GSI LUMONICS INC - 10-Q Quarterly Report

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 þ No o

Indicate by a check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o

As at October 31, 2003, there were 40,891,315 shares of the Registrant’s common shares, no par value, issued and outstanding.

These unaudited interim consolidated financial statements have been prepared by GSI Lumonics, Inc. in United States (U.S.) dollars and in accordance with accounting principles generally accepted in the U.S. for interim financial statements including the rules and regulations promulgated by the U.S. Securities and Exchange Commission, 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 Annual Report on Form 10-K, as amended, for the year ended December 31, 2002. The results for interim periods are not necessarily indicative of results to be expected for the year or for any future periods.

As indicated in note 8, effective January 1, 2003, the Company has removed the designation of all short-term hedge contracts from their corresponding hedge relationships. Accordingly, such contracts are recorded at fair value with changes in fair value recognized currently in income starting January 1, 2003, instead of being included in accumulated other comprehensive income. Unrealized gains on these contracts included in accumulated other comprehensive income at December 31, 2002 are recognized in the same periods as the underlying hedged transactions.

Certain prior year amounts have been reclassified to conform to the current year presentation in the financial statements for the three-months and nine-months ended September 26, 2003. These reclassifications had no effect on the previously reported results of operations or financial position.

The estimated excess of the purchase price over the fair value of net identifiable tangible assets acquired (approximately $1.1 million) is recorded as acquired technology to be amortized over its estimated useful life of four years. There was no goodwill associated with this acquisition. There was no purchased in process research and development included with this acquisition, therefore no amounts were written off to results of operations. The Company’s consolidated results of operations have included the Encoder division activity as of the closing date of May 2, 2003. Pro forma results of operations have not been presented because the effects of the acquisition were not material to the Company. The addition of the Encoder division assets represents the addition of technology and products that expand the Company’s offering of precision motion control components. The integration of the Encoder division into the Company’s Components Group in Billerica, Massachusetts was completed during the third quarter of 2003.

The acquisition of the principal assets of Spectron Laser Systems Limited, a subsidiary of Lumenis Ltd (Spectron), located in Rugby, United Kingdom closed on May 7, 2003. The purchase price of approximately $6.5 million, subject to final adjustment, was comprised of $5.9 million in cash and $0.6 million in estimated costs of the acquisition. The purchase price allocation is not yet final, as the parties are negotiating certain purchase price adjustments, related primarily to inventory, and other indemnification claims submitted by the Company. The purchase price, which is subject to final adjustment, is allocated to the assets and liabilities based upon their estimated fair value at the date of acquisition, as noted below.

The estimated excess of the purchase price over the fair value of net identifiable tangible assets acquired (approximately $1.5 million) is recorded as acquired technology to be amortized over its estimated useful life of five years. There was no goodwill associated with this acquisition. There was no purchased in process research and development included with this acquisition, therefore no amounts were written off to results of

operations. The Company’s consolidated results of operations have included the Spectron activity as of the closing date of May 7, 2003. Pro forma results of operations have not been presented because the effects of the acquisition were not material to the Company. This acquisition adds both diode pumped laser solid state (DPSS) technology and products to the Company’s marketplace offerings, as well as expanded product lines in both lamp pumped (LPSS) and CO(2)-based technologies. The integration of this acquisition into the Company’s Laser Group in Rugby, United Kingdom was completed during the third quarter of 2003.

At September 26, 2003, the Company had two facilities that were classified as available for sale. One is a 75,000 square foot facility in Kanata, Ontario and the other is a 104,000 square foot facility in Maple Grove, Minnesota. The Maple Grove facility became available for sale in 2003, see notes 9 and 10 for details. These buildings are recorded at their estimated fair market value (approximately $1.9 million for the Kanata, Ontario property and $6.4 million for the Maple Grove, Minnesota facility). During the first three quarters of 2003, the Company recorded $0.3 million in additional write-downs for the Kanata property, see note 9. At December 31, 2002, facilities available for sale included $2.2 million for the Kanata, Ontario property and $0.7 million for a facility in Nepean, Ontario, which was sold in the second quarter of 2003.

The Company generally warrants its products for a period of up to 12 months for material and labor to repair and service the system. A provision for the estimated cost related to warranty is recorded at the time revenue is recognized.

The estimate of costs to service the warranty obligations is based on historical experience and expectation of future conditions. To the extent we experience increased warranty claims or increased costs associated with servicing those claims, revisions to the estimated warranty liability would be made.

In July 2002, Statement of Financial Accounting Standards (SFAS) No. 146 Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146) was issued. SFAS 146 requires that a liability for costs associated with exit or disposal activities be recognized and measured initially at fair value only when the liability is incurred. SFAS 146 is effective for exit or disposal activities initiated after December 31, 2002. In 2003, the Company followed the accounting methods prescribed in SFAS 146 in accounting for its restructuring activities in Europe and Asia Pacific, see note 9 for additional detail.

In November 2002, the Financial Accounting Standards Board (FASB) issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45). FIN 45 significantly changes current practice in the accounting for, and disclosure of, guarantees. Guarantees meeting the characteristics described in FIN 45, which are not included in a long list of exceptions, are required to be initially recorded at fair value, which is different from the general prior practice, including that of the Company, of recording a liability only when a loss is probable and

reasonably estimable, as those terms are defined in SFAS No. 5, Accounting for Contingencies. FIN 45 also requires a guarantor to make significant new disclosures for virtually all guarantees even if the likelihood of the guarantor’s having to make payments under the guarantee is remote. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. Accounting for guarantees issued prior to December 31, 2002 should not be revised or restated. See note 10 to the consolidated financial statements, for additional information about guarantees.

In December 2002, SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure (SFAS 148), was issued to amend SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123). SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. The transition guidance and annual disclosure provisions of SFAS 148 are effective for fiscal years ending after December 15, 2002. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. The adoption of SFAS 148 did not have a material impact on our financial position, results of operations, or cash flows, because the Company continues to follow the guidance of Accounting Principals Board Opinion No. 25 (APB 25) in recognizing stock compensation expense. The effect of stock based compensation is included in note 6 to the consolidated financial statements.

In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46), which is an Interpretation of Accounting Research Bulletin No. 51. FIN 46 provides guidance on identifying entities known as “variable interest entities” (VIEs) and determining when VIEs should be consolidated. This new approach for consolidation applies to entities: 1) whose equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties; or 2) where the equity investors, as a group, lack certain characteristics of a controlling financial interest. In addition, FIN 46 requires that both the primary beneficiary and other enterprises with a significant variable interest in a VIE make additional disclosures. FIN 46 is effective for all new VIEs created or acquired after January 31, 2003. Certain disclosures are effective immediately. On October 9, 2003, the FASB issued a FASB Staff Position deferring the effective date for applying the provisions of FIN 46 for interests in VIEs created before February 1, 2003 until the end of the first interim or annual period ending after December 15, 2003. The Company is in the process of evaluating FIN 46, and has not determined its effect on the Company’s financial position or results of operations.

On April 30, 2003, SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (SFAS 149), was issued. The amendments set forth in SFAS 149 improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. In particular, this statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative as discussed in SFAS 133. In addition, it clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS 149 amends certain other existing pronouncements. Those changes will result in more consistent reporting of contracts that are derivatives in their entirety or that contain embedded derivatives that warrant separate accounting. SFAS 149 is effective for contracts entered into or modified after June 30, 2003, except as stated below and for hedging relationships designated after June 30, 2003. The guidance should be applied prospectively. The provisions of this Statement that relate to SFAS 133 implementation issues that have been effective for fiscal quarters that

began prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates. In addition, certain provisions relating to forward purchases or sales of when-issued securities or other securities that do not yet exist, should be applied to existing contracts as well as new contracts entered into after June 30, 2003. The Company has evaluated the impact of SFAS 149 relative to our existing hedge contracts and concluded that there are no required changes to the fundamental accounting treatment.

Certain Financial Instruments with Characteristics of both Liabilities and Equity

In May 2003, SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (SFAS 150), was issued and requires certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity to be classified as liabilities. Many of these instruments previously were classified as equity or temporary equity, and as such, SFAS 150 represents a significant change in practice in the accounting for a number of financial instruments, including mandatorily redeemable equity instruments and certain equity derivatives that frequently are used in connection with share repurchase programs. SFAS 150 is effective for public companies for all financial instruments created or modified after May 31, 2003, and to other instruments at the beginning of the first interim period beginning after June 15, 2003 (July 1, 2003 for calendar quarter companies). SFAS 150 did not have a material effect on the Company’s financial position or results of operations.

In May 2003, the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board (or FASB) finalized revisions to EITF 00-21, Revenue Arrangements with Multiple Deliverables, on which it had reached a consensus in November 2002. EITF 00-21 addresses certain aspects of the accounting for arrangements that involve the delivery or performance of multiple products, services and/ or rights to use assets. Under EITF 00-21, revenue arrangements with multiple deliverables should be divided into separate units of accounting if the deliverables meet certain criteria, including whether the fair value of the delivered items can be determined and whether there is evidence of fair value of the undelivered items. In addition, the consideration should be allocated among the separate units of accounting based on their fair values, and the applicable revenue recognition criteria should be considered separately for each of the separate units of accounting. EITF 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of EITF 00-21 did not have a material impact on the Company’s financial position or results of operations.

At September 26, 2003, the Company had a line of credit denominated in U.S. dollars with Fleet National Bank (Fleet) and a letter of credit in United Kingdom pounds with NatWest for a total amount of available credit of U.S.$4.1 million versus U.S.$12.1 million at December 31, 2002. The Company’s previous agreement with Fleet, which provided for an $8.0 million line of credit, expired in the second quarter of 2003 and was renewed for $4.0 million. NatWest provides a $0.1 million bank guarantee for a letter of credit used for VAT purposes in the United Kingdom. Short-term investments totaling $5.0 million at September 26, 2003 have been pledged as collateral for the Fleet credit facility under security agreements. In addition to the customary representations, warranties and reporting covenants, the borrowings under the Fleet credit facility require the Company to maintain a quarterly minimum tangible net worth of $200.0 million. At September 26, 2003, the Company had $4.0 million denominated in U.S. dollars available for general purposes under the credit facility with Fleet discussed above. Of the available amount, $3.8 million was in use at September 26, 2003 consisting of funds committed at Fleet for use in foreign exchange transactions. Though the Fleet amount of $3.8 million is committed for support of foreign currency hedging contracts and not available, it is not considered used for the purpose of calculating interest payments. The Fleet line of credit is due on demand

and bears interest based on either prime or LIBOR depending on the borrowing notification period. The line of credit with Fleet expires on June 27, 2004.

At December 31, 2002, the Company had a line of credit with Canadian Imperial Bank of Commerce (CIBC) denominated in Canadian dollars for approximately U.S. $4.0 million. This $4.0 million line of credit with CIBC was reviewed by the Company and a decision to cancel the line of credit was conveyed to CIBC prior to December 31, 2002. The $4.0 million line of credit with CIBC was reduced by the end of the first quarter in 2003 to two letters of credit totaling $0.4 million, which were used to support the Company’s payroll and credit card programs. These two letters of credit were cancelled in the second quarter of 2003, thereby eliminating the CIBC line of credit.

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 26, 2003, 94,477 common shares were issued pursuant to exercised stock options and the employee share purchase plan for proceeds of approximately $0.5 million.

The following table provides the details of accumulated other comprehensive loss at

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 September 27, 2002 and the nine months ended September 26, 2003 and September 27, 2002, the effect of converting options and warrants was anti-dilutive.

At September 26, 2003, the Company had options and warrants outstanding entitling holders to up to 3,439,368 and 51,186 common shares, respectively.

No stock compensation expense has been included in net income (loss) for the three and nine months ended September 26, 2003 or September 27, 2002. Had compensation cost for the Company’s stock option plans and employee stock purchase plan been determined consistent with SFAS No. 123, the Company’s net income per share and income per share would have been decreased and the net loss and loss per share would have been increased to the pro forma amounts below.

The fair value of options was estimated at the date of grant using a Black-Scholes option-pricing model with the following assumptions:

The Company recorded sales revenue from Sumitomo Heavy Industries Ltd., a significant shareholder of the Company, of $1.0 million and $3.3 million in the three and nine months ended September 26, 2003, respectively, and $0.6 million and $1.1 million in the three and nine months ended September 27, 2002, respectively, at amounts and terms approximately equivalent to third-party transactions. Receivables from Sumitomo Heavy Industries Ltd. of $0.7 million and $0.5 million as at September 26, 2003 and December 31, 2002, respectively, are included in accounts receivable on the balance sheet.

The Company has an agreement with V2Air LLC relating to the use of V2Air LLC’s aircraft for Company purposes. The Company’s President and Chief Executive Officer, Charles D. Winston owns V2Air LLC. Pursuant to the terms of the agreement, the Company is required to reimburse V2Air LLC for certain expenses associated with the use of the aircraft for Company business travel. During the three months ended September 26, 2003 and September 27, 2002, the Company reimbursed V2Air LLC $39 thousand and $13 thousand, respectively, under the terms of the agreement. During the nine months ended September 26, 2003, the Company reimbursed V2Air LLC $102 thousand under the terms of the agreement compared to $111 thousand for the nine months ended September 27, 2002.

In January of 2001, the Company made an investment of $2.0 million in a technology fund managed by OpNet Partners, L.P. During 2002, the Company received a cash distribution (return of capital) from OpNet

Partners in the amount of $1.4 million. In the second quarter of 2002, the Company wrote-down the investment by $0.2 million to its estimated fair market value and wrote-off the remainder of the investment of $0.4 million in the fourth quarter of 2002. Richard B. Black, a member of the Company’s Board of Directors, is a General Partner of OpNet Partners, L.P.

On April 26, 2002, the Company entered into an agreement with Photoniko, Inc, a private photonics company in which one of the Company’s directors, Richard B. Black, was a director and stock option holder. As of August 16, 2002, Mr. Black was no longer a director or stock option holder of Photoniko, Inc. Under the agreement, the Company provided a non-interest bearing unsecured loan of $75 thousand to Photoniko, Inc. to fund designated business activities at Photoniko, Inc. in exchange for an exclusive 90 day period to evaluate potential strategic alliances. In accordance with the terms of the agreement and the promissory note which was signed by Photoniko, Inc. on April 26, 2002, the loan was to be repaid in full to the Company no later than August 28, 2002, but still remains outstanding. The Company has provided a full reserve for this receivable.

At September 26, 2003, the Company had $59.8 million invested in cash equivalents denominated in U.S. dollars with maturity dates between September 29, 2003 and December 17, 2003. At December 31, 2002, the Company had $53.3 million invested in cash equivalents denominated in U.S. dollars with maturity dates between January 2, 2003 and March 24, 2003. Cash equivalents, stated at amortized cost, approximate fair value.

At September 26, 2003, the Company had $54.2 million in short-term investments and $3.1 million in long-term investments invested in U.S. dollars with maturity dates between October 2, 2003 and November 23, 2004. Short-term and long-term investments are recorded at fair market value. At December 31, 2002 the Company had $29.0 million in short-term investments and $37.4 million in long-term investments invested in U.S. dollars with maturity dates between January 6, 2003 and November 23, 2004. As discussed in note 5 to the financial statements, $5.0 million of short-term investments are pledged as collateral for the Fleet credit facility at September 26, 2003. Also, included in long-term investments at September 26, 2003 is a minority equity investment of a private United Kingdom company valued at $0.6 million that was purchased as part of the assets acquired in the Spectron acquisition.

At September 26, 2003, the Company had one foreign exchange forward contract to purchase $1.5 million U.S. dollars with an aggregate fair value loss of $0.2 million recorded in the statement of operations as foreign exchange transaction losses. Also, the Company had one currency swap contract with a notional value of $8.7 million U.S. dollars and an aggregate fair value loss of $0.7 million after-tax recorded in accumulated other comprehensive income.

At December 31, 2002, the Company had eleven foreign exchange forward contracts to purchase $16.9 million U.S. dollars and one currency swap contract fair valued at $8.7 million U.S. dollars with an

aggregate fair value loss of $0.5 million after-tax recorded in accumulated other comprehensive income and maturing at various dates in 2003.

From 2000 through 2002, the Company faced a decline in revenues and responded by streamlining operations to reduced fixed costs.

During fiscal 2000, the Company took total restructuring charges of $15.1 million, $12.5 million of which resulted from the Company’s decision to exit the high powered laser product line that was produced in its Rugby, United Kingdom facility. The $12.5 million charge consisted of $1.0 million to accrue employee severance for approximately 50 employees; $3.8 million for reduction and elimination of the Company’s United Kingdom operation and worldwide distribution system related to high power laser systems; and $7.7 million for excess capacity at three leased facilities in the United States and Germany where high power laser systems operations were conducted. The provisions for lease costs at our Livonia and Farmington Hills, Michigan facilities and in Germany related primarily to future contractual obligations under operating leases, net of expected sublease revenue on leases that the Company cannot terminate. Additionally, for our Farmington Hills, Michigan and Maple Grove, Minnesota facilities, we accrued an anticipated loss on our contractual obligations to guarantee the value of the buildings. This charge was estimated as the excess of our cost to purchase the buildings over their estimated fair market value. The Company also recorded a non-cash write-down of land and building in the United Kingdom of $2.0 million, based on market assessments as to the net realizable value of the facility. In addition, the Company recorded in cost of goods sold a reserve of $8.5 million for raw materials, work-in-process, equipment, parts and demo equipment inventory that related to the high power laser product line in its Rugby, United Kingdom facility and other locations that supported this product line.

The remaining restructuring charge for fiscal 2000, $0.6 million of compensation expense, resulted from the acceleration of options upon the sale of our Life Sciences business and MPG product line during that year.

Also during fiscal 2000, the Company reversed a provision of $5.0 million originally recorded at the time of the 1999 merger of General Scanning, Inc. and Lumonics Inc. At the time the $5.0 million provision was recorded, the Company intended to close its Rugby, United Kingdom facility and transfer those manufacturing activities to its Kanata, Ontario facility, but upon further evaluation the Company reversed its intentions. Thus, the Company reversed the $5.0 million that had initially been recorded for this proposed restructuring.

Cumulative cash draw-downs of $12.0 million, a reversal of $0.5 million recorded in the fourth quarter of 2001 for anticipated restructuring costs that will not be incurred and a non-cash draw-down of $2.6 million have been applied against the total fiscal 2000 provision of $15.1 million, resulting in no remaining balance at September 26, 2003. All actions relating to the 2000 restructuring charge have been completed. The Company paid the $6.0 million loss accrual remaining at December 31, 2002 in connection with the purchase of the Farmington Hills, Michigan and the Maple Grove, Minnesota facilities. The properties, which had been under leases until June 2003, were purchased for $18.9 million, but had an estimated market value of $12.5 million. The difference between the purchase price and estimated market value had been provided for as restructuring losses in 2000 ($6.0 million), in 2002 ($0.1 million) and 2003 ($0.3 million). The Farmington Hills, Michigan facility is being used and was recorded in property, plant and equipment at a cost of $6.1 million during the second quarter of 2003 and the Maple Grove, Minnesota facility is held for sale and is included in other assets for $6.4 million at September 26, 2003.

In the fourth quarter of fiscal 2001, to further reduce capacity in response to declining sales, the Company determined that most of the remaining functions located in its Farmington Hills, Michigan facility should be integrated with its Wilmington, Massachusetts facility and that its Oxnard, California facility should be closed. In addition, the Company decided to integrate its Bedford, Massachusetts facility with its Billerica, Massachusetts manufacturing facility. The Company took total restructuring charges of $3.4 million. The $3.4 million charge consisted of $0.9 million to accrue employee severance for approximately 35 employees at the Farmington Hills, Michigan and Oxnard, California locations; $1.8 million for excess capacity at five leased locations in the United States, Canada and Germany; and $0.7 million write-down of leasehold improvements and certain equipment associated with the exiting of leased facilities located in Bedford, Massachusetts. The lease costs primarily related to future contractual obligations under operating leases, net of expected sublease revenue on leases that the Company cannot terminate. The expected effects of the restructuring were to better align our ongoing expenses and cash flows in light of reduced sales.

Cumulative cash draw-downs of approximately $2.5 million and non-cash draw-downs of $0.7 million have been applied against the provision, resulting in a remaining provision balance of $0.2 million as at September 26, 2003. The restructuring is complete, except for costs that are expected to be paid on the leased facilities in Munich, Germany (lease expiration January 2013) and Nepean, Ontario (lease expiration January 2006).

Two major restructuring plans were initiated in 2002, as the Company continued to adapt to a lower level of sales. In the first quarter of 2002, the Company made a determination to reduce fixed costs by transferring manufacturing operations at its Kanata, Ontario facility to other manufacturing facilities. Associated with this decision, the Company incurred restructuring costs in the first, second, and fourth quarters of 2002. At this time, the Company believes that all costs associated with the closure of this facility have been recorded, as noted below.

During the first quarter of 2002, the Company consolidated its electronics systems business from its facility in Kanata, Ontario into the Company’s existing systems manufacturing facility in Wilmington, Massachusetts and transferred its laser business from the Company’s Kanata, Ontario facility to its existing facility in Rugby, United Kingdom. In addition, the Company closed its Kanata, Ontario facility. The Company took a total restructuring charge of $2.7 million related to these activities in the first quarter of 2002. The $2.7 million charge consisted of $2.2 million to accrue employee severance and benefits for 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 second quarter of fiscal 2002, the Company recorded additional restructuring charges of $1.4 million related to cancellation fees on contractual obligations of $0.3 million, a write-down of land and building in Kanata, Ontario and Rugby, United Kingdom of $0.8 million, and also leased facility costs of $0.3 million at the Farmington Hills, Michigan and Oxnard, California locations. The lease costs primarily related to future contractual obligations under operating leases, net of expected sublease revenue on leases that the Company cannot terminate. The write-downs of the building bring the properties offered for sale in line with market values and the recording of these write-downs has no effect on cash.

The second major restructuring plan in 2002 was redirection of the Company’s precision optics operations in Nepean, Ontario away from optical telecommunications and into its custom optics business as a result of the telecom industry’s severe downturn. The Company reduced capacity at the Nepean, Ontario facility and recorded a pre-tax restructuring charge of $2.3 million in the fourth quarter of 2002 which included $0.6 million to accrue employee severance and benefits for approximately 41 employees. The Company also wrote-off approximately $0.2 million of excess fixed assets and wrote-down one of the Nepean, Ontario

buildings by $0.2 million to its estimated fair market value. Additionally, the Company continued to evaluate accruals made in prior restructurings and we recorded charges of approximately $0.8 million for an adjustment to earlier provisions for leased facilities in the United States and Germany. Specifically, the $0.8 million in adjustments in the fourth quarter of 2002 related to earlier provisions for the leased facilities in Munich, Germany, Maple Grove, Minnesota and Farmington Hills, Michigan. Management originally estimated a restructuring reserve of $0.5 million based upon the assumption that the Munich, Germany facility would be subleased in 2003. Instead, the market for commercial real estate in Munich, Germany declined further making full recovery of the lease rate less likely. Therefore, an additional provision of $0.5 million was recorded to cover a longer anticipated time to sublease the space and to reflect subleasing at less than our existing lease rates. The Maple Grove, Minnesota facility had been subleased through January 2003. Management had anticipated finding a buyer for this building by January 2003, exercising our option to purchase the building and not paying the remaining lease costs. As this did not happen, the contractual lease costs through the end of the lease in June 2003 of $0.2 million were accrued. The Farmington Hills, Michigan facility, also, was not sold by the end of 2002, so the costs for the unused space through the end of the lease in June 2003 of $0.1 million were accrued. The Company also took a further write-down of $0.3 million on the buildings in Kanata, Ontario and Rugby, United Kingdom and a $0.1 million write-off for fixed assets in Kanata, Ontario and a $0.1 million for the Maple Grove, Minnesota and Farmington Hills, Michigan facilities.

At December 31, 2002, the net book value of two facilities, one in Kanata, Ontario and the other in Nepean, Ontario, were classified as held for sale and included in other assets. The Nepean, Ontario facility was sold in the second quarter of 2003. The Company has entered into an agreement to sell the Kanata, Ontario property, which was amended in the third quarter of 2003, and is expected to close on this agreement during the fourth quarter of 2003. Because the estimated selling price for the Kanata facility was less than the net book value, the Company took a restructuring charge of $0.1 million in the second quarter of 2003 and an additional restructuring charge of $0.2 million in the third quarter of 2003. This facility remains in other assets at September 26, 2003.

Cumulative cash draw-downs of approximately $4.0 million and non-cash draw-downs of $1.8 million have been applied against the provisions taken in 2002, resulting in a remaining provision balance of $0.6 million at September 26, 2003. For severance related costs associated with these two restructuring actions, the actions are complete and the Company does not anticipate taking additional restructuring charges and expects to finalize payment in 2003. The Company will continue to evaluate the fair value of the buildings and fixed assets that were written down. The restructuring accrual is expected to be completely utilized during January 2013 at the end of the lease term for the Munich, Germany facility. The Company estimated the restructuring charge for the Munich, Germany facility based on contractual payments required on the lease for the unused space, less what is expected to be received for subleasing. Because this is a long-term lease that extends until 2013, the Company will draw-down the amount accrued over the life of the lease. Future sublease market conditions may require the Company to make further adjustments to this restructuring reserve.

To align the distribution and service groups with our business segments, in the first quarter of 2003 the Company commenced a restructuring plan that is expected to significantly reduce these operations around the world and to consolidate these functions at the Company’s manufacturing facilities. As part of this plan, the Company provided for severance and termination benefits of approximately $0.6 million for 22 employees in Germany, France, Italy and Belgium in the first quarter of 2003. Under SFAS 146, if an employee continues to work beyond a minimum period of time after their notification, then their termination benefits are to be accrued over the period that they continue to work. During the second quarter of 2003, the Company took additional restructuring charges of $0.4 million for the severance and termination benefits associated with the

restructuring actions taken in the first quarter, as a result of employees working beyond a minimum period as required by SFAS 146.

As a continuation of the restructuring plan initiated in the first quarter of 2003 to reduce our distribution and service groups, during the second quarter of 2003 the Company further reduced its European operations, including terminating an additional 10 employees in Europe and closing its Paris, France office. Also, the Company closed its office in Hong Kong and terminated 7 employees from that location. Additionally, the Company terminated 8 employees in other offices in Asia Pacific. Associated with these actions taken in the second quarter of 2003, the Company recorded restructuring charges of $0.8 million consisting of severance and termination benefits of $0.6 million, and lease and contract termination charges of $0.2 million. In the third quarter of 2003, the Company incurred restructuring charges of $0.1 million for the closing of our Singapore office.

As the Company has retained certain employees to help with the transition of work beyond the minimum periods specified in SFAS 146, the Company accrued additional termination and severance benefits for these employees of approximately $0.1 million during the third quarter, as a result of the actions taken in the first and second quarters of 2003. Additionally, during the third quarter of 2003 the Company reversed restructuring expense of approximately $0.1 million for severance costs accrued in prior quarters that will not be incurred.

As part of its review of the restructuring actions taken in prior quarters, during the second quarter of 2003 the Company took an additional $0.3 million restructuring charge for the anticipated loss on the market value of the Farmington Hills, Michigan and Maple Grove, Minnesota facilities, on which the Company first took a restructuring charge in 2000, as noted above. Also, the Company took an additional charge of $0.1 million in the second quarter of 2003 and $0.2 million in the third quarter of 2003 to write-down the net book value of the Kanata, Ontario facility to its estimated fair market value. The Company had previously written down the Kanata, Ontario facility in 2002, as noted above.

Cumulative cash draw-downs of approximately $1.7 million and non-cash draw-downs of $0.7 million and reversal of expense of $0.1 million have been applied against the provisions taken in 2003, resulting in no remaining provision balance at September 26, 2003.

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

During the first quarter of 2003, the Company recorded a reserve of approximately $0.6 million on notes receivable from a litigation settlement initially recorded in 1998. The reserve was provided because of a default on the quarterly payment due in March 2003. The Company intends to pursue legal action to regain its rights to the technology it had licensed, instead of pursuing further collection. Additionally, the Company recorded a benefit during the first quarter of approximately $0.2 million for royalties earned on a divested product line and earned as part of a litigation settlement agreement. In the second quarter of 2003, the Company recorded a charge of approximately $0.5 million to write-off excess and unused equipment. In the third quarter of 2002, the Company recorded a benefit of $1.25 million related to a litigation settlement.

The Company leased two facilities under operating lease agreements that expired in June 2003. At the end of the initial lease term, these leases required the Company to renew the lease for a defined number of years at the fair market rental rate or purchase the property at the fair market value. The lessor may have sold the facilities to a third party but the leases provided for a residual value guarantee of the first 85% of any loss the lessor may have incurred on its $19.1 million investment in the buildings, which would have become payable by the Company upon the termination of the transaction. In June 2003, the Company exercised its option to purchase the facilities for $18.9 million. There is no longer a residual value guarantee in connection with these leases. The lease agreement required, among other things, the Company to maintain specified quarterly financial ratios and conditions. As of March 29, 2002, the Company was in breach of the fixed charge coverage ratio, but on April 30, 2002, the Company entered into a Security Agreement with the Bank of Montreal (BMO) pursuant to which the Company deposited with BMO and pledged approximately $18.9 million as security in connection with the operating leases discussed above in exchange for a written waiver from BMO and BMO Global Capital Solutions for any Company defaults of or obligations to satisfy the specified financial covenants relating to the operating lease agreements until June 30, 2003. This item was

included on the balance sheet in long-term investments at December 31, 2002 and was used to satisfy the purchase price of the buildings during June 2003.

The Company is subject to a claim by a customer of its French subsidiary that a Laserdyne 890 system, which was delivered in 1999, had unresolved technical problems that resulted in the customer’s loss of revenue and profit, plus the costs to repair the machine. In May 2001, the court determined that the Company had breached its obligations to the customer and that it should be liable for damages. The expert appointed by the court had filed an initial report, which estimated the cost to repair the machine at approximately French Franc 0.8 million (or approximately US$0.1 million). In the third quarter of 2003, the Company was notified that the customer is seeking cost of repairs, damages and lost profits of Euro 1.9 million (approximately US$2.2 million). The Le Creusot commercial court is reviewing the amount requested by the customer. The Company intends to vigorously defend this action and any claim amount. The customer has not paid Euro 0.3 million (or approximately US$0.4 million) of the purchase price for the system, which the Company believes it may offset against any damages. The Company has fully reserved this receivable. At this time, it is not possible to estimate an amount that the Company may be required to pay regarding this action.

In August 2003, the Company announced that it filed an action against Electro Scientific Industries, Inc. (ESI) of Portland, Oregon in the United States District Court for the Central District of California for patent infringement. The complaint alleges Electro Scientific is violating three GSI Lumonics’ patents: 6337462, 6181728 and 6573473. This patented technology is used in the Company’s laser systems for processing semiconductor devices. The Company seeks injunctive relief, an unspecified amount of damages, costs, and attorneys’ fees. On September 2, 2003, the Company filed a First Amended Complaint, which did not change the substantive allegations of patent infringement. By court order dated September 18, 2003, the case was transferred to the United States District Court for the Northern District of California. ESI filed its answer and counterclaim denying infringement and seeking a declaratory judgment that the patents are invalid. Pretrial discovery has not yet begun and no trial date has been set. At this time, it is not possible to estimate any recovery that the Company may receive from this action.

As the Company has disclosed since 1994, a party has commenced legal proceedings in the United States against a number of United States 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. Due to (i) the relatively small number of systems sold to any one of the Company’s customers involved in this litigation, (ii) the low probability of success by the plaintiff in securing judgment(s) against the Company’s customers and (iii) the existence of a countersuit that seeks to invalidate the patents that are the basis for the litigation, the Company does not believe that the outcome of any of these claims individually will have a material adverse effect upon the Company’s financial condition or results of operations. No assurances can be given, however, that these or similar claims, if successful and taken in the aggregate would not have a material adverse effect upon the Company’s financial condition or results of operations.

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.

In Japan, where it is customary to do so, the Company discounts certain customer notes receivable at a bank with recourse. The Company’s maximum exposure was $1.7 million at September 26, 2003 and $1.4 million at December 31, 2002. The book value of the recourse receivables approximates fair value. Recourse receivables are included in accounts receivable on the balance sheet and the liability is included in accrued expenses.

In the normal course of our operations, we execute agreements that provide for indemnification and guarantees to counterparties in transactions such as business dispositions, the sale of assets, sale of products and operating leases.

These indemnification undertakings and guarantees may require us to compensate the counterparties for costs and losses incurred as a result of various events including breaches of representations and warranties, intellectual property right infringement, loss of or damages to property, environmental liabilities, changes in the interpretation of laws and regulations (including tax legislation) or as a result of litigation that may be suffered by the counterparties. Also, in the context of the sale of all or a part of a business, this includes the resolution of contingent liabilities of the disposed businesses or the reassessment of prior tax filings of the corporations carrying on the business.

Certain indemnification undertakings can extend for an unlimited period and generally do not provide for any limit on the maximum potential amount. The nature of substantially all of the indemnification undertakings prevents us from making a reasonable estimate of the maximum potential amount we could be required to pay counterparties as the agreements do not specify a maximum amount and the amounts are dependent upon the outcome of future contingent events, the nature and likelihood of which cannot be determined at this time.

Historically, we have not made any significant payments under such indemnifications. As at September 26, 2003, nothing has been accrued in the consolidated balance sheet with respect to these indemnification undertakings.

During the three and nine months ended September 26, 2003, the tax provision largely reflects taxes in the Company’s foreign locations. The income tax benefit on losses incurred in the nine months ended September 26, 2003 was reduced as a result of increases in valuation allowances related to the Company’s geographic distribution of its operating loss carry-forwards. This includes a full valuation allowance against the Company’s Canadian deferred tax asset in accordance with the closure of the Kanata, Ontario facility described in note 9. It is expected that operations and income in Canada in the foreseeable future will not be sufficient to offset existing loss carryforwards. Our ability to recover deferred tax assets of $16.7 million at September 26, 2003 depends primarily upon the Company’s ability to generate profits in the United States and United Kingdom tax jurisdictions. If actual results differ from our plans or we do not achieve profitability, we may be required to increase the valuation allowance on our tax assets by taking a charge to the Statement of Operations, which may have a material negative result on our operations.

The Company’s subsidiary in the United Kingdom maintains a pension plan, known as the GSI Lumonics Ltd. United Kingdom Pension Scheme Retirement Savings Plan. The plan has two components: the Final Salary Plan, which is a defined benefit plan, and the Retirement Savings Plan, which is a defined contribution plan. Effective April 1997, membership to the Final Salary Plan was closed. Benefits under this

plan are based on the employees’ years of service and compensation. GSI Lumonics’ funding policy is to fund pensions and other benefits based on widely used actuarial methods as permitted by regulatory authorities. The funded amounts reflect actuarial assumptions regarding compensation, interest and other projections. The assets of this plan consist primarily of equity and fixed income securities of United Kingdom and foreign issuers.

In December 2002, the Company notified plan participants that it no longer wanted to sponsor the Final Salary Plan. The trustees of the plan voted to freeze the Final Salary Plan effective May 31, 2003. Plan participants will no longer accrue benefits under the Final Salary Plan as of this date. The Company plans to continue funding the obligation for the Final Salary Plan as required by United Kingdom law. Once a new actuarial valuation is complete, the Company will be able to determine if there is any gain or loss associated with the curtailment, and will record it at that time. The most recent actuarial valuation was performed as of November 30, 2000.

During the fourth quarter of 2002, the Company restructured into three core businesses: components, lasers and laser systems. 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 2002 year has been restated to conform to the current year’s presentation.

The financial performance of the segments are evaluated on measures of profit or loss from operations before income taxes excluding the impact of amortization of purchased intangibles, acquired in-process research and development, restructuring and other, gain (loss) on sale of assets and investments, interest income, interest expense and foreign exchange transaction losses. Certain corporate-level operating expenses, including corporate marketing, finance and administrative expenses, are not allocated to operating segments. 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 are distinct business segments: the Components segment (Components Group); the Laser segment (Laser Group); and the Laser Systems segment (Laser Systems Group).

Components Group — The Company’s component products are designed and manufactured at our facilities in Billerica, Massachusetts, Nepean, Ontario and Moorpark, California and are sold directly, or, in some territories, through distributors, to original equipment manufacturers (OEMs). Products include optical scanners and subsystems and encoders used by OEMs for applications in materials processing, test and measurement, alignment, inspection, displays, imaging, graphics, vision, rapid prototyping and medical use such as dermatology and ophthalmology. The Components Group also manufactures printers for certain medical end products such as defibrillators, patient care monitors and cardiac pacemaker programmers, as well as film imaging subsystems for use in CAT scans and magnetic resonance imaging systems. Under the trade name, WavePrecision, we also manufacture precision optics supplied to OEM customers for applications in aerospace and semiconductor. Major markets are medical, semiconductor, electronics, light industrial, automotive and aerospace.

Laser Group — The Company designs and manufactures a wide range of lasers at our Rugby, United Kingdom facility for sale in the merchant market to end-users, OEMs and systems integrators. We also use some of these products in the Company’s own laser systems. The Laser Group also derives significant revenues from providing parts and technical support to its installed base at customer locations. These lasers are primarily used in material processing applications (cutting, welding and drilling) in light automotive, semiconductor, electronics, aerospace, medical and light industrial markets. The lasers are sold worldwide

directly in North America and Europe, and through distributors in Japan, Asia Pacific and China. Sumitomo Heavy Industries Ltd. (a significant shareholder of the Company) is our distributor in Japan.

Laser Systems Group — The Company’s laser systems are designed and manufactured at our Wilmington, Massachusetts facility and are sold directly, or, in some territories, through distributors, to end users, usually semiconductor integrated device manufacturers and electronic component and assembly manufacturers. The Laser Systems Group also derives significant revenues from servicing systems in its installed base at customer locations. System applications include laser repair to improve yields in the production of dynamic random access memory chips (DRAMs), permanent marking systems for silicon wafers and individual dies for traceability and quality control, circuit processing systems for linear and mixed signal devices, as well as for certain passive electronic components, and printed circuit boards (PCB) manufacturing systems for via hole drilling, solder paste inspection and component placement inspection.

Management does not review asset information on a segmented basis and the Company does not maintain assets on a segmented basis, therefore a breakdown of assets by segments is not included.

Revenues are attributed to geographic areas on the basis of the bill to customer location. Not infrequently, equipment is sold to large international companies, which may be headquartered in Asia-Pacific, but the sales of our systems are billed and shipped to locations in the United States. These sales are therefore reflected in United States totals in the table below. Long-lived assets are attributed to geographic areas in which Company assets reside.

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 Regarding Forward-Looking Statements” below, as well as our annual report on Form 10-K and other reports filed with the Securities and Exchange Commission.

We design, develop, manufacture and market components, lasers and laser-based advanced manufacturing systems as enabling tools for a wide range of applications. We believe our products allow customers to meet demanding manufacturing specifications, including device complexity and miniaturization, as well as advances in materials and process technology. Major markets for our products include the medical, automotive, semiconductor and electronics industries. In addition, we sell our products and services to other markets such as light industrial and aerospace.


	•	Sales for the quarter increased to $44.9 million from $44.7 million in the second quarter of 2003 and $37.4 million in the third quarter of 2002.

	•	Net income for the quarter was $0.6 million, or $0.01 per share, compared to a net loss of $3.6 million, or $0.09 per share, in the second quarter of 2003 and a $5.4 million net loss, or $0.13 per share, in the third quarter of last year.

	•	Bookings of orders were $50.1 million in the third quarter of 2003 compared to $42.7 million in the second quarter of 2003 and $39.1 million in the third quarter of 2002. Ending backlog was $47.6 million as compared with $42.4 million at the end of the second quarter of 2003 and $54.1 million at the end of the third quarter of last year.

	•	The change in cash, cash equivalents, short-term and long-term investments for the third quarter of 2003 from the end of the second quarter of 2003 was an increase of $9.4 million. Cash, cash equivalents, short-term investments and long-term investments were $132.0 million (this includes $5.0 million pledged to secure lines of credit) at September 26, 2003.

Several significant markets for our products have been in severe decline since 2000. From 2000 through the end of 2002, the Company faced a decline in revenues, primarily in systems for semiconductor and electronics production and precision optics for telecommunications networks. The Company responded by streamlining operations to reduce fixed costs. This decline was due to the downturn in general economic conditions, exacerbated by excess manufacturing capacity. During this period the Company also discontinued and divested product lines that were no longer strategic.

In response to the business environment, management restructured operations bringing costs in line with expectations for sales of systems for the semiconductor and electronics markets. Primary emphasis been consolidating operations at multiple locations and reducing overhead. The Company incurred additional restructuring charges in each of the first three quarters of 2003 as it continued to reduce and consolidate operations around the world. The Company believes that restructuring activities are now substantially complete.

In addition to restructuring activities noted below, on August 7, 2003, the Company announced to its employees that the Company intends to consolidate and relocate its precision optics operations from the Nepean, Ontario location to its similar facility in Moorpark, California. In the third quarter of 2003, the

Management now believes the macro economy affecting its business is showing early signs of recovery as indicated by the improvements in orders and revenues during the first nine months of 2003, compared with the same period in 2002. While still cautious the Company’s major customers continued to be more active in the third quarter of 2003 than in the prior year.

During fiscal 2000, the Company took total restructuring charges of $15.1 million, $12.5 million of which resulted from the Company’s decision to exit the high powered laser product line that was produced in its Rugby, United Kingdom facility. The $12.5 million charge consisted of $1.0 million to accrue employee severance for approximately 50 employees; $3.8 million for reduction and elimination of the Company’s United Kingdom operation and worldwide distribution system related to high power laser systems; and $7.7 million for excess capacity at three leased facilities in the United States and Germany where high power laser systems operations were conducted. The provisions for lease costs at our Livonia and Farmington Hills, Michigan facilities and in Germany related primarily to future contractual obligations under operating leases, net of expected sublease revenue on leases that the Company cannot terminate. Additionally, for our Farmington Hills, Michigan and Maple Grove, Minnesota facilities, we accrued an anticipated loss on our contractual obligations to guarantee the value of the buildings. This charge was estimated as the excess of our cost to purchase the buildings over their estimated fair market value. The Company also recorded a non-cash write-down of land and building in the United Kingdom of $2.0 million, based on market assessments as to the net realizable value of the facility. Included in the expected savings in earnings and cash an annual “go forward” basis was approximately $1.1 million related to salaries and benefits of employees terminated in the Company’s Rugby, United Kingdom facility as part of the elimination of this product line. In addition, the Company recorded in cost of goods sold a reserve of $8.5 million for raw materials, work-in-process, equipment, parts and demo equipment inventory that related to the high power laser product line in its Rugby, United Kingdom facility and other locations that supported this product line.

During the first quarter of 2002, the Company consolidated its electronics systems business from its facility in Kanata, Ontario into the Company’s existing systems manufacturing facility in Wilmington, Massachusetts and transferred its laser business from the Company’s Kanata, Ontario facility to its existing facility in Rugby, United Kingdom. In addition, the Company closed its Kanata, Ontario facility. The Company took a total restructuring charge of $2.7 million related to these activities in the first quarter of 2002. The $2.7 million charge consisted of $2.2 million to accrue employee severance and benefits for 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. Future expense and cash outflow associated with 90 employees, whose employment was terminated, will be avoided, improving income before tax and cash flow by approximately $1.2 million per quarter. During the second quarter of fiscal 2002, the Company recorded additional restructuring charges of $1.4 million related to cancellation fees on contractual obligations of $0.3 million, a write-down of land and building in Kanata, Ontario and Rugby, United Kingdom of $0.8 million, and also leased facility costs of $0.3 million at the Farmington Hills, Michigan and Oxnard, California locations. The lease costs primarily related to future contractual obligations under operating leases, net of expected sublease revenue on leases that the Company cannot terminate. The write-downs of the building bring the properties offered for sale in line with market values and the recording of these write-downs has no effect on cash.

The second major restructuring action in 2002 was the redirection of the Company’s precision optics operations in Nepean, Ontario away from optical telecommunications and into its custom optics business as a result of the telecom industry’s severe downturn. The Company reduced capacity at the Nepean, Ontario facility and recorded a pre-tax restructuring charge of $2.3 million in the fourth quarter of 2002 which included $0.6 million to accrue employee severance and benefits for approximately 41 employees. Future expense and cash outflow associated with 41 employees, whose employment was terminated, will be avoided,

improving quarterly income before tax and cash flow by approximately $0.5 million per quarter. The Company also wrote-off approximately $0.2 million of excess fixed assets and wrote-down one of the Nepean, Ontario buildings by $0.2 million to its estimated fair market value. Additionally, the Company continued to evaluate accruals made in prior restructurings and we recorded charges of approximately $0.8 million for an adjustment to earlier provisions for leased facilities in the United States and Germany. Specifically, the $0.8 million in adjustments in the fourth quarter of 2002 related to earlier provisions for the leased facilities in Munich, Germany, Maple Grove, Minnesota and Farmington Hills, Michigan. Management had originally estimated a restructuring reserve of $0.5 million based upon the assumption that the Munich, Germany facility would be subleased in 2003. Instead, the market for commercial real estate in Munich, Germany declined further making recovery of the lease rate less likely. Therefore, an additional provision of $0.5 million was recorded to cover a longer anticipated time to sublease the space and to reflect a sublease at less than our existing lease rates. The Maple Grove, Minnesota facility had been subleased through January 2003. Management had anticipated finding a buyer for this building by January 2003, exercising of the option to purchase the building and not paying the remaining lease costs. As this did not happen, the contractual lease costs through the end of the lease in June 2003 of $0.2 million were accrued. The Farmington Hills, Michigan facility, also, was not sold by the end of 2002, so the costs for the unused space through the end of the lease in June 2003 of $0.1 million were accrued. The Company also took a further write-down of $0.3 million on the buildings in Kanata, Ontario and Rugby, United Kingdom and a $0.1 million write-off for fixed assets in Kanata, Ontario and a $0.1 million for the Maple Grove, Minnesota and Farmington Hills, Michigan facilities.

The result of this restructuring activity was the establishment of our three new primary business segments: Components Group, Laser Group and Laser Systems Group. In addition, improved working capital management provided substantially reduced investment in receivables and inventories.

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

During the fourth quarter of 2002, the Company changed the business based on its three core business segments: Components, Lasers and Laser Systems. 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 2002 year has been restated to conform to the current year’s presentation.

The following table sets forth sales in thousands of dollars by our business segments for the third quarter of 2003 and 2002.

Sales. Sales for the three months ended September 26, 2003 increased by $7.5 million or 20% compared to the quarter ended September 27, 2002. Sales for the third quarter of 2003 include $3.9 million generated

Sales in the Components segment increased by $1.3 million, or 7%, for the third quarter of 2003 as compared to the same period in 2002. This increase is primarily due to sales of $2.0 million from the DRC encoder product lines, which we acquired in the second quarter of 2003. Sales of precision optics products experienced increases in demand from the defense market. These increases were partly offset by the decreases in sales of our laser imaging and printer product lines. The printer product line experienced a delay in the introduction of two new products due to customers’ decision to delay their new programs. Laser imaging sales continued an anticipated decline associated with end of life for this mature product. We anticipate continued decline in sales for this product line in the future.

Sales in the Lasers segment in the third quarter of 2003 increased by $2.5 million, or 41%, over the third quarter last year. This increase was mostly due to sales of $1.9 million in the quarter from the Spectron products acquired in the second quarter of 2003. The JK series of products also had increased sales, as a result of new and updated product introductions within that series late in 2002.

In the third quarter of 2003, sales in the Laser Systems segment increased by $4.8 million, or 32%, over sales in the same period last year primarily due to gains in memory repair and circuit trim, partly offset by the decline in sales of the discontinued general purpose marker product lines. Increased global production of DRAMs was the driver for this quarter for sales of our memory systems. Gains in circuit trim product lines are due to pricing strategy to liquidate inventory of older products, combined with renewed activity for high performance equipment used for trimming chip resistor components and circuits of digital cameras and wireless communications products.

Sales in our corporate segment represent elimination of sales between our segments. There was a $1.1 million increase in sales between segments for the three months ended September 26, 2003 as compared to the same period last year.

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: North America consisting of Canada and the United States of America, 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. Sales are attributed to these geographic areas on the basis of the bill to customer location. Not infrequently, equipment is sold to large international companies, which may be headquartered in Asia-Pacific, but the sales of our systems are billed and shipped to locations in North America. These sales are therefore reflected in the North America totals in the table below. The following table shows sales in millions of dollars to each geographic region for the third quarter of 2003 and 2002, respectively.

Japan and Asia Pacific continue to be an area of growth for all of our segments. The increase in sales in Europe in the third quarter of 2003 as compared to the same period in 2002 is mainly the result of sales from the products associated with the Spectron acquisition.

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 26, 2003 was $47.6 million compared to $54.1 million at September 27, 2002.

Gross Profit. Gross profit was 37.1% in the three months ended September 26, 2003 compared to 30.2% in the same period in 2002. As a percent of sales, gross profit increased primarily due to lower material cost generated by a favorable product mix, due to increased sales of higher margin memory repair laser systems in the third quarter of 2003 compared with the third quarter of 2002. Other contributing factors were lower inventory provision costs in the third quarter of 2003 as compared to the same period in 2002 and substantial completion of restructuring activities. These were partially offset by increased costs of integration and increases in the overhead structure from the acquisitions. Gross profit by segment is not provided, due to a reclassification at a consolidated level for service sales support and service management costs from cost of sales to selling, general and administrative expenses, which is not attributed to particular segments.

Research and Development Expenses. Research and development expenses for the three months ended September 26, 2003 were 7.3% of sales, or $3.3 million, compared with 14.0% of sales, or $5.2 million, in the three months ended September 27, 2002. Research and development expenses for the Components group at $1.1 million in the third quarter of 2003 were unchanged from the same period in 2002. In the third quarter of 2003, research and development expenses for the Lasers segment were $0.7 million, which represents a $0.1 million decrease from $0.8 million in the third quarter of 2002. Research and development expenses in the Laser Systems segment were $1.4 million for the three months ended September 26, 2003, a $2.1 million decrease from $3.5 million the same period last year, as result of the recent completion of new product development projects and reduced personnel costs, as a result of staff reductions. The corporate segment research and development expenses, mostly in our patent application management, at $0.1 million in the third quarter of 2003, were approximately the same as last year as direct costs were assigned to the business segments.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were 24.6% of sales or $11.0 million in the three months ended September 26, 2003, compared with 38.0% of sales, or $14.2 million, in the three months ended September 27, 2002. The reduction in expenses in the third quarter of 2003 is due to a combined drop of $1.6 million in salaries, benefits and travel expenses arising from a 15% reduction in headcount assigned to Selling, General and Administrative functions at the end of the third quarter of 2003 compared to the end of the third quarter in 2002. Other factors are a $0.3 million reduction in facility and depreciation costs and a $0.5 million reduction in sales support and service management costs resulting from the business downsizing. Although legal expenses were lower in the third quarter of 2003 in comparison to the third quarter of 2002 by $0.1 million, general and administrative expenses in the third quarter of 2003 included $0.6 million of legal and other expenses relating to the proposal submitted to shareholders with respect to reorganizing the Company as a United States domiciled corporation. This proposal was withdrawn by the Company in August 2003. Selling, general and administrative expenses are not provided by segment, due to a reclassification at a consolidated level of service sales support and service management costs from cost of sales to selling, general and administrative expenses, which is not attributed to particular segments.

Amortization of Purchased Intangibles. Amortization of purchased intangibles was 3.1% of sales or $1.4 million for the quarter ended September 26, 2003 primarily as a result of amortizing intangible assets from acquisitions. This compares to $1.3 million or 3.4% of sales for the same period in 2002. The $0.1 million increase in 2003 is due to the amortization of intangible assets representing the developed technology acquired with the Spectron and Encoder product lines. Beginning in the second quarter of 2004, the Company will no longer have amortization expense of approximately $1.0 million per quarter, as the technology acquired with the General Scanning and Lumonics merger will be fully amortized. As the Company has stated that it is continuing to pursue potential investments in or acquisitions of complementary technologies and products, future amortization expense may increase depending on the nature of assets acquired in any potential acquisition.

Restructuring. As described above and in note 9 to the consolidated financial statements, for the three months ended September 26, 2003 we recorded restructuring charges of $0.3 million. There were no restructuring charges recorded in the third quarter of 2002.

Other. During the three months ended September 27, 2002, the Company recorded a benefit of $1.25 million related to a litigation settlement. There were no similar charges or benefits in the third quarter of 2003.

Income (Loss) from Operations. The following table sets forth income (loss) from operations in millions of dollars by our business segments for the third quarter of 2003 and 2002.

Interest Income. Interest income was $0.3 million in the three months ended September 26, 2003 and $0.5 million in the three months ended September 27, 2002.

Interest Expense. There was no interest expense in the three months ended September 26, 2003, compared to $0.2 million in interest expense for the three months ended September 27, 2002.

Foreign Exchange Transaction Gain (Losses). Foreign exchange transaction losses were approximately $0.1 million in the three months ended September 26, 2003 compared to a $0.6 million gain for the three months ended September 27, 2002. These amounts arise, primarily, from the functional currency of a division differing from its local currency, transactions denominated in currencies other than local currency and, beginning in 2003, unrealized gains (losses) on derivative contracts.

Income Taxes. The effective tax rate was 36.9% for the third quarter of 2003, compared with 25.5% in the same period in 2002 and 24.5% for fiscal 2002. The tax provision for the quarter largely reflects taxes in the Company’s foreign locations. The tax rate reflects the reduction in income tax benefit as a result of increases in valuation allowances related to the Company’s geographic distribution of its operating loss carry-forwards. The Company did not reflect any income tax benefit to offset the operating loss based on the continuing evaluation of deferred tax assets. While the Company believes it can recover the current deferred tax assets within the next three years, the Company is not increasing its deferred tax assets based on current year performance. Our ability to recover deferred tax assets of $16.7 million at September 26, 2003 depends primarily upon the Company’s ability to generate profits in the United States and United Kingdom tax jurisdictions. If actual results differ from our plans or we do not achieve profitability, we may be required to increase the valuation allowance on our tax assets by taking a charge to the Statement of Operations, which may have a material negative result on our operations.

Net Income (Loss). As a result of the foregoing factors, net income for the third quarter of 2003 was $0.6 million, compared with net loss of $5.4 million in the same period in 2002.

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

The following table sets forth sales in thousands of dollars by our business segments for the nine months ended September 26, 2003 and September 27 2002.

Sales. Sales for the nine months ended September 26, 2003 increased by $16.7 million or 15% compared to the nine months ended September 27, 2002. The year to date 2003 sales include $6.3 million generated from acquisitions completed in May 2003. The Spectron and DRC product line acquisitions are expected to add in the range of $3 to $5 million a quarter in sales going forward.

Sales in the Components segment decreased by $0.3 million, or 1%, for the first nine months of 2003 as compared to the same period in 2002, primarily due to a decrease in sales of laser imaging, printer products and optical scanner modules offset by sales from the Encoder product line acquired from DRC and increased sales in our precision optics product line. The decline in the printer product line is due to delayed introduction

Sales in our Lasers segment in the nine months ended September 26, 2003 increased by $7.0 million, or 41%, over the same period last year, mostly due to sales from the acquisition of the Spectron product line and increases in our JK series of products. The gain in the JK series is the result of increases in the volume of sales related to new product introductions within that series.

In the first nine months of 2003, sales in our Laser Systems segment increased by approximately $11.8 million, or 26%, over sales in the same period last year primarily due to gains in memory repair and circuit trim products, offset by a decline in sales of the discontinued general purpose marker product line. Steady increases in global production in DRAMs are the underlying driver for sales of our memory systems. Gains in circuit trim products are due to our pricing strategy to liquidate inventory of older products combined with demand for high performance used for trimming chip resistor components and circuits used in the manufacturing of digital cameras and wireless communications products.

Sales in our corporate segment represent elimination of sales between segments. There was a $1.8 million increase in sales between segments for the nine months ended September 26, 2003 as compared to the same period last year.

Gross Profit. Gross profit was 36.0% in the nine months ended September 26, 2003 compared to 31.4% in the same period in 2002. As a percent of sales, gross profit increased primarily due to favorable product mix, as we sold more of our higher margin memory repair products in the 2003 than in 2002. As a percent of sales, gross profit increased primarily due the combination of the revenue increase and a $0.3 million reduction in fixed expenses. Other factors contributing to the increase in gross profit percent were a $0.7 million reduction in warranty costs offset and a $0.5 million decrease in inventory reserve against slow moving inventory primarily in the Laser Systems group. The savings in warranty spending primarily relates to higher expense in 2002 for warranty activities related to the semiconductor wafer marker product line combined with a reduction in warranty spending against the DrillStar product line in 2003. Offsetting these decreases were increased costs of transition and additions to the overhead structure from the acquisitions of the DRC encoder products and the Spectron acquisition. Gross profit by segment is not provided, due to a reclassification at a consolidated

Research and Development Expenses. Research and development expenses for the nine months ended September 26, 2003 were $10.5 million, or 8.0% of sales, compared with $16.1 million, or 14.1% of sales, for the nine months ended September 27, 2002. Research and development expenses for the Components Group were $3.3 million in the first nine months of 2003 or $0.1 million below the same period in 2002. In the nine months ended September 26, 2003, research and development expenses in the Laser Group were $2.0 million, which was a $0.2 million decrease from the same period in 2002. Research and development expenses in the Laser Systems Group were $4.7 million for the nine months ended September 26, 2003, which is a $5.0 million decrease from the same period last year. The reduction in research and development expenses in the Laser Systems Group is mostly the result of a $2.8 million decrease on engineering projects and a $1.6 million reduction in personnel costs as result of completion of projects and efforts to reduce costs, respectively. Both resulted from the completion and introduction into the marketplace of four new products developed during the past several years. The total R&D headcount as at September 26, 2003 was 13% below the level the end of the third quarter in 2002, with the majority of the reductions originating from the Systems group. In our Corporate segment, research and development expenses, which are mostly in support of our patent application management at $0.5 million in the first nine months of 2003, were $0.3 million below last year as corporate activities were either reduced or assigned to the business segments.

Selling, General and Administrative Expenses. Selling, general and administrative expenses $35.7 million, or 27.4% of sales, in the nine months ended September 26, 2003, compared with $42.9 million, or 37.7% of sales, in the nine months ended September 27, 2002. The reduction in the first nine months of 2003 is primarily due to a combined decrease of $4.1 million in salaries, benefits and travel expenses due to a 15% reduction in headcount assigned to Selling, General and Administrative at the end of the third quarter in 2003, as compared to the same period in 2002. Other factors include a $1.8 million reduction in facility and depreciation costs, as well as a $1.6 million reduction in sales support and service management from downsizing in Europe, Canada, Asia Pacific and the United States. These decreases in expenses were partially offset by $2.2 million of legal and other expenses incurred in the nine months ended September 26, 2003 related to the proposal to the shareholders to reorganize the Company as a United States domiciled corporation. This proposal was withdrawn by the Company in August 2003. Selling, general and administrative expenses are not provided by segment, due to a reclassification at a consolidated level of service sales support and service management costs from cost of sales to selling, general and administrative expenses, which is not attributed to particular segments.

Amortization of Purchased Intangibles. Amortization of purchased intangibles was 3.1% of sales, or $4.1 million, for the nine months ended September 26, 2003 primarily as a result of amortizing intangible assets from acquisitions. This compares to $3.8 million, or 3.4% of sales, for the same period in 2002.

Restructuring. As described above and in note 9 to the consolidated financial statements, for the nine months ended September 26, 2003 we recorded restructuring charges of $2.5 million compared to $4.2 million recorded for the nine months ended September 27, 2002.

Other. During the nine months ended September 26, 2003, the Company recorded a reserve of approximately $0.6 million on notes receivable from a litigation settlement initially recorded in 1998. The reserve was provided because of a default on the quarterly payment due in March 2003. The Company also took a $0.5 million write off against idle and obsolete fixed assets. Additionally, the Company recorded a benefit of approximately $0.2 million for royalties earned on a divested product line and earned as part of a litigation settlement agreement. During the nine months ended September 27, 2002, the Company recorded a benefit of $1.25 million related to a litigation settlement.

Income (Loss) from Operations. The following table sets forth loss from operations in millions of dollars by our business segments for the nine months ended September 26, 2003 and September 27, 2002.

Other Income (Expense). During the first nine months of 2003, the Company recorded a $0.1 million gain on the disposal of a facility in Nepean, Ontario. During the first nine months of 2002, the Company wrote down by approximately $0.2 million an investment in OpNet Partners L.P.

Interest Income. Interest income was $1.6 million in the nine months ended September 26, 2003, compared to $1.7 million in the nine months ended September 27, 2002.

Interest Expense. Interest expense was $0.1 million in the nine months ended September 26, 2003, compared to $0.5 million in the nine months ended September 27, 2002.

Foreign Exchange Transaction Gains (Losses). Foreign exchange transaction gains were $0.6 million for the nine months ended September 26, 2003, compared to a loss of $0.3 million in the nine months ended September 27, 2002. These amounts arise, primarily, from the functional currency of a division differing from its local currency, transactions denominated in currencies other than local currency and beginning in 2003 unrealized gains (losses) on derivative contracts.

Income Taxes. The effective tax rate was 7.4% for the nine months ended September 26, 2003, compared with 20.9% for the same period in 2002. The tax rate reflects the reduction in income tax benefit as a result of increases in valuation allowances related to the Company’s geographic distribution of its operating loss carry-forwards. The Company did not reflect any income tax benefit to offset the operating loss based on the continuing evaluation of deferred tax assets. While the Company believes it can recover the current deferred tax assets within the next three years, the Company is not increasing its deferred tax assets based on current year performance. Our ability to recover deferred tax assets of $16.7 million at September 26, 2003 depends primarily upon the Company’s ability to generate profits in the United States and United Kingdom tax jurisdictions. If actual results differ from our plans or we do not achieve profitability, we may be required to increase the valuation allowance on our tax assets by taking a charge to the Statement of Operations, which may have a material negative result on our operations.

Net Loss. As a result of the foregoing factors, net loss for the nine months ended September 26, 2003 was $4.7 million, compared with net loss of $23.1 million in the same period in 2002.

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

Cash and cash equivalents totaled $74.0 million at September 26, 2003 compared to $83.6 million at December 31, 2002. In addition, the Company had $54.2 million in short-term investments and $3.1 million in long-term investments at September 26, 2003 compared to $29.0 million in short-term investments and $37.4 million in long-term investments at December 31, 2002. Also, included in long-term investments at September 26, 2003 is a minority equity investment in a private United Kingdom company valued at $0.6 million that was purchased as part of the assets in the Spectron acquisition. As discussed in note 5 to the consolidated financial statements, at September 26, 2003 $5.0 million of short-term investments were pledged as collateral for the Fleet credit facility.

Cash flows provided by operating activities for the nine months ended September 26, 2003 were $7.9 million, compared to $2.1 million during the same period in 2002. Net loss, after adjustment for non-cash items, provided cash of $3.4 million in the first nine months of 2003. Decreases in inventories and increases in current liabilities provided $9.3 million, which was offset by increases in accounts receivable and other current assets using $4.8 million in cash. The increase in receivables, and corresponding increase in days sales outstanding, was due to slower collections resulting largely from a shift in sales volume to Japan and Asia Pacific where we have experienced historically longer collection cycles. In the normal course of business, days sales outstanding tend to fluctuate and the increase experienced in the first nine months of 2003 falls within historical ranges. Net loss, after adjustment for non-cash items, used cash of $12.8 million in the first nine months of 2002. Decreases in accounts receivable, inventories and other current assets and increases in current liabilities provided $14.9 million, including income tax refunds of $13.6 million in the nine months ended September 27, 2002.

Cash flows used in investing activities were $19.7 million during the nine months ended September 26, 2003, primarily to acquire two businesses for $9.0 million and $18.9 million to purchase two leased buildings offset by net maturities of $8.8 million of short-term and long-term investments. Cash flows used in investing activities were $37.2 million during the nine months ended September 27, 2002, primarily from net purchases of $37.0 million of short-term and long-term investments and $2.4 million of property, plant and equipment. This was offset by a $2.2 million reduction of other assets.

Cash flows provided by financing activities during the nine months ended September 26, 2003 were $0.5 million from the issue of share capital from the exercises of stock option and issuance of shares under the employee stock purchase plan. During the nine months ended September 27, 2002 cash flows provided by financing activities were $1.3 million, which consisted of $3.5 million proceeds from bank indebtedness and $0.8 million from the issuance of share capital, offset by the repayment of long-term debt of $3.0 million.

The Company’s final salary defined benefit pension plan in the United Kingdom had an excess of projected benefit obligation over the fair market value of plan assets of approximately $5.0 million at December 31, 2002. This plan was curtailed effective May 31, 2003 with regards to accruing additional benefits. The Company’s funding policy is to fund pensions and other benefits based on widely used actuarial methods as permitted by applicable regulatory authorities. These factors are subject to many changes, including the performance of investments of the plan assets. Because of the current underfunding and potential changes in the future, the Company may have to increase payments to fund the pension plan.

The Company leased two facilities under operating lease agreements that expired in June 2003. At the end of the initial lease term, these leases required the Company to renew the lease for a defined number of years at the fair market rental rate or purchase the property at the fair market value. The lessor may have sold the facilities to a third party but the leases provided for a residual value guarantee of the first 85% of any loss the lessor may have incurred on its $19.1 million investment in the buildings, which would have become payable by the Company upon the termination of the transaction. In June 2003, the Company exercised its option to purchase the facilities for $18.9 million. There is no longer a residual value guarantee in connection with these leases. The lease agreement required, among other things, the Company to maintain specified quarterly financial ratios and conditions. The $18.9 million security that was pledged in connection with the operating leases was used to satisfy the purchase price of the buildings during June 2003. The properties were purchased for $18.9 million, but had an estimated fair market value of $12.5 million. Accruals that were recorded for these anticipated losses were used to offset the difference. The Farmington Hills, Michigan facility is included in property, plant and equipment and initially recorded at $6.1 million and the Maple Grove, Minnesota facility is included in other assets for $6.4 million at September 26, 2003. The Company is trying to sell these two facilities. The total expected value of the buildings at the time of sale may vary, depending on whether or not the buildings are leased at time of sale and whether the buildings are sold to a buyer/owner or to an investor. The Company will incur other costs such as lease and sales commissions. If market values for the two facilities were to decrease by 10%, our required provision would change by approximately $1.0 million.

Effective January 1, 2003, the Company removed the designation of all short-term hedge contracts from their corresponding hedge relationships. Accordingly, such contracts are recorded at fair value with changes in fair value recognized currently in income starting January 1, 2003, instead of included in accumulated other comprehensive income. Unrealized gains on these contracts included in accumulated other comprehensive income at December 31, 2002 are recognized in the same periods as the underlying hedged transactions. Although the Company now marks-to-market short-term hedge contracts to the statement of operations, the Company does not intend to enter into hedging contracts for speculative purposes. At September 26, 2003, the Company had one foreign exchange forward contract to purchase $1.5 million U.S. dollars with an aggregate fair value of loss of $0.2 million recorded in the statement of operations as foreign exchange transaction losses. Also, the Company had one currency swap contract with a notional value of $8.7 million U.S. dollars and an aggregate fair value loss of $0.7 million after-tax recorded in accumulated other comprehensive income.

On March 31, 2003, the Company completed the sale to a third party of its excess facility in Nepean, Ontario for a price of approximately U.S. $0.8 million. The gain on the sale of this facility of approximately U.S. $0.1 million was recorded in our second quarter.

On May 2, 2003, the Company acquired the principal assets of the Encoder division of Dynamics Research Corporation (DRC), located in Wilmington, Massachusetts. The purchase price of $3.1 million, subject to final adjustment, was comprised of $3.0 million in cash and $0.1 million in costs of the acquisition. The purchase price allocation is not yet final, as the Company is waiting for final agreement from DRC on the adjustment amount. The purchase price, which is subject to final adjustment, was allocated to the assets and liabilities based upon their estimated fair value at the date of acquisition. The addition of the Encoder division assets represents the addition of technology and products that expand the Company’s offering of precision motion control components. The integration of the Encoder division into the Company’s Components Group in Billerica, Massachusetts was completed during the third quarter of 2003.

The acquisition of the principal assets of Spectron Laser Systems Limited, a subsidiary of Lumenis Ltd (Spectron), located in Rugby, United Kingdom was closed on May 7, 2003. The purchase price of approximately $6.5 million, subject to final adjustment, was comprised of $5.9 million in cash and $0.6 million in estimated costs of the acquisition. The purchase price allocation is not yet final, as the Company is negotiating with Spectron on certain purchase price adjustments and indemnification for breach of warranties. Issues relating to inventory are the most significant area of dispute. The purchase price, which is subject to final adjustment, is allocated to the assets and liabilities based upon their estimated fair value at the date of acquisition. This acquisition adds both diode pumped laser solid state (DPSS) technology and products to the Company’s marketplace offerings, as well as expanded product lines in both lamp pumped (LPSS) and CO(2)-based technologies. The lasers are primarily used in material processing applications such as marking, cutting plastic and diamonds, silicon machining and micro-welding. The Company believes that these products complement the Company’s product lines by expanding applications in the 7W to 100W range. The integration of this acquisition into the Company’s Laser Group in Rugby, United Kingdom was completed during the third quarter of 2003.

Both of these acquisitions were consistent with the Company’s stated strategy to expand its technology and product offerings complementary with its existing markets through both development and acquisition.

The Company has entered into an agreement to sell the Kanata, Ontario property and is expected to close on this agreement during the fourth quarter of 2003. Because the estimated selling price for the Kanata facility was less than the net book value, the Company took an additional restructuring charge of $0.1 million in the second quarter of 2003 and $0.2 million in the third quarter of 2003. This facility remains in other assets at September 26, 2003.

Our future liquidity and cash requirements will depend on numerous factors, including, but not limited to, the level of sales we will be able to achieve in the future, the introduction of new products and potential acquisitions of related businesses or technology. 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.

Certain statements contained in this report on Form 10-Q constitute forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995, Section 27A of the United States Securities Act of 1933, as amended, and Section 21E of the United States Securities Exchange Act of 1934, as amended. These forward-looking statements relate to anticipated financial performance, management’s plans and objectives for future operations, business prospects, customer behavior, outcome of regulatory proceedings, market conditions, tax issues and other matters. All statements contained in this report on Form 10-Q that do not relate to matters of historical fact should be considered forward-looking statements, and are generally identified by words such as “anticipate,”, “believe,” “estimate,” “expect,” “intend,” “plan” and “objective” and other similar expressions. Readers should not place undue reliance on the forward-looking statements contained in this document. Such statements are based on management’s beliefs and assumptions

and on information currently available to management and are subject to risks, uncertainties and changes in condition, significance, value and effect, including risks discussed in reports and documents filed by the Company with the United States Securities and Exchange Commission and with securities regulatory authorities in Canada. Such risks, uncertainties and changes in condition, significance, value and effect, many of which are beyond our control, could cause our actual results and other future events to differ materially from those anticipated. We do 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.

The risks presented below may not be all of the risks that we may face. These are the factors that we believe could cause actual results to be different from expected and historical results. Other sections of this report and other reports we file with the Securities and Exchange Commission include additional factors that could have an effect on our business and financial performance. The industry in which we compete is very competitive and changes rapidly. Sometimes new risks emerge and management may not be able to predict all of them, or be able to predict how they may cause actual results to be different from those contained in any forward-looking statements. You should not rely upon forward-looking statements as a prediction of future results.

A prolonged economic slowdown will continue to put pressure on our ability to meet anticipated revenue levels. We are in a broad-based economic slowdown affecting most technology sectors and semiconductors and electronics in particular. As a result, many of our customers continue to order low quantities. A large portion of our sales is dependent on the need for increased capacity or replacement of inefficient manufacturing processes, because of the capital-intensive nature of our customers’ businesses. These also tend to lag behind in an economic recovery longer than other businesses. Because it is difficult to predict how long this slowdown will continue, we may not be able to meet anticipated revenue levels on a quarterly or annual basis.

We have experienced operating losses and may not sustain profitability. In the third quarter of 2003, we generated a profit from operations, but we have incurred operating losses on an annual basis since 1998. For the nine months ended September 26, 2003, we incurred a net loss of $4.7 million. No assurances can be given that we will sustain profitability in the future and the market price of our common shares may decline as a result.

Our inability to remain profitable may result in the loss of significant deferred tax assets. In determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets requires subjective judgment and analysis. While the Company believes it can recover the current deferred tax assets within the next three years, the Company is not increasing its deferred tax assets based on current year performance. Our ability to recover deferred tax assets of $16.7 million at September 26, 2003 depends primarily upon the Company’s ability to generate profits in the United States and United Kingdom tax jurisdictions. If actual results differ from our plans or we do not achieve profitability, we may be required to increase the valuation allowance on our tax assets by taking a charge to the Statement of Operations, which may have a material negative result on our operations.

Our business depends significantly upon capital expenditures, including by manufacturers in the semiconductor, electronics, machine tool and automotive industries, each of which are subject to cyclical fluctuations. The semiconductor and electronics, machine tool and automotive industries are cyclical and have historically experienced periods of oversupply, resulting in significantly reduced demand for capital equipment, including the products that we manufacture and market. The timing, length and severity of these cycles, and their impact on our business, are difficult to predict. For the foreseeable future, our operations will continue to depend upon capital expenditures in these industries, which, in turn, depend upon the market demand for their products. The cyclical variations in these industries have the most pronounced effect on our Laser Systems segment, due in large measure to that segment’s historical focus on the semiconductor and electronics industries and the Company’s need to support and maintain a comparatively larger global infrastructure (and, therefore, lesser ability to reduce fixed costs) than in our other segments. Our margins, net sales, financial condition and results of operations have been and will likely continue to be materially adversely affected by

The success of our business is dependent upon our ability to respond to fluctuations in demand for our products. During a period of declining demand, we must be able quickly and effectively to 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. We attempt to manage this risk by employing inventory management practices such as outsourcing portions of the development and manufacturing processes, limiting our purchase commitments and focusing on production to order rather than to stock, but no assurances can be given that our efforts in this regard will be successful in mitigating this risk or that our financial condition or results of operations will not be materially adversely affected thereby.

During a period of increasing demand and rapid growth, we must be able to increase manufacturing capacity quickly 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 with us.

Fluctuations in our customers’ businesses, timing and recognition of revenues from customer orders and other factors beyond our control may cause our results of operations quarter over quarter to fluctuate, perhaps substantially. Our revenues and net income, if any, in any particular period may be lower than revenues and net income, if any, in a preceding or comparable period. Factors contributing to these fluctuations, some of which are beyond our control, include:


	•	fluctuations in our customers’ businesses;

	•	timing and recognition of revenues from customer orders;

	•	timing and market acceptance of new products or enhancements introduced by us or our competitors;

	•	availability of components from our suppliers and the manufacturing capacity of our subcontractors;

	•	timing and level of expenditures for sales, marketing and product development; and

	•	changes in the prices of our products or of our competitors’ products.

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, which, on average, can range from ten to fourteen weeks. We may receive one or more large orders in one quarter from a customer and then receive no orders from that customer in the next quarter. As a result, the timing and recognition of sales from customer orders can cause significant fluctuations in our operating results from quarter to quarter. If our quarterly revenue or operating results fall below the expectations of investors or public market analysts, our common share price may decline as a result.

Gross profits 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.

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. We believe that fluctuations in quarterly results may cause the market

Our reliance upon third party distribution channels subjects us to credit, inventory, business concentration and business failure risks beyond our control. The Company sells products through resellers (which include OEMs, systems integrators and distributors). Reliance upon third party distribution sources subjects us to risks of business failure by these individual resellers, distributors and OEMs, and credit, inventory and business concentration risks. In addition, our net sales depend in part upon the ability of our OEM customers to develop and sell systems that incorporate our products. Adverse economic conditions, large inventory positions, limited marketing resources and other factors affecting these OEM customers could have a substantial impact upon our financial results. No assurances can be given that our OEM customers will not experience financial or other difficulties that could adversely affect their operations and, in turn, our financial condition or results of operations.

The steps we take to protect our intellectual property may not be adequate to prevent misappropriation or the development of competitive technologies or products by others that could harm our competitive position and materially adversely affect our results of operations. Our future success depends in part upon our intellectual property rights, including trade secrets, know-how and continuing technological innovation. There can be no assurance that the steps we take to protect our intellectual property rights will be adequate to prevent misappropriation or that others will not develop competitive technologies or products. As of October 2, 2003, we held 125 United States and 103 foreign patents, and had filed 59 United States and 108 foreign patent applications, which are under review by the patent authorities. There can be no assurance that other companies are not investigating or developing other technologies that are similar to ours, that any patents will issue from any application filed by us or that, if patents do issue, the claims allowed will be sufficiently broad to deter or prohibit others from marketing similar products. In addition, there can be no assurance that any patents issued to us will not be challenged, invalidated or circumvented, or that the rights thereunder will provide a competitive advantage to us.

Our success depends upon our ability to protect our intellectual property and to successfully defend against claims of infringement by third parties. From time to time we receive notices from third parties alleging infringement of such parties’ patent or other proprietary rights by our products. While these notices are common in the laser industry and we have in the past been able to develop non-infringing technology or license necessary patents or technology on commercially reasonable terms, there can be no assurance that we would in the future prevail in any litigation seeking damages or expenses from us or to enjoin us from selling our products on the basis of such alleged infringement, or that we would be able to develop any non-infringing technology or license any valid and infringed patents on commercially reasonable terms. In the event any third party made a valid claim against us or our customers for which a license was not available to us on commercially reasonable terms, we would be adversely affected. Our failure to avoid litigation for infringement or misappropriation of propriety rights of third parties or to protect our propriety technology could result in a loss of revenues and profits or that we are forced to settle with these other parties.

The industries in which we operate are highly competitive and competition in our markets could intensify, or our technological advantages may be reduced or lost, as a result of technological advances by our competitors. 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. There can be no assurance that we will successfully differentiate our current and proposed products from the products of our competitors or that the market place will consider our products to be superior to competing products. Because many of the components required to develop and produce a laser-based marking system are commercially available, barriers to entry into this market are relatively low and we expect new competitive product entries in this market. To maintain our competitive position in this market, we believe that we will be required to continue a high level of investment in engineering, research and development, marketing and customer service and support. There can be no assurance that we will have sufficient resources to continue to make these investments, that we will be able to make the technological advances necessary to maintain our competitive position, or that our products will

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. 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. The loss of key personnel could negatively impact our operations. Competition for qualified personnel is intense and we cannot guarantee that we will be able to continue to attract and retain qualified personnel.

We may not develop, introduce or manage the transition to new products as successfully as our competitors. The markets for our products experience rapidly changing technologies, evolving industry standards, frequent new product introductions, changes in customer requirements and short product life cycles. To compete effectively we must continually introduce new products that achieve market acceptance. Our future performance will depend on the successful development, introduction and market acceptance of new and enhanced products that address technological changes as well as current and potential customer requirements. 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. The introduction by us or by our competitors of new and enhanced products may cause our customers to defer or cancel orders for our existing products, which may harm our operating results. Failed market acceptance of new products or problems associated with new product transitions could harm our business.

Delays or deficiencies in research, development, manufacturing, delivery of or demand for new products or of higher cost targets could have a negative affect on our business, operating results or financial condition. We are active in the research and development of new products and technologies. Our research and development efforts may not lead to the successful introduction of new or improved products. The development by others of new or improved products, processes or technologies may make our current or proposed products obsolete or less competitive. Our ability to control costs is limited by our need to invest in research and development. Because of intense competition in the industries in which we compete, if we were to fail to invest sufficiently in research and development, our products could become less attractive to potential customers and our business and financial condition could be materially and adversely affected. As a result of our need to maintain our spending levels in this area, our operating results could be materially harmed if our net sales fall below expectations. In addition, as a result of our emphasis on research and development and technological innovation, our operating costs may increase further in the future and research and development expenses may increase as a percentage of total operating expenses and as a percentage of net sales.

In addition, we may encounter delays or problems in connection with our research and development efforts. Product development delays may result from numerous factors, including:


	•	changing product specifications and customer requirements;

	•	difficulties in hiring and retaining necessary technical personnel;

	•	difficulties in reallocating engineering resources and overcoming resource limitations;

	•	changing market or competitive product requirements; and

	•	unanticipated engineering complexities.

New products often take longer to develop, have fewer features than originally considered desirable and achieve higher cost targets than initially estimated. There may be delays in starting volume production of new products and new products may not be commercially successful. Products under development are often announced before introduction and these announcements may cause customers to delay purchases of existing products until the new or improved versions of those products are available.

We may not be able to find suitable targets or consummate acquisitions in the future, and there can be no assurance that the acquisitions we have made and do in the future make will provide expected benefits. We have recently consummated two strategic acquisitions and intend in the future to continue to pursue other strategic acquisitions of businesses, technologies and products complementary to our own. 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 management’s attention from our core businesses and risks associated with unanticipated problems or liabilities. No assurances can be given that management’s efforts in this regard will be sufficient, or that identified acquisition candidates will be receptive to our advances or, consistent with our acquisition strategy, accretive to earnings.

Should we acquire another business, the process of integrating acquired operations into our existing operations may result in unforeseen operating difficulties or additional expenses and may require the allocation of significant financial resources that would otherwise be available for the ongoing development or expansion of our existing business. We attempt to mitigate these risks by focusing our attention on the acquisition of businesses, technologies and products that have current relevancy to our existing lines of business and that are complementary to our existing product lines. Other difficulties we may encounter, and which we may or may not be successful in addressing, include those risks associated with the potential entrance into markets in which we have limited or no prior experience and the potential loss of key employees, particularly those of the acquired business.

There is a risk that United States holders could be considered to hold shares in a passive foreign investment company under United States tax laws, which may have adverse tax consequences for United States holders of our shares. Under United States tax laws, United States investors who hold stock in a passive foreign investment company, referred to in this report as a PFIC, may be subject to adverse tax consequences. Any non-United States corporation may be classified as a PFIC if 75% or more of its gross income in any year is considered passive income for United States tax purposes. For this purpose, passive income generally includes interest, dividends and gains from the sale of assets that produce these types of income. In addition, a non-United States corporation may be classified as a PFIC if the average percentage of the fair market value of its gross total assets during any year that produced passive income (based on the average of such values as at each quarter end of that year), or that were held to produce passive income, is at least 50% of the fair market value of its gross total assets.

The determination of whether a corporation is a PFIC is a fact-sensitive inquiry that depends, among other things, on the fair market value of its assets (and such value is subject to change from time to time). We believe that the Company is not now and has not in the past been a PFIC. However, there is a risk that United States holders of our shares will be deemed to hold shares in a PFIC. This risk may be mitigated, as the market value of the Company’s shares increase, or as investments in operating assets are made.

The tax consequences to United States holders of disposing of shares in a PFIC are as follows. All gains recognized on the disposition of PFIC shares by a United States shareholder are taxable as ordinary income. Additionally, at the time of disposition, the United States shareholder incurs an interest charge. The interest is computed at the rate for underpayments of tax, generally as though the gain had been included in the United States shareholder’s gross income ratably over the period the United States shareholder held the PFIC’s stock, but payment of the resulting tax had been delayed until the sale or distribution. Similar rules apply to “excess distributions.” An excess distribution is a current year distribution received by a United States shareholder on PFIC stock, to the extent the distribution exceeds his or her ratable portion of 125% of the average amount so received during the three preceding years. The portion of an actual distribution that is not an excess distribution is not taxed under the excess distribution rules, but rather is treated as a distribution subject to the normal tax rules. A United States shareholder may avoid the effect of the forgoing rules if he or she makes a “qualified electing fund” election or a “mark-to-market election,” but then becomes subject to the special rules that apply to such elections.

Our classification as a controlled foreign corporation could have adverse tax consequences for significant United States shareholders. A non-United States corporation, such as we are, will constitute a controlled

If we are treated as a CFC, this status should have no adverse effect on any shareholder who does not own (directly, indirectly, or constructively) 10% or more of the total combined voting power of all classes of our shares. If, however, we are treated as a CFC for an uninterrupted period of thirty (30) days or more during any taxable year, any United States shareholder who owns (directly, indirectly, or constructively) 10% or more of the total combined voting power of all classes of our shares on any day during the taxable year, and who directly or indirectly owns any shares on the last day of the year in which we are a CFC, will have to include in its gross income for United States federal income tax purposes its pro rata share of the Company’s subpart F income (primarily consisting of investment income such as dividends, interest and capital gains on the sale of assets producing such income) relating to the period during which we are or were a CFC.

In addition, if we were treated as a CFC, any gain realized on the sale of our shares by such a shareholder would be treated as ordinary income to the extent of the shareholder’s proportionate share of the undistributed earnings and profits of the Company accumulated during the shareholder’s holding period while we are a CFC. If the United States shareholder is a corporation, however, it may be eligible to credit against its United States tax liability with respect to these potential inclusions foreign taxes paid on the earnings and profits associated with the included income.

We do not believe that we are currently, or have ever been, a CFC. However, no assurances can be given that we will not become a CFC in the future.

We depend on limited source suppliers that could cause substantial manufacturing delays and additional cost if a disruption in supply occurs. While we attempt to mitigate risks associated with our reliance on single suppliers by actively managing our supply chain, we do obtain some components used in our business segments from a single source. We also rely on a limited number of independent contractors to manufacture subassemblies for some of our products, particularly in our Laser Systems segment. Despite our and their best efforts, there can be no assurance that our current or alternative sources will be able to continue to meet all of our demands on a timely basis. 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, if any, on commercially reasonable terms.

Each of our suppliers can be replaced, either by contracting with another supplier or through internal production of the part or parts previously purchased in the market, but no assurances can be given that we would be able to do so quickly enough to avoid an interruption or delay in delivery of our products to our customers and any associated harm to our reputation and customer relationships. Unavailability of necessary parts or components, or suppliers of the same, could require us to reengineer our products to accommodate available substitutions. Any such actions would likely increase our costs and could have a material adverse effect on manufacturing schedules, product performance and market acceptance, each or all of which could be expected to have a material adverse effect on our financial condition or results of operations.

Production difficulties and product delivery delays could materially adversely affect our business, operating results or financial condition. We assemble our products at our facilities in the United States, Canada and the United Kingdom. If use of any of our manufacturing facilities were interrupted by natural disaster or otherwise, our operations could be negatively affected until we could establish alternative production and service operations. In addition, we may experience production difficulties and product delivery delays in the future as a result of:


	•	changing process technologies;

	•	ramping production;

	•	installing new equipment at our manufacturing facilities; and

	•	shortage of key components.

Our operations in foreign countries subject us to risks not faced by companies operating exclusively in the United States. In addition to operating in the United States, Canada and the United Kingdom, we currently have sales and service offices in Germany, Japan, Korea and Taiwan. During 2003, we closed our offices in France, Italy, Hong Kong, Singapore, Malaysia and the Philippines, but we may in the future expand into other international regions. During the nine months ended September 26, 2003 and September 27, 2002, approximately 48% and 35% of our revenue, respectively, were derived from our international operations.

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;

	•	use of different systems and equipment;

	•	difficulties in staffing and managing foreign operations and diverse cultures;

	•	protective tariffs;

	•	trade barriers and export/import controls;

	•	transportation delays and interruptions;

	•	reduced protection for intellectual property rights in some countries; and

	•	the impact of recessionary foreign economies.

We cannot predict whether the United States or any other country will impose new quotas, tariffs, taxes or other trade barriers upon the importation of our products or supplies or gauge the effect that new barriers would have on our financial position or results of operations.

We do not believe that travel advisories or health concerns have had a material effect on our business to date. However, no assurances can be given that future travel advisories or health concerns will not have an impact on our business.

If the economic and political conditions in United States and globally do not improve or if the economic slowdown continues, we may continue to experience material adverse impacts on our business, operating results and financial condition. Our business is subject to the effects of general economic and political conditions globally. Our revenues and operating results have declined partially due to continuing unfavorable economic conditions as well as uncertainties arising out of the threatened terrorist attacks on the United States, including the potential worsening or extension of the current global economic slowdown, the economic consequences of protracted military action or additional terrorist activities and associated political instability and the impact of heightened security concerns on domestic and international travel and commerce. In particular, due to these uncertainties we are subject to:


	•	the risk that future tightening of immigration controls may adversely affect the residence status of non-United States engineers and other key technical employees in our United States facilities or our ability to hire new non-United States employees in such facilities; and

	•	the risk of more frequent instances of shipping delays.

Increased governmental regulation of our business could materially adversely affect our business, operating results and financial condition. We are subject to the laser radiation safety regulations of the Radiation Control for Health and Safety Act administered by the National Center for Devices and Radiological Health, a branch of the United States Food and Drug Administration. Among other things, these regulations require a laser manufacturer to file new product and annual reports, to maintain quality control and sales records, to perform product testing, to distribute appropriate operating manuals, to incorporate design and operating features in lasers sold to end-users and to certify and label each laser sold to end-users as one of

four classes (based on the level of radiation from the laser that is accessible to users). Various warning labels must be affixed and certain protective devices installed depending on the class of product. The National Center for Devices and Radiological Health is empowered to seek fines and other remedies for violations of the regulatory requirements. We are subject to similar regulatory oversight, including comparable enforcement remedies, in the European markets we serve.

Changes in governmental regulations may reduce demand for our products or increase our expenses. We compete in many markets in which we and our customers must comply with federal, state, local and international regulations, such as environmental, health and safety and food and drug regulations. We develop, configure and market our products to meet customer needs created by those regulations. Any significant change in regulations could reduce demand for our products, which in turn could materially adversely affect our business, operating results and financial condition.

Defects in our products or problems arising from the use of our products together with other vendors’ products may seriously harm our business and reputation. Products as complex as ours may contain known and undetected errors or performance problems. Defects are frequently found during the period immediately following introduction and initial implementation of new products or enhancements to existing products. Although we attempt to resolve all errors that we believe would be considered serious by our customers before implementation, our products are not error-free. These errors or performance problems could result in lost revenues or customer relationships and could be detrimental to our business and reputation generally. In addition, our customers generally use our products together with their own products and products from other vendors. As a result, when problems occur in a combined environment, it may be difficult to identify the source of the problem. These problems may cause us to incur significant warranty and repair costs, divert the attention of our engineering personnel from our product development efforts and cause significant customer relations problems. To date, defects in our products or those of other vendors’ products with which ours are used by our customers have not had a material negative effect on our business. However, we cannot be certain that a material negative effect will not occur in the future.

Interest Rate Risk. Our exposure to market risk associated with changes in interest rates relates primarily to our cash equivalents, short-term investments, long-term investments and debt obligations. As described in note 8 to the consolidated financial statements, at September 26, 2003, the Company had $59.8 million invested in cash equivalents and $57.3 million invested in short-term and long-term investments. At December 31, 2002, the Company had $53.3 million invested in cash equivalents and $66.4 million invested in short-term and long-term investments. Due to the average maturities and the nature of the current investment portfolio, a one percent change in interest rates could have approximately a $1.0 million to $1.5 million effect on our interest income on an annual basis. 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, currency swaps 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. Effective January 1, 2003, the Company removed the designation of all short-term hedge contracts from their corresponding hedge relationships. Accordingly, such contracts are recorded at fair value with changes in fair value recognized currently in income starting January 1, 2003, instead of included in accumulated other comprehensive income. Unrealized gains on these contracts included in accumulated other comprehensive income at December 31, 2002 are recognized in the same periods as the underlying hedged transactions. Although the Company now marks-to-market short-term

hedge contracts to the statement of operations, the Company does not intend to enter into hedging contracts for speculative purposes. At September 26, 2003, the Company had one foreign exchange forward contract to purchase $1.5 million U.S. dollars with an aggregate fair value of loss of $0.2 million recorded in the statement of operations as foreign exchange transaction losses. Also, the Company had one currency swap contract with a notional value of $8.7 million U.S. dollars and an aggregate fair value loss of $0.7 million after-tax recorded in accumulated other comprehensive income.

At December 31, 2002, the Company had eleven foreign exchange forward contracts to purchase $16.9 million U.S. dollars and one currency swap contract fair valued at $8.7 million U.S. dollars with an aggregate fair value loss of $0.5 million after-tax recorded in accumulated other comprehensive income and maturing at various dates in 2003.

GSI Lumonics’ management, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of effectiveness of disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a- 15(b) under the United States Securities Exchange Act of 1934, as amended. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective as of the end of the period covered by this report. There have been no significant changes in the Company’s internal control over financial reporting that occurred during the quarter covered by this report that has materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

See the description of legal proceedings in note 10 to the Consolidated Financial Statements.


*	Incorporated by reference to the Registrant’s Registration Statement on Form S-4/A filed on February 11, 1999.


	•	Form 8-K dated July 8, 2003 and filed on July 14, 2003 — Item 9, Regulation FD Disclosure


		Disclosed, and included as an exhibit, written communication comprised of slides which were provided and disseminated in both written and oral form to participants in a series of investor presentations delivered by officers of the Company beginning on July 8, 2003.


	•	Form 8-K dated July 22, 2003 and furnished on July 22, 2003 — Item 9, Regulation FD Disclosure (Intended to be furnished under Item 12. Results of Operations and Financial Condition” in accordance with SEC Release No. 33-8216)


		Disclosed, and included as an exhibit, a press release announcing the Company’s financial position and results of operations as of and for the fiscal quarter ended June 27, 2003.


	•	Form 8-K dated August 1, 2003 and filed on August 1, 2003 — Item 5, Other Events


		Disclosed, and included as an exhibit, a press release announcing that the Company had withdrawn the proposal submitted to its shareholders to restructure the Company as a publicly traded United States-domiciled corporation, and that the special meeting of the Company’s shareholders called to consider the same had been cancelled.


	•	Form 8-K dated August 19, 2003 and filed on August 19, 2003 — Item 5, Other Events


		Disclosed, and included as an exhibit, a press release announcing that the Company had filed an action for patent infringement against Electro Scientific Industries, Inc. of Portland, Oregon in the United States District Court for the Central District of California.


	•	Form 8-K dated August 20, 2003 and filed on August 20, 2003 — Item 9, Regulation FD Disclosure


		Disclosed, and included as an exhibit, written communication comprised of slides, which the Company posted to the “Investor News” section of its Internet website (accessible at http://www.gsilumonics.com/investors/) an updated investor presentation (slideshow) in Microsoft® PowerPoint® format. Additionally, beginning on August 20, 2003, officers of the Company will deliver to selected investors a series of presentations that will include written communication (comprised of this slideshow) which will be disseminated and provided in both written and oral form to the participants.

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.


*	Incorporated by reference to the Registrant’s Registration Statement on Form S-4/A filed on February 11, 1999.


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

		For the quarterly period ended September 26, 2003

or

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


New Brunswick, Canada		98-0110412
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


39 Manning Road Billerica, MA (Address of principal executive offices)		01821 (Zip Code)


PART I -- FINANCIAL INFORMATION
	Item 1. Financial Statements
		CONSOLIDATED BALANCE SHEETS
		CONSOLIDATED STATEMENTS OF OPERATIONS
		CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
Part II -- OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
Ex-31.1 Section 302 Certification, CEO
Ex-31.2 Section 302 Certification, CFO
Ex-32.1 Section 906 Certification, CEO
Ex-32.2 Section 906 Certification, CFO
Ex-99.1 Selected Consolidated Financial Statements
Ex-99.2 Management Discussion and Analysis



Item No			Page No

PART I — FINANCIAL INFORMATION				2
	ITEM 1.	FINANCIAL STATEMENTS		2
		CONSOLIDATED BALANCE SHEETS (unaudited)		2
		CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)		3
		CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)		4
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)		5
	ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		25
	ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		48
	ITEM 4.	CONTROLS AND PROCEDURES		49
PART II — OTHER INFORMATION				50
	ITEM 1.	LEGAL PROCEEDINGS		50
	ITEM 6.	EXHIBITS AND REPORTS ON FORM 8-K		50
SIGNATURES				52


			September 26,			December 31,
			2003			2002

ASSETS
Current
	Cash and cash equivalents (note 8)		$	74,049		$	83,633
	Short-term investments (note 8)			54,186			28,999
	Accounts receivable, less allowance of $2,600 (December 31, 2002 — $2,681)			41,951			33,793
	Income taxes receivable			10,054			8,431
	Inventories (note 3)			38,404			39,671
	Deferred tax assets (note 11)			9,327			9,763
	Other current assets			6,503			4,448

		Total current assets		234,474			208,738
Property, plant and equipment, net of accumulated depreciation of $21,563 (December 31, 2002 — $21,453)				32,755			26,675
Deferred tax assets (note 11)				7,353			7,443
Other assets (note 3)				8,661			3,360
Long-term investments (note 8)				3,729			37,405
Intangible assets, net of amortization of $20,296 (December 31, 2002 — $16,217) (note 3)				12,063			13,467

			$	299,035		$	297,088


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current
	Accounts payable		$	14,678		$	9,235
	Accrued compensation and benefits			5,797			6,523
	Other accrued expenses (note 3)			19,501			20,845

		Total current liabilities		39,976			36,603
Deferred compensation				2,141			2,129
Accrued minimum pension liability (note 12)				4,032			3,875

		Total liabilities		46,149			42,607
Commitments and contingencies (note 10)
Stockholders’ equity (note 6)
	Common shares, no par value; Authorized shares: unlimited; Issued and outstanding: 40,880,399 (December 31, 2002 — 40,785,922)			305,220			304,713
	Additional paid-in capital			2,592			2,592
	Accumulated deficit			(45,940	)		(41,270	)
	Accumulated other comprehensive loss			(8,986	)		(11,554	)

		Total stockholders’ equity		252,886			254,481

			$	299,035		$	297,088



			Three Months Ended						Nine Months Ended

			September 26,			September 27,			September 26,			September 27,
			2003			2002			2003			2002

Sales			$	44,881		$	37,419		$	130,682		$	113,971
Cost of goods sold				28,237			26,109			83,659			78,185

Gross profit				16,644			11,310			47,023			35,786
Operating expenses:
	Research and development			3,297			5,242			10,454			16,116
	Selling, general and administrative			11,021			14,237			35,735			42,891
	Amortization of purchased intangibles			1,408			1,278			4,055			3,835
	Restructuring			264			—			2,451			4,152
	Other			—			(1,250	)		841			(1,250	)

		Total operating expenses		15,990			19,507			53,536			65,744

Income (loss) from operations				654			(8,197	)		(6,513	)		(29,958	)
	Other income (expense)			—			—			64			(203	)
	Interest income			293			508			1,601			1,707
	Interest expense			—			(188	)		(129	)		(541	)
	Foreign exchange transaction gains (losses)			(75	)		609			629			(275	)

Income (loss) before income taxes				872			(7,268	)		(4,348	)		(29,270	)
Income tax provision (benefit)				322			(1,853	)		322			(6,123	)

Net income (loss)			$	550		$	(5,415	)	$	(4,670	)	$	(23,147	)


Net income (loss) per common share:
	Basic		$	0.01		$	(0.13	)	$	(0.11	)	$	(0.57	)
	Diluted		$	0.01		$	(0.13	)	$	(0.11	)	$	(0.57	)
Weighted average common shares outstanding (000’s)				40,857			40,699			40,817			40,641
Weighted average common shares outstanding and dilutive potential common shares (000’s)				41,343			40,699			40,817			40,641


	Estimated Fair
	Value at
	Acquisition
	Date

	(In millions)
Accounts receivable	$	0.9
Inventories		1.1
Property, plant and equipment		0.2
Acquired technology		1.1
Accounts payable and other accrued expenses		(0.2	)

Total purchase price	$	3.1



		September 26, 2003						December 31, 2002

					Accumulated						Accumulated
		Cost			Amortization			Cost			Amortization

Patents and acquired technology		$	31,335		$	(19,850	)	$	28,660		$	(15,850	)
Trademarks and trade names			1,024			(446	)		1,024			(367	)

	Total cost		32,359		$	(20,296	)		29,684		$	(16,217	)

Accumulated amortization			(20,296	)					(16,217	)

	Net intangible assets		12,063					$	13,467


	For the			For the
	Three Months			Nine Months
	Ended			Ended
	September 26,			September 26,
	2003			2003

Balance at the beginning of the period	$	3,354		$	3,383
Charged to cost of goods sold		1,125			2,870
Warranty accrual established as part of acquisitions		—			415
Use of provision		(1,010	)		(3,229	)
Foreign currency exchange rate changes		109			139

Balance at the end of the period	$	3,578		$	3,578


	Severance			Facilities			Total


	(In millions)
Provision at December 31, 2002	$	1.2		$	7.6		$	8.8
Charges during first quarter of 2003		0.6			—			0.6
Cash draw-downs during first quarter of 2003		(0.9	)		(0.5	)		(1.4	)

Provision at March 28, 2003		0.9			7.1			8.0
Charges during second quarter of 2003		1.0			0.6			1.6
Cash draw-downs during second quarter of 2003		(1.0	)		(6.4	)		(7.4	)
Non-cash draw-downs during second quarter of 2003		—			(0.4	)		(0.4	)

Provision at June 27, 2003		0.9			0.9			1.8
Charges during third quarter of 2003		0.1			0.3			0.4
Reversal of charges during third quarter of 2003		(0.1	)		—			(0.1	)
Cash draw-downs during third quarter of 2003		(0.8	)		(0.2	)		(1.0	)
Non-cash draw-downs during third quarter of 2003		—			(0.3	)		(0.3	)

Provision at September 26, 2003	$	0.1		$	0.7		$	0.8



		Three Months Ended


		September 26, 2003					September 27, 2002

		Sales		% of Total			Sales		% of Total


		(In millions)
North America		$	19.5		43	%	$	23.6		63	%
Latin and South America			—		—			0.2		1
Europe			8.6		19			6.0		16
Japan			7.9		18			4.6		12
Asia-Pacific, other			8.9		20			3.0		8

	Total	$	44.9		100	%	$	37.4		100	%



			As at

			September 26,		December 31,
			2003		2002


			(In millions)
Long-lived assets:
	United States		$	32.9	$	24.2
	Canada			5.8		6.7
	Europe			13.6		11.5
	Japan			0.7		0.6
	Asia-Pacific, other			0.1		0.1

		Total	$	53.1	$	43.1


Item 2.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*


	*Three Months Ended September 26, 2003 Compared to Three Months Ended September 27, 2002*


	*Results of Operations for the Nine Months Ended September 26, 2003 Compared to the Nine Months Ended September 27, 2002*


	*2000*


	*2001*


	*2002*


	*2003*


	*Cash Flows for Nine Months Ended September 26, 2003 and September 27, 2002*


Item 3.	*Quantitative and Qualitative Disclosures About Market Risk*


Exhibit
Number		Description

	3.1	Articles of Continuance of the Registrant(*)
	3.2	By-law No. 1 of the Registrant(*)
	31.1	Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2	Chief Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32.1	Chief Executive Officer Certification pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32.2	Chief Financial Officer Certification pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	99.1	Selected Consolidated Financial Statements and Notes in U.S. Dollars and in accordance with Canadian Generally Accepted Accounting Principles.
	99.2	Management’s Discussion and Analysis of Financial Condition and Results of Operations — Canadian Supplement.



Name	Title	Date


/s/ CHARLES D. WINSTON Charles D. Winston	President and Chief Executive Officer (Principal Executive Officer)	November 7, 2003

/s/ THOMAS R. SWAIN Thomas R. Swain	Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer)	November 7, 2003


Exhibit
No.		Description

	3.1	Articles of Continuance of the Registrant(*)
	3.2	By-law No. 1 of the Registrant(*)
	31.1	Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2	Chief Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32.1	Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	32.2	Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	99.1	Selected Consolidated Financial Statements and Notes in U.S. Dollars and in accordance with Canadian Generally Accepted Accounting Principles
	99.2	Management’s Discussion and Analysis of Financial Condition and Results of Operations — Canadian Supplement