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 March 29, 2002

[ ] 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 April 16, 2002, there were 40,610,621 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....................... 14

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

PART II - OTHER INFORMATION.......................................... 23
ITEM 1. LEGAL PROCEEDINGS.......................................... 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)

March 29, December 31,
2002 2001
--------- ------------
ASSETS
Current
Cash and cash equivalents........................ $ 96,215 $102,959
Short-term investments........................... 37,336 43,541
Accounts receivable, less allowance of $3,003
(December 31, 2001 - $3,034)................... 30,127 39,919
Income taxes receivable.......................... 12,811 9,224
Inventories...................................... 56,093 57,794
Deferred tax assets.............................. 14,879 15,097
Other current assets............................. 6,483 8,528
-------- --------
Total current assets......................... 253,944 277,062

Property, plant and equipment, net of accumulated
depreciation of $21,721
(December 31, 2001 - $20,575).................... 31,716 32,482
Deferred tax assets................................. 7,085 6,537
Other assets........................................ 1,240 1,539
Other investment (note 9)........................... 19,000 --
Intangible assets, net of amortization of $12,349
(December 31, 2001 - $11,857).................... 17,266 19,067
-------- --------
$330,251 $336,687
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current
Bank indebtedness................................ $ 9,027 $ 6,171
Accounts payable................................. 10,675 10,839
Accrued compensation and benefits................ 8,242 7,515
Other accrued expenses........................... 21,847 25,096
Current portion of long-term debt................ 2,654 2,654
-------- --------
Total current liabilities.................... 52,445 52,275

Deferred compensation............................... 2,244 2,082
-------- --------
Total liabilities............................ 54,689 54,357
Commitments and contingencies (note 9)
Stockholders' equity
Common shares, no par value; Authorized shares:
unlimited; Issued and outstanding: 40,603,175
(December 31, 2001 - 40,556,130).............. 303,725 303,504
Additional paid-in capital....................... 2,592 2,592
Deficit.......................................... (20,166) (13,546)
Accumulated other comprehensive loss............. (10,589) (10,220)
-------- --------
Total stockholders' equity .................. 275,562 282,330
-------- --------
$330,251 $336,687
======== ========

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
------------------
March 29, March 30,
2002 2001
--------- --------

Sales................................................ $ 36,888 $87,707

Cost of goods sold................................... 24,615 53,574
-------- -------
Gross profit......................................... 12,273 34,133

Operating expenses:
Research and development.......................... 5,830 6,974
Selling, service and administrative............... 13,529 20,633
Amortization of purchased intangibles............. 1,278 1,333
Restructuring and other........................... 2,745 (1,400)
-------- -------
Income (loss) from operations........................ (11,109) 6,593
Interest income................................... 645 1,258
Interest expense.................................. (140) (109)
Foreign exchange transaction gains (losses)....... 384 (216)
-------- -------
Income (loss) before income taxes.................... (10,220) 7,526

Income tax provision (benefit)....................... (3,600) 2,747
-------- -------
Net income (loss).................................... $ (6,620) $ 4,779
======== =======

Net income (loss) per common share:
Basic............................................ $ (0.16) $ 0.12
Diluted.......................................... $ (0.16) $ 0.12

Weighted average common shares outstanding (000's)... 40,589 40,217
Weighted average common shares outstanding and
dilutive potential common shares (000's).......... 40,589 40,961

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)

Three months ended
------------------
March 29, March 30,
2002 2001
--------- ---------

Cash flows from operating activities:

Net income (loss)................................. $ (6,620) $ 4,779
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Loss on disposal of assets................... 392 --
Stock-based compensation..................... -- 200
Depreciation and amortization................ 2,740 3,354
Deferred income taxes........................ (191) (928)
Changes in current assets and liabilities:
Accounts receivable.......................... 9,605 9,124
Inventories.................................. 1,625 (5,121)
Other current assets......................... 425 147
Accounts payable, accruals, and taxes
(receivable) payable....................... (6,090) (31,746)
-------- --------
Cash provided by (used in) operating activities... 1,886 (20,191)
-------- --------

Cash flows from investing activities:
Additions to property, plant and equipment... (622) (3,633)
Maturity of short-term investments........... 39,068 20,020
Purchase of short-term investments........... (51,863) (28,133)
Decrease (increase) in other assets.......... 1,598 (3,464)
-------- --------
Cash used in investing activities................. (11,819) (15,210)
-------- --------

Cash flows from financing activities:
Proceeds (payments) of bank indebtedness..... 2,968 (738)
Issue of share capital....................... 221 488
-------- --------
Cash provided by (used in) financing activities... 3,189 (250)
-------- --------

Effect of exchange rates on cash and
cash equivalents............................... -- 1,814
-------- --------
Decrease in cash and cash equivalents............. (6,744) (33,837)
Cash and cash equivalents, beginning of period.... 102,959 113,858
-------- --------
Cash and cash equivalents, end of period.......... $ 96,215 $ 80,021
======== ========

The accompanying notes are an integral part of these financial statements

GSI LUMONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
As of March 29, 2002
(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 U.S. 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, 2001. The results for
interim periods are not necessarily indicative of results to be expected for the
year or any future periods.

Comparative amounts

Certain comparative amounts have been reclassified to conform to the
presentation of the financial statements for the quarter ended March 29, 2002.

2. Inventories

Inventories consist of the following:
March 29, December 31,
2002 2001
--------- ------------
Raw materials.......................... $31,891 $29,779
Work-in-process........................ 9,775 8,028
Finished goods......................... 8,133 12,918
Demo inventory......................... 6,294 7,069
------- -------
Total inventories................. $56,093 $57,794
======= =======

3. New Accounting Pronouncements

Business Combinations

On January 1, 2002, the Company implemented, on a prospective basis, Statement
of Financial Accounting Standards ("SFAS") No. 141, Business Combinations. As a
result, all business combinations initiated in the future will be accounted for
under the purchase method. Also, SFAS 141 does not permit the Company to
recognize an assembled workforce asset. Therefore, the Company reallocated its
assembled workforce asset with a cost of $2.8 million and a net carrying value
of $2.0 million at January 1, 2002 to other remaining long-lived assets arising
on the merger with General Scanning, Inc. in 1999, including $1.4 million to
developed technology, $0.5 million to property, plant and equipment and $0.1
million to trademarks and trade names. The adoption of SFAS 141 did not have any
other material impact on the Company's financial position or cash flows. It will
accelerate amortization by $0.6 million per year for the next two years and
reduce amortization thereafter.

Intangible Assets

On January 1, 2002, the Company implemented, on a prospective basis, Statement
of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other
Intangible Assets. As a result, intangible assets with finite useful lives must
now be amortized and goodwill and intangible assets with indefinite lives will
not be amortized, but will

rather be tested at least annually for impairment. The adoption of SFAS 142 did
not have a material impact on the Company's financial position, as it does not
possess goodwill or intangible assets with indefinite lives. It also did not
have a material impact on the Company's results of operations or cash flows.

Intangible assets consist of the following:

March 29, 2002 December 31, 2001
------------------------- ---------------------------
Accumulated Accumulated
Cost Amortization Cost Amortization
-------- ------------ -------- ------------

Patents and acquired technology.... $ 10,381 $ (1,681) $ 10,384 $ (1,429)
Developed technology............... 18,210 (10,380) 16,790 (9,380)
Assembled workforce................ -- -- 2,814 (786)
Trademarks and trade names......... 1,024 (288) 936 (262)
-------- -------- -------- --------
Total cost.................... 29,615 $(12,349) 30,924 $(11,857)
======== ========
Accumulated amortization........... (12,349) (11,857)
-------- --------
Net intangible assets......... $ 17,266 $ 19,067
======== ========

Impairment or Disposal of Long-Lived Assets

On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS 144 applies to all long-lived assets, including
discontinued operations, and develops one accounting model for long-lived assets
to be disposed of by sale. SFAS 144 supersedes SFAS 121, and the accounting and
reporting provisions of APB No. 30, Reporting the Results of Operations --
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions ("APB 30"), for the
disposal of a segment of a business. The adoption of SFAS 144 did not have a
material impact on the Company's financial position, results of operations or
cash flows.

4. Bank Indebtedness

The Company has lines of credit at March 29, 2002 of approximately $32.9 million
denominated in Canadian dollars, US dollars, UK Pound sterling, Euro and
Japanese yen that are available for general purposes. As at March 29, 2002,
approximately $13.9 million of our lines of credit were in use, representing
$9.0 million of borrowings in Japan and $4.9 million of bank guarantees and
outstanding letters of credit. The lines of credit are due on demand and bear
interest based on the prime rate. Borrowings are limited to the sum of eligible
accounts receivable under 90 days and North American inventories. Accounts
receivable and inventories have been pledged as collateral for the bank
indebtedness under general security agreements. At March 29, 2002, availability
under the lines of credit amounts to $19.0 million. The lines of credit require
annual payment of an undisbursed revolving commitment fee equal to .125% of the
unutilized available balance. The borrowings require, among other things, the
Company to maintain specified financial ratios, such as minimum EBITDA,
limitation of capital expenditures not greater than $20.0 million per year and
seek consent of the bank for payment of dividends, acquisitions and
divestitures. As at March 29, 2002, the Company was in breach of one of the
financial covenants, the interest coverage ratio, for which no borrowings were
made under the facility. The bank issued a waiver of this non-compliance, which
would allow the Company to draw on the line of credit if needed. In April 2002,
the Company is reviewing the terms of its lines of credit with the lenders.

5. 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 three months ended March 29,
2002, 47,045 shares of common stock were issued pursuant to share options
exercised for proceeds of $0.2 million.

Accumulated other comprehensive loss

At March 29, 2002, accumulated other comprehensive loss was comprised of an
unrealized gain of $0.6 million (net of tax of $0.4 million) on cash flow
hedging instruments and accumulated foreign currency translation adjustments of
($11.2 million). At December 31, 2001, accumulated other comprehensive loss was
comprised of an unrealized gain on cash flow hedging instruments of $0.8 million
(net of tax of $0.6 million) and accumulated foreign currency translation
adjustments of ($11.0 million).

The components of comprehensive income (loss) are as follows:

Three months ended
------------------------------
March 29, March 30,
2002 2001
--------- ---------

Net income (loss).......................................... $(6,620) $ 4,779
Other comprehensive income (loss)
Cumulative effect of change in accounting
policy for cash flow hedges........................ -- (164)
Realized (gain) loss on cash flow hedging
instruments, net of tax of $567 (March 30,
2001 - $0) (note 7)................................ (793) 164
Unrealized gain on cash flow hedging
instruments, net of tax of $435 (note 7)........... 606 --
Foreign currency translation adjustments.............. (182) (2,655)
Change in unrealized loss on equity
securities, net of tax of $562........................ -- (1,043)
------- -------
Comprehensive income (loss) $(6,989) $ 1,081
======= =======

Net income (loss) per common share

Basic net income (loss) per common share was computed by dividing net income
(loss) by the weighted-average number of common shares outstanding during the
period. For diluted net income (loss) 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 loss for the three months ended
March 29, 2002, the effect of converting options was anti-dilutive.

Common and common share equivalent disclosures are:

Three months ended
------------------------------
March 29, March 30,
2002 2001
--------- ---------

Weighted average common shares outstanding.................. 40,589 40,217
Dilutive potential common shares............................ -- 744
------ ------
Diluted common shares....................................... 40,589 40,961
====== ======

At March 29, 2002, the Company had options and warrants outstanding entitling
holders to up to 3,935,280 and 51,186 common shares, respectively.

6. Related Party Transactions

The Company recorded sales revenue from Sumitomo Heavy Industries, Ltd., a
significant shareholder, of $0.4 million in the three months ended March 29,
2002 and $1.7 million in the three months ended March 30, 2001 at amounts and
terms approximately equivalent to third-party transactions. Transactions with
Sumitomo are at normal trade terms. Receivables from Sumitomo of $0.3 million
and $1.3 million as at March 29, 2002 and March 30, 2001, respectively, are
included in accounts receivable on the balance sheet.

In January of 2001, the Company made an investment of $2.0 million in a
technology fund, managed by OpNet Partners, L.P. During the three months ended
March 29, 2002, the Company received sixty-five percent (65%), or

$1.3 million, of the investment. The remaining investment made by the Company
continues to be maintained in OpNet Partners private investment portfolio.
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 other assets on
the balance sheet.

The Company has an Agreement with V2Air LLC relating to the use of the LLC
aircraft for Company purposes. The Company's President and Chief Executive
Officer, Charles D. Winston owns the V2Air LLC. Pursuant to the terms of the
Agreement, the Company is required to reimburse the V2Air LLC for certain
expenses associated with the use of the aircraft for Company business travel.
During the three months ended March 29, 2002, the Company reimbursed V2Air LLC
approximately $34 thousand under the terms of the Agreement.

7. Financial Instruments

Cash equivalents and short-term investments

At March 29, 2002, the Company had $73.7 million invested in cash equivalents
denominated in U.S. dollars with maturity dates between March 30, 2002 and June
12, 2002. At December 31, 2001, the Company had $79.8 million invested in cash
equivalents denominated in U.S. dollars with maturity dates between January 7,
2002 and March 1, 2002. Cash equivalents, stated at amortized cost, approximate
fair value.

At March 29, 2002, the Company had $56.3 million invested in short-term
investments denominated in U.S. dollars with maturity dates between April 4,
2002 and April 25, 2003. This $56.3 million includes $19 million to be pledged
as security and classified as long-term in connection with the operating leases
discussed in note 9. At December 31, 2001, the Company had $43.5 million
invested in short-term investments denominated in U.S. dollars with maturity
dates between January 24, 2002 and May 6, 2002. The carrying value of short-term
investments approximates fair value.

Derivative financial instruments

At March 29, 2002, the Company had seven foreign exchange forward contracts to
purchase $14.8 million U.S. dollars with an aggregate fair value gain of $0.6
million after-tax recorded in accumulated other comprehensive income and
maturing between April 15, 2002 and August 15, 2002. At December 31, 2001, the
Company had eight foreign exchange forward contracts to purchase $17.8 million
U.S. dollars and one foreign exchange option contract to purchase $6.5 million
U.S. dollars with an aggregate fair value gain of $0.8 million after-tax
recorded in accumulated other comprehensive income and maturing at varying dates
in 2002.

8. Restructuring and other

Restructuring charges

2002

In connection with a restructuring plan to align the Company's manufacturing
costs and operating expenses with the prevailing economic environment, the
Company recorded a pre-tax restructuring charge of $2.7 million during the first
quarter of fiscal 2002. The Company is consolidating the Electronics systems
business from its facility in Kanata, Ontario into the Company's existing
systems manufacturing facility in Wilmington, MA. In addition, Kanata's laser
sources business will transfer to the Company's Rugby, UK facility.
Restructuring provisions relate to severance and benefits of $2.2 million for
the termination of approximately 90 employees, $0.3 million for the write-off of
furniture, equipment and system software, and $0.2 million for plant closure and
other related costs.

A non-cash draw-down of $0.3 million has been applied against the provision for
asset write-offs, resulting in a remaining provision balance of $2.4 million as
at March 29, 2002.

2001

During the fourth quarter of fiscal 2001, a charge of $3.4 million was recorded
to accrue employee severance of $0.9 million for approximately 35 employees at
our Farmington Hills and Oxnard locations, leased facilities costs of $1.8

million associated with restructuring for excess capacity at five leased
locations in the United States, Canada, and Germany and write-down of leasehold
improvements and certain equipment of $0.7 million associated with the exiting
of leased facilities.

Cumulative cash draw-downs of approximately $0.6 million and a non-cash
draw-down of $0.7 million have been applied against the provision, resulting in
a remaining provision balance of $2.1 million as at March 29, 2002.

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 and
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; 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 cash draw-downs of $5.8 million, reversal of $0.5 million for
restructuring costs that will not be incurred and a non-cash draw-down of $2.6
million have been applied against the provision, resulting in a remaining
provision balance of $6.2 million as at March 29, 2002.

The following table summarizes changes in the restructuring provision included
in other accrued expenses on the balance sheet.

(in millions) Total Severance Facilities Other
----- --------- ---------- -----

Provision at December 31, 2001......... $ 8.9 $ 0.9 $ 8.0 $--
Cash draw-downs during Q1 2002......... (0.6) (0.2) (0.4) --
Charge during Q1 2002.................. 2.7 2.2 0.3 0.2
Non-cash draw-down during Q1 2002...... (0.3) -- (0.3) --
----- ------ ----- ----
Provision at March 29, 2002............ $10.7 $ 2.9 $ 7.6 $0.2
----- ------ ----- ----

Other

During the first quarter of 2001, the Company adjusted an accrual related to
litigation with Electro Scientific Industries, Inc. and recorded a benefit of
$1.4 million. On April 17, 2001, the U.S. Court of Appeals for the Federal
Circuit affirmed the judgment of the U.S. District Court for the Northern
District of California in a patent infringement action filed by Electro
Scientific Industries, Inc. See Note 9.

9. Commitments and Contingencies

Operating Leases

The Company leases two facilities under operating lease agreements that expire
in 2003. At the end of the initial lease term, these leases require the Company
to provide for a residual value guarantee of the first 85% of any loss the
lessor may incur on its $19.1 million investment in the building, which may
become payable by the Company upon the termination of the transaction, or the
Company may exercise its option to purchase the facilities for approximately $19
million. As of March 29, 2002, residual value guarantees in connection with
these leases totaled approximately $16 million. Upon termination of the leases,
the Company expects the fair market value of the leased properties to reduce
substantially the payment under the residual value guarantees and, during the
fourth quarter of fiscal 2000, the Company took a charge of $6 million
associated with restructuring for excess capacity at the two leased facility
locations, including the estimated residual value guarantees. The lease
agreement requires, among other things, the Company to maintain specified
quarterly financial ratios and conditions. As at March 29, 2002, the Company was
in breach of the fixed charge coverage ratio and the lessor has provided a
waiver of this and any future financial covenant defaults, provided the Company
grants the lessor a first priority continuing security interest

in and lien on approximately $19 million of the Company's deposit account to be
maintained, with the administrative agent for the lease, until the Company's
obligations under the leases are paid in full. This item is reflected on the
balance sheet as other investment.

Legal proceedings and disputes

Electro Scientific Industries, Inc. v. GSI Lumonics, Inc. et al. 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 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 the Company's 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.

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 the Company. The
plaintiff in the proceedings has alleged that certain equipment used by these
manufacturers infringes patents claimed to be held by the plaintiff. While the
Company is not a defendant in any of the proceedings, several of the Company's
customers have notified the Company that, if the party successfully pursues
infringement claims against them, they may require the Company to indemnify them
to the extent that any of their losses can be attributed to systems sold to them
by the Company.

The Company is also subject to various legal proceedings and claims that arise
in the ordinary course of business. The Company does not believe that the
outcome of these claims will have a material adverse effect upon the Company's
financial conditions or results of operations 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.

10. Segment Information

General description

During the fourth quarter of fiscal 2001, the Company changed the way it manages
its business to reflect a growing focus on providing precision optics and laser
systems to its customers. In classifying operational entities into a particular
segment, the Company aggregated businesses with similar economic
characteristics, products and services, production processes, customers and
methods of distribution. Segment information for the 2001 year has been restated
to conform to the current year's presentation.

The Executive Committee ("EC") is the chief operating decision maker in
assessing the performance of the segments and the allocation of resources to
the segments. The EC evaluates financial performance based on measures of
profit or loss from operations before income taxes excluding the impact of
amortization of purchased intangibles, restructuring and other, interest income,
interest expense, and foreign exchange transaction gains (losses). Certain
corporate- level operating expenses, including sales, marketing, finance, and
administrative expenses, are not allocated to operating segments. The EC does
not review asset information on a segmented basis. Intersegment sales are based
on fair market values. All intersegment profit, including any unrealized profit
on ending inventories, is eliminated on consolidation.

GSI Lumonics operations include two reportable operating segments: the Laser
Systems segment (Laser Systems); and the WavePrecision segment (WavePrecision).
Laser Systems designs, develops, manufactures and markets

laser-based advanced manufacturing systems and components as enabling tools for
a wide range of high-technology applications, including computer-chip memory
repair processing, wafer and die marking, inspection systems for solder paste
and component placement on surface-mount printed circuits, via drilling of
printed circuit boards, hybrid circuit trim, circuit trim on silicon, and laser
printing for medical applications. Major markets for its products include the
semiconductor and electronics industries. WavePrecision provides precision
optics for Dense Wave Division Multiplexing networks. Major markets for its
products include the telecommunications industry.

Segments

Information on reportable segments is as follows:

Three months ended
-------------------------
March 29, March 30,
2002 2001
Sales --------- ---------
Laser Systems.................................. $ 34,448 $81,206
WavePrecision.................................. 2,555 6,961
Intersegment sales elimination................. (115) (460)
-------- -------
Total....................................... $ 36,888 $87,707
======== =======
Segment income (loss) from operations
Laser Systems.................................. $ (1,638) $ 7,903
WavePrecision.................................. (1,113) 1,798
-------- -------
Total by segment............................ (2,751) 9,701

Unallocated amounts:
Corporate expenses............................. 4,335 3,175
Amortization of purchased intangibles.......... 1,278 1,333
Restructuring and other........................ 2,745 (1,400)
-------- -------
Income (loss) from operations............... $(11,109) $ 6,593
======== =======

As at
------------------------
March 29, December 31,
2002 2001
Assets --------- ------------
Laser Systems..................................... $103,968 $115,387
WavePrecision..................................... 11,027 11,506
Corporate......................................... 215,256 209,794
-------- --------
Total assets................................... $330,251 $336,687
======== ========

Total assets for corporate include treasury controlled, income tax, other and
intangible assets.

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
---------------------------------
March 29, 2002 March 30, 2001
-------------- --------------
Revenues from external customers:
United States...................... $24.1 65% $36.4 41%
Canada............................. 0.8 2% 6.8 8%
Europe............................. 6.3 17% 20.8 24%
Japan.............................. 2.5 7% 14.0 16%
Asia-Pacific, other................ 3.1 9% 9.1 10%
Latin and South America............ 0.1 0% 0.6 1%
---- -----
Total.......................... $36.9 100% $87.7 100%
===== =====

As at
---------------------------------
March 29, 2002 December 31, 2001
-------------- -----------------
Long-lived assets:
United States...................... $28.3 $29.7
Canada............................. 8.9 9.4
Europe............................. 11.0 11.5
Japan.............................. 0.6 0.7
Asia-Pacific, other................ 0.2 0.2
----- -----
Total.......................... $49.0 $51.5
===== =====

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(in United States dollars, and in accordance with U.S. GAAP)

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."

Overview

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

Highlights for the Three Months Ended March 29, 2002 and Outlook

o Sales for the quarter dropped to $36.9 million from $42.4 million in
the fourth quarter of 2001 and $87.7 million in the first quarter of
2001.
o Net loss for the quarter was $6.6 million and net loss per share was
$0.16 compared to net income of $4.8 million and $0.12 diluted net
income per share in the first quarter of last year.
o Orders were $43 million in the first quarter of 2002 compared to $35
million in the fourth quarter of 2001 and $82 million in the first
quarter of 2001. During the first quarter of 2002, the Company
received over $12 million in orders from three separate customers for
its new memory processing systems, the M430. Ending backlog was $57
million as compared with $50 million at the end of the fourth quarter
of last year and $114 million at the end of the first quarter of last
year.
o The change in cash, cash equivalents, short-term and other investments
for the first quarter of 2002 was an increase of $6.1 million. Cash,
cash equivalents, and short-term investments were $152.6 million (this
includes $19 million to be pledged as security in connection with
operating leases) at March 29, 2002.

Our current work plan is to streamline our business around our core markets in
order to align our cost structure to the current market conditions and
strengthen our financial position. In conjunction with this plan, we recorded a
pre-tax restructuring charge of $2.7 million during the first quarter of fiscal
2002 related to consolidating our Electronics systems business from its facility
in Kanata, Ontario into the Company's existing systems manufacturing facility in
Wilmington, MA. In addition, Kanata's laser sources business will transfer to
the Company's Rugby, UK facility. Restructuring provisions relate to severance
and benefits for the termination of approximately 90 employees, the write-off of
assets, and for plant closure and other related costs. Savings from this
consolidation are expected to fully cover the cost within the rest of fiscal
2002. 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.

The Company announced a new product during the quarter. The TrimSmart(TM) EP1000
Laser Trimmer, for use in the adjustment of passive components within the inner
layers of multi-layer printed circuit boards, was introduced in March. This new
manufacturing tool meets the demands of a processing change designed to permit
greater functionality to be attained within a smaller board size -- a key driver
for the next generation of personal electronic devices.

We anticipate operating results for the second and third quarters of this fiscal
year to be similar to the first quarter just ended. We expect losses to decline
as we feel the positive impact of previously announced restructuring and
operating charges taken over the past nine months. We expect gross margins will
improve as a result of plant

consolidations and favorable product mix, and operating expenses will decline
compared to levels experienced in fiscal 2001. However, the Company may elect to
use some of its cash resources over the next several quarters to accelerate the
development of certain products related to new process technologies, that are
seeing increasing interest from prospective customers. These include products
addressing the transition to 300mm wafers, copper interconnects, chip scale
packaging and production of next generation printed circuit boards.

Results of Operations

The following table sets forth items in the unaudited consolidated quarterly
statement of operations as a percentage of sales for the periods indicated:

Three months ended
----------------------
March 29, March 30,
2002 2001
--------- ---------
Sales............................................... 100.0% 100.0%
Cost of goods sold.................................. 66.7 61.1
----- -----
Gross profit........................................ 33.3 38.9
Research and development............................ 15.8 8.0
Selling, service and administrative................. 36.7 23.5
Amortization of purchased intangibles .............. 3.5 1.5
Restructuring and other............................. 7.4 (1.6)
----- -----
Income (loss) from operations....................... (30.1) 7.5
Interest income..................................... 1.7 1.4
Interest expense.................................... (0.3) (0.1)
Foreign exchange transaction gains (losses)......... 1.0 (0.2)
----- -----
Income (loss) before income taxes................... (27.7) 8.6
Income tax provision (benefit)...................... (9.8) 3.1
----- -----
Net income (loss)................................... (17.9)% 5.5%
===== =====

Commencing in the first quarter of 2002, we classify technical support and
service management costs as selling, service and administrative expenses. In
prior years, we classified these costs as cost of goods sold and such costs have
been reclassified in the comparative statement of operations. Field service
management costs were $1.5 million or 4.0% of sales and $1.6 million or 1.8% of
sales during the three months ended March 29, 2002 and March 30, 2001,
respectively.

Sales by Market. The following table sets forth sales to our primary markets for
the first three months of 2002 and 2001.

Three months ended
--------------------------------
(in millions) March 29, 2002 March 30, 2001
-------------- --------------
% of % of
Sales Total Sales Total
----- ----- ----- -----
Semiconductor............................... $8.4 23% $30.6 35%
Electronics................................. 6.5 18 26.1 30
Medical..................................... 10.2 28 8.5 10
Components.................................. 5.2 14 7.9 9
Optics...................................... 2.4 6 6.5 7
Other....................................... 4.2 11 8.1 9
----- --- ----- ---
Total.................................... $36.9 100% $87.7 100%
===== === ===== ===

Sales for the three months ended March 29, 2002 decreased substantially compared
to the same period in 2001, primarily due to the significant downturn in the
markets we serve, especially in the semiconductor and electronics markets, and
the impact of reduced and/or deferred capital spending by our customers due to
excess of manufacturing capacity and their customers' excess inventories of
components. 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. However,
the decline in bookings over the past four quarters seems to have slowed and we
are beginning to experience some increase in bookings, mainly in the
semiconductor and medical markets.

Semiconductor systems sales for the first quarter of 2002 decreased by $22.2
million compared to the same period of 2001 and electronic systems sales
decreased by $19.6 million due to the decline in market conditions since the
middle of 2000. In particular, the decline in semiconductor sales was due
primarily to a weakness in demand for semiconductor marker and trim-and-test
products, offset by significant growth in our memory repair applications. With
respect to the electronics market, the decline in sales was due primarily to
weakness in demand for our laser drilling, electronics marker, circuit trim and
SMT applications. Sales to the medical market increased by $1.7 million as the
markets for our printing and imaging applications have remained relatively
strong through the economic downturn that has negatively impacted other areas of
our business. Sales of components for the first quarter of 2002 decreased by
$2.7 million compared to the same period of 2001 due to general economic
conditions. Sales of optics for the first quarter of 2002 decreased by $4.1
million compared to the same period of 2001 due to a sharp decline in sales to
the telecommunications market. Sales to the other markets (including aerospace,
packaging and automotive) decreased by $3.9 million from the same period of
2001.

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;
Latin and South America; Europe, consisting of Europe, the Middle East and
Africa; Japan; and Asia-Pacific, consisting of ASEAN countries, China and other
Asia-Pacific countries. Revenues are attributed to these geographic areas on the
basis of customer location. The following table shows sales to each geographic
region for the first three months of 2002 and 2001.

Three months ended
--------------------------------
(in millions) March 29, 2002 March 30, 2001
-------------- --------------
% of % of
Sales Total Sales Total
----- ----- ----- -----
United States.............................. $24.1 65% $36.4 41%
Canada..................................... 0.8 2 6.8 8
Europe..................................... 6.3 17 20.8 24
Japan...................................... 2.5 7 14.0 16
Asia-Pacific, other........................ 3.1 9 9.1 10
Latin and South America.................... 0.1 0 0.6 1
----- --- ----- ---
Total................................... $36.9 100% $87.7 100%
===== === ===== ===

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 March 29, 2002 was $57 million
compared to $114 million at March 30, 2001 and $50 million at December 31, 2001,
with over 54% in the semiconductor and electronics market, 17% in the medical
market and 17% in the components market.

Gross Margin. Gross margin was 33.3% in the three months ended March 29, 2002
compared to 38.9% in the same period of 2001. Gross margins reflect the impact
of the economic downturn and fixed manufacturing 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 March 29, 2002 were 15.8% of
sales or $5.8 million compared with 8.0% of sales or $7.0 million in the three
months ended March 30, 2001. The decrease reflects the impact of initiatives
undertaken by us to focus our spending on key potential growth areas, as well as
the divestiture of the Laserdyne and Custom Systems product lines in the second
quarter of 2001 in order to focus on our core technologies. During the first
quarter of 2002, research and development activities focused on products
targeted at the semiconductor, electronics and telecommunications markets.

Selling, Service and Administrative Expenses. Selling, service and
administrative expenses were 36.7% of sales or $13.5 million in the three months
ended March 29, 2002, compared with 23.5% of sales or $20.6 million in the three
months ended March 31, 2001. The decrease reflects the impact of restructuring
activities, lower sales, divested product lines, cost reduction measures,
mandatory factory shut down days and other cost savings initiatives undertaken
in fiscal 2001.

Amortization of Purchased Intangibles. Amortization of purchased intangibles
was 3.5% of sales or $1.3 million primarily as a result of amortizing intangible
assets from acquisitions.

Restructuring and other. In connection with a restructuring plan to align the
Company's manufacturing costs and operating expenses with the prevailing
economic environment, the Company recorded a pre-tax restructuring charge of
$2.7 million or 7.4% of sales during the first quarter of fiscal 2002. We are
consolidating the Electronics systems business from its facility in Kanata,
Ontario into the Company's existing systems manufacturing facility in
Wilmington, MA. In addition, Kanata's laser sources business will transfer to
the Company's Rugby, UK facility. Restructuring provisions relate to severance
and benefits of $2.2 million for the termination of approximately 90 employees,
$0.3 million for the write-off of furniture, equipment and system software, and
$0.2 million for plant closure and other related costs.

During the first quarter of 2001, the Company adjusted an accrual related to
litigation with Electro Scientific Industries, Inc. and recorded a benefit of
$1.4 million or 1.6% of sales. On April 17, 2001, the U.S. Court of Appeals for
the Federal Circuit affirmed the judgment of the U.S. District Court for the
Northern District of California in a patent infringement action filed by Electro
Scientific Industries, Inc.

Interest Income. Interest income was $0.6 million in the three months ended
March 29, 2002, compared to $1.3 million in the three months ended March 30,
2001. The decrease was due to a significant decline in interest rates over the
past year, partially offset by an increase in the average investment balance
compared to 2001.

Interest Expense. Interest expense was $0.1 million in the three months ended
March 29, 2002, compared to $0.1 million in the three months ended March 30,
2001.

Income Taxes. The effective tax rate was 35.2% for the first quarter of 2002,
compared with 36.5% in the same period in 2001 and 34.6% for fiscal 2001. Our
tax rate reflects the estimated effective annual rate.

Net Income (Loss). As a result of the foregoing factors, net loss for the first
quarter of 2002 was $6.6 million, compared with net income of $4.8 million in
the same period in 2001.

Segment Results of Operations

Our customers and markets continue to evolve. As a result, during the fourth
quarter of fiscal 2001, we changed the way we manage our business to reflect a
growing focus on providing precision optics and laser systems to our customers.
Financial information by segment is reported on the new basis for the 2001
Annual Report and on a quarterly basis commencing in the three months ended
March 29, 2002.

Our operations include two reportable operating segments: the Laser Systems
segment (Laser Systems); and the WavePrecision segment (WavePrecision). Laser
Systems designs, develops, manufactures and markets laser-based advanced
manufacturing systems and components as enabling tools for a wide range of
high-technology applications, including computer-chip memory repair processing,
wafer and die marking, inspection systems for solder paste and component
placement on surface-mount printed circuits, via drilling of printed circuit
boards, hybrid circuit trim, circuit trim on silicon, and laser printing for
medical applications. Major markets for its products include the semiconductor
and electronics industries. WavePrecision provides precision optics for Dense
Wave Division Multiplexing networks. Major markets for its products include the
telecommunications industry.

The following table sets forth sales by reportable segment for the first three
months of 2002 and 2001.

Three months ended
-----------------------
March 29, March 30,
2002 2001
--------- ---------
Sales
Laser Systems....................................... $34,448 $81,206
WavePrecision....................................... 2,555 6,961
Intersegment sales elimination...................... (115) (460)
------- -------
Total............................................ $36,888 $87,707
======= =======

Segment income (loss) from operations
Laser Systems....................................... $(1,638) $ 7,903
WavePrecision....................................... (1,113) 1,798
------- -------
Total by segment................................. $(2,751) $ 9,701
======= =======

Sales of the Laser Systems segment are discussed under Sales by Market and
represent all market sectors, except optics. WavePrecision sells to the optics
market. Loss from operations in both segments for the three months ended March
29, 2002 resulted from the significant downturn in the markets they serve.

Critical Accounting Policies and Estimates

Our consolidated financial statements are based on the selection and application
of significant accounting policies, which require management to make significant
estimates and assumptions. There is no change in our critical accounting
policies included in Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations, of the Company's Form 10-K for the year
ended December 31, 2001.

Liquidity and Capital Resources

Cash and cash equivalents totaled $96.2 million at March 29, 2002 compared to
$103.0 million at December 31, 2001. In addition, short-term investments were
$56.3 million at March 29, 2002 compared to $43.5 million at December 31, 2001.
This $56.3 million includes $19 million to be pledged as security and classified
as long-term in connection with the operating leases discussed in note 9 to the
financial statements.

Cash flows provided by operating activities for the first three months of 2002
were $1.9 million, compared to $20.2 million that was used by operating
activities during the same period in 2001. Net income, after adjustment for
non-cash items, used cash of $3.7 million in the first quarter of 2002.
Decreases in accounts receivable, inventories and other current assets provided
$11.7 million. This was offset by a decrease in current liabilities using $6.1
million. In the first quarter of 2001, net income, after adjustment for non-cash
items, provided cash of $7.4 million. Decreases in accounts receivable and other
current assets provided $9.3 million, offset by inventories using $5.1 million
and current liabilities using $31.8 million. The use of cash by current
liabilities was due primarily to the payment of taxes in March 2001 on the gain
on sale of the Life Sciences business recognized in October of 2000.

Cash flows used in investing activities were $11.8 million during the first
three months ended March 29, 2002, primarily from net purchases of $12.8 million
of short-term and other investments and $0.6 million of property, plant and
equipment. This was offset by a $1.6 million reduction of other assets. In the
first quarter of 2001, investing activities used $15.2 million, primarily from
net purchases of $8.1 million of short-term investments and $7.1 million of
property, plant and equipment and other assets.

Cash flows provided by financing activities during the first three months ended
March 29, 2002 were $3.2 million, compared to $0.3 million used during the same
period in 2001.

We have lines of credit at March 29, 2002 of approximately $32.9 million
denominated in Canadian dollars, US dollars, UK Pound sterling, Euro and
Japanese yen that are available for general purposes. As at March 29, 2002,
approximately $13.9 million of our lines of credit were in use, representing
$9.0 million borrowings in Japan and

$4.9 million bank guarantees and outstanding letters of credit. The lines of
credit are due on demand and bear interest based on the prime rate. Borrowings
are limited to the sum of eligible accounts receivable under 90 days and North
American inventories. Accounts receivable and inventories have been pledged as
collateral for the bank indebtedness under general security agreements. At March
29, 2002, we had availability under the lines of credit amounting to $19.0
million. The lines of credit require annual payment of an undisbursed revolving
commitment fee equal to .125% of the unutilized available balance. The
borrowings require, among other things, our Company to maintain specified
financial ratios, such as minimum EBITDA, limitation of capital expenditures not
greater than $20.0 million per year and seek consent of the bank for payment of
dividends, acquisitions and divestitures. As at March 29, 2002, the Company was
in breach of one of the financial covenants, the interest coverage ratio, for
which no borrowings were made under the facility. The bank issued a waiver of
this non-compliance, which would allow the Company to draw on the line of credit
if needed.

With the outstanding lines of credit scheduled to expire in April and May 2002,
the Company is negotiating new lines of credit and expects to allow unused
portions of the existing credit lines to expire, reducing the total amount of
credit to approximately $24.0 million, with terms including removal of the
pledge of accounts receivable and inventories as collateral, no stand by fees,
the addition of a tangible net worth covenant and granting the lenders a
security interest in short-term deposits totaling approximately 125% of any
borrowings.

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.

We lease certain equipment and facilities under operating lease agreements that
expire through 2013. At the end of the initial lease term in 2003, two of these
facility leases require the Company to provide for a residual value guarantee of
the first 85% of any loss the lessor may incur on its $19.1 million investment
in the building, which may become payable by the Company upon the termination of
the transaction, or the Company may exercise its option to purchase the
facilities for approximately $19 million. As at March 29, 2002, residual value
guarantees in connection with these leases totaled approximately $16 million.
Upon termination of the leases, we expect the fair market value of the leased
properties to reduce substantially the payment under the residual value
guarantees and, during the fourth quarter of fiscal 2000, we took a charge of $6
million associated with restructuring for excess capacity at the two leased
facility locations, including the estimated residual value guarantees. The lease
agreement requires, among other things, the Company to maintain specified
quarterly financial ratios and conditions. As at March 29, 2002, the Company was
in breach of the fixed charge coverage ratio and the lessor has provided a
waiver of this and any future financial covenant defaults, provided the Company
grants the lessor a first priority continuing security interest in and lien on
approximately $19 million of the Company's deposit account to be maintained,
with the administrative agent for the lease, until the Company's obligations
under the leases are paid in full. This item is reflected on the balance sheet
as other investment.

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 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 whether or not such claims are
substantiated in the courts. 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 9
to the consolidated 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 March 29, 2002, the Company had $73.7 million invested
in cash equivalents and $56.3 million (this includes $19.0 million to be pledged
as security in connection with operating leases) 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. At
March 29, 2002, we had seven foreign exchange forward contracts to purchase
$14.8 million US dollars with an aggregate fair value after-tax gain of $0.6
million recorded in accumulated other comprehensive income and maturing between
April 15, 2002 and August 15, 2002.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See the description of legal proceedings in Note 9 to the Consolidated
Financial Statements.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a) List of Exhibits

EXHIBIT
NUMBER DESCRIPTION
- ------- -----------

99 Selected Consolidated Financial Statements and Notes in U.S. Dollars
and in accordance with Canadian Generally Accepted Accounting
Principles

99.1 Management's Discussion and Analysis of Financial Condition and
Results of Operations - Canadian Supplement

b) Reports on Form 8-K

The Company filed a Current Report on Form 8-K dated January 24, 2002 related to
its shareholder rights plan (the Rights Plan). On April 12, 1999, the Board of
Directors of the Company adopted a Rights Plan, which was ratified by the
Company's shareholders at its annual meeting on May 11, 1999. Pursuant to the
terms of the Rights Plan, the Board must submit the resolution to the Company's
shareholders at its next annual meeting seeking ratification of the continued
existence of the Rights Plan. If ratified by a majority of common shares held by
shareholders, the Rights Plan will remain in full force and effect for a period
of six years.

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 April 26, 2002
- ---------------------- Officer (Principal Executive
Charles D. Winston Officer)

/s/ THOMAS R. SWAIN Vice President Finance and Chief April 26, 2002
- ---------------------- Financial Officer (Principal
Thomas R. Swain Financial and Accounting Officer)

EXHIBIT INDEX

EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----

99 Selected Consolidated Financial Statements and Notes in U.S. Dollars and in
accordance with Canadian Generally Accepted Accounting Principles 26-37
99.1 Management's Discussion and Analysis of Financial Condition and Results of
Operations - Canadian Supplement 38-39