UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 28, 2001

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

COMMISSION FILE NO. 333-71449

----------------

GSI LUMONICS INC.
(Exact name of registrant as specified in its charter)

NEW BRUNSWICK, CANADA 98-0110412
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

105 SCHNEIDER ROAD,
KANATA, ONTARIO, CANADA K2K 1Y3
(Address of principal executive offices) (Zip Code)

(613) 592-1460
(Registrant's telephone number, including area code)

----------------

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 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 [ ]

As at October 17, 2001, there were 40,449,229 shares of the Common Stock of GSI
Lumonics Inc., no par value, issued and outstanding.

GSI LUMONICS INC.

TABLE OF CONTENTS

ITEM NO. PAGE NO.

PART I - FINANCIAL INFORMATION........................................ 3

ITEM 1. FINANCIAL STATEMENTS..................................... 3
CONSOLIDATED BALANCE SHEETS (unaudited).................. 3
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)........ 4
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)........ 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)... 6

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...................... 13

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK........................................ 22

PART I - OTHER INFORMATION............................................ 23

ITEM 1. LEGAL PROCEEDINGS........................................ 23

ITEM 5. OTHER INFORMATION........................................ 23

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K......................... 23

Signatures............................................................ 24

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

GSI LUMONICS INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(U.S. GAAP AND IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AMOUNTS)

SEPTEMBER 28, DECEMBER 31,
2001 2000
------------- ------------

ASSETS
Current
Cash and cash equivalents....................................................... $ 87,894 $113,858
Short-term investments.......................................................... 20,005 20,020
Accounts receivable, less allowance of $3,365 (December 31, 2000 - $2,758)...... 50,175 85,226
Income taxes receivable......................................................... 4,387 --
Inventories..................................................................... 67,102 77,906
Deferred tax assets............................................................. 14,957 25,615
Other current assets............................................................ 9,859 5,465
--------- ---------
Total current assets........................................................ 254,379 328,090

Property, plant and equipment, net of accumulated depreciation of $22,093
(December 31, 2000 - $23,961)................................................... 34,102 33,368
Deferred tax assets................................................................ 7,693 6,253
Other assets....................................................................... 39,217 37,398
Intangible assets, net of amortization of $12,170
(December 31, 2000 - $11,363)................................................... 22,037 26,075
--------- ---------
$357,428 $431,184
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current
Bank indebtedness............................................................... $ 11,098 $ 11,414
Accounts payable................................................................ 14,594 30,030
Accrued compensation and benefits............................................... 7,759 12,797
Income taxes payable............................................................ -- 32,489
Other accrued expenses.......................................................... 28,854 46,561
Current portion of long-term debt............................................... 2,654 3,821
--------- ---------
Total current liabilities................................................... 64,959 137,112

Long-term debt due after one year.................................................. -- 2,697
Deferred compensation.............................................................. 2,046 2,108
--------- ---------
Total liabilities........................................................... 67,005 141,917
Commitments and contingencies (note 7)
Stockholders' equity
Capital stock, no par value; Issued common shares of 40,448,229
(December 31, 2000 - 40,162,608)............................................. 302,967 301,667
Additional paid-in capital...................................................... 1,159 759
Retained earnings............................................................... 1,029 1,152
Accumulated other comprehensive loss............................................ (14,732) (14,311)
--------- ---------
Total stockholders' equity.................................................. 290,423 289,267
--------- ---------
$357,428 $431,184
========= =========

The accompanying notes are an integral part of these financial statements.

GSI LUMONICS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(U.S. GAAP AND IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AMOUNTS)

THREE MONTHS ENDED NINE MONTHS ENDED
------------------------- -------------------------
SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER
28, 2001 29, 2000 28, 2001 29, 2000
--------- --------- --------- ---------

Sales.................................................. $41,277 $97,631 $205,526 $278,368

Cost of goods sold..................................... 31,969 58,547 134,265 165,313
-------- ------- -------- --------
Gross profit........................................... 9,308 39,084 71,261 113,055

Operating expenses:
Research and development.......................... 5,626 8,993 19,444 26,276
Selling, general and administrative............... 16,363 20,625 53,151 60,852
Amortization of technology and other intangibles.. 1,390 1,127 4,054 3,508
Other............................................. (170) (243) (1,570) (2,913)
-------- ------- -------- --------
Income (loss) from operations.......................... (13,901) 8,582 (3,818) 25,332

Gain on sale of assets............................ -- 1,680 -- 2,388
Interest income, net.............................. 759 998 3,382 1,582
Foreign exchange transaction gains (losses)....... 9 (229) 256 (2,003)
-------- ------- -------- --------
Income (loss) before income taxes...................... (13,133) 11,031 (180) 27,299

Income tax provision (benefit)......................... (4,646) 3,855 (57) 9,529
-------- ------- -------- --------
Net income (loss)...................................... $ (8,487) $ 7,176 $ (123) $ 17,770
======== ======= ======== ========
Net income (loss) per common share:
Basic.......................................... $ (0.21) $ 0.18 $ -- $ 0.47
Diluted........................................ $ (0.21) $ 0.17 $ -- $ 0.45

Weighted average common shares outstanding (000's)..... 40,410 39,807 40,307 37,606
Weighted average common shares outstanding and dilutive
potential common shares (000's)................... 40,410 41,731 40,307 39,644

The accompanying notes are an integral part of these financial statements.

GSI LUMONICS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(U.S. GAAP AND IN THOUSANDS OF U.S. DOLLARS)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................... $ (8,487) $ 7,176 $ (123) $ 17,770
Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities:
Gain on sale of assets............................. -- (1,680) -- (2,388)
Translation loss on liquidation of a subsidiary.... 723 -- 723 --
Depreciation and amortization...................... 2,738 2,598 8,975 8,177
Compensation expense............................... 200 -- 400 --
Provision for (recovery of) deferred income taxes.. 5,821 (2,519) 8,848 (2,036)
Changes in current assets and liabilities:
Accounts receivable................................ 15,456 (8,644) 32,617 (14,238)
Inventories........................................ 5,061 (3,012) 507 (30,836)
Other current assets............................... 4,232 (1,604) 852 (2,893)
Accounts payable, accrued expenses, and taxes
payable............................................ (23,929) 10,105 (73,947) 12,306
-------- -------- -------- --------
Cash provided by (used in) operating activities......... 1,815 2,420 (21,148) (14,138)
-------- -------- -------- --------

CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of a business, net of cash acquired.... -- (6,548) -- (6,548)
Sale of assets..................................... -- 12,457 6,000 26,193
Additions to property, plant and equipment......... (1,858) (1,451) (6,885) (6,160)
Maturity of short-term investments................. 32,726 21,755 80,880 29,097
Purchase of short-term investments................. (20,005) (31,507) (80,865) (52,804)
Decrease (increase) in other assets................ 423 281 (1,819) 835
-------- -------- -------- --------
Cash provided by (used in) investing activities......... 11,286 (5,013) (2,689) (9,387)
-------- -------- -------- --------

CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to (payments of) bank indebtedness....... 596 (5,989) (316) (12,442)
Repayment of long-term debt........................ (3,762) 5 (3,762) (2,732)
Issue of share capital (net of issue costs)........ 536 3,090 1,300 78,251
-------- -------- -------- --------
Cash provided by (used in) financing activities......... (2,630) (2,894) (2,778) 63,077
-------- -------- -------- --------

Effect of exchange rates on cash and cash equivalents... 254 582 651 1,946
-------- -------- -------- --------
Increase (decrease) in cash and cash equivalents........ 10,725 (4,905) (25,964) 41,498
Cash and cash equivalents, beginning of period.......... 77,169 71,675 113,858 25,272
-------- -------- -------- --------
Cash and cash equivalents, end of period................ $ 87,894 $66,770 $ 87,894 $ 66,770
======== ======== ======== ========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest........................................... $ 188 $ 273 $ 443 $ 994
Income taxes....................................... $ 779 $ 1,973 $ 32,902 $ 3,913

The accompanying notes are an integral part of these financial statements.

GSI LUMONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
AS OF SEPTEMBER 28, 2001
(U.S. GAAP AND TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS
EXCEPT SHARE AMOUNTS)

1. BASIS OF PRESENTATION

These unaudited interim consolidated financial statements have been prepared by
the Company in United States (U.S.) dollars and in accordance with accounting
principles generally accepted in the United States for interim financial
statements and with the instructions to Form 10-Q and Regulation S-X pertaining
to interim financial statements. Accordingly, these interim consolidated
financial statements do not include all information and footnotes required by
generally accepted accounting principles for complete financial statements. The
consolidated financial statements reflect all adjustments and accruals,
consisting only of adjustments and accruals of a normal recurring nature, which
management considers necessary for a fair presentation of financial position and
results of operations for the periods presented. The consolidated financial
statements include the accounts of GSI Lumonics Inc. and its wholly owned
subsidiaries (the "Company"). Intercompany transactions and balances have been
eliminated. The consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company's Form 10-K for the year ended December 31, 2000. The results for
interim periods are not necessarily indicative of results to be expected for the
year or any future periods.

2. INVENTORIES

Inventories consist of the following:

September 28, December 31,
2001 2000
------------- ------------
Raw materials............ $37,567 $42,468
Work-in-process.......... 8,274 11,083
Finished goods........... 12,538 15,392
Demo inventory........... 8,723 8,963
------- -------
Total inventories..... $67,102 $77,906
------- =======

3. STOCKHOLDERS' EQUITY

CAPITAL STOCK

The authorized capital of the Company consists of an unlimited number of common
shares without nominal or par value. During the nine months ended September 28,
2001, the Company issued 287,930 shares of common stock pursuant to share
options exercised for proceeds of $1.3 million and 2,309 shares were cancelled.

ACCUMULATED OTHER COMPREHENSIVE INCOME

At September 28, 2001, accumulated other comprehensive income was comprised of
an accumulated unrealized loss of $5.0 million after tax on investment in
Packard BioScience Company common stock and $9.7 million of accumulated foreign
exchange translation adjustments.

The components of comprehensive income are as follows:

THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER
28, 2001 29, 2000 28, 2001 29, 2000
--------- --------- --------- ---------

Net income (loss)................................... $(8,487) $ 7,176 $ (123) $ 17,770
Other comprehensive income (loss)...................
Cumulative effect of change in accounting
policy for cash flow hedges (note 5)........... -- -- (164) --
Realized gain on cash flow hedging
instruments, net of tax (note 5)............... (806) -- (642) --
Unrealized (loss) gain on cash flow hedging
instruments, net of tax (note 5)............... (32) -- 774 --
Foreign currency translation adjustments....... 870 (1,572) (1,495) (2,754)
Translation loss on liquidation of a subsidiary 723 -- 723 --
Unrealized gain (loss) on equity securities,
net of tax..................................... (1,140) -- 383 --
--------- --------- --------- ---------
Comprehensive income (loss)......................... $(8,872) $5,604 $ (544) $ 15,016
========= ========= ========= =========

NET INCOME PER COMMON SHARE

Basic net income per common share was computed by dividing net income by the
weighted-average number of common shares outstanding during the period. For
diluted net income per common share, the denominator also includes dilutive
outstanding stock options and warrants determined using the treasury stock
method. As a result of the net losses for the three months and nine months ended
September 28, 2001, the effect of converting options was antidilutive.

Common and common share equivalent disclosures are:

(in thousands) THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- -------------------------
SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER
28, 2001 29, 2000 28, 2001 29, 2000
--------- --------- --------- ---------

Weighted average common shares outstanding......... 40,410 39,807 40,307 37,606
Dilutive potential common shares................... -- 1,924 -- 2,038
--------- --------- --------- ---------
Diluted common shares.............................. 40,410 41,731 40,307 39,644
========= ========= ========= =========

At September 28, 2001, the Company had options and warrants outstanding
entitling holders to up to 4,137,864 and 68,024 common shares, respectively.

EMPLOYEE STOCK PURCHASE PLAN

At the Annual General Meeting of Shareholders on May 8, 2001, the Shareholders
of the Company approved the adoption of the Employee Stock Purchase Plan (the
"Purchase Plan"). A total of 300,000 common shares have been reserved for
issuance under the Purchase Plan. The Company will make open market purchases
and/or issue treasury common shares to satisfy employee subscriptions under the
Purchase Plan. The Purchase Plan provides for consecutive offering periods
during which payroll deductions may be accumulated for the purchase of common
shares. The initial offering period commenced on July 1, 2001 and will end on
December 31, 2001. Thereafter, each offering period will continue for a period
of six months following commencement. The purchase price per share at which
shares will be sold in an offering period under the Purchase Plan is the lower
of 85% of the Fair Market Value of a common share at the beginning of the
offering period or 85% of the Fair Market Value of a common share at the end of
the offering period. Fair Market Value, as defined by the Purchase Plan, is the
weighted average sale price of the shares for the five (5) day period preceding
the grant date and the exercise date.

4. RELATED PARTY TRANSACTIONS

In addition to matters discussed elsewhere, the Company had the following
transactions with related parties. The Company recorded sales revenue from
Sumitomo Heavy Industries, Ltd., a significant shareholder, of $3.4 million in
the nine months ended September 28, 2001 and $7.3 million in the nine months
ended September 29, 2000 at amounts and terms approximately equivalent to third
party transactions. Transactions with Sumitomo are at normal trade terms.
Receivables from Sumitomo of $0.4 million and $1.8 million as at September 28,
2001 and December 31, 2000, respectively, are included in accounts receivable on
the balance sheet.

In January of 2001, the Company made an investment of $2 million in a technology
fund, managed by OpNet Partners, L.P. Richard B. Black, a member of the
Company's Board of Directors, is a General Partner for OpNet Partners, L.P. This
investment is reflected in long-term other assets on the balance sheet.

5. FINANCIAL INSTRUMENTS

CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

At September 28, 2001, the Company had $56.4 million invested in cash
equivalents denominated in U.S. dollars with maturity dates between October 2,
2001 and December 10, 2001. At December 31, 2000, the Company had $81.1 million
invested in cash equivalents denominated in both U.S. and Canadian dollars with
maturity dates between January 8, 2001 and February 27, 2001. The carrying value
of cash equivalents approximates their fair value.

At September 28, 2001, the Company had $20.0 million invested in short-term
investments denominated in U.S. dollars with maturity dates between November 1,
2001 and February 4, 2002. At December 31, 2000, the Company had $20.0 million
invested in short-term investments denominated in U.S. dollars with maturity
dates between January 8, 2001 and March 30, 2001. The carrying value of
short-term investments approximates their fair value.

DERIVATIVE FINANCIAL INSTRUMENTS

On January 1, 2001, the Company implemented, on a prospective basis, Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138
(collectively, the "Statement"). This Statement requires all derivatives to be
recognized in the consolidated balance sheet at fair value, with changes in the
fair value of derivative instruments to be recorded in current earnings or
deferred in accumulated other comprehensive income, depending on whether a
derivative is designated and effective as a hedge and on the type of hedging
transaction. The Company recorded a transition adjustment loss of $164 thousand
in other comprehensive income as a result of adopting SFAS 133 on January 1,
2001. The loss was recognized in earnings during the period ended March 30,
2001, and at that time the underlying hedged transactions were realized.

The Company applies hedge accounting as allowed by the Statement. At September
28, 2001, the Company had twelve derivatives that qualified as foreign currency
cash flow hedges. For hedged forecasted transactions, hedge accounting is
discontinued if the forecasted transaction is no longer intended to occur, and
any previously deferred hedging gains or losses are recorded to earnings
immediately. Earnings impacts for all designated hedges are recorded in the
consolidated statement of operations generally on the same line item as the gain
or loss on the item being hedged. The Company records all derivatives at fair
value as assets or liabilities in the consolidated balance sheet, with
classification as current or long-term depending on the duration of the
instrument.

Currency forwards and options are used by the Company to manage exposures to
changes in currency exchange rates associated with sales transactions. These
financial instruments are used to fix the cash flow variable of local currency
costs or selling prices denominated in currencies other than the functional
currency. As of September 28, 2001, the Company had nine foreign exchange
forward contracts to purchase $19.9 million U.S. dollars and three foreign
exchange option contracts to purchase $17.7 million U.S. dollars with an
aggregate fair value loss of $32

thousand after-tax recorded in accumulated other comprehensive income and
maturing in December 2001, March 2002 and on the 15th of each following month
until August 15, 2002.

6. RESTRUCTURING

RESTRUCTURING CHARGES

2000

During the fourth quarter of fiscal 2000, a charge of $12.5 million was taken to
accrue employee severance of $1.0 million for approximately 50 employees, other
exit costs of $3.8 million for the Company's United Kingdom operation and
worldwide distribution system related to high-power laser systems for certain
automotive applications, and costs of $7.7 million associated with restructuring
for excess capacity at three leased facility locations in the United States and
Germany. The Company also recorded a write-down of land and building in the
United Kingdom of $2.0 million. Compensation expense of $0.6 million arising on
the acceleration of vesting of options upon the sale of businesses during the
year was also charged to restructuring. In addition, an inventory write-down to
net realizable value of $8.5 million was recorded in cost of goods sold related
to the high-power laser system product line.

Cumulative draw-downs by cash payments of $3.2 million have been applied against
the provision, resulting in a provision balance of $9.3 million as at September
28, 2001. The remaining provision is expected to be substantially drawn-down by
the fourth quarter of 2001, except for certain long-term leased facility costs.

The following table summarizes changes in the restructuring provision.

(in millions) SEVERANCE FACILITIES OTHER TOTAL
------------ ------------ ------------ ------------

Provision at December 31, 2000........... $ 1.2 $ 8.3 $ 3.8 $ 13.3
Draw-downs during first quarter.......... (0.7) (0.8) (1.3) (2.8)
Draw-downs during second quarter......... (0.2) (0.4) (0.1) (0.7)
Draw-downs during third quarter.......... (0.2) (0.2) (0.1) (0.5)
------------ ------------ ------------ ------------
Provision at September 28, 2001.......... $ 0.1 $ 6.9 $ 2.3 $ 9.3
============ ============ ============ ============

OTHER

During the third quarter of 2001, the Company recorded a benefit of $0.2 million
related to settlement of litigation. During the third quarter of 2000, the
Company recorded a benefit of $0.2 million related to royalties earned on the
sale of the OLT precision alignment system product line.

7. COMMITMENTS AND CONTINGENCIES

LEGAL PROCEEDINGS

Robotic Vision Systems, Inc. v. View Engineering, Inc., USDC Case No. 95-7441.
In March 2000, the United States District Court for the Central District of
California entered judgement in favor of View Engineering, Inc., a wholly owned
subsidiary. Robotic Vision had alleged infringement relating to lead inspection
machines formerly sold by View Engineering and sought damages of $60.5 million.
The District Court found Robotic Vision's patent invalid and Robotic Vision
appealed that decision. The Court of Appeals affirmed the invalidity judgment on
May 7, 2001. On August 8, 2001 Robotic Vision filed a Petition for a Writ of
Certiorari with the Supreme Court of the United States. On October 9, 2001, View
Engineering filed its Brief in Opposition to Robotic Vision's Petition.

Electro Scientific Industries, Inc. v. GSI Lumonics Inc. On March 16, 2000,
Electro Scientific Industries, Inc. filed an action for patent infringement in
the United States District Court for the Central District of California against
the

Company and Dynamic Details Inc., an unrelated party that is one of the
Company's customers. Electro Scientific alleged that the Company offered to sell
and import into the United States the GS-600 high speed laser drilling system
and that Dynamic Details possessed and used a GS-600 System. It further alleged
that Dynamic Details' use of the GS-600 laser system infringed Electro
Scientific's U.S. patent no.5,847,960 and that the Company had actively induced
the infringement of, and contributorily infringed, the patent. Electro
Scientific sought an injunction, unspecified damages, trebling of those damages,
and attorney fees. GSI Lumonics indemnified Dynamic Details with respect to
these allegations. On August 14, 2001, the United States District Court for the
Central District of California granted GSI Lumonics' motion for summary judgment
of non-infringement and denied Electro Scientific's motion for summary judgment
of infringement. In the ruling, the Court concluded that the GS-600 system did
not literally infringe the asserted claims of the alleged Electro Scientific
patent, nor did it infringe under the doctrine of equivalents. On September 7,
2001, Electro Scientific appealed the District Court's decision on the summary
judgment motions. The Company intends to vigorously contest Electro Scientific's
appeal.

Electro Scientific Industries, Inc. v. General Scanning, Inc. In September 1998,
the United States District Court for the Northern District of California granted
Electro Scientific's motions for summary judgment against General Scanning in
this case on a claim of patent infringement and on the issue of whether Electro
Scientific committed inequitable conduct by intentionally failing to cite prior
art to the U.S. Patent Office in connection with one of its patents. The Court
denied General Scanning's motion for summary judgment that the Electro
Scientific patents are invalid due to prior art. During March 1999, the Court
granted Electro Scientific's motion for partial summary judgment that upgrade
kits, sold by General Scanning for 1.3 micron laser wavelength memory repair,
infringe the Electro Scientific patents in suit. In April 1999 a federal court
jury issued a verdict that Electro Scientific's patent 5,473,624 was invalid,
and that Electro Scientific's patent 5,265,114 was valid, and awarded a $13.1
million damage judgment against the Company. In July 1999, the Court refused
Electro Scientific's requests to increase damages awarded by the jury in April,
and for attorney fees, but granted interest on the damages. The Company recorded
a provision during the three months ended April 2, 1999 of $19 million to
reflect the amount of the damage award plus accrued interest and related costs.
The Court also affirmed the jury's decision to invalidate one of the two patents
asserted by Electro Scientific in the case. The Company appealed the decisions
on infringement, the validity of the second patent and the award of damages. The
Company was required to post an unsecured bond with the court in order to
proceed with the appeal. The Court of Appeals affirmed the judgment on April 18,
2001 and the Company paid approximately $15.3 million in May 2001 in
satisfaction of the judgment.

Other. As the Company has disclosed since 1994, a party has commenced legal
proceedings in the United States against a number of U.S. manufacturing
companies, including companies that have purchased systems from GSI Lumonics.
The plaintiff in the proceedings has alleged that certain equipment used by
these manufacturers infringes patents claimed to be held by the plaintiff. While
GSI Lumonics is not a defendant in any of the proceedings, several of GSI
Lumonics' customers have notified GSI Lumonics that, if the party successfully
pursues infringement claims against them, they may require GSI Lumonics to
indemnify them to the extent that any of their losses can be attributed to
systems sold to them by GSI Lumonics. GSI Lumonics does not believe that the
outcome of these claims will have a material adverse effect upon GSI Lumonics,
but there can be no assurance that any such claims, or any similar claims, would
not have a material adverse effect upon the Company's financial condition or
results of operations.

8. SEGMENT INFORMATION

GSI Lumonics Inc. designs, develops, manufactures and markets laser systems and
components as enabling tools for a wide range of high-technology applications,
including computer-chip memory repair processing, inspection systems for solder
paste and component placement on surface-mount printed circuits, via drilling,
hybrid circuit trim and circuit trim on silicon. The Company also provides
precision optics for Dense Wave Division Multiplexing networks. Major markets
for its products include the semiconductor, electronics, and telecommunications
industries. The Company's principal markets are in the United States, Canada,
Europe, Japan and Asia-Pacific.

GEOGRAPHIC SEGMENT INFORMATION

The Company attributes revenues to geographic areas on the basis of the customer
location. Long-lived assets are attributed to geographic areas in which Company
assets reside.

(in millions) THREE MONTHS ENDED
----------------------------------------------------------
SEPTEMBER 28, 2001 SEPTEMBER 29, 2000
---------------------------- -----------------------------

Revenues from external customers:
United States................. $ 25.6 62% $ 49.0 50%
Canada........................ 0.8 2% 5.0 5%
Europe........................ 6.1 15% 15.2 16%
Japan......................... 5.6 14% 15.7 16%
Asia-Pacific, other........... 3.0 7% 10.7 11%
Latin and South America....... 0.2 0% 2.0 2%
------ --- ------ ---
Total.................... $ 41.3 100% $ 97.6 100%
====== ======

NINE MONTHS ENDED
----------------------------------------------------------
SEPTEMBER 28, 2001 SEPTEMBER 29, 2000
---------------------------- -----------------------------

United States................. $ 95.6 47% $129.2 46%
Canada........................ 11.0 5% 13.4 5%
Europe........................ 43.0 21% 58.4 21%
Japan......................... 34.0 17% 43.1 15%
Asia-Pacific, other........... 21.1 10% 30.0 11%
Latin and South America....... 0.8 0% 4.3 2%
------ --- ------ ---
Total.................... $205.5 100% $278.4 100%
====== ======

AS AT
----------------------------------------------------------
SEPTEMBER 28, 2001 DECEMBER 31, 2000
---------------------------- -----------------------------

Long-lived assets:
United States................... $ 32.6 $ 35.7
Canada.......................... 9.9 9.9
Europe.......................... 12.6 12.9
Japan........................... 0.8 0.7
Asia-Pacific, other............. 0.2 0.2
------ ------
Total.................... $ 56.1 $ 59.4
====== ======

9. DIVESTITURE

On April 2, 2001, the Company completed the sale of operating assets of the
Laserdyne and custom systems product lines without a gain for proceeds of
approximately $9 million, subject to final adjustment per the terms of the Asset

Purchase Agreement. Sales for these product lines were $2.9 million and $18.6
million for the nine months ended September 28, 2001 and September 29, 2000,
respectively.

10. RECENT PRONOUNCEMENTS

On June 29, 2001, the Financial Accounting Standards Board approved for issuance
Statement of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS 141"), and Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001. As a result, the pooling-of-interests method will be prohibited. SFAS
142 establishes criteria for recognition of intangibles and how they should be
accounted for after initial recognition and changes the accounting for goodwill
from an amortization method to an impairment-only approach. Thus, amortization
of goodwill, including goodwill recorded in past business combinations, will
cease upon adoption of this Statement, which for the Company will be January 1,
2002. However, for any acquisitions completed after June 30, 2001, goodwill and
intangible assets with an indefinite life will not be amortized.

On October 1, 2001, the Financial Accounting Standards Board approved for
issuance Statement of Financial Accounting Standards No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144
supersedes Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("SFAS 121"). The new rules significantly change the criteria that would have to
be met to classify an asset as held-for-sale. The distinction is important
because assets to be disposed of are stated at the lower of their fair values or
carrying amounts and depreciation is no longer recognized. The new rules also
will now require expected future operating losses from discontinued operations
to be displayed in discontinued operations in the period(s) in which the losses
are incurred, rather than as of the measurement date as is presently required.
In addition, more dispositions will qualify for discontinued operations
treatment in the statement of income. The Company will adopt the Statement
effective January 1, 2002.

The adoption of SFAS 141 will not have an impact on the business, results of
operations, and financial condition of GSI Lumonics. The Company is still
evaluating the impact of the adoption of SFAS 142 and SFAS 144 and has not yet
determined the effect of adoption on the business, results of operations, and
financial condition of the Company.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

You should read this discussion together with the consolidated financial
statements and other financial information included in this report. This report
contains forward-looking statements that involve risks and uncertainties. Our
actual results may differ materially from those indicated in the forward-looking
statements. Please see the special note set forth below under "Forward-Looking
Statements." All dollar amounts in this Management's Discussion and Analysis of
Financial Condition and Results of Operations are in United States dollars,
unless otherwise stated, and in accordance with U.S. GAAP.

OVERVIEW

We design, develop, manufacture and market laser systems and components as
enabling tools for a wide range of high-technology applications, including
computer-chip memory repair processing, inspection systems for solder paste and
component placement on surface-mount printed circuits, via drilling, hybrid
circuit trim and circuit trim on silicon. We also provide precision optics for
Dense Wave Division Multiplexing networks. Major markets for our products
include the semiconductor, electronics, and telecommunications industries. In
addition, we sell to other markets such as the medical industry. Our systems
sales depend on our customers' capital expenditures that are affected by
business cycles in the markets they serve.

The events of September 11th and thereafter have further hindered our ability to
develop any certainty about the timing of any turnaround of the downward trends
in the last three quarters. Our strategy is to focus the Company's resources on
our strategic markets and core businesses, building on synergies we have already
created, tightening operational controls and consolidating operations. Our
efforts continue to focus on reductions in all areas of non-essential costs.

HIGHLIGHTS FOR THE THREE MONTHS ENDED SEPTEMBER 28, 2001 AND OUTLOOK

o Revenues dropped dramatically for the quarter to $41 million from
$77 million in the second quarter and $98 million in the third quarter of
2000.
o Net loss for the quarter was $8.5 million and net loss per share was $0.21
compared to net income of $7.2 million and $0.17 diluted net income per
share in the third quarter of last year.
o Orders continued at the same level as the second quarter at $34 million.
Ending backlog was $56 million (excluding $1 million related to
discontinued and divested products) as compared with $84 million
(excluding $19 million related to discontinued and divested products) for
the third quarter of last year.
o The change in cash, cash equivalents, and investments for the quarter
was close to breakeven at a net usage of $2 million including a payment
of $4 million related to debt arising on the purchase of General Optics
in 2000. Cash, cash equivalents and short-term investments were
$107.9 million at September 28, 2001. In addition, we own approximately
4.5 million unregistered shares of common stock in Packard BioScience
Company with a quoted market value of approximately $35.6 million as at
September 28, 2001.

Normally, GSI Lumonics experiences seasonality in both sales and bookings, with
softness in the first quarter, strength in the spring, slowdown in the summer
months, followed by a strong fourth quarter. Given the change in booking
patterns experienced in the first three quarters of this year, the
discontinuance of our general purpose marker product line, and net of the
recently completed divestiture in early April, we expect that consolidated
quarterly sales in the fourth quarter will remain at the sales level experienced
in the third quarter. The Company is committed to a series of cost reductions.
However, the investment in new product development will not be impacted by these
actions, as we believe this is critical to the Company's success going forward.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 28, 2001

The following table presents unaudited quarterly results of operations as a
percentage of sales. This information has been presented on the same basis as
the consolidated financial statements.

THREE MONTHS ENDED
-----------------------
SEPTEMBER SEPTEMBER
28, 2001 29, 2000
--------- ---------

Sales.......................................................... 100.0% 100.0%
Cost of goods sold............................................. 77.4 60.0
--------- ---------
Gross profit................................................... 22.6 40.0
Research and development....................................... 13.6 9.2
Selling, general and administrative............................ 39.7 21.1
Amortization of technology and other intangibles............... 3.4 1.2
Other.......................................................... (0.5) (0.3)
--------- ---------
Income (loss) from operations.................................. (33.6) 8.8
Gain on sale of assets......................................... -- 1.7
Interest income, net........................................... 1.8 1.0
Foreign exchange transaction gains (losses).................... -- (0.2)
--------- ---------
Income (loss) before income taxes.............................. (31.8) 11.3
Income tax provision (benefit)................................. (11.2) 3.9
--------- ---------
Net income (loss).............................................. (20.6)% 7.4%
========= =========

Our sales were $41.3 million in the third quarter of 2001 compared to $97.6
million in the third quarter of 2000. On a pro forma basis, net of discontinued
and divested product lines, sales were $37.5 million and $68.9 million,
respectively.

Sales by Market. The following table sets forth sales to our primary markets for
the three months ended September 28, 2001 and September 29, 2000, respectively.

(in millions) THREE MONTHS ENDED
---------------------------------
SEPTEMBER 28, SEPTEMBER 29,
2001 2000
------------- -------------
% OF % OF
SALES TOTAL SALES TOTAL
----- ----- ----- -----

Semiconductor....................................... $ 6.6 16% $26.8 27%
Electronics......................................... 1.8 4 14.4 15
Medical............................................. 10.7 26 14.4 15
Components.......................................... 5.8 14 8.9 9
Optics.............................................. 3.2 8 4.0 4
Other............................................... 3.7 9 16.4 17
Parts and service................................... 9.5 23 12.7 13
------ ----- ----- -----
Total............................................ $41.3 100% $97.6 100%
====== ===== ===== =====

On a pro forma basis net of discontinued and divested product lines, sales for
the three months ended September 28, 2001 were 56% of sales experienced in the
third quarter of 2000 as a result of reduced and/or deferred capital spending by
our customers in the continued economic slowdown. Following a period of strong
economic conditions in 1999 and 2000, we saw tighter capital markets and a rapid
and severe slowdown in the economy resulting in lower capital spending. Decline
in bookings over the past four quarters seem to have stabilized at a level of
$34 million for second and third quarters of 2001. Semiconductor systems sales
for the third quarter decreased by $20.2 million compared to the same period of
2000 and electronics systems sales decreased by $12.6 million due to decline in
market conditions since the middle of 2000. Sales to the medical market
decreased by net $3.7 million from the same period of 2000 due primarily to the
divestiture of the Life Sciences business and Laserdyne/custom system product
lines offset by improvements in sales of imaging and printer products. Sales of
components for the third quarter of 2001 decreased by $3.1 million compared to
the same period of 2000. Sales of optics for the third

quarter of 2001 decreased by $0.8 million compared to the same period of 2000
due to a sharp decline in sales to a significant customer offset by additional
sales from the acquisition of General Optics at the end of the third quarter of
2000. Sales to the other markets (including aerospace, packaging and automotive)
decreased by $12.7 million from the same period of 2000 due to the restructuring
of the AM Series product line in Rugby, UK and sale of the package coding
product line in Hull, UK. Parts and service sales decreased by $3.2 million from
the same period of 2000 as a result of the divestiture of product lines.

Sales by Region. We distribute our systems and services via our global sales and
service network and through third-party distributors and agents. Our sales
territories are divided into the following regions: the United States; Canada;
Europe, consisting of Europe, the Middle East and Africa; Japan; Asia-Pacific,
consisting of ASEAN countries, China and other Asia-Pacific countries; and Latin
and South America. Revenues are attributed to these geographic areas on the
basis of customer location. The following table shows sales to each geographic
region for the three months ended September 28, 2001 and September 29, 2000,
respectively.

(in millions) THREE MONTHS ENDED
-------------------------------------------
SEPTEMBER 28, 2001 SEPTEMBER 29, 2000
------------------ ------------------
% OF % OF
SALES TOTAL SALES TOTAL
----- ----- ----- -----

United States....................................... $25.6 62% $49.0 50%
Canada.............................................. 0.8 2 5.0 5
Europe.............................................. 6.1 15 15.2 16
Japan............................................... 5.6 14 15.7 16
Asia-Pacific, other................................. 3.0 7 10.7 11
Latin and South America............................. 0.2 0 2.0 2
----- ----- ----- ----
Total............................................ $41.3 100% $97.6 100%
===== ===== ===== ====

Backlog. We define backlog as unconditional purchase orders or other contractual
agreements for products for which customers have requested delivery within the
next twelve months. Order backlog at September 28, 2001 was $56 million
(excluding $1 million related to discontinued and divested products) compared to
$65 million at June 29, 2001 and $84 million (excluding $19 million related to
discontinued and divested products) at September 29, 2000.

Gross Profit Margin. Gross profit margin was 23% in the three months ended
September 28, 2001 compared to 40% in the three months ended September 29, 2000.
Gross margins reflect the impact of fixed manufacturing and service overhead
costs and inventory loss provisions during a period of lower product and service
volumes.

Research and Development Expenses. Research and development expenses, net of
government assistance, for the three months ended September 28, 2001 were 13.6%
of sales or $5.6 million compared with 9.2% of sales or $9.0 million for the
three months ended September 29, 2000. The decline was due primarily to the
impact of divested product lines. Research and development activities focused on
products targeted at the electronics, semiconductor and telecommunications
markets.

Selling, General and Administrative Expenses. SG&A expenses were 39.7% of sales
or $16.4 million in the three months ended September 28, 2001, compared with
21.1% of sales or $20.6 million in the three months ended September 29, 2000.
The decline in spending was due primarily to the impact of lower sales, divested
product lines, cost cutting measures, and shutdown days. The impact of continued
cost cutting efforts was understated by significant legal costs and expenses for
the patent infringement lawsuit with Electro Scientific Industries that was
recently resolved in our favor and for the patent infringement lawsuit which the
Company initiated against Rofin Baasel, Inc. (formerly AB Lasers, Inc.) and Carl
Baasel Lasertechnik, GmbH. SG&A expenses are expected to further decline during
the fourth quarter as the impact of initiatives undertaken by us to streamline
our business and reduce our cost structure are expected to be realized.

Amortization of Technology and Other Intangibles. Amortization of technology and
other intangibles was 3.4% of sales or $1.4 million in the three months ended
September 28, 2001, compared with 1.2% of sales or $1.1 million in the three
months ended September 29, 2000.

Other. During the third quarter of 2001, the Company recorded a benefit of $0.2
million related to settlement of litigation. During the third quarter of 2000,
the Company recorded a benefit of $0.2 million related to royalties earned on
the sale of the OLT precision alignment system product line.

Interest Income. Net interest income was $0.8 million in the three months ended
September 28, 2001, compared to $1.0 million in the three months ended September
29, 2000. The decrease was due to a combination of declining interest rates and
a slightly lower average short-term investments balance during the third quarter
of 2000 compared to the third quarter of 2001.

Income Taxes. The effective tax rate was 35.4% for the third quarter of 2001,
compared with 34.9% in the same period in 2000. The change in the effective tax
rate was primarily due to the change in the Company's geographic mix of
earnings. Our earnings are subject to different effective tax rates in each of
the countries in which we operate. A change in our overall tax rate can result
when there is a change in our geographic earnings mix.

Net Income (Loss). As a result of the foregoing factors, net loss for the third
quarter of 2001 was $8.5 million, compared with net income of $7.2 million in
the same period in 2000.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 28, 2001

The following table presents unaudited quarterly results of operations as a
percentage of sales. This information has been presented on the same basis as
the consolidated financial statements.

NINE MONTHS ENDED
--------- ---------
SEPTEMBER SEPTEMBER
28, 2001 29, 2000
--------- ---------

Sales.......................................................... 100.0% 100.0%
Cost of goods sold............................................. 65.3 59.4
----- -----
Gross profit................................................... 34.7 40.6
Research and development....................................... 9.5 9.4
Selling, general and administrative............................ 25.8 21.9
Amortization of technology and other intangibles............... 2.0 1.3
Other.......................................................... (0.8) (1.1)
----- -----
Income (loss) from operations.................................. (1.8) 9.1
Gain on sale of assets......................................... -- 0.8
Interest income, net........................................... 1.6 0.6
Foreign exchange transaction gains (losses).................... 0.1 (0.7)
----- -----
Income (loss) before income taxes.............................. (0.1) 9.8
Income tax provision........................................... 0.0 3.4
----- -----
Net income (loss).............................................. (0.1)% 6.4%
====== =====

Our sales were $205.5 million for the first nine months of 2001 compared to
$278.4 million for the first nine months of 2000. On a pro forma basis, net of
discontinued and divested product lines, sales were $187.5 million and $198.6
million, respectively.

Sales by Market. The following table sets forth sales to our primary markets for
nine months ended September 28, 2001 and September 29, 2000, respectively.

(in millions) NINE MONTHS ENDED
------------------------------------------
SEPTEMBER 28, 2001 SEPTEMBER 29, 2000
------------------ ------------------
% OF % OF
SALES TOTAL SALES TOTAL
----- ----- ----- -----

Semiconductor....................................... $ 57.3 28% $54.7 20%
Electronics......................................... 37.2 18 68.7 25
Medical............................................. 31.0 15 44.2 16
Components.......................................... 20.7 10 23.2 8
Optics.............................................. 14.5 7 9.5 3
Other............................................... 10.2 5 40.2 14
Parts and service................................... 34.6 17 37.9 14
------ --- ------ ---
Total............................................ $205.5 100% $278.4 100%
====== === ====== ===

Sales declined for the nine months ended September 28, 2001 compared to the same
period in 2000 as a result of strategic divestitures that have repositioned the
Company to focus on our core businesses, and weakening economic conditions.

The decline of new orders during the first nine months of 2001 reflected a
continued slowdown in demand for systems and products in the semiconductor,
electronics and telecom optics markets. On a pro forma basis, net of
discontinued and divested product lines, bookings were approximately $135
million resulting in an ending backlog of approximately $56 million, as compared
with bookings of $225 million and ending backlog of $84 million for the first
nine months of last year.

Sales by Region. The following table shows sales to each geographic region for
the nine months ended September 28, 2001 and September 29, 2000.

United States....................................... $ 95.6 47% $129.2 46%
Canada.............................................. 11.0 5 13.4 5
Europe.............................................. 43.0 21 58.4 21
Japan............................................... 34.0 17 43.1 15
Asia-Pacific, other................................. 21.1 10 30.0 11
Latin and South America............................. 0.8 0 4.3 2
----- ----- ----- -----
Total............................................ $205.5 100% $278.4 100%
====== ===== ====== ====

Gross Profit Margin. Gross profit margin was 35% for the nine months ended
September 28, 2001 compared to 41% for the nine months ended September 29, 2000.
Gross margins reflect the impact of fixed manufacturing and service overhead
costs and inventory loss provisions during a period of lower product and service
volumes.

Research and Development Expenses. Research and development expenses, net of
government assistance, for the nine months ended September 28, 2001 were 9.5% of
sales or $19.4 million compared with 9.4% of sales or $26.3 million for the nine
months ended September 29, 2000. The decline was due primarily to the impact of
divested product lines. Research and development activities focused on products
targeted at the electronics, semiconductor and telecommunications markets.

Selling, General and Administrative Expenses. SG&A expenses were 25.8% of sales
or $53.2 million for the nine months ended September 28, 2001, compared with
21.9% of sales or $60.9 million for the nine months ended September 29, 2000.
The decline in spending was due primarily to the impact of lower sales, divested
product lines, cost cutting measures, and shutdown days.

Amortization of Technology and Other Intangibles. Amortization of technology and
other intangibles was 2.0% of sales or $4.1 million for the nine months ended
September 28, 2001, compared with 1.3% of sales or $3.5 million for the nine
months ended September 29, 2000.

Other. During the first nine months of 2001, the Company adjusted an accrual
related to litigation with Electro Scientific Industries, Inc. and recorded a
benefit of $1.6 million. During the nine months ended September 29, 2000, the
Company recorded a benefit of $0.2 million related to royalties earned on the
sale of the OLT precision alignment system product line and $2.7 million
received for licensing some of the Company's technology.

Interest Income. Net interest income was $3.4 million for the nine months ended
September 28, 2001, compared to $1.6 million for the nine months ended September
29, 2000. The increase was due to the investment of proceeds from the April 2000
share offering and significant proceeds from the sale of assets during the
fourth quarter of 2000, contributing to an increased average cash and
investments balance during the first nine months of 2001 compared to the same
period of 2000. Interest income was negatively impacted by declining interest
rates during 2001 compared to 2000.

Income Taxes. The effective tax rate was 31.7% for the nine months ended
September 28, 2001, compared with 34.9% for the same period in 2000. Our
effective tax rate reflects the fact that we do not recognize the tax benefit
from losses in certain countries where future use of the losses is uncertain and
other deductible costs. Our earnings are subject to different effective tax
rates in each of the countries in which we operate. A change in our overall tax
rate can result when there is a change in our geographic earnings mix.

Net Income (Loss). As a result of the foregoing factors, net loss for the nine
months ended September 28, 2001 was $0.1 million, compared with net income of
$17.8 million for the same period in 2000.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents totaled $87.9 million on September 28, 2001 compared
to $113.9 million at December 31, 2000. In addition, short-term investments were
$20.0 million at September 28, 2001 compared to $20.0 million at December 31,
2000.

The investment in equity securities at September 28, 2001 of $35.6 million,
consisting of approximately 4.5 million shares, or 6.5%, of Packard BioScience
Company common stock, is included in other long-term assets. These equity
securities are subject to market fluctuations and, during the nine months ended
September 28, 2001, we recorded an unrealized gain of $0.4 million (after tax)
as a separate component of accumulated other comprehensive income.

Cash flows used in operating activities for the nine months ended September 28,
2001 were $21.1 million, compared to $14.1 million during the same period in
2000. Net loss, after adjustment for non-cash items, provided cash of $18.8
million in the first nine months of 2001. Decrease in accounts receivable due to
lower sales provided $32.6 million. This was more than offset by a decrease in
current liabilities using $73.9 million, including $32.9 million of income taxes
paid relating to the gain on sale of the Life Sciences business recognized in
October 2000 and income tax installments for the first nine months of 2001 and
$15.3 million paid in May 2001 in settlement of the legal judgment in a patent
infringement action filed by Electro Scientific Industries, Inc. In the first
nine months of 2000, net income, after adjustment for non-cash items, provided
cash of $21.5 million, offset by $35.7 million of increases in accounts
receivable, inventories, other current assets and current liabilities.

Cash flow used in investing activities was $2.7 million during the nine months
ended September 28, 2001, primarily from the purchase of $80.9 million of
short-term investments and $6.9 million of property, plant, and equipment,
offset by the maturity of $80.9 million of short-term investments. Cash proceeds
of $6.0 million were received on the sale of certain assets of the Laserdyne and
Custom Systems product lines on April 2, 2001. In the first nine months of 2000,
investing activities used $9.4 million, primarily from the purchase of
short-term investments and property, plant and equipment, and the acquisition of
General Optics. This was offset primarily by the disposal of assets and the
maturity of short-term investments.

Cash flow used in financing activities was $2.8 million for the nine months
ended September 28, 2001. In comparison, financing activities provided
$63.1million during the same period in 2000, primarily due to a large issue of
share capital.

We have credit facilities of $39.1 million denominated in Canadian dollars, US
dollars, Pounds sterling and Japanese yen. Bank indebtedness, of which $11.1
million was outstanding at September 28, 2001, is due on demand and bears
interest based on the prime rate. As at September 28, 2001, the Company had
unused and available demand lines of credit amounting to $19.9 million and
outstanding letters of credit of $8.1 million.

Accounts receivable and inventories have been pledged as collateral for the bank
indebtedness under general security agreements. The borrowings require, among
other things, the Company to maintain specified financial ratios and conditions.
We are currently in compliance with those ratios and conditions.

We believe that existing cash balances, together with cash generated from
operations and available bank lines of credit, will be sufficient to satisfy
anticipated cash needs to fund working capital and investments in facilities and
equipment for the next two years.

RECENT PRONOUNCEMENTS

The adoption of SFAS 141 will not have an impact on the business, results of
operations, and financial condition of the Company. The Company is still
evaluating the impact of the adoption of SFAS 142 and SFAS 144 and has not yet
determined the effect of adoption on the business, results of operations, and
financial condition of the Company.

FORWARD-LOOKING STATEMENTS

Certain statements in this report on Form 10-Q constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 (the "Reform Act"). Such forward-looking statements involve known and
unknown risks, uncertainties, and other factors which may cause the actual
results, performance, or achievements of the Company to be materially different
from any future results, performance or achievements, expressed or implied by
such forward-looking statements. In making these forward-looking statements,
which are identified by words such as "will", "expects", "intends",
"anticipates" and similar expressions, the Company claims the protection of the
safe-harbor for forward-looking statements contained in the Reform Act. The
Company does

not assume any obligation to update these forward-looking statements to reflect
actual results, changes in assumptions, or changes in other factors affecting
such forward-looking statements.

Customers' Cyclical Fluctuations. Several significant markets for our products
have historically been subject to economic fluctuations due to the substantial
capital investment required in the industries served. The timing, length and
severity of these cycles are difficult to predict. Most businesses in the
semiconductor industry have announced a slowdown in new orders as market
conditions weaken. Semiconductor manufacturers may contribute to these cycles by
misinterpreting the conditions in the industry and over- or under-investing in
semiconductor manufacturing capacity and equipment. We may not be able to
respond effectively to these industry cycles. During a period of declining
demand, we must be able to quickly and effectively reduce expenses while
continuing to motivate and retain key employees. Our ability to reduce expenses
in response to any downturn is limited by our need for continued investment in
engineering and research and development and extensive ongoing customer service
and support requirements. In addition, the long lead-time for production and
delivery of some of our products creates a risk that we may incur expenditures
or purchase inventories for products which we cannot sell. During a period of
increasing demand and rapid growth, we must be able to quickly increase
manufacturing capacity to meet customer demand and hire and assimilate a
sufficient number of qualified personnel. Our inability to ramp up in times of
increased demand could harm our reputation and cause some of our existing or
potential customers to place orders with our competitors rather than us.

Quarterly Fluctuations in Operations. We derive a substantial portion of our
sales from products that have a high average selling price and significant lead
times between the initial order and delivery of the product. The timing and
recognition of sales from customer orders can cause significant fluctuations in
our operating results from quarter to quarter. Gross margins realized on product
sales vary depending upon a variety of factors, including production volumes,
the mix of products sold during a particular period, negotiated selling prices,
the timing of new product introductions and enhancements and manufacturing
costs. A delay in a shipment, or failure to meet our revenue recognition
criteria, near the end of a fiscal quarter or year, due, for example, to
rescheduling or cancellations by customers or to unexpected difficulties
experienced by us, may cause sales in a particular period to fall significantly
below our expectations and may materially adversely affect our operations for
that period. Our inability to adjust spending quickly enough to compensate for
any sales shortfall would magnify the adverse impact of that sales shortfall on
our results of operations. In addition, announcements of new products and
technologies by either us or by our competitors could cause customers to defer
purchases of our existing systems, which could negatively impact our earnings
and our financial position. As a result of these factors, our results of
operations for any quarter or year are not necessarily indicative of results to
be expected in future periods. Our future operating results may be affected by
various trends and factors that must be managed in order to achieve favorable
operating results.

Proprietary Rights; Infringement Claims. If we cannot protect or lawfully use
our proprietary technology, we may not be able to compete successfully. We
protect our intellectual property through patent filings, confidentiality
agreements and the like. However, these methods of protection are uncertain and
costly. In addition, we may face allegations that we are violating the
intellectual property rights of third parties. These types of allegations are
common in the industry. Claims or litigation could seriously harm our business
or require us to incur significant costs. We are subject to litigation from time
to time, some of which is material to our business. If, in any of these actions,
there is a final adverse ruling against us, it could seriously harm our business
and have a material adverse effect on our operating results and financial
condition, as well as having a significant negative impact on our liquidity.
Among other things, we are currently subject to the claims and actions referred
to in Note 7 to the Financial Statements in this report.

Competition. The industries in which we operate are highly competitive. We face
substantial competition from established competitors, some of which have greater
financial, engineering, manufacturing and marketing resources than we do. Our
competitors can be expected to continue to improve the design and performance of
their products and to introduce new products. Furthermore, competition in our
markets could intensify, or our technological advantages may be reduced or lost
as a result of technological advances by our competitors. We may not be able to
compete successfully in the future, and increased competition may result in
price reductions, reduced profit margins, loss of market share, and an inability
to generate cash flows that are sufficient to maintain or expand our development
of new products.

Reliance on Key Personnel. The loss of key personnel could negatively impact our
operations. Our business and future operating results depend in part upon our
ability to attract and retain qualified management, technical, sales and support
personnel for our operations on a worldwide basis. Competition for qualified
personnel is intense, and we cannot guarantee that we will be able to continue
to attract and retain qualified personnel. Our operations could be negatively
affected if we lose key executives or employees or are unable to attract and
retain skilled executives and employees as needed.

Rapid Technological Change. The markets for our products experience rapidly
changing technologies, evolving industry standards, frequent new product
introductions and short product life cycles. Developing new technology is a
complex and uncertain process requiring us to be innovative and to accurately
anticipate technological and market trends. We may have to manage the transition
from older products to minimize disruption in customer ordering patterns, avoid
excess inventory and ensure adequate supplies of new products. We may not
successfully develop, introduce or manage the transition to new products. Failed
market acceptance of new products or problems associated with new product
transitions could harm our business.

Acquisitions. We have made, and continue to pursue, strategic acquisitions,
involving significant risks and uncertainties. Our identification of suitable
acquisition candidates involves risks inherent in assessing the values,
strengths, weaknesses, risks and profitability of acquisition candidates,
including the effects of the possible acquisition on our business, diversion of
our management's attention and risks associated with unanticipated problems or
liabilities. Should we acquire another business, the process of integrating
acquired operations into our existing operations may result in unforeseen
operating difficulties and may require significant financial resources that
would otherwise be available for the ongoing development or expansion of our
existing business. We must manage the growth of our business effectively.

Dependence on limited source suppliers. We depend on limited source suppliers
that could cause substantial manufacturing delays and additional cost if a
disruption of supply occurs. We obtain some components from a single source. We
also rely on a limited number of independent contractors to manufacture
subassemblies for some of our products. If suppliers or subcontractors
experience difficulties that result in a reduction or interruption in supply to
us or fail to meet any of our manufacturing requirements, our business would be
harmed until we are able to secure alternative sources. These components and
manufacturing services may not continue to be available to us at favorable
prices, if at all.

Operating in Foreign Countries. In addition to operating in the United States,
Canada and the United Kingdom, we have sales and service offices in France,
Germany, Italy, Japan, Singapore, Hong Kong, Korea, Taiwan, Malaysia and the
Philippines. We may in the future expand into other international regions.
Because of the scope of our international operations, we are subject to risks
which could materially impact our results of operations, including foreign
exchange rate fluctuations, longer payment cycles, greater difficulty in
collecting accounts receivable, utilization of different systems and equipment,
and difficulties in staffing and managing foreign operations and diverse
cultures.

General Economic, Political and Market Conditions. Our business is subject to
the effects of general economic and political conditions in the United States
and globally. Our revenues and operating results have declined and been
adversely affected by the tragic events of September 11, 2001 and the
unfavorable economic conditions. If the economic and political conditions in the
United States and globally do not improve or if the economic slowdown continues
to deteriorate, we may continue to experience material adverse impacts on our
business, operating results and the financial condition of the Company.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk. Our exposure to market risk associated with changes in
interest rates relates primarily to our cash equivalents, short-term investments
and debt obligations. At September 28, 2001, the Company had $56.4 million
invested in cash equivalents and $20.0 million invested in short-term
investments. Due to the average maturities and the nature of the investment
portfolio, a change in interest rates is not expected to have a material effect
on the value of the portfolio. We do not use derivative financial instruments in
our investment portfolio. We do not actively trade derivative financial
instruments but may use them to manage interest rate positions associated with
our debt instruments. We currently do not hold interest rate derivative
contracts.

Foreign Currency Risk. We have substantial sales and expenses and working
capital in currencies other than U.S. dollars. As a result, we have exposure to
foreign exchange fluctuations, which may be material. To reduce the Company's
exposure to exchange gains and losses, we generally transact sales and costs and
related assets and liabilities in the functional currencies of the operations.
We have a foreign currency hedging program using currency forwards and currency
options to hedge exposure to foreign currencies. These financial instruments are
used to fix the cash flow variable of local currency costs or selling prices
denominated in currencies other than the functional currency. We do not
currently use currency forwards or currency options for trading purposes. As of
September 28, 2001, the Company had nine foreign exchange forward contracts to
purchase $19.9 million U.S. dollars and three foreign exchange option contracts
to purchase $17.7 million U.S. dollars with an aggregate fair value loss of
$0.03 million recorded in accumulated other comprehensive income and maturing in
December 2001, March 2002 and on the 15th of each following month until August
15, 2002.

PART I - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS
See the description of legal proceedings in Note 7 to the Financial
Statements.

ITEM 5: OTHER INFORMATION

The Company has entered into severance agreements with Kurt A. Pelsue, V.P.
Technology and Alfonso DaSilva, V.P. Customer Service. The agreements, in each
instance, provide for a severance payment and certain other benefits if
employment with the Company is terminated upon or following defined change of
control events or by the Company without cause. The effective date for the
agreement is May 24, 2001 for Mr. Pelsue and July 9, 2001 for Mr. DaSilva. Each
agreement continues for a minimum term of three (3) years from its respective
date and will automatically extend for periods of one year after the initial
term unless the Company or the executive gives notice at least ninety days prior
to the expiration of the current period that the agreement will not be extended.
Under the agreement, the payment in the event of termination without cause is
equal to a minimum of one year and a maximum of two years of the sum of (a)
annual base salary; (b) targeted annual bonus; (c) prorated portion of annual
bonus; and (d) the cost of certain employment benefits. If the termination of
employment occurs upon or following a defined change of control of the Company,
the payment is equal to three times the sum of (a)-(d). Pursuant to these
agreements, all unvested options then held will immediately vest, provided that
such options shall expire upon the earlier of (i) three years or the remainder
of the option term in the event of a change of control, or (ii) six months or
the remainder of the option term in the event of a termination for cause.

The Company entered into a Separation Agreement and General Release on August
21, 2001 with its V.P. Sales, Patrick D. Austin. Pursuant to the terms of the
agreement, Mr. Austin, whose employment with the Company ended on September 28,
2001, will continue to receive salary payments and health benefit coverage for a
period not to exceed twelve (12) months.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

A) LIST OF EXHIBITS

10.24 Severance Agreement between the Registrant and Kurt A.
Pelsue dated May 24, 2001
10.25 Severance Agreement between the Registrant and Alfonso
DaSilva dated July 9, 2001.
10.26 Separation Agreement and General Release between the
Registrant and Patrick D. Austin dated August 21, 2001.

B) REPORTS ON FORM 8-K
None

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant, GSI Lumonics Inc., has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.

GSI LUMONICS INC.
(REGISTRANT)

NAME TITLE DATE
- -------------------------------------- ---------------------------------------------- ----------------------

/s/ CHARLES D. WINSTON Director and Chief Executive Officer November 8, 2001
- ---------------------- (Principal Executive Officer)
Charles D. Winston

/s/ THOMAS R. SWAIN Vice President Finance and Chief Financial November 8, 2001
- ------------------- Officer (Principal Financial and Accounting
Thomas R. Swain Officer)