5 ~~for~~million ~~the~~or ~~six months ended June 30, 2009, related to the same non-U~~$0.S.20 ~~based~~per ~~subsidiary~~share ~~compared to $122,000~~ for the ~~six~~first nine months ~~ended~~of ~~June 30,~~ 2008.

Provision Benefit for Income Taxes (from continuing operations)

Our historical operating losses raise doubt about our ability to realize the benefits of our deferred tax assets. As a result, we provide a valuation allowance for the net deferred tax assets that may not be realized. We recorded a deferred tax benefit of approximately $214,000 for the nine months ended September 30, 2009, related to the same non-U.S. based subsidiary compared to $203,000 for the nine months ended September 30, 2008, which are considered realizable in that tax jurisdiction.

LIQUIDITY AND CAPITAL RESOURCES

Our cash balance was $1.2 million at ~~June~~September 30, 2009 versus $1.6 million at December 31, 2008. The ~~primarily~~reduction aswas primarily a result of the principal and interest payments and payments against revolving lines of credit, which were partially offset by a new loan in the amount of $0.5 million from a ~~private~~ private investor.

As of ~~June~~September 30, 2009, our net accounts receivable balance was $31.42 million compared to $31.97 million at year end. Our days sales outstanding ~~increased~~decreased from 47 50 days at December 31, 2008 to 5245 days at ~~June~~September 30, 2009.

24Inventories at September 30, 2009 were flat to the $1.4 million at December 31, 2008.

~~Inventories~~Capital atspending ~~June~~for the nine months ending September 30, 2009 ~~were~~was ~~flat~~$36,000. The Company has no material contingent capital expenditure commitments as of September 30, 2009 and has no plans to ~~the~~purchase ~~$3.9~~additional ~~million~~capital atitems between October 1, 2009 and December 31, ~~2008~~ 2009.

~~Capital~~As a ~~spending~~result ~~for~~of the ~~six~~sale ~~months~~of ~~ending~~substantially ~~June~~all ~~30,~~North ~~2009~~American ~~was~~assets ~~$356~~of the Company on October 13,~~000.~~ ~~The~~2009, the Company’s management believes it has adequate funds to nosustain ~~material~~current ~~contingent~~operations. Proceeds ~~capital~~from ~~expenditure~~the ~~commitments~~sale asamounted ofto $15,000,000 ~~June~~from 30which approximately $9,700,000 ~~2009~~was ~~but~~used to repay loans, pay ~~has~~expenses ~~plans~~associated towith ~~purchase~~the ~~approximately~~sale, and other settlements and obligations. In addition, $~~139~~750,000 of ~~capital~~the ~~items~~proceeds ~~between~~is held in escrow ~~July 1~~for a period of one year from the date of sale. The cash balance was $6.3 million, ~~2009~~including ~~and~~$750,000 ~~December~~ held in escrow, on October 31, 2009, after the payment of loans, transaction expenses and other obligations.

As of June 30, 2009, the Company may not have sufficient liquidity and working capital to meet its ongoing operating obligations. In addition, the Company has a significant amount of short term debt obligations payable between July 1, 2009 and December 31, 2009, including approximately $4,200,000 of term debt and approximately $3,600,000 of revolving credit lines. Management is continuing its efforts to raise additional capital so that the Company can meet its obligations and sustain operations through the sale of its equity securities, through offerings of debt securities, or through borrowings from financial institutions. We are in discussions with several potential lenders to refinance the North American revolving credit facility as well as potential lenders to refinance portions of the term debt of the Company. However, there can be no assurance that such activities will result in refinancing, and if we were able to refinance our indebtedness, such terms may be less favorable to the Company than the current terms.

As previously disclosed, on March 27, 2009, the Company entered into the First Amendment to Stock and Warrant Purchase Agreement, dated as of March 23, 2009 (the “Amendment”), with Lewis Opportunity Fund LP (“Lewis”) which extended the closing date of that certain Stock and Warrant Purchase Agreement (the “Purchase Agreement”) to June 30, 2009. Under the Purchase Agreement, Lewis agreed to purchase from the Company, and the Company agreed to sell to Lewis, 2,000,000 shares of the Company’s common stock at a per share purchase of $0.25, for an aggregate purchase price of $500,000.

The Company did not receive the funds by ~~June~~September 30, 2009, and is evaluating the options for closing the Purchase Agreement.

OFF-BALANCE SHEET ARRANGEMENTS

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

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

Not required.

Item 44T. Controls and Procedures.

Evaluation of disclosure controls and procedures.

Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of ~~June~~September 30, 2009. Based on ~~that~~ that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of ~~June~~September 30, 2009, our disclosure controls and procedures ~~were~~ were effective in ensuring that the information we are required to disclose in ~~the~~ the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported on a timely basis, and that this ~~information~~ information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosures.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting during the quarter ended ~~June~~September 30, 2009, ~~that~~ that materially affected, or is reasonably likely to materially affect, our ~~internal~~ internal control over financial reporting.

PART II: OTHER INFORMATION

Item 1.

Legal Proceedings.

From time to time, we may become involved in litigation relating to claims arising out of operations in the normal course of business, which we consider routine and incidental to our business. We currently are not a party to any legal proceedings, the adverse outcome of which, in management’s opinion, would have a material adverse effect on our business, results of operation or financial condition.

Item 1A.

Risk Factors.

~~During~~Other ~~the~~than ~~period~~with ~~covered~~respect byto ~~this~~the ~~Form~~risk ~~10-Q~~factor below, there have ~~not~~ been ~~any~~no material changes ~~from~~to the risk factors ~~previously~~ disclosed in ~~the~~Part I, “Item 1A. Risk Factors” ofin our annual report on Form 10-K, for the fiscal year ended December 31, 2008. In The ~~addition~~risks todescribed ~~the other information set forth in this report~~below, ~~you~~and ~~should carefully consider the factors discussed~~ in our annual report on Form 10-K, ~~which could materially affect our business, financial condition or future results. The risks described in our annual report on Form 10-K~~ are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Our purchase and sale agreement with the buyer of our North American assets includes indemnification obligations which may negatively affect our liquidity. On October 13, 2009, we sold substantially all North American assets of SYC and our specialty optical fiber product line to Coherent Inc. Pursuant to the purchase and sale agreement, we agreed to indemnify Coherent Inc. for any losses sustained, for any breach of or inaccuracy in any of the representations or warranties we made to Coherent Inc. in the purchase and sale agreement, provided that we are not obligated to indemnify Coherent Inc. for any amount in excess of $15,000,000. Should any of our representations or warranties prove to be inaccurate, we could be obligated to pay Coherent Inc. up to $15,000,000, which would negatively affect our liquidity and our ability to continue operations.

Item 5.

Other Information.

During the quarter ended ~~June~~September 30, 2009, we made no material changes to the ~~procedures~~ procedures by which ~~shareholders~~stockholders may recommend nominees to our Board of Directors, as described in our most recent proxy statement.

On July 28, 2009, the Company entered into a Waiver and Amendment (the “Waiver”), dated as of July 16, 2009, with LV Administrative Services, Inc. (“LV”), Valens U.S. SPV I, LLC (“Valens”), Valens Offshore SPV I, Ltd. (“Valens Offshore”), Valens Offshore SPV II, Corp. (“Valens Offshore II”) and PSource Structured Debt Limited (“PSource”, and collectively with LV, Valens, Valens Offshore and Valens Offshore II, the “Creditor Parties”), pursuant to which the Creditor Parties agreed to amend (i) that certain Overadvance Letter, dated March 31, 2008 (the “Overadvance Letter”), by and between the Company and Laurus, (ii) that certain Security and Purchase Agreement, dated as of June 28, 2006 (the “Security Agreement”), by and between the Company and Laurus, (iii) those certain amended and restated secured term notes, dated as of December 28, 2007 (the “Notes”) issued by the Company to Laurus and its assignees and (iv) that certain Secured Non-Convertible Revolving Note, dated as of June 28, 2006 (the “2006 Note”) issued by the Company to Laurus.

As previously disclosed, on June 28, 2006, the Company entered into the Security Agreement with Laurus. Under the Security Agreement, a 3-year revolving line of credit was established. The Security Agreement provided for (i) a revolving line of credit not to exceed $4.0 million and (ii) a security interest in and lien upon all of the Company’s assets in favor of Laurus. Under the Security Agreement, the Company may borrow a total amount at any given time up to $4.0 million, limited to qualifying receivables and inventories. On March 31, 2008, pursuant to the Overadvance Letter, Laurus granted the Company the ability to borrow up to $500,000 over the limit defined by qualified receivables and inventory for one year, expiring March 31, 2009, which was extended to June 28, 2009. On June 28, 2006, the Company issued the 2006 Note in the aggregate principal amount of $4.0 million, to Laurus to evidence the line of credit and the amounts outstanding thereunder. The outstanding principal under the 2006 Note accrued interest at an annual rate of 1% above the prime rate from time to time. All unpaid principal plus accrued but unpaid interest was due and payable on June 28, 2009.

Also, as previously disclosed, on December 28, 2007, the Company issued the Notes to Laurus and its assignees, pursuant to which the Company borrowed an additional $1.0 million from Valens. The Notes amended and restated the secured term notes issued by the Company to Laurus on December 30, 2005 (the “December Note”) and June 19, 2007 (the “June Note”). The terms of the Note issued to Valens (the “Valens Note”) were the same as the June Note, except that the principal amount of the Valens Note consisted of a $1.0 million portion, which was the amount borrowed by the Company from Valens on December 28, 2007, and a $764,684 portion, which was the amount owed to Valens prior to December 28, 2007 under the June Note. The $1.0 million portion of the Valens Note accrued interest at an annual rate of 10.5%. The other Notes amended and restated the December Note and the June Note and reduced the monthly principal payments of the Company by $50,000. The Notes, other than the $1.0 million portion of the Valens Note, accrued interest at an annual rate of 2% above the prime rate from time to time (but in no event less than 8%).

The Waiver, among other things, (i) extends the Company’s ability to borrow up to $500,000 over the limit defined by qualified receivables and inventory from June 28, 2009 to October 15, 2009, (ii) extends the maturity date of the 2006 Note from June 28, 2009 to October 15, 2009, (iii) increases the interest rate on the 2006 Note to an annual rate of 10%, (iv) defers the payment of the monthly principal amounts due and payable under the Notes for the period commencing on June 1, 2009 through and including October 1, 2009 to October 15, 2009 and (v) increases the interest rate on each of the Notes to an annual rate of 12.0%.

Further, each Creditor Party waived any events of default that may have occurred under the Notes, the 2006 Note or the Overadvance Letter on or before the date of the Waiver that arose due to the Company’s failure to make any payments under the Notes, the 2006 Note or the Overadvance Letter.

The foregoing description is subject to, and qualified in its entirety by, the Waiver filed as an exhibit hereto and incorporated herein by reference.

Item 6.

Exhibits.

The Exhibits listed in the Exhibit Index immediately preceding such Exhibits are filed with, or incorporated by reference in, this report.

2724

SIGNATURES

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

	STOCKERYALE, INC.
Date: August 3, 2009	By:	/s/ Mark W. Blodgett
Date: November 20, 2009	By:	/s/ MARK W. BLODGETT
		Mark W. Blodgett
		President, Chief Executive Officer and Chairman of the Board
Date: August 3, 2009	By:	/s/ Timothy P. Losik
Date: November 20, 2009	By:	/s/ TIMOTHY P. LOSIK
		Timothy P. Losik
		Chief Operating Officer and Chief Financial Officer

2825

EXHIBIT INDEX

Exhibit Number		Description
10.1		~~Amendment~~Deed toof ~~Instrument~~Variation, ~~Constituting~~dated ~~Euro~~October ~~935~~7,~~000~~ ~~12%~~2009, ~~Senior~~by ~~Fixed~~and ~~Rate~~among ~~Secured~~StockerYale, ~~Bond~~Inc., ~~dated~~StockerYale as(UK) ofLimited, ~~June~~Antony 9,Brian ~~2009~~Pope, byJohanna Pope and ~~between~~Damon ~~Mark~~Cookman ~~Hawtin~~is ~~and~~incorporated ~~StockerYale~~herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated October 7, 2009 (~~IRL)~~File ~~Ltd~~No. 000-27372).
10.2		~~Common~~Purchase ~~Stock~~and ~~Purchase~~Sale ~~Warrant~~Agreement, dated as of ~~June~~October 913, 2009, ~~issued~~ by and among StockerYale, Inc., Coherent Inc., and StockerYale Canada, Inc. is incorporated herein by reference to ~~Mark~~Exhibit ~~Hawtin~~10.1 to the Registrant’s Current Report on Form 8-K dated October 13, 2009 (File No. 000-27372).
10.3		~~Transfer~~Lease Amending Agreement, bydated ~~and~~as ~~among~~of ~~StockerYale~~October ~~(UK)~~13, ~~Limited~~2009, between StockerYale ~~(IRL)~~Canada, ~~Ltd~~Inc. and ~~Mark~~the ~~Hawtin,~~Standard ~~dated~~Life asAssurance Company of ~~June~~Canada 9is incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated October 13, 2009 (File No. 000-27372).
10.4		~~Waiver~~First ~~and~~ Amendment to Lease, dated as of ~~July~~October 1613, 2009, bybetween StockerYale, Inc. and ~~among~~55 LVHeritage ~~Administrative~~(Salem) ~~Services,~~LLC ~~Inc.,~~is ~~Valens~~incorporated ~~Offshore~~herein ~~SPV~~by I,reference ~~Ltd.,~~to ~~Valens~~Exhibit U10.S.3 ~~SPV~~to I,the ~~LLC,~~Registrant’s ~~Valens~~Current ~~Offshore~~Report ~~SPV~~on ~~II,~~Form ~~Corp.,~~8-K ~~PSource~~dated ~~Structured~~October ~~Debt~~13, ~~Limited~~2009 ~~and~~(File ~~StockerYale,~~No. ~~Inc~~000-27372).
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

2926

Filing Compare · STOCKERYALE INC