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 29, 2004, there were 41,228,182 shares of the Registrant’s common stock, 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 and the rules and regulations promulgated by the U.S. Securities and Exchange Commission, including the instructions to Form 10-Q and the provisions of 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 for the year ended December 31, 2003. The results for interim periods are not necessarily indicative of results to be expected for the year or for any future periods.

A reconciliation of the differences between United States and Canadian generally accepted accounting principles (GAAP) is presented in note 14.

Certain prior year amounts have been reclassified to conform to the current year presentation in the financial statements as of and for the quarter and nine months ended October 1, 2004. These reclassifications had no effect on the previously reported results of operations.

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 was comprised of $3.0 million in cash and $0.1 million in costs of the acquisition. The purchase price was 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 $1.1 million) was 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 $6.4 million was comprised of $5.8 million in cash and $0.6 million in estimated costs of the acquisition. The purchase price, 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 (1.1 million British Pounds Sterling or approximately $1.8 million) was 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.

On December 10, 2003, GSI Lumonics Corporation completed the purchase of all of the issued share capital of Westwind Air Bearings Inc. from FR Holdings Inc. and GSI Lumonics Limited completed the purchase of all of the issued share capital of Westwind Air Bearings Limited from Cobham Plc and Lockman Investments Limited. Both GSI Lumonics Corporation and GSI Lumonics Limited are wholly owned subsidiaries of GSI Lumonics Inc. The combined purchase price of $34.9 million was comprised of $33.7 million in cash, which is net of cash acquired of $2.6 million and $1.2 million in costs of the acquisition. The amount of the consideration was determined through arm’s length negotiations between the parties and

was financed out of available cash and investments at hand. The purchase price, was allocated to the assets and liabilities based upon their estimated fair value at the date of acquisition, as noted below.

The estimated fair value of intangible assets acquired were recorded as follows:

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 Westwind activity as of the closing date of December 10, 2003. The addition of Westwind represents the addition of technology and products that expand the Company’s offering of enabling components to include high precision rotary motion technology using air bearings. Pro forma results of operations, as if the purchase had occurred at the beginning of the fiscal period, are presented below.

On May 14, 2004, GSI Lumonics Inc. completed its acquisition of MicroE Systems Corporation, a Delaware corporation (MicroE). The acquisition was completed by means of a merger of Motion Acquisition Corporation, a Delaware corporation and an indirect wholly owned subsidiary of the Company, with and into MicroE, pursuant to an Agreement and Plan of Merger dated as of April 12, 2004. As a result of the merger, MicroE became an indirect wholly owned subsidiary of GSI Lumonics Inc.

The Company paid the former MicroE security holders $53.7 million in cash, which is net of cash acquired of $3.5 million in exchange for all of MicroE’s outstanding capital stock. The merger consideration and the terms of the merger were determined in arms-length negotiations between the parties. The Company paid the merger consideration from existing cash. The total purchase price, net of cash acquired and including estimated costs of the transaction of $1.0 million, is approximately $54.7 million. The Company completed the valuation of the fair value of the assets acquired or liabilities assumed, including the allocation of the purchase price in the third quarter of 2004, as noted below.

The estimated fair value of intangible assets acquired were recorded as follows:

The fair value of the assets acquired and liabilities assumed is less than the purchase price, resulting in goodwill. The acquisition of MicroE was structured in such a manner that the Company is not expected to receive any tax benefit from the amortization of intangibles. As such, in accordance with US GAAP, a deferred tax liability based on estimated tax rates has been established with a corresponding increase to goodwill. An estimated in-process research and development charge of approximately $0.4 million was recorded in the second quarter of 2004 for purchased in-process technology related to development projects that have not reached technological feasibility, have no alternative future use, and for which successful development is uncertain. The Company’s consolidated results of operations have included MicroE activity as of the closing date of May 14, 2004. The addition of MicroE’s products and technology will complement the

Company’s existing portfolio of enabling precision motion component and subsystems. Pro forma results of operations, as if the purchase had occurred at the beginning of the fiscal period, are presented below.

The Company accounts for goodwill pursuant to SFAS No. 142, “Goodwill and Other Intangible Assets,” which requires that goodwill no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of SFAS No. 142.

The Company generally warrants its products for a period of up to 12 months for material and labor to repair and service the product. 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 are made.

In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). Application of FIN 46 is required in financial statements of public entities that have interests in structures that are commonly referred to as special-purpose entities for periods ending after December 15, 2003. The Company does not have any interests in special-purpose entities and therefore FIN 46 has no impact on its financial position or results of operations. For all other types of variable interest entities FIN 46 is required in financial statements for periods ending after March 15, 2004. The Company does not have any interests in other types of variable interest entities and therefore the adoption of this aspect of FIN 46 did not have any impact on its financial position or results of operations.

At October 1, 2004, the Company had no lines of credit but had two bank guarantees in British Pounds Sterling and Euros with National Westminster Bank (NatWest) and Deutsche Bank, respectively, for a total amount of available credit of $0.2 million versus guarantees of $0.2 million at December 31, 2003. NatWest provides a $0.1 million bank guarantee for letters of credit used for duty purposes in the United Kingdom. The Deutsche Bank guarantee of $0.1 million is for our Munich, Germany office lease. At December 31, 2003, the NatWest guarantee was $0.1 million and the Deutsche Bank guarantee was $0.1 million. At October 1, 2004 and December 31, 2003, pursuant to a $4.0 million security agreement between the Company and Fleet Bank N.A.(Fleet), long-term investments totaling $5.0 million had been pledged as collateral for the Fleet agreement to support a foreign currency swap contract.

The authorized capital of the Company consists of an unlimited number of common shares without nominal or par value. During the nine months ended October 1, 2004 and September 26, 2003, 287,972 and 94,477, respectively, common shares were issued pursuant to exercised stock options and the employee share purchase plan for proceeds of approximately $2.0 million and $0.5 million, respectively.

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

At October 1, 2004, the Company had options and warrants outstanding entitling holders to acquire up to 3,819,109 and 51,186 common shares, respectively. At September 26, 2003, the Company had options and warrants outstanding entitling holders to acquire up to 3,439,368 and 51,186 common shares, respectively.

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 and net income per share would have

been decreased and the net loss and net 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 $1.4 million in the three months ended October 1, 2004 and $1.0 million in the three months ended September 26, 2003 at amounts and terms approximately equivalent to third-party transactions. In the nine months ended October 1, 2004 and September 26, 2003, these revenues were $4.3 million and $3.3 million, respectively. Receivables from Sumitomo Heavy Industries Ltd. of $1.4 million and $1.3 million as at October 1, 2004 and December 31, 2003, 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 October 1, 2004 and September 26, 2003, the Company reimbursed V2Air LLC $42 thousand and $39 thousand, respectively, under the terms of the agreement. During the nine months ended October 1, 2004, the Company reimbursed V2Air LLC $120 thousand under the terms of the agreement compared to $102 thousand for the nine months ended September 26, 2003.

At October 1, 2004, the Company had $22.5 million invested in cash equivalents denominated in U.S. dollars with maturity dates of October 1, 2004. At December 31, 2003, the Company had $49.7 million invested in cash equivalents denominated in U.S. dollars with maturity dates between January 2, 2004 and March 4, 2004. Cash equivalents are stated at fair value.

At October 1, 2004, the Company had $11.0 million in short-term investments and $6.0 million in long-term investments denominated in U.S. dollars with maturity dates between October 28, 2004 and December 31, 2005. Short-term and long-term investments are recorded at fair market value. At December 31, 2003 the Company had $39.6 million in short-term investments and $3.1 million in long-term investments in U.S. dollars with maturity dates between January 6, 2004 and November 23, 2004. As discussed in note 5 to the financial statements, $5.0 million of long-term investments are pledged as collateral for the Fleet pledge agreement at October 1, 2004. Also, included in long-term investments at October 1, 2004 and December 31, 2003 is a minority equity investment of a private United Kingdom company valued at $0.6 million and $0.6 million, respectively, that was purchased as part of the assets acquired in the Spectron asset acquisition.

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. Although the Company now marks-to-market short-term hedge contracts to the statement of operations, the Company does not enter into hedging contracts for speculative purposes. Long-term hedge contracts continue to be accounted for under methods allowed by SFAS 133, and changes in their fair value are included in accumulated other comprehensive income. At October 1, 2004 there were six short-term hedge contracts outstanding with an aggregate fair value loss of $0.1 million recorded in foreign exchange gain/loss.

At October 1, 2004 and December 31, 2003 the Company had one currency swap contract valued at $8.7 million U.S. dollars with an aggregate fair value loss of $1.1 million and $1.5 million, respectively, after-tax recorded in accumulated other comprehensive income and maturing in December 2005.

Several significant markets for our products had been in severe decline from 2000 through early 2003. Our sales of systems for semiconductor and electronics applications and precision optics for telecommunications had declined. From 2000 through 2002, the Company faced declines in revenues and responded by streamlining operations to reduce fixed costs.

In response to the business environment, the Company restructured operations in an effort to bring costs in line with our expectations for sales of systems for the semiconductor and telecommunications markets. Our emphasis was predominantly on consolidating operations at various locations and reducing overhead. The Company incurred restructuring charges in each of the years from 2000 to 2003 as it continued to reduce and consolidate operations around the world. The level of restructuring actions declined significantly in the latter half of 2003.

To align the distribution and service groups with our business segments, in the first quarter of 2003 the Company commenced a restructuring plan that was 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 offices in Asia Pacific.

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 of 2003, 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. In the fourth quarter of 2003, the Company incurred less than $0.1 million for additional severance and termination benefits associated with the European restructuring plan.

Although the Company does not report restructuring by segment, SFAS 146 requires disclosure of restructuring activities by segment. The alignment of the service and distribution groups described above is primarily related to our Laser Systems segment. Total costs incurred, net of $0.1 million in reversals noted above, were $1.9 million. All costs were incurred during 2003, and it is not anticipated that there will be any additional charges for this restructuring initiative.

As part of its review of the restructuring actions taken in prior years, during the second quarter of 2003 the Company took a $0.3 million restructuring charge for the anticipated loss on the market value of the Farmington Hills, Michigan and Maple Grove, Minnesota facilities. Also, the Company took a charge of $0.1 million in the second quarter of 2003 and a charge of $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. In the fourth quarter of 2003, the Company recorded an additional restructuring provision of $0.7 million for the Munich, Germany facility. This additional charge was necessary in light of the continued decline in the commercial real estate lease rates in that market as compared to our lease rate and the longer time anticipated to find a subtenant. The Company has taken charges on this Munich facility in 2000, 2001, 2002 and 2003 totaling $1.7 million. The lease on the Munich office continues through January 2013. As the commercial real estate market is difficult to predict, the Company will continue to evaluate the restructuring accrual associated with the Munich office and will adjust the provisions as required.

Cumulative cash payments of approximately $1.9 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 a remaining provision balance of $0.7 million as at October 1, 2004, for the accrual of the loss on the Munich excess office space under lease. There are no accruals remaining related to the 2003 restructuring actions to align the distribution and service groups.

As of December 31, 2003, the Company had $1.4 million remaining in the accruals related to all restructuring actions taken from 2000 through 2003. Specifically, $0.1 million of this amount related to an accrual for a facility in Nepean, Ontario originally recorded in 2001 for future contractual obligations under an operating lease, net of expected sublease revenue on a lease that the Company cannot terminate. This lease expires in January 2006. The remaining $1.3 million in accruals related to provisions for lease costs at our facility in Munich, Germany related primarily to future contractual obligations under operating leases, net of expected sublease revenue on a lease that expires in January 2013, which the Company cannot terminate. The Company had taken restructuring charges on this Munich facility in each of the years 2000 through 2003. During 2004, there was no additional restructuring expense or reversal of prior expense. The only activity in 2004 related to payments under the leases noted above. At October 1, 2004, the Company has $0.1 million remaining in accruals related to the facility in Nepean, Ontario and $0.9 million remaining in accruals related to the facility in Munich, Germany.

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

During the first half 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 is pursuing 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 half of 2003 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-down excess and unused equipment.

The Company leases certain equipment and facilities under operating lease agreements. Most of these lease agreements expire between 2004 and 2013. In the United Kingdom where longer leases are more common, the Company has leases that extend through 2106. The facility leases require the Company to pay real estate taxes and other operating costs.

The Company’s French subsidiary is subject to a claim by a customer of the 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 Le Creusot commercial court determined that the Company had breached its obligations to the customer and that it should be liable for damages. An expert appointed by the Le Creusot commercial court had filed an initial report, which estimated the cost to repair the machine at approximately French Franc 0.8 million (or approximately US$0.2 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$2.3 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 recently begun. In May 2004, pursuant to an agreement between the Company and ESI, the court entered a stipulated dismissal of two of the asserted patents without prejudice: the 6181728 patent and the 6337462 patent. In August 2004, pursuant to an agreement between the Company and ESI, the court entered a stipulated dismissal of the last asserted patent, Patent No. 6573473 with prejudice. The Company made no payments nor received any payments as a result of the dismissal.

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 findings in a countersuit that the patents that are the basis for the litigation are unenforceable and invalid, although these findings are being appealed; 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 nil at October 1, 2004 and $1.3 million at December 31, 2003. 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 October 1, 2004, nil has been accrued in the consolidated balance sheet with respect to these indemnification undertakings.

The Company uses financial instruments that potentially subject it to concentrations of credit risk. Such instruments include cash equivalents, securities available-for-sale, trade receivables and financial instruments used in hedging activities. The Company does not believe it is exposed to any significant credit risk on these instruments.

Due to the short term nature of the Company’s investments, the Company does not believe it is exposed to any significant interest rate risk.

Certain of the components and materials included in the Company’s laser systems and optical products are currently obtained from single source suppliers. There can be no assurance that a disruption of this outside supply would not create substantial manufacturing delays and additional cost to the Company.

There is no concentration of credit risk related to the Company’s position in trade accounts receivable. Credit risk, with respect to trade receivables, is minimized because of the diversification of the Company’s operations, as well as its large customer base and its geographical dispersion.

The Company’s operations involve a number of other risks and uncertainties including, but not limited to, the cyclicality of the semiconductor and electronics markets, the effects of general economics conditions, rapidly changing technology, and international operations.

At the end of each interim reporting period, the Company determines its estimated annual effective tax rate, which is revised, as required, at the end of each successive interim period based on facts known at that time. The estimated annual effective tax rate is applied to the year-to-date pre-tax income at the end of each interim period. The tax effect of significant unusual items is reflected in the period in which they occur. The Company’s reported effective tax rate of 10.9% for the nine months ended October 1, 2004, differed from the

expected Canadian federal statutory rate, primarily due to income being earned by the Company in a jurisdiction where the Company previously provided a valuation allowance against deferred tax assets of that jurisdiction, where recent cumulative losses had been incurred.

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 were based on the employees’ years of service and compensation. In December 2002, the Company notified plan participants that it no longer wanted to sponsor the Final Salary Plan. After a consultation period, the curtailment of the plan was effective June 1, 2003, after which no additional benefits accrue to the participants.

The Company continues to follow its policy 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 U.K. and foreign issuers.

Pension and other benefit costs reflected in the consolidated statements of operations are based on the projected benefit method of valuation. Within the consolidated balance sheet, pension plan benefit liabilities are included in accrued compensation and benefits.

The table below set forth the estimated net periodic cost of the Final Salary Plan of GSI Lumonics Ltd. United Kingdom Pension Scheme Retirement Savings Plan.

It is not practicable to provide the components of the net periodic pension cost for the three months or nine months ended September 26, 2003.

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.

The President and Chief Executive Officer has been identified as the chief operating decision maker (“CODM”) in assessing the performance of the segments and the allocation of resources to the segments. The CODM evaluates financial performance based 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, information systems and administrative expenses, are not allocated to operating segments. Intersegment sales are based on negotiated prices subject to normal discounting practices between segments to approximate market prices. All intersegment profit, including any unrealized profit on ending inventories, is eliminated on consolidation. The accounting policies of the segments are the same as those described in the Annual Report on Form 10-K.

The Company’s operations include three reportable operating segments: the Components segment (Components Group); the Laser segment (Laser Group); and the Laser Systems segment (Laser Systems Group).

In May 2004, the MicroE acquisition expanded the Company’s and the Component Group’s existing portfolio of enabling precision motion component and subsystems to include designing and manufacturing position encoders for precision motion control applications in data storage, semiconductor and electronics, industrial automation and medical markets. Additionally, with the acquisition of MicroE, the Company acquired a manufacturing facility in Natick, Massachusetts.

The Components Group’s major markets are medical, semiconductor and electronics, light industrial, automotive, data storage and aerospace.

There have been no other significant changes to the Company’s reportable operating segments since December 31, 2003. The Components operating segment, except as noted above, and the Company’s other operating segments are the same as those described in the Annual Report on Form 10-K.

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 for example, but the sales of our systems are billed and shipped to locations in the United States for instance. These sales are therefore reflected in North America totals in the table below. In this and other similar instances, the sale is attributed to the geographic area of the bill-to customer’s location. Long-lived assets, which include property, plant and equipment and intangibles, but exclude other assets, long-term investments

and deferred tax assets, are attributed to geographic areas in which Company assets reside. As of October 1, 2004 long-lived assets also included goodwill.

Significant differences between United States and Canadian GAAP are described below.

Under U.S. GAAP, certain marketable investments, which are considered to be “available-for-sale” securities, are measured at market value, with the unrealized gains or losses included in comprehensive income. Under Canadian GAAP, the concept of comprehensive income does not exist and these investments are measured at amortized cost.

On March 22, 1999, Lumonics Inc. (Lumonics) and General Scanning, Inc. (General Scanning) completed a merger of equals to form the Company. Under Canadian GAAP, the merger was accounted for using the pooling of interests method and the consolidated financial statements reflect the combined historical carrying values of the assets, liabilities, stockholders’ equity and the historical operating results of the two predecessor companies.

Under U.S. GAAP, the merger has been accounted for as a purchase transaction. The purchase price, based on the fair value of General Scanning shares purchased, is allocated in the consolidated financial statements to acquired net identifiable General Scanning assets. Property, plant and equipment and acquired intangible assets were recorded at their estimated fair values at the time of the 1999 acquisition and are being amortized over their useful life. The acquired technology established as part of this merger is fully amortized and the tradename intangible asset will be fully amortized in the first quarter of 2009.

Under U.S. GAAP, if the accumulated benefit obligation exceeds the market value of plan assets, a minimum pension liability for the excess is recognized to the extent that the liability recorded in the balance sheet is less than the minimum liability. This additional liability is charged to comprehensive income. Canadian GAAP has no such requirement to record a minimum liability and does not apply the concept of comprehensive income.

Effective January 1, 2004, under Canadian GAAP, the Company is required to measure and expense stock based compensation using a fair value method. This change is being applied on a retroactive basis with restatement of Canadian GAAP for prior comparative periods. Under U.S. GAAP, the Company uses the intrinsic value method for accounting for its stock option plans. Under this method, no stock based compensation expense is recorded in the financial statements, unless the exercise price of an option differs from the fair market value of the underlying stock on the date of grant. Further, under U.S. GAAP, if there has been a modification of terms of a stock option, which requires the use of variable accounting, stock compensation expense will be recorded with the offset included as a component of stockholders’ equity.

U.S. GAAP requires the disclosure of comprehensive income which, for the Company, comprises net income under U.S. GAAP, changes in foreign currency translation amounts, unrealized gains or losses for the period less gains or losses realized during the period on “available-for-sale” securities, unrealized gains or losses for the period less gains or losses realized during the period on derivatives and the movement in the accrued minimum pension liability. The accumulation of these movements is recorded as a component of stockholders’ equity. The concept of comprehensive income is not applicable under Canadian GAAP and the only amount that is included as a component of stockholders’ equity is accumulated foreign currency translation adjustments.

In 1994, the shareholders of Lumonics approved a reduction of the stated capital and deficit under Canadian GAAP totaling $40 million under the terms of the Ontario Business Corporations Act. This concept does not exist under U.S. GAAP, therefore at the time of merger between Lumonics and General Scanning for U.S. GAAP, this was not allowed.

For Canadian GAAP, CICA Handbook section 3870, stock-based compensation and other stock-based payments was amended to require that equity instruments awarded to employees be measured at fair value and expensed, eliminating the provision to allow disclosure only. The transitional provisions include both retroactive and prospective alternatives. However, the prospective method is only available to companies that elect to apply the fair value based method for fiscal years beginning before January 1, 2004. The Company adopted this amendment effective January 1, 2004; the Company has restated its prior results under Canadian GAAP to reflect the fair value of stock based compensation. The effect of the restatement for the three months and nine months ended September 26, 2003 is an additional expense of $0.7 million and $2.0 million; respectively, as compared to the previously filed Canadian GAAP statements. Additionally, as of December 31, 2003 this restatement under Canadian GAAP has the effect of decreasing retained earnings by $2.7 million and increasing contributed surplus by $2.7 million. The effects of stock based compensation are included in the reconciliation of U.S. and Canadian GAAP in the table below.

CICA has issued Accounting Guideline No. 15, Consolidation of Variable Interest Entities (“AcG-15”), which is substantially in line with FIN 46. AcG-15 sets out criteria for identifying variable interest entities (“VIEs”) and additional criteria for determining what entity, if any, should consolidate them. In general a VIE is an entity that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support activities. VIEs are evaluated for consolidation based on their variable interests, such as contractual, ownership or other interests that expose their holders to the risks and rewards of the VIE. AcG-15 is effective November 1, 2004. The Company does not have any interests in special-purpose entities or other types of variable interest entities and therefore AcG-15 has no impact on its financial position or results of operations.

The letter references in the two tables below refer to the letters describing the significant differences in the accounting between U.S. and Canadian GAAP above. The difference in retained earnings (accumulated

deficit) between U.S. and Canadian GAAP is an accumulation of all the differences in the results of operations from the merger date to the current time, plus the $40 million reduction of deficit noted in (f).

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 enabling technology components, lasers and laser-based advanced manufacturing systems as enabling tools for a wide range of applications. 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 semiconductor, electronics, automotive and medical industries. In addition, we sell our products and services to other markets such as light industrial and aerospace.


	•	Sales for the quarter increased to $90.7 million from $84.5 million in the second quarter of 2004 and $44.9 million in the third quarter of 2003.

	•	Net income for the quarter was $12.1 million, or $0.29 per diluted share, compared to a net income of $11.8 million, or $0.28 per diluted share, in the second quarter of 2004 and a $0.6 million net income, or $0.01 per share, in the third quarter of last year.

	•	Bookings of orders were $67.2 million, net of adjustments of $6.2 million, in the third quarter of 2004 compared to $93.7 million in the second quarter of 2004 and $50.1 million in the third quarter of 2003. Included in bookings for the second quarter of 2004 is $8.5 million of backlog acquired from MicroE. Ending backlog was $77.7 million as compared with $101.1 million at the end of the second quarter of 2004 and $47.6 million at the end of the third quarter of last year.

	•	Cash, cash equivalents, short-term investments and long-term marketable securities were $80.1 million (this includes $5.0 million pledged under a security agreement) at October 1, 2004.

Several significant markets for our products had been in severe decline from 2000 through early 2003. Our sales of systems for semiconductor and electronics applications and precision optics for telecommunications declined significantly during that period. From 2000 through 2002, the Company faced a $215 million decline in revenues primarily as a result of the downturn in general economic conditions and divestitures of selected businesses, combined with our customers’ excess of manufacturing capacity and their customers’ excess inventories of semiconductor and electronic components. While in the process of streamlining the business to reduce fixed costs, the Company made decisions to divest product lines that were not strategic. This accounted for 43% of the decline in revenue from 2000 to 2002.

In response to the business environment, we restructured our operations in an effort to bring costs in line with our long-term expectations for sales of systems for the semiconductor and telecommunications markets. Our emphasis was predominantly on consolidating operations at various locations and reducing overhead. The Company incurred restructuring charges in each of the years from 2000 to 2003 as it continued to reduce and consolidate operations around the world. The level of restructuring actions declined significantly in the latter half of 2003. No new restructuring actions have been initiated since the first half of 2003.

As of December 31, 2003, the Company had $1.4 million remaining in the accruals related to all restructuring actions. Specifically, $0.1 million of this amount related to an accrual for a facility in Nepean,

Ontario originally recorded in 2001 for future contractual obligations under an operating lease, net of expected sublease revenue on a lease that the Company cannot terminate. This lease expires in January 2006. The remaining $1.3 million in accruals related to provisions for lease costs at our facility in Munich, Germany related primarily to future contractual obligations under operating leases, net of expected sublease revenue on a lease that expires in January 2013, which the Company cannot terminate. The Company had taken restructuring charges on this Munich facility in each of the years from 2000 through 2003. During 2004, there was no additional restructuring expense or reversal of prior expense. The only restructuring activity in 2004 related to payments under the leases noted above. At October 1, 2004, the Company has $0.1 million remaining in accruals related to the facility in Nepean, Ontario and $0.9 million remaining in accruals related to the facility in Munich, Germany.

The Company neither expects nor plans any major restructuring expenses in the foreseeable future. The Company will continue to monitor restructuring accruals that were made in the past, particularly those that were made for excess facilities, to ensure that such amounts remain appropriate in light of changing conditions in the markets, and make appropriate adjustments, if any are required, to the accruals and our results of operations.

In addition to the restructuring activities, on August 7, 2003, the Company announced to its employees its intention to consolidate and relocate its precision optics operations from the Nepean, Ontario location to its similar facility in Moorpark, California. In the third and fourth quarter of 2003, the Company recorded $0.5 million of costs, including severance, associated with this move. In the first half of 2004, the Company incurred an additional $0.3 million of costs associated with this move. These are included in cost of goods sold and operating expenses. The Company does not anticipate that it will incur any significant additional amounts related to this move.

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

Sales by Segment. The following table sets forth sales in thousands of dollars by our business segments for the third quarter of 2004 and 2003.

Sales. Sales for the three months ended October 1, 2004 increased by $45.8 million, or 102%, compared to the quarter ended September 26, 2003. Sales for the third quarter of 2004 include $25.1 million generated from the Westwind acquisition completed in December 2003 and the MicroE acquisition completed in May 2004.

Sales in the Components segment increased by $24.1 million, or 134%, for the third quarter of 2004 as compared to the same period in 2003. This increase was due to sales of $25.1 million from the Westwind and MicroE product lines. In addition there were decreased external sales in the traditional Components segment of $2.2 million which were partially offset by a higher volume of internal sales from the Components segment to the Laser Systems segment. Part of the decreased external sales resulted from an anticipated decline associated with end of life for a mature laser imaging product. We anticipate a continued decline in sales for this product line in the future.

Sales in the Lasers segment in the third quarter of 2004 increased by $3.2 million, or 38%, over the third quarter last year. Sales increased by $1.6 million in the quarter from our Excimer, JK and Spectron product lines. Spectron was acquired in the second quarter of 2003. Increases in sales of lasers to our Laser Systems segment contributed approximately $1.3 million to the increase in sales. There were smaller increases and decreases in other product lines that comprised the remaining balance of the change in sales in the third quarter of 2004 compared to the third quarter of 2003.

In the third quarter of 2004, sales in the Laser Systems segment increased by $20.9 million, or 104.5%, over sales in the same period last year. This increase was driven predominantly by the increased sales of equipment to support the rise in demand for Wafer Trim capacity. The Memory Repair line of products also increased over the same period last year. Together these comprised the majority of the balance or 75.2% of the increase in sales.

Sales in our Corporate segment represent elimination of sales between our segments and is shown in the table above as intersegment sales elimination. There was a $2.4 million increase in sales between segments for the three months ended October 1, 2004 as compared to the same period last year. This was a result of increases in sales from our Components and Laser segments to our Laser Systems segment, which was in large part due to the increased volume of the Laser Systems business.

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 the United States and Canada; Latin and South America; Europe, consisting of Europe, the Middle East and Africa; Japan; and Asia-Pacific, consisting of ASEAN countries, China and other Asia-Pacific countries. 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 for example, but the sales of our systems are billed and shipped to locations in the United States, although the equipment may eventually be installed in Asia-Pacific, for instance. These sales are therefore

reflected in North America totals in the table below. In this and other similar instances, the sale is attributed to the geographic area of the bill-to customer’s location. The following table shows sales in millions of dollars to each geographic region for the third quarter of 2004 and 2003, respectively.

Japan and Asia Pacific continue to be an area of growth and focus for all of our segments, especially our Laser Systems segment. The increase in sales in Europe in the third quarter of 2004 as compared to the same period in 2003 is mainly the result of sales generated from products acquired from the Westwind acquisition and sales from products in our Laser segment, which continues to see growth in this market.

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 October 1, 2004 was $77.7 million compared to $47.6 million at September 26, 2003.

Gross Profit by Segment. The following table sets forth gross profit in thousands of dollars by our business segments for the third quarter of 2004 and 2003. For 2003, the reclassification of service sales support and service management costs from cost of sales to selling, general and administrative expenses, which had been prepared on a consolidated level was attributed to particular segments for comparative purposes.

Gross profit was 40.9% in the three months ended October 1, 2004 compared to 37.1% in the three months ended September 26, 2003. Gross profit percentage can be influenced by a number of factors including product mix, pricing, volume, third-party costs for raw materials and outsourced manufacturing, warranty costs and charges related to excess and obsolete inventory, and the reversal thereof, at any particular time.

The gross profit for the Components business was 37.3% for the three months ended October 1, 2004 versus 35.5% in the same period last year. More favorable margins from the MicroE product line, coupled with lower margins from Westwind products and a heavier mix of lower margin internal sales contributed to the slight shift in gross profit for the three months ended October 1, 2004 over last year.

For our Laser segment the gross profit percentage was 31.6% in the third quarter of 2004 compared to 36.9% in the third quarter of 2003. The gross profit for the Laser segment continued to be negatively impacted by the strengthening of the British Pound Sterling against the value of the U.S. dollar. The Company has adjusted the U.S. price lists in response to the increased exchange rate exposure. It is expected that the effect of these price adjustments on gross profit will be fully realized in the fourth quarter of 2004.

The gross profit for Laser Systems is up significantly at 43.8% for the third quarter of 2004 as compared to 36.2% from the same period last year. The increase is predominantly a result of higher sales volume, firmer product pricing and cost reductions. For the three months ended October 1, 2004, the Company recorded a benefit of $0.4 million from selling inventory that had previously been written down. In the same period last year, an inventory charge of $0.1 million was taken. Reduced overhead as a result of last year’s restructuring and outsourcing programs were the other major drivers again this quarter to increase profitability.

The Gross Profit of $0.2 million for the intersegment sales elimination and other for the third quarter of 2004 includes expenses associated with the variable incentive compensation program for which there were no similar charges in 2003.

Research and Development Expenses. Research and development expenses for the three months ended October 1, 2004 were 7.2% of sales, or $6.6 million, compared with 7.0% of sales, or $3.1 million, in the three months ended September 26, 2003. Research and development expenses for the Components group at $3.0 million in the third quarter of 2004 increased $1.9 million from the same period in 2003. The majority or 91.5% of the increase is attributable to research and development expenses in the Westwind product lines that were acquired in late 2003 and the MicroE product lines acquired in May 2004. Decreases in personnel offset by increases in other research and development costs contributed to the remainder of the increase in spending in this area. Personnel cuts made at the end of the quarter are expected to partially decrease expenses in the fourth quarter of 2004, while the full benefit of the cost savings is expected to be realized in the first quarter of 2005. In the third quarter of 2004, research and development expenses for the Lasers segment were $1.0 million, which represents a $0.3 million increase from $0.7 million in the third quarter of 2003, primarily as a result of increased personnel costs and increased project spending. Research and development expenses in the Laser Systems segment were $2.3 million for the three months ended October 1, 2004, a $1.0 million increase from $1.3 million the same period last year, mainly as result of increased personnel costs and spending on new product development projects. The Corporate segment research and development expenses, at $0.3 million in the third quarter of 2004, increased by $0.3 million from $36 thousand for the same period last year primarily due to a charge in the current quarter for variable compensation expense which was not experienced in the same period last year.

Selling, General and Administrative Expenses. Selling, general and administrative (SG&A) expenses were 17.2% of sales, or $15.6 million, in the three months ended October 1, 2004, compared with 24.9% of sales, or $11.2 million, in the three months ended September 26, 2003. SG&A expenses in the Components segment were $5.5 million for the third quarter of 2004 compared to $1.9 million in the third quarter of 2003, which was an increase of $3.6 million. The major factors for the increase was the additional SG&A expenses incurred as a result of the acquisitions of Westwind and MicroE and increases in personnel costs. SG&A expense in the Laser segment was $2.0 million in the third quarter of 2004 compared to $1.9 million in same period in the prior year, an increase of $0.1 million. In the Lasers Systems segment, SG&A expenses increased by $0.6 million from $3.2 million in the third quarter of 2003 to $3.8 million in the third quarter of 2004. This increase was mainly a result of increased personnel costs related to sales volume offset by decreases in facilities and depreciation costs over the same period in 2003. SG&A expenses in our Corporate group were $4.3 million in the third quarter of 2004 compared to $4.2 million in the same period last year, a slight increase of $0.1 million. The increase is primarily a result of incentive compensation expense and increased costs associated with Sarbanes-Oxley compliance offset by decreases in legal expenses. In the three months ended

September 26, 2003, there was $0.6 million of legal and other expenses related to a proposed reorganization of the Company as a United States domiciled corporation which was submitted to shareholders. There were no similar charges in the current period.

Amortization of Purchased Intangibles. Amortization of purchased intangibles was $1.6 million, or 1.8% of sales, for the quarter ended October 1, 2004 primarily as a result of amortizing intangible assets from acquisitions. This compares to $1.4 million or 3.1% of sales for the same period in 2003. The $0.2 million increase in the third quarter of 2004 is mainly from the amortization of intangible assets acquired with both the Westwind acquisition in December 2003 and the MicroE acquisition in May 2004 which amounted to $1.2 million. This is partially offset by a $1.0 million savings related to the fully amortized General Scanning and Lumonics merger technology. The technology was fully amortized in the first quarter of 2004. For the third quarter of 2004, amortization from the MicroE acquisition was $0.8 million. 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 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 2004.

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 2004 and 2003.

Interest Income. Interest income was $0.3 million in both the third quarter of 2004 and in the third quarter of 2003.

Interest Expense. Interest expense was minimal, approximately $0.1 million, in the three months ended October 1, 2004 compared to nil in the three months ended September 26, 2003. During 2003 and 2004, the Company had no bank debt. Interest expense is primarily from interest on deferred compensation. In the three months ended October 1, 2004 interest expense also included interest on a tax settlement in a certain tax jurisdiction. In the same period in 2003, interest expense was also from discounting receivables with recourse at a bank.

Foreign Exchange Transaction Gain (Losses). Foreign exchange transaction gains were approximately $0.3 million in the three months ended October 1, 2004 compared to a $0.1 million loss for the three months ended September 26, 2003. These amounts arise, primarily, from the functional currency of a site differing from its local currency, transactions denominated in currencies other than local currency and unrealized gains

Income Taxes. The effective tax rate for the third quarter of 2004 was 12.3% compared with an effective tax rate of nil on loss before taxes for the year ended 2003 and 36.9% for the third quarter of 2003. The tax provision for the quarter reflects the Company’s estimated annual effective tax rate and is driven by the jurisdictions where the income is earned.

Statement of Financial Accounting Standards No. 109 “Accounting for Income Taxes” (“SFAS No. 109”) requires a valuation allowance be established when it is “more likely than not” that all or a portion of deferred tax assets will not be realized. A review of all available positive and negative evidence needs to be considered, including a company’s performance, the market environment in which the Company operates, length of carry-back and carry-forward periods, existing sales backlog, future taxable income projections and tax planning strategies. We have previously provided valuation allowances against losses in the parent company and subsidiaries with an inconsistent history of taxable income and loss due to the uncertainty of their realization. In addition, the Company has provided a valuation allowance on tax credits, due to the uncertainty of generating earned income to claim the tax credits. In the event that actual results differ from our estimates of future taxable income, or we adjust these estimates in future periods, we may need to establish an additional valuation allowance, which could have a material impact on our financial position and results of operations.

Net Income (Loss). As a result of the foregoing factors, net income for the third quarter of 2004 was $12.1 million, compared to $0.6 million in the same period in 2003.

Results of Operations for the Nine Months Ended October 1, 2004 Compared to the Nine Months Ended September 26, 2003

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 October 1, 2004 and September 26, 2003.

Sales. Sales for the nine months ended October 1, 2004 increased by $119.4 million or 91% compared to the nine months ended September 26, 2003. The sales increase for the nine months includes a $59.2 million increase generated from the Westwind product line acquired in December 2003 and the MicroE product line acquired in May 2004.

Sales for our Components segment increased by $65.0 million, or 124%, for the first nine months of 2004 as compared to the same period in 2003, primarily due to sales resulting from the Westwind and MicroE acquisitions. Sales from these recent acquisitions represented 91% of the increase. Increased intersegment sales and sales from the encoder line acquired from DRC in May 2003 primarily accounted for the remaining increase over the same period last year. This is offset by the continued decline associated with end of life for a mature laser imaging product, as anticipated.

Sales in our Lasers segment in the nine months ended October 1, 2004 increased by $11.2 million, or 46.6%, over the same period last year, mainly due to sales from the acquisition of the Spectron product line. Spectron accounted for $4.8 million of the increase. The remainder of the increase was mainly due to increased internal sales to Laser Systems. There were smaller increases and decreases in other product lines that comprised the balance of the change in sales in the first nine months of 2004 compared to the same period last year.

In the first nine months of 2004, sales in our Laser Systems segment increased by approximately $54.3 million, or 95.5%, over sales in the same period last year primarily due to gains in Wafer Trim and Memory Repair. Together these accounted for 88.9% of the increase. Semiconductor Marker also contributed to the increase over the same period last year. These increases are mainly a result of broad market recovery and manufacturers increasing capacity.

Sales in our Corporate segment represent the elimination of sales between segments. There was an $11.2 million increase in sales between segments for the nine months ended October 1, 2004 as compared to the same period last year. The increase is mainly a result of the increased volume in the Laser Systems business which in turn increased the intersegment sales from the Components and Lasers segments to the Laser Systems segment.

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; 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 for example, 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. In this and other similar instances, the sale is attributed to the geographic area of the bill-to customer’s location. The following table shows sales

Gross Profit by Segment. The following table sets forth gross profit in thousands of dollars by our business segments for the nine months ended October 1, 2004 and September 26, 2003. For 2003, the reclassification of service sales support and service management costs from cost of sales to selling, general and administrative expenses, which had been prepared on a consolidated level was attributed to particular segments for comparative purposes.

Gross profit was 40.9% in the nine months ended October 1, 2004 compared to 36.0% in the nine months ended September 26, 2003. Gross profit percentage primarily increased due to increased sales volume. In the first nine months of 2004, the Company recorded a benefit of $1.6 million from selling inventory that had previously been written down. In the same period in 2003, the Company recorded inventory loss provisions of $1.3 million. The acquisition of MicroE and volume in the Spectron line of products also contributed to the increased gross profit percentage. Market recovery for certain other products comprised the balance of the increase. There are numerous factors that can influence gross profit percentage including product mix, pricing, volume, third-party costs for raw materials and outsourced manufacturing, warranty costs and charges related to excess and obsolete inventory, and the reversal thereof, at any particular time.

The gross profit for the Components business was 37.2% for the nine months ended October 1, 2004 versus 39.8% in the same period last year. Lower margins from the Westwind and DRC product lines, which accounted for 43.3% of revenues for the nine months ended October 1, 2004, primarily contributed to the decline in gross profit over last year. The traditional Components segment margins were down due to increases

in personnel costs, a combination of sales mix changes, relocation costs and other adjustments contributed to the decline in gross profit for the nine months ended October 1, 2004 over last year. Personnel cuts made at the end the quarter are expected to partially improve margins in the fourth quarter of 2004, while the full benefit of the cost savings is expected to be realized in the first quarter of 2005.

For our Laser segment the gross profit percentage was 30.4% in the first nine months of 2004 compared to 33.8% in the first nine months of 2003. Gross profit for the Laser segment was negatively impacted by continued strengthening of the British Pound Sterling against the value of the U.S. dollar for the nine months ended October 1, 2004 over the same period in 2003. The Company has adjusted the U.S. price lists in response to the increased exchange rate exposure. It is expected that the effect of these price adjustments on gross profit will be fully realized in the fourth quarter of 2004.

The gross profit for Laser Systems is up significantly at 44.2% for the first nine months of 2004 as compared to 33.0% from the same period last year. Sales volume accounted for the majority of the increase in gross profit over last year. For the nine months ended October 1, 2004, the Company recorded a benefit of $1.6 million from selling inventory that had previously been written down. In the same period last year, an inventory charge of $1.3 million was taken. Reduced overhead as a result of restructuring and outsourcing programs were the other major drivers that increased profitability.

The Gross Profit of $1.1 million for the intersegment sales elimination and other for the first nine months of 2004 includes expenses associated with the variable incentive compensation program for which there were no similar charges in 2003.

Research and Development Expenses. Research and development expenses for the nine months ended October 1, 2004 were 6.9% of sales, or $17.3 million, compared with 7.6% of sales, or $10.0 million, for the nine months ended September 26, 2003. Research and development expenses for the Components group at $6.9 million in the first nine months of 2004 were $3.8 million above the same period in 2003. In the first nine months of 2004, research and development expenses in our Lasers segment were $2.8 million, which was a $0.8 million increase from the first nine months of 2003. For our Laser Systems segment, research and development expenses were $6.8 million for the nine months ended October 1, 2004, a $2.3 million increase from the same period last year. In the Components group the increase in research and development is primarily due to the Westwind and MicroE product line acquisitions which is partially offset by decreases in personnel costs in the traditional components group. Personnel cuts made at the end of the quarter are expected to partially reduce expenses in the fourth quarter of 2004, while the full benefit of the cost savings is expected to be realized in the first quarter of 2005. Personnel related cost increases contributed to the increase in research and development in the Lasers group. The increase in the Laser Systems group is mainly a result of increased personnel costs and spending on new product development projects. The Corporate segment research and development expenses, at $0.8 million in the first nine months of 2004, increased by $0.4 million from the same period last year primarily due to charges in the first nine months of 2004 for variable compensation expense which was not experienced in the same period last year.

Selling, General and Administrative Expenses. Selling, general and administrative (SG&A) expenses were 17.5% of sales, or $43.6 million, in the nine months ended October 1, 2004, compared with 27.7% of sales, or $36.2 million, in the nine months ended September 26, 2003. SG&A expenses in the Components segment were $14.3 million for the first nine months of 2004 compared to $5.7 million in the same period in 2003, which was an increase of $8.6 million. The increase was mainly the result of additional SG&A expenses incurred as a result of the acquisitions of Westwind and MicroE and increased personnel costs. SG&A expense in the Laser segment were $6.1 million for the nine months ended October 1, 2004 and $6.1 million for the same period in 2003. In the Lasers Systems segment, SG&A expenses decreased by $0.2 million from $11.4 million in the first nine months of 2003 to $11.2 million in the first nine months of 2004. This decrease was mainly a result of lower personnel and facility costs from the restructuring actions in 2003, plus decreased bad debt expense. SG&A expenses in our corporate group were $12.0 million in the nine months ended October 1, 2004 compared to $13.0 million in the same period last year, a decrease of $1.0 million. The decrease is primarily a result of lower legal expenses, related to the 2003 proposal to reorganize the Company

Amortization of Purchased Intangibles. Amortization of purchased intangibles was 1.7% of sales, or $4.3 million, for the nine months ended October 1, 2004 primarily as a result of amortizing intangible assets from acquisitions. This compares to $4.1 million, or 3.1% of sales, for the same period in 2003. The Westwind acquisition in December 2003 and the MicroE acquisition in May 2004 accounted for the increase which was partially offset by a $1.2 million savings related to the fully amortized General Scanning and Lumonics merger technology. That technology was fully amortized in the first quarter of 2004. For the nine months of 2004, amortization from the MicroE acquisition was $1.2 million. The amortization for intangible assets of MicroE is based on the fair value of assets acquired and liabilities assumed.

Restructuring. As described in note 9 to the consolidated financial statements, for the nine months ended September 26, 2003 we recorded restructuring charges of $2.5 million. There were no restructuring charges recorded in the same period in 2004.

Other. During the nine months ended October 1, 2004, the Company recorded a one-time charge of $0.4 million for in-process research and development in connection with the acquisition of MicroE. The in-process research and development from the MicroE acquisition is based on the valuation of assets acquired and liabilities assumed, which the Company completed in the third quarter of 2004. During the first nine months 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 also took a $0.5 million write off against idle and obsolete fixed assets in the Laser Systems segment. 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.

Income (Loss) from Operations. The following table sets forth income (loss) from operations in millions of dollars by our business segments for the nine months ended October 1, 2004 and September 26, 2003.

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. There were no similar gains or losses during the first nine months of 2004.

Interest Income. Interest income was $0.7 million in the nine months ended October 1, 2004, compared to $1.6 million in the nine months ended September 26, 2003. The average cash balance in the first nine months of 2004 was lower than the same period in 2003. This coupled with a more conservative investment policy, resulted in less interest income in the nine months ended October 1, 2004.

Interest Expense. Interest expense was $0.2 million in the nine months ended October 1, 2004, compared to $0.1 million in the nine months ended September 26, 2003. Interest expense is primarily from discounted receivables with recourse at a bank and for interest on deferred compensation.

Foreign Exchange Transaction Gains (Losses). Foreign exchange transaction losses were $0.3 million for the nine months ended October 1, 2004, compared to a gain of $0.6 million in the nine months ended September 26, 2003. These amounts arise, primarily, from the functional currency of a site differing from its local currency, transactions denominated in currencies other than local currency and unrealized gains (losses) on derivative contracts.

Income Taxes. The effective tax rate for nine months ended October 1, 2004 was 10.9% compared with nil for the same period in 2003. The tax rate for nine months ended October 1, 2004 reflects the Company’s estimated annual effective tax rate and is driven by the jurisdictions where income is earned. The acquisition of MicroE in May 2004 was structured in such a manner, that the Company is not expected to receive any tax benefit from the amortization of intangibles. As such, the Company recorded a deferred tax liability based on estimated tax rates with a corresponding increase to goodwill.

The Company’s reported effective tax rate for the nine month ended October 1, 2004 differed from the expected Canadian federal statutory rate, primarily due to income being earned by the Company in a jurisdiction where the Company is in a recent cumulative loss position and previously provided a valuation allowance against deferred tax assets of that jurisdiction. We will continue to monitor the recoverability of our deferred tax asset on a periodic basis. The tax rate for nine months ended September 26, 2003 includes the fact that the Company did not reflect any income tax benefit to offset the operating loss based on the continuing evaluation of deferred tax assets.

Net Income (Loss). As a result of the foregoing factors, net income for the nine months ended October 1, 2004 was $32.9 million, compared with net loss of $4.7 million in the same period in 2003.

Our consolidated financial statements are based on the selection and application of significant accounting policies, which require management to make significant estimates and assumptions. There is no change in our critical accounting policies included in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of the Company’s Form 10-K, as amended, for the year ended December 31, 2003.

Cash flows provided by operating activities for the three months ended October 1, 2004 were $8.2 million, compared to $7.8 million during the same period in 2003. Net income, after adjustment for non-cash items, provided cash of $8.0 million in the third quarter of 2004. Increases in accounts receivable, inventory, and other current assets used $7.6 million and increases in current liabilities provided $7.9 million in cash. The increase in receivables was a result of the increase in sales in the quarter. Net income, after adjustment for non-cash items, provided cash of $3.3 million in the three months ended September 26, 2003. Decreases in accounts receivable and inventories provided $2.9 million in cash in the same period in 2003. This was partially offset by an increase in other current assets which used $0.3 million and an increase in current liabilities which provided $2.0 million.

Cash flows provided by investing activities were $1.6 million during the three months ended October 1, 2004, primarily from the net maturities of short and long-term investments of $2.1 million offset by other long-term asset additions of $0.5 million. Cash flows from investing activities used $21.2 million during the three months ended September 26, 2003, primarily from the net purchases of short and long-term investments of $21.1 million.

Cash flows provided by financing activities during the three months ended October 1, 2004 were $0.3 million primarily from the issue of share capital, compared to $0.4 million for the same period in 2003.

Cash and cash equivalents totaled $63.2 million at October 1, 2004 compared to $64.0 million at December 31, 2003. In addition, the Company had $11.0 million in marketable short-term investments and $6.0 million in marketable long-term investments at October 1, 2004 compared to $39.6 million in marketable short-term investments and $3.1 million in marketable long-term investments at December 31, 2003. Also, included in long-term investments at October 1, 2004 and December 31, 2003 is a minority equity investment in a private United Kingdom company valued at $0.6 million and $0.6 million, respectively, that was purchased as part of the assets in the Spectron acquisition. As discussed in note 5 to the consolidated financial statements, at October 1, 2004 $5.0 million of short-term investments were pledged as collateral for the Fleet security agreement.

Cash flows provided by operating activities for the nine months ended October 1, 2004 were $27.3 million, compared to $7.9 million during the same period in 2003. Net income, after adjustment for non-cash items, provided cash of $30.2 million in the first nine months of 2004. Increases in accounts receivable, inventory, and other current assets used $21.2 million, which was offset by an increase in other current liabilities providing $18.3 million in cash. The increase in receivables and inventory were a result of the increase in sales during the first nine months of 2004. Net loss, after adjustment for non-cash items, generated cash of $3.4 million in the first nine months of 2003. Increases in accounts receivable and other current assets used $4.8 million. This was offset by decreases in inventories and an increase in current liabilities providing $9.3 million in the first nine months of 2003.

Cash flows used in investing activities were $30.5 million during the nine months ended October 1, 2004, primarily from the acquisition of MicroE of $54.7 million. This was partially offset by net maturities of short-term and long-term investments which generated $25.8 million in cash. Cash flows from investing activities used $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 provided by financing activities during the nine months ended October 1, 2004 were $2.0 million primarily from the issue of share capital, compared to $0.5 million for the same period in 2003.

There have been no significant changes in the Company’s lines of credit or other liquidity matters since December 31, 2003.

On April 12, 2004, the Company announced the signing of an Agreement and Plan of Merger dated as of April 12, 2004 by and among the Company, Motion Acquisition Corporation, a Delaware corporation and an indirect wholly owned subsidiary of the Company, and MicroE Systems Corp., a Delaware corporation (“MicroE”), providing for the acquisition of MicroE by the Company. This acquisition closed on May 14, 2004. The Company acquired all the shares of MicroE for a purchase price of US$54.7 million, net of cash acquired and including costs of transactions. MicroE, located in Natick, MA, is recognized as a technology leader in the design and manufacture of position encoders for precision motion control applications in data storage, semiconductor and electronics, industrial automation and medical markets. This acquisition is consistent with the Company’s stated strategy to expand its technology and product offerings complementary with its existing markets through both development and acquisition.

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 and investment balances, together with cash generated from operations, will be sufficient to satisfy anticipated cash needs to fund working capital and investments.

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 include additional factors that could have an effect on our business and financial performance. The industries in which we compete are very competitive and change 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 halt in economic growth or a slowdown will put pressure on our ability to meet anticipated revenue levels. We are seeing the continuing signs of an economic recovery from a broad-based economic slowdown that has been affecting most technology sectors and particularly the semiconductor and electronics markets. It is difficult to predict if this recovery can be sustained and expand. As a result, many of our customers continue to order low quantities or limit orders to about one quarter’s visibility. 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. If the recovery does not continue and expand, we may not be able to meet anticipated revenue levels on a quarterly or annual basis.

We have a history of operating losses and may not be able to sustain or grow the current level of profitability. Beginning in the second half of 2003, we have generated profits from operations, but we had incurred operating losses on an annual basis from 1998 through 2003. For the year ended December 31, 2003, we incurred a net loss of $2.2 million. For the three and nine months ended October 1, 2004, we had a net income of $12.1 million and $32.9 million. No assurances can be given that we will sustain or increase the level of 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, based on planned profits, our ability to recover deferred tax assets of $24.6 million at October 1, 2004 depends primarily upon the Company’s ability to generate future profits in the United States, Canada and United Kingdom tax jurisdictions. If actual results differ from our plans or we do not achieve profitability, we may be required to

Our business depends significantly upon capital expenditures, including those 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. Currently, we are in an upturn in the cycle and our margins, net sales, financial condition and results of operations have benefited. There is no assurance that we will continue to benefit in the future to the same extent as we have recently, or that we will not be materially adversely affected by future downturns or slowdowns in the semiconductor and electronics, machine tool and automotive industries that we serve.

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 five to eleven weeks, although it will vary by product. 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, foreign exchange rates 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 prices of our common shares, on The NASDAQ Stock Market and the Toronto Stock Exchange, to fluctuate, perhaps substantially.

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 influencing 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 2004, we held 168 United States and 114 foreign patents; in addition, applications were pending for 76 United States and 105 foreign patents. 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 infringe-

ment 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. To maintain our competitive position, 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 receive market acceptance. We may not be able to compete successfully in the future, and increased competition may result in price reductions, reduced profit margins, loss of market share and an inability to generate cash flows that are sufficient to maintain or expand our development of new products.

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, Taiwan and the People’s Republic of China. During 2003, we closed our offices in France, Italy, Hong Kong, Malaysia and the Philippines, but we may in the future expand into other international regions. During the three months ended October 1, 2004, approximately 54.1% of our revenue was derived from operations outside North America. International operations are an expanding part of our business.

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.

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. In the past twelve months, we have consummated four 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.

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 impact 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 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, the United Kingdom and the People’s Republic of China. If use of any of our manufacturing facilities were interrupted by natural disaster or otherwise, our operations could be negatively impacted 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.

If the political conditions in United States and globally do not improve or if the economic turnaround is not sustained, we may 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. While there have been improvements in the economy since the second half of 2003, our revenues and operating results are subject to fluctuations from unfavorable economic conditions as well as uncertainties arising out of the threatened terrorist attacks on the United States, including the economic consequences of protracted military action or additional terrorist activities and associated political instability and the impact of heightened


	•	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 impact 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 and long-term investments. As described in note 8 to the consolidated financial statements, at October 1, 2004, the Company had $22.5 million invested in cash equivalents and $16.9 million invested in short-term and long-term investments. At December 31, 2003, the Company had $49.7 million invested in cash equivalents and $42.7 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 $0.5 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. During the first nine months of 2004, the gross profit for the Laser segment has been negatively impacted by the strengthening of the British Pound Sterling against the value of the U.S. dollar, as approximately half of the segment’s products are sold in U.S. dollars, while the vast majority of its costs are denominated in British Pounds Sterling. 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. Additionally, we may utilize 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 or speculative purposes. Short-term hedge contracts are recorded at fair value with changes in fair value recognized currently in income instead of included in accumulated other comprehensive income. Long-term hedge contracts continue to be accounted for under methods allowed by SFAS 133, and changes in their fair value are included in accumulated other comprehensive income. There were six short-term hedge contracts outstanding as of October 1, 2004. At October 1, 2004, the Company had one currency swap contract valued at $8.7 million U.S. dollars with an aggregate fair value loss of $1.1 million after-tax recorded in accumulated other comprehensive income and maturing in December 2005.

The Company’s 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 have 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.

Other independent auditors, Ernst & Young LLP (“E&Y”) recently notified the Audit Committee of our Board of Directors that certain non-audit services E&Y performed, in China, Singapore and Korea for public companies including GSI Lumonics Inc., have raised issues under the auditor independence rules.

In Korea, E&Y performed tax return preparation services for certain subsidiaries of GSI Lumonics or their employees from 2000 through 2003. In Singapore, an affiliate of E&Y performed assistance with payroll and accounting records, secretarial and directorship services. In China, E&Y performed tax calculation and preparation services for GSI Lumonics Inc.’s employees (2 employees during 2001, 2003 and 2004 and 3 employees during 2002) and affiliates of E&Y made payment of the relevant taxes on behalf of the Company. E&Y China also provided certain bookkeeping services in connection with the handling of the employment tax payments during such period. The payment of those taxes involved handling of Company related funds, which is not permitted under SEC auditor independence rules. The fees paid by the Company to E&Y China for the services were approximately $6,000 in 2001, $10,700 in 2002, $9,600 in 2003 and $3,000 in 2004. These actions by affiliates of E&Y have been discontinued.

The Audit Committee and E&Y have discussed E&Y’s independence with respect to the Company in light of the foregoing facts. E&Y has informed the Audit Committee that it does not believe that the holding and paying of these funds impaired E&Y’s independence with respect to the Company. The Company’s is unaware, and E&Y has informed the Audit Committee that it is unaware, of any similar instance in which E&Y has held custody of GSI Lumonics’s funds in a manner raising questions regarding E&Y’s independence.

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 October 1, 2004

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)



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		27
	ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		46
	ITEM 4.	CONTROLS AND PROCEDURES		47
PART II — OTHER INFORMATION				48
	ITEM 1.	LEGAL PROCEEDINGS		48
	ITEM 6.	EXHIBITS AND REPORTS ON FORM 8-K		48
	ITEM 8.01.	OTHER EVENTS		48
SIGNATURES				49
EX-10.1 FORM OF STOCK OPTION AGREEMENT FOR EXECUTIVE OFFICERS
EX-31.1 SECTION 302 CERTIFICATION OF CEO
EX-31.2 SECTION 302 CERTIFICATION OF CFO
EX-32.1 SECTION 906 CERTIFICATION OF CEO
EX-32.2 SECTION 906 CERTIFICATION OF CFO
EX-99.1 MANAGEMENT DISCUSSION AND ANALYSIS - CANADIAN SUPPLEMENT


			October 1,			December 31,
			2004			2003

ASSETS
Current
	Cash and cash equivalents (note 8)		$	63,220		$	64,035
	Short-term investments (note 8)			10,974			39,562
	Accounts receivable, less allowance of $3,313 (December 31, 2003 — $4,465)			63,191			53,040
	Income taxes receivable			—			4,839
	Inventories (note 3)			59,852			43,916
	Deferred tax assets (note 11)			13,633			5,507
	Other current assets			9,520			8,048

		Total current assets		220,390			218,947
Property, plant and equipment, net of accumulated depreciation of $26,199 (December 31, 2003 — $22,305)				49,380			52,982
Deferred tax assets (note 11)				10,969			8,521
Other assets (note 3)				2,589			2,297
Long-term investments (note 8)				6,636			3,743
Intangible assets, net of amortization of $26,246 (December 31, 2003 — $21,924) (note 3)				52,082			23,985
Goodwill (note 2, 3)				31,094			—

			$	373,140		$	310,475


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current
	Accounts payable		$	23,586		$	18,218
	Income taxes payable			754			—
	Accrued compensation and benefits			13,056			7,424
	Other accrued expenses (note 3)			22,126			18,451

		Total current liabilities		59,522			44,093
Deferred compensation				2,151			2,162
Deferred tax liability (note 2, 11)				13,315			1,879
Other liability				28			—
Accrued minimum pension liability (note 12)				1,578			1,553

		Total liabilities		76,594			49,687
Commitments and contingencies (note 10)
Stockholders’ equity (note 6)
	Common shares, no par value; Authorized shares: unlimited; Issued and outstanding: 41,215,471 (December 31, 2003 — 40,927,499)			307,482			305,512
	Additional paid-in capital			2,714			2,800
	Accumulated deficit			(10,564	)		(43,440	)
	Accumulated other comprehensive loss			(3,086	)		(4,084	)

		Total stockholders’ equity		296,546			260,788

			$	373,140		$	310,475



			Three Months Ended						Nine Months Ended

			October 1,			September 26,			October 1,			September 26,
			2004			2003			2004			2003

Sales			$	90,671		$	44,881		$	250,061		$	130,682
Cost of goods sold				53,573			28,237			147,705			83,659

Gross profit				37,098			16,644			102,356			47,023
Operating expenses:
	Research and development			6,562			3,123			17,323			9,955
	Selling, general and administrative			15,627			11,195			43,639			36,234
	Amortization of purchased intangibles			1,614			1,408			4,324			4,055
	Acquired in-process research and development			—			—			430			—
	Restructuring			—			264			—			2,451
	Other			—			—			—			841

		Total operating expenses		23,803			15,990			65,716			53,536
Income (loss) from operations				13,295			654			36,640			(6,513	)
	Other income			119			—			104			64
	Interest income			253			293			643			1,601
	Interest expense			(104	)		—			(159	)		(129	)
	Foreign exchange transaction (losses) gains			267			(75	)		(339	)		629

Income (loss) before income taxes				13,830			872			36,889			(4,348	)
Income tax provision				1,707			322			4,013			322

Net income (loss)			$	12,123		$	550		$	32,876		$	(4,670	)

Net income (loss) per common share:
	Basic		$	0.29		$	0.01		$	0.80		$	(0.11	)
	Diluted		$	0.29		$	0.01		$	0.78		$	(0.11	)
Weighted average common shares outstanding (000’s)				41,209			40,857			41,071			40,817
Weighted average common shares outstanding for diluted net income (loss) per common share (000’s)				42,084			41,343			42,159			40,817


	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


	Estimated Fair
	Value at		Estimated
	Acquisition Date		Useful Life

	(In millions)		(In years)
Customer relationships	$	5.3		10
Tradename		1.6		15
Acquired technology		5.7		8

Total intangible assets	$	12.6


	Pro Forma Combined		Pro Forma Combined
	(Unaudited) for the		(Unaudited) for the
	Three Months Ended		Nine Months Ended
	September 26, 2003		September 26, 2003

Sales	$	51,831	$	150,710
Net loss	$	951	$	10,835
Net loss per common share: basic and diluted	$	0.02	$	(0.27	)
Weighted average shares outstanding: basic		40,857		40,817
Weighted average shares outstanding: diluted		41,343		40,817



		October 1, 2004						December 31, 2003

					Accumulated						Accumulated
		Cost			Amortization			Cost			Amortization

Patents and acquired technology		$	58,465		$	(24,675	)	$	37,725		$	(21,451	)
Customer relationships			13,994			(810	)		5,442			—
Trademarks and trade names			5,869			(761	)		2,742			(473	)

	Total cost		78,328		$	(26,246	)		45,909		$	(21,924	)

Accumulated amortization			(26,246	)					(21,924	)

	Net intangible assets	$	52,082					$	23,985


	For the			For the			For the			For the
	Three Months			Three Months			Nine Months			Nine Months
	Ended			Ended			Ended			Ended
	October 1,			September 26,			October 1,			September 26,
	2004			2003			2004			2003

Balance at the beginning of the period	$	5,145		$	3,354		$	4,571		$	3,383
Charged to costs of goods sold		2,154			1,125			5,346			2,870
Warranty accrual established as part of acquisition		—			—			299			415
Use of provision		(1,598	)		(1,010	)		(4,560	)		(3,229	)
Foreign currency exchange rate changes		(22	)		109			23			139

Balance at the end of the period	$	5,679		$	3,578		$	5,679		$	3,578


	Severance		Facilities			Total


	(In millions)
Provision at December 31, 2003	$	—	$	1.4		$	1.4
Charges during the first nine months of 2004		—		—			—
Cash draw-downs during the first nine months of 2004		—		(0.4	)		(0.4	)

Provision at October 1, 2004	$	—	$	1.0		$	1.0



			As at

			October 1,		December 31,
			2004		2003

Long-lived assets:
	United States		$	92,282	$	32,063
	Canada			1,996		2,931
	Europe			37,099		40,741
	Japan			658		799
	Asia-Pacific, other			521		433

		Total	$	132,556	$	76,967


14.	Differences between United States and Canadian Generally Accepted Accounting Principles (GAAP)


	*(b) Property, Plant and Equipment and Intangible Assets*


	*(e) Accumulated Other Comprehensive Income (Loss) and Accumulated Foreign Currency Translation Adjustments*


Item 1.	*Financial Statements*


1.	Basis of Presentation


2.	Acquisitions


	*Purchases*


	*Stock Based Compensation and Change in Accounting Policy*



					For the Three Months Ended						For the Nine Months Ended

								Restated(d)						Restated(d)
					October 1,			September 26,			October 1,			September 26,
		Ref.			2004			2003			2004			2003

Net income (loss) — as reported in U.S. GAAP					$	12,123		$	550		$	32,876		$	(4,670	)
Differences due to:
	• Differences in depreciation and amortization resulting from different merger accounting methods		(b	)		7			1,612			765			4,659
	• Stock compensation recorded under fair value method		(d	)		(1,942	)		(725	)		(3,021	)		(1,998	)
	• Stock compensation recorded as a result of variable accounting		(d	)		(205	)		—			(86	)		—

Net income (loss) — Canadian GAAP					$	9,983		$	1,437		$	30,534		$	(2,009	)

Net income (loss) per common share — basic — Canadian GAAP					$	0.24		$	0.04		$	0.74		$	(0.05	)
Net income (loss) per common share — diluted — Canadian GAAP					$	0.24		$	0.03		$	0.72		$	(0.05	)


	*Selected balance sheet accounts where differences exist between U.S. and Canadian GAAP*


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


	*Three Months Ended October 1, 2004 Compared to Three Months Ended September 26, 2003*


	*Cash Flows for Three Months Ended October 1, 2004 and September 26, 2003*


	*Cash Flows for Nine Months Ended October 1, 2004 and September 26, 2003*


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(*)
	10	.1	Form of Stock Option Agreement for Executive Officers
	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	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 10, 2004

/s/ THOMAS R. SWAIN Thomas R. Swain	Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer)	November 10, 2004