`





**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549








**FORM
      10-Q**








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


SECURITIES
      EXCHANGE ACT OF 1934





For
      the
      Quarterly Period Ended June 30, 2006


OR


[
      ]
      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
      EXCHANGE ACT OF 1934











Commission
      File Number 333-43089














**The
                GSI Group, Inc.**(Exact
                name of registrant as specified in its charter)**Delaware**
            **37-0856587**(State
                or other jurisdiction
            (I.R.S.
                Employerof
                incorporation or organization)
            Identification
                No.)**1004
                E. Illinois Street, Assumption, Illinois**
            **62510**(Address
                of principal executive offices)
            (Zip
                Code)





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. Yes [X] No [ ]





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one): Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer
      [
      X]





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





Indicate
      the number of shares outstanding of each of the registrant's classes of common
      stock, as of the latest practicable date. Common stock, par value $0.01 per
      share, 826,948 shares outstanding as of August 14, 2006.










1














**TABLE
                OF CONTENTS****Page****PART
                I - Financial Information**Item
                1.
            Financial
                StatementsBalance
                Sheets
            4Statements
                of Operations
            5Statements
                of Cash Flows
            6Notes
                to Financial Statements
            7Item
                2.
            Management's
                Discussion and Analysis of Financial Condition and Results of
                Operations
            13Item
                3.
            Quantitative
                and Qualitative Disclosure About Market Risk
            19Item
                4.
            Controls
                and Procedures
            19**PART
                II - Other Information**Item
                1.
            Legal
                Proceedings
            21Item
                2.
            Changes
                in Securities and Use of Proceeds
            *Item
                3.
            Defaults
                Upon Senior Securities
            *Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            *Item
                5.
            Other
                Information
            *Item
                6.
            Exhibits
            21













*
      No
      response to this item is included herein for the reason that it is
      inapplicable.





2


**Forward-Looking
      Statements**





This
      report contains forward-looking statements within the meaning of the Private
      Securities Litigation Reform Act of 1995 concerning, among other things, the
      prospects and developments of The GSI Group, Inc. (the "Company") and business
      strategies for our operations, all of which are subject to risks and
      uncertainties. Among these forward-looking statements and among those risks
      and
      uncertainties, are obtaining suitable financing to support our growth in
      operations; possible acquisition or divestiture transactions; managing our
      growth to achieve operating efficiencies; successfully competing in our markets;
      adequately protecting our proprietary information and technology from
      competitors; assuring that our products are not rendered obsolete by products
      or
      technologies of competitors; successfully managing product liability risks;
      and
      avoiding problems with third parties, including key personnel, upon whom we
      may
      be dependent. These forward-looking statements are included in various sections
      of this report. These statements are identified as "forward-looking statements"
      or by their use of terms (and variations thereof) such as "will," "may," "can,"
      "anticipate," "intend," "continue," "estimate," "expect," "plan," "should,"
      "outlook," "believe," and "seek" and similar terms (and variations thereof)
      and
      phrases.





When
      a
      forward-looking statement includes a statement of the assumptions or bases
      underlying the forward-looking statement, we caution that, while we believe
      such
      assumptions or bases to be reasonable and make them in good faith, assumed
      facts
      or bases almost always vary from actual results, and the differences between
      assumed facts or bases and actual results can be material, depending upon the
      circumstances. Where, in any forward-looking statement, we or our management
      express an expectation or belief as to future results, we express that
      expectation or belief in good faith and believe it has a reasonable basis,
      but
      we can give no assurance that the statement of expectation or belief will result
      or be achieved or accomplished. The Company expressly disclaims any obligation
      to update forward-looking information for future events and changes in existing
      events and circumstances.





Our
      actual results may differ significantly from the results discussed in the
      forward-looking statements.





3


**PART
      I - FINANCIAL INFORMATION** <TABLE><CAPTION>


**ITEM
      1 - FINANCIAL STATEMENTS**


**THE
      GSI GROUP, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


**(In
      thousands, except share and per share data)**


**(Unaudited)****<BTB>**
            **June
                30,**
            **December
                31,****Assets**
            **2006**
            **2005**<S>Current
                Assets:Cash
                and cash equivalents
            $
                4,543
            $
                2,522Accounts
                receivable, net
            49,647
            35,801Inventories,
                net
            58,386
            46,746Prepaids
            1,768
            2,961Income
                tax receivable
            --
            1,499Deferred
                taxes
            5,497
            4,645Other
            2,338
            3,165Total
                current assets
            122,179
            97,339Property,
                Plant and Equipment, net
            37,975
            33,933Other
                Assets:Goodwill
            39,162
            39,162Other
                intangible assets, net
            49,508
            51,684Deferred
                taxes
            502
            323Deferred
                financing costs, net
            4,759
            5,105Other
            113
            102Total
                other assets
            94,044
            96,376Total
                assets
            $
                254,198
            $
                227,648**Liabilities
                and Stockholder’s Equity**Current
                Liabilities:Accounts
                payable
            $
                30,890
            $
                20,989Accrued
                interest
            1,573
            1,722Payroll
                and payroll related expenses
            8,690
            6,683Accrued
                warranty
            2,178
            2,335Accrued
                workers compensation
            4,881
            4,539Other
                accrued expenses
            4,487
            3,449Customer
                deposits
            6,992
            5,256Current
                maturities of long-term debt
            162
            876Total
                current liabilities
            59,853
            45,849Long-Term
                Debt,less
                current maturities
            122,178
            119,306Minority
                Interest
            2,976
            2,654Commitments
                and ContingenciesStockholder’s
                Equity:Common
                stock, $.01 par value voting (authorized 6,900,000 shares; issued6,633,652
                shares; outstanding 626,948 shares)
            16
            16Common
                stock, $.01 par value, nonvoting (authorized 1,100,000
                shares;issued
                1,059,316 shares; outstanding 200,000 shares)
            2
            2Additional
                paid-in capital
            97,881
            97,881Accumulated
                other comprehensive income
            1,652
            762Retained
                earnings
            11,199
            2,737Treasury
                stock, at cost, voting (6,006,704 shares)
            (41,550)
            (41,550)Treasury
                stock, at cost, nonvoting (859,316 shares)
            (9)
            (9)Total
                stockholder’s equity
            69,191
            59,839Total
                liabilities and stockholder’s equity
            $
                254,198
            $
                227,648


**</TABLE>** The
      accompanying notes to condensed consolidated financial statements are an
      integral part of these statements.


4


**<TABLE><CAPTION>**





**THE
      GSI GROUP, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


**(In
      thousands, except share and per share data)**


**(Unaudited)**





**Three
                Months**
            
            **Six
                Months****Successor**
            
            **Pre-decessor**
            
            **Successor**
            
            **Pre-decessor****May
                17 -**
            
            **April
                2 -**
            
            
            **May
                17-**
            
            **Jan.
                1 -****June
                30,**
            **July
                1,**
            
            **May
                16,**
            
            **June
                30,**
            **July
                1,**
            
            **May
                16,**<S>
            **2006**
            **2005**
            
            **2005**
            
            **2006**
            **2005**
            
            **2005**Sales
            $113,548
            $
                48,178
            
            $
                41,961
            
            $
                205,800
            $
                48,178
            
            $
                114,635Cost
                of sales
            85,863
            40,282
            
            28,389
            
            156,727
            40,282
            
            83,733Warranty
                expense
            215
            342
            
            (321)
            
            390
            342
            
            (519)Total
                cost of sales
            86,078
            40,624
            
            28,068
            
            157,117
            40,624
            
            83,214Gross
                profit
            27,470
            7,554
            
            13,893
            
            48,683
            7,554
            
            31,421Selling,
                general andadministrative
                expenses
            10,916
            6,093
            
            15,506
            
            22,232
            6,093
            
            24,333Amortization
                expense
            1,053
            962
            
            4
            
            2,176
            962
            
            166Research
                anddevelopment
                expense
            1,086
            450
            
            390
            
            1,980
            450
            
            1,235Total
                operating expenses
            13,055
            7,505
            
            15,900
            
            26,388
            7,505
            
            25,734Operating
                income
            14,415
            49
            
            (2,007)
            
            22,295
            49
            
            5,687Other
                income (expense):Interest
                expense
            (3,863)
            (1,975)
            
            (1,657)
            
            (7,515)
            (1,975)
            
            (5,238)Other,
                net
            (217)
            87
            
            178
            
            297
            87
            
            707Income
                from continuingoperations
                before income taxexpense
                and minority interest
            10,335
            (1,839)
            
            (3,486)
            
            15,077
            (1,839)
            
            1,156Minority
                interest in net incomeof
                subsidiary
            26
            (55)
            
            (50)
            
            (129)
            (55)
            
            (105)Income
                tax expense
            4,369
            (1,572)
            
            501
            
            6,486
            (1,572)
            
            1,115Net
                income
            $
                5,992
            $
                (322)
            
            $
                (4,037)
            
            $
                8,462
            $
                (322)
            
            $
                (64)Basic
                and diluted earnings pershare
            $
                7.25
            $
                (0.39)
            
            $
                (4.88)
            
            $
                10.23
            $
                (0.39)
            
            $
                (0.08)Weighted
                average commonshares
                outstanding
            826,948
            826,948
            
            826,948
            
            826,948
            826,948
            
            826,948Comprehensive
                IncomeNet
                income
            $
                5,992
            $
                (322)
            
            $
                (4,037)
            
            $
                8,462
            $
                (322)
            
            $
                (64)Cumulative
                currencytranslation
                adjustment
            (387)
            584
            
            1,086
            
            890
            584
            
            536Comprehensive
                income
            $
                5,605
            $
                262
            
            $
                (2,951)
            
            $
                9,352
            $
                262
            
            $
                472





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


5


<TABLE><CAPTION>


**THE
      GSI GROUP, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(In
      thousands)**


**(Unaudited)**





**<BTB>**
            **Successor**
            
            **Predecessor****Six
                Fiscal****Months**
            **May
                17 -**
            
            **January
                1 -****Ended**
            **July
                1,**
            
            **May
                16,****June
                30, 2006**
            **2005**
            
            **2005**<S>Cash
                Flows From Operating Activities:Net
                income
            $
                8,462
            $
                (322)
            
            $
                (64)Adjustments
                to reconcile net income to cash providedby
                operating activities:Depreciation
                and amortization
            5,015
            1,616
            
            2,070Amortization
                of deferred financing costs
            346
            94
            
            572Gain
                on sale of property and equipment
            (15)
            (23)
            
            (84)Non-cash
                charges related to inventoryfair
                value adjustment
            --
            2,644
            
            --Deferred
                taxes
            (1,031)
            (2,072)
            
            (69)Minority
                interest in net income of subsidiaries
            129
            55
            
            105Minority
                interest compensation expense
            193
            --
            
            779Stock-based
                compensation
            --
            --
            
            2,842Changes
                in:Accounts
                receivable, net
            (13,846)
            (3,265)
            
            (11,388)Inventories,
                net
            (11,640)
            5,047
            
            (6,968)Other
                current assets
            3,519
            669
            
            5,159Accounts
                payable
            9,901
            (1,788)
            
            5,388Accrued
                expenses and payroll related expenses
            3,081
            4,100
            
            3,130Customer
                deposits
            1,736
            (810)
            
            (1,449)Net
                cash flows provided by operating activities
            5,850
            5,945
            
            23Cash
                Flows From Investing Activities:Capital
                expenditures
            (6,490)
            (647)
            
            (2,046)Proceeds
                from sale of property and equipment
            80
            47
            
            268Other
            (11)
            8
            
            (48)Net
                cash flows used in investing activities
            (6,421)
            (592)
            
            (1,826)Cash
                Flows From Financing Activities:Payments
                on long-term debt
            (7,991)
            (100,000)
            
            (90)Proceeds
                from stockholder loan
            --
            --
            
            12Payments
                on stockholder loan
            --
            (5,012)
            
            --Proceeds
                from issuance of long-term debt
            --
            110,000
            
            --Proceeds
                under line of credit agreement
            54,273
            29,530
            
            10,369Payments
                under line of credit agreement
            (44,124)
            (49,786)
            
            --Net
                proceeds of equity contributed
            --
            15,326
            
            --Payment
                of deferred financing costs
            --
            (5,378)
            
            (485)Dividends
                paid
            --
            --
            
            (7,913)Other
            426
            670
            
            50Net
                cash flows used in financing activities
            2,584
            (4,650)
            
            1,943Effect
                of Exchange Rate Changes on Cash
            8
            (33)
            
            (7)Increase
                (decrease) In Cash and Cash Equivalents
            $
                2,021
            $670
            
            $
                133Cash
                and Cash Equivalents,beginning
                of period
            2,522
            2,437
            
            2,304Cash
                and Cash Equivalents,end
                of period
            $
                4,543
            $
                3,107
            
            $
                2,437


**</TABLE>**


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


6


**THE
      GSI GROUP, INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**





**1.**
            **Summary
                of Significant Accounting
                Policies**





The
      financial statements have been prepared by The GSI Group, Inc. (the "Company"),
      without audit, pursuant to the rules and regulations of the Securities and
      Exchange Commission. Certain information and footnote disclosures normally
      included in financial statements prepared in accordance with accounting
      principles generally accepted in the United States of America have been
      condensed or omitted pursuant to such rules and regulations, although the
      Company believes that the disclosures are adequate to make the information
      not
      misleading. The condensed consolidated balance sheet of the Company as of
      December 31, 2005 has been derived from the audited consolidated balance sheet
      of the Company as of that date. Certain information and note disclosures
      normally included in the Company's annual financial statements prepared in
      accordance with generally accepted accounting principles have been condensed
      or
      omitted. These condensed consolidated financial statements should be read in
      conjunction with the consolidated financial statements and related notes
      contained in the Company's December 31, 2005 Form 10-K as filed with the
      Securities and Exchange Commission. Other than as indicated herein, there have
      been no significant changes from the data presented in the Company's 2005 Form
      10-K.





In
      the
      opinion of management, the accompanying unaudited condensed consolidated
      financial statements contain all adjustments necessary to present fairly the
      financial position of the Company as of June 30, 2006 and the results of
      operations and cash flows for the successor period of six months ended June
      30,
      2006 and May 17-July 1, 2005 and the predecessor period ended May 16, 2005.
      Those adjustments consist only of normal recurring adjustments.





The
      results of operations for the successor period of six months ended June 30,
      2006
      and May 17 - July 1, 2005 and the predecessor period ended May 16, 2005 are
      not
      necessarily indicative of the operating results for the full year.





Sales
      of
      agricultural equipment are seasonal, with farmers traditionally purchasing
      grain
      storage bins and grain drying and handling equipment in the summer and fall
      in
      conjunction with the harvesting season, and swine and poultry producers
      purchasing equipment during prime construction periods in the spring, summer
      and
      fall. The Company's sales and net income have historically been lower during
      the
      first and fourth fiscal quarters as compared to the second and third quarters.





The
      financial statements are presented under two different ("Predecessor" and
      "Successor") bases of accounting. The predecessor and successor financial
      statements are consolidated and include all of the accounts of GSI Group, Inc.
      and its subsidiaries. All intercompany transactions and balances have been
      eliminated.





**2.**  **Detail
      of Certain Assets and Liabilities**


**<TABLE><CAPTION>**


<BTB>
            
            **(Unaudited)****June
                30,**
            
            **December
                31,****2006**
            
            **2005**<S>
            
            **(In
                thousands)***Accounts
                Receivable*Trade
                receivables
            $
                52,188
            
            $
                37,747Allowance
                for doubtful accounts
            (2,541)
            
            (1,946)Total
            $
                49,647
            
            $
                35,801*Inventories*Raw
                materials
            $
                19,405
            
            $
                16,039Work-in-process
            10,237
            
            8,758Finished
                goods
            28,744
            
            21,949Total......................................................
            $
                58,386
            
            $
                46,746





7





*Property,
                Plant and Equipment*Land
            $
                599
            
            $
                594Buildings
                and improvements
            13,592
            
            12,817Machinery
                and equipment
            28,092
            
            24,279Office
                equipment and furniture
            2,820
            
            2,523Construction-in-progress
            3,086
            
            86848,189
            
            41,081Accumulated
                depreciation
            (10,214)
            
            (7,148)Property,
                plant and equipment, net
            $
                37,975
            
            $
                33,933*Intangible
                Assets*Goodwill
            $
                39,162
            
            $
                39,162Non-compete
                agreements
            $
                2,890
            
            $
                2,890Technology
            5,700
            
            5,700Trade
                names
            14,300
            
            14,300Customer
                relations
            31,400
            
            31,400Backlog
            3,490
            
            3,49057,780
            
            57,780Accumulated
                amortization
            (8,272)
            
            (6,096)Total
            $
                49,508
            
            $
                51,684*Deferred
                Financing Costs*Deferred
                financing costs
            $
                5,570
            
            $
                5,570Accumulated
                amortization
            (811)
            
            (465)Total
            $
                4,759
            
            $
                5,105*Accrued
                Warranty*Beginning
                balance
            $
                2,335
            
            $
                2,764Increase
                to expense
            690
            
            1,630Costs
                incurred
            (847)
            
            (2,059)Ending
                balance
            $
                2,178
            
            $
                2,335</TABLE>





**3.
      Supplemental Cash Flow Information**





The
      Company paid $6.9 million, $0.2 million and $6.0 million in interest during
      the
      successor period of six months ended June 30, 2006 and May 17 - July 1, 2005
      and
      the predecessor period ended May 16, 2005, respectively. The Company paid $4.0
      million, $0.0 million and $0.2 million in income taxes during the successor
      period of six months ended June 30, 2006 and May 17 - July 1, 2005 and the
      predecessor period ended May 16, 2005, respectively.





**4.**
            **Debt**





***Revolving
      Credit Facility***





On
      May
      16, 2005, concurrently with the issuance of $110,000,000 of 12% Senior Notes
      due
      2013 and the closing of the acquisition of The GSI Group, Inc. (the "Company")
      by GSI Holdings Corp. ("GSI Holdings"), an affiliate of Charlesbank Equity
      Fund
      V, Limited Partnership, the Company refinanced its existing credit facility
      with
      a five-year asset-backed revolving credit facility provided by lenders led
      by
      Wachovia Capital Finance Corporation (Central) ("Wachovia"), as the agent.
      The
      maximum amount of revolving credit available under the Company's refinanced
      credit facility (the "Credit Facility") is $60.0 million and the Company has
      the
      option to increase the facility in increments of $5.0 million up to a maximum
      of
      $75.0 million (subject to compliance with the covenants in the indenture).
      Up to
      $15 million of the facility is available for issuances of letters of
      credit.





The
      Credit Facility provides floating rate revolving loans bearing interest at
      a
      rate equal to 0.0% to 0.5% over Wachovia's prime rate or 1.50% to 2.00% over
      LIBOR, in each case based on the excess availability under the borrowing base
      from time to time.


8


The
      Company's obligations under its Credit Facility are secured by a first priority
      lien on, and pledge of, substantially all of its and any subsidiary guarantors'
      current and future assets. In addition, GSI Holdings pledged all of its shares
      of the Company's common stock, as well as any rights that it may have under
      the
      stock purchase agreement with the Company's selling stockholders, as additional
      collateral security.





The
      Credit Facility contains certain covenants that are substantially similar to,
      but generally no more restrictive than, the covenants under the Company's
      existing credit facility. The Company's ability to make borrowings under the
      Credit Facility is subject to customary representations, warranties and
      covenants. The Credit Facility also contains various customary events of
      default.





***Senior
      Notes due 2013***





On
      May
      16, 2005, concurrently with the refinancing of its existing revolving credit
      facility with Wachovia Capital Finance Corporation and the closing of the
      acquisition of The GSI Group, Inc. (the "Company") by GSI Holdings Corp. ("GSI
      Holdings"), an affiliate of Charlesbank Equity Fund V, Limited Partnership,
      the
      Company issued and sold $110,000,000 aggregate principal amount of Senior Notes
      due 2013 (the "Notes"). Payment on the Notes is guaranteed on an unsecured
      basis
      by GSI Holdings and by all of the Company's domestic material subsidiaries.
      None
      of the Company's domestic subsidiaries are currently material subsidiaries.
      The
      Notes were issued under an Indenture among the Company, the Guarantors and
      U.S.
      Bank National Association, as trustee (the "Indenture").





The
      Notes
      have a fixed annual interest rate of 12%, which will be paid semiannually in
      arrears on May 15 and November 15, commencing on November 15, 2005.





Prior
      to
      May 15, 2008, the Company may redeem up to 35% of the Notes at a redemption
      price of 112.000% of the principal amount, plus accrued and unpaid interest
      from
      the proceeds of certain equity offerings; *provided* that:
      (i)
      at least 65% of the aggregate principal amount of Notes originally issued under
      the Indenture (excluding Notes held by the Company and its subsidiaries) remains
      outstanding immediately after the occurrence of such redemption and (ii) the
      redemption occurs within 90 days of the date of the closing of such equity
      offering. Except pursuant to the preceding sentence, the Notes will not be
      redeemable at the Company's option prior to May 15, 2009.





On
      or
      after May 15, 2009, the Company may redeem all or a part of the Notes upon
      not
      less than 30 nor more than 60 days' notice, at the redemption prices (expressed
      as percentages of principal amount) listed below plus accrued and unpaid
      interest and liquidated damages, if any, on the Notes redeemed, to the
      applicable redemption date, if redeemed during the twelve-month period beginning
      on May 15 of the years indicated below, subject to the rights of holders of
      Notes on the relevant record date to receive interest on the relevant interest
      payment date: 2009 at a redemption price of 106.000%; 2010 at a redemption
      price
      of 103.000%; and 2011 and thereafter at a redemption price of
      100.000%.





Upon
      a
      change of control, as defined in the Indenture, the Company is required to
      offer
      to purchase all of the Notes then outstanding for cash at 101% of the aggregate
      principal amount thereof plus accrued and unpaid interest and liquidated
      damages, if any, on the Notes repurchased to the date of purchase, subject
      to
      the rights of holders of Notes on the relevant record date to receive interest
      due on the relevant interest payment date.





The
      Company purchased $7.4 million of its outstanding bonds from Charlesbank, an
      affiliate of its parent, on May 12, 2006 and immediately retired them. The
      bonds
      were purchased at a 1% premium.


9





**5.
      Income Taxes**





The
      following table represents the unaudited successor and predecessor income taxes
      for the first six months of 2006 and 2005.


<TABLE><CAPTION>


**Successor**
            
            **Predecessor**<BTB>
            Six
                Months as of June 30, 2006
            
            May
                17,2005 - July 1,2005
            
            Jan
                1,2005 - May16,2005Income/(Loss)
            Income
                Tax
            
            Income/(Loss)
            Income
                Tax
            
            Income/(Loss)
            Income
                TaxBefore
            Expense/
            
            Before
            Expense/
            
            Before
            Expense/Income
                Taxes
            (Benefit)
            
            Income
                Taxes
            (Benefit)
            
            Income
                Taxes
            (Benefit)<S>U.S.
            $
                12,026
            $
                6,019
            
            $
                (2,811)
            $
                (1,679)
            
            $
                (564)
            $
                495Brazil
            1,278
            418
            
            493
            143
            
            1,051
            336Malaysia
            600
            49
            
            132
            1
            
            (317)
            (10)Mexico
            666
            --
            
            218
            --
            
            432
            256China
            (96)
            --
            
            19
            --
            
            242
            --Poland
            (140)
            --
            
            (12)
            --
            
            (2)
            --South
                Africa
            614
            --
            
            67
            (37)
            
            209
            38Total
            $
                14,948
            $
                6,486
            
            $
                (1,894)
            $
                (1,572)
            
            $
                1,051
            $
                1,115Current
                income taxes
            
            $
                7,518
            
            
            $
                500
            
            
            $
                1,184Deferred
                income taxes
            
            (1,032)
            
            
            (2,072)
            
            
            (69)Total
            
            $
                6,486
            
            
            $
                (1,572)
            
            
            $
                1,115





Successor
            
            PredecessorSix
                Months as of June 30, 2006
            
            Jan
                1,2005 - May16,2005
            
            Jan
                1,2005 - May16,2005Income
                taxes at U.S. statutory rate
            $
                5,232
            
            
            $
                (663)
            
            
            $
                368Effect
                of conversion to “C” corporation
            --
            
            
            (990)
            
            
            --State
                income taxes
            1,091
            
            
            (138)
            
            
            77Foreign
                tax rate differential-federal
            467
            
            
            107
            
            
            620Other
            (304)
            
            
            112
            
            
            50Total
            
            $
                6,486
            
            
            $
                (1,572)
            
            
            $
                1,115</TABLE>





10


The
      following table represents the successor and predecessor income taxes for the
      second quarter of 2006 and 2005.


<TABLE><CAPTION>


**Successor**
            
            **Predecessor**<BTB>
            Three
                Months as of June 30, 2006
            
            May
                17,2005 - July 1,2005
            
            April
                2, 2005 - May16,2005Income/(Loss)
            Income
                Tax
            
            Income/(Loss)
            Income
                Tax
            
            Income/(Loss)
            Income
                TaxBefore
            Expense/
            
            Before
            Expense/
            
            Before
            Expense/Income
                Taxes
            (Benefit)
            
            Income
                Taxes
            (Benefit)
            
            Income
                Taxes
            (Benefit)<S>U.S.
            $
                9,922
            $
                4,267
            
            $
                (2,811)
            $
                (1,679)
            
            $
                (3,953)
            $
                255Brazil
            (98)
            72
            
            493
            143
            
            220
            55Malaysia
            256
            30
            
            132
            1
            
            (196)
            (30)Mexico
            236
            --
            
            218
            --
            
            310
            183China
            (48)
            --
            
            19
            --
            
            240
            --Poland
            (99)
            --
            
            (12)
            --
            
            29
            --South
                Africa
            192
            --
            
            67
            (37)
            
            (186)
            38Total
            $
                10,361
            $
                4,369
            
            $
                (1,894)
            $
                (1,572)
            
            $
                (3,536)
            $
                501Current
                income taxes
            
            $
                4,655
            
            
            $
                500
            
            
            $
                625Deferred
                income taxes
            
            (286)
            
            
            (2,072)
            
            
            (124)Total
            
            $
                4,369
            
            
            $
                (1,572)
            
            
            $
                501





Successor
            
            PredecessorThree
                Months as of June 30, 2006
            
            Jan
                1,2005 - May16,2005
            
            Jan
                1,2005 - May16,2005Income
                taxes at U.S. statutory rate
            $
                3,626
            
            
            $
                (663)
            
            
            $
                (1,238)Effect
                of conversion to “C”corporation
            --
            
            
            (990)
            
            
            --State
                income taxes
            756
            
            
            (138)
            
            
            (258)Foreign
                tax rate differential-federal
            365
            
            
            107
            
            
            247Other
            (378)
            
            
            112
            
            
            1,750Total
            
            $
                4,369
            
            
            $
                (1,572)
            
            
            $
                501





The
      Company was an “S” Corporation for federal income tax purposes for the period
      ended May 16, 2005. Income taxes for the period were an obligation of its
      stockholders.


11


**6.**  **Business
      Segment**





The
      Company has no separately reportable segments in accordance with Statement
      of
      Financial Accounting Standard ("SFAS") No. 131, "Disclosure About Segments
      of an
      Enterprise and Related Information." Under the enterprise wide disclosure
      requirements of SFAS 131, the Company reports sales by each product line.
      Amounts for the first six months of 2006 and 2005, based on the aggregation
      of
      historical and successor accounting, are as shown in the table below (in
      thousands).


<TABLE><CAPTION>


**Successor**
            
            **Predecessor****May
                17 -****June
                30,**
            **July
                1,**
            
            **May
                16,****2006**
            **2005**
            
            **2005**<S>Grain
                product line
            $
                119,853
            $
                29,027
            
            $
                67,234Swine
                product line
            44,556
            9,411
            
            20,789Poultry
                product line
            41,391
            9,740
            
            26,612Sales
            $
                205,800
            $
                48,178
            
            $
                114,635


</TABLE>


For
      the
      first six months of 2006 and 2005, sales in Brazil were $21.9 million and $17.0
      million, respectively. Long-lived assets in Brazil were $6.9 million at June
      30,
      2006.








12





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


**RESULTS
      OF OPERATIONS.**





The
      following discussion of the financial condition and results of operations of
      the
      Company should be read in conjunction with the Consolidated Financial Statements
      and the notes included in Item 1 hereof.





**General**





The
      Company is a major worldwide manufacturer of agricultural equipment. The
      Company's grain, swine and poultry products are used by producers and purchasers
      of grain, and by producers of swine and poultry. Demand for our agricultural
      equipment is driven by the overall level of grain, swine and poultry production,
      the level of net farm income, agricultural real estate values and producers'
      increasing focus on improving productivity in their operations. In addition,
      fluctuations in grain and feed prices affect our sales, with sustained increases
      in grain and feed prices increasing demand for our grain equipment and
      decreasing demand for our swine and poultry equipment. We believe that our
      diversified product offerings mitigate the effects of fluctuations in the price
      of grain. Sales of our swine and poultry equipment are also affected by
      long-term trends in consumer demand for pork and poultry both domestically
      and
      internationally.





Sales
      of
      agricultural equipment are seasonal, with farmers traditionally purchasing
      grain
      storage bins and grain conditioning and handling equipment in the summer and
      fall in conjunction with the harvesting season, and swine and poultry producers
      purchasing equipment during prime construction periods in the spring, summer
      and
      fall. The Company's sales, operating income and net income have historically
      been lower during the first and fourth fiscal quarters as compared to the second
      and third quarters. Traditionally, this has caused the Company to have increased
      working capital needs during the second and third quarters as material is
      purchased and converted to inventory during the year.





Although
      the Company's sales are primarily denominated in U.S. dollars and are not
      generally affected by currency fluctuations (except for transactions from the
      Company's Brazilian operation), the production costs, profit margins and
      competitive position are affected by the strength of the U.S. dollar relative
      to
      the strength of the currencies in countries where its products are sold.





The
      Company's international sales have historically comprised a significant portion
      of our total sales. In the first six months of 2006 and 2005, the Company's
      international sales accounted for 31.6% and 31.8%, of total sales, respectively.
      International operations generally are subject to various risks that are not
      present in domestic operations, including restrictions on dividends,
      restrictions on repatriation of funds, unexpected changes in tariffs and other
      trade barriers, difficulties in staffing and managing foreign operations,
      political instability, fluctuations in currency exchange rates, reduced
      protection for intellectual property rights in some countries, seasonal
      reductions in business activity and potentially adverse tax consequences, any
      of
      which could adversely impact our international operations.





The
      primary raw materials we use to manufacture our products are steel and polymers.
      Fluctuations in the prices of steel and, to a lesser extent, polymer materials
      can impact our cost of sales.





**Items
      Affecting Comparability**





On
      April
      6, 2005, all of the Company's stockholders entered into a stock purchase
      agreement with GSI Holdings, Inc. (GSI Holdings), a newly formed holding company
      owned primarily by an affiliate of Charlesbank Equity Fund V, Limited
      Partnership, pursuant to which GSI Holdings purchased for cash all of the issued
      and outstanding shares of the Company's common stock. On May 16, 2005, under
      the
      "successor" basis of accounting, the closing of the Acquisition occurred.
      Consequently, our financial statements shown in Item 1 of this Form 10Q have
      been presented under two different bases of accounting, with all historical
      Company activity up to and including May 16, 2005 under the predecessor basis,
      and all Company activity from May 17, 2005 to present under the successor basis.
      The following discussion and analysis is based upon these two bases of
      accounting for the six months ended June 30, 2006, and our review of the
      business and operations during such periods as compared to the same periods
      of
      2005.


13


As
      a
      result of the Acquisition, our assets and liabilities have been adjusted to
      their fair value as of the closing date. Depreciation and amortization expenses
      are higher in successor accounting due to the fair value assessments resulting
      in increases to the carrying value of our property, plant and equipment and
      intangible assets.





We
      believe the discussion and analysis of The GSI Group, Inc.'s financial condition
      and combined results of operations set forth below are not indicative nor should
      they be relied upon as an indicator of our future performance. Please refer
      to
      the footnotes to the Financial Statements included in Item 1 of this report,
      including "Summary of Significant Accounting Policies" for important additional
      information concerning the basis of presentation of financial information
      included in this report.





**Historical
      Performance**





***Results
      of Operations***





The
      following table sets forth a summary of the Company's operations and their
      percentages of total revenue for the periods indicated based on the aggregation
      of historical predecessor and successor accounting (dollars in
      thousands):





<TABLE><CAPTION>


**Three
                months ended****June
                30, 2006**
            **July
                1, 2005****(Unaudited)**
            **(Unaudited)**<BTB><S>**Amount**
            **%**
            **Amount**
            **%**Sales
            $
                113,548
            100.0
            $
                90,139
            100.0Cost
                of sales
            85,863
            75.6
            68,671
            76.2Warranty
                expense
            215
            0.2
            21
            0.0Total
                cost of sales
            86,078
            75.8
            68,692
            76.2Gross
                profit
            27,470
            24.2
            21,447
            23.8Selling,
                general and administrative expenses
            10,916
            9.6
            21,599
            24.0Amortization
                expense
            1,053
            0.9
            966
            1.1Research
                and development expense
            1,086
            1.0
            840
            0.9Total
                operating expenses
            13,055
            11.5
            23,405
            26.0Operating
                income
            14,415
            12.7
            (1,958)
            (2.2)Other
                income (expense):Interest
                expense
            (3,863)
            (3.4)
            (3,632)
            (4.0)Other,
                net
            (217)
            (0.2)
            265
            0.3Income
                before income tax expense and minority interest
            10,335
            9.1
            (5,325)
            (5.9)Minority
                interest in net income of subsidiary
            26
            0.0
            (105)
            (0.1)Income
                tax provision(benefit)
            4,369
            3.8
            (1,071)
            (1.2)Net
                income
            $
                5,992
            5.3
            $
                (4,359)
            (4.8)Basic
                and diluted earnings per share
            $
                7.25
            
            $
                (5.27)Weighted
                average common shares outstanding
            826,948
            
            826,948</TABLE>




14





The
      following table sets forth a summary of the Company's operations and their
      percentages of total revenue for the six month periods indicated based on the
      aggregation of historical predecessor and successor accounting (dollars in
      thousands):





<TABLE><CAPTION>


**Six
                months ended****June
                30, 2006**
            **April
                1, 2005****(Unaudited)**
            **(Unaudited)**<BTB><S>**Amount**
            **%**
            **Amount**
            **%**Sales
            $
                205,800
            100.0
            $
                162,813
            100.0Cost
                of sales
            156,727
            76.1
            124,015
            76.2Warranty
                expense
            390
            0.2
            (177)
            (0.1)Total
                cost of sales
            157,117
            76.3
            123,838
            76.1Gross
                profit
            48,683
            23.7
            38,975
            23.9Selling,
                general and administrative expenses
            22,232
            10.8
            30,426
            18.7Amortization
                expense
            2,176
            1.1
            1,128
            0.7Research
                and development expense
            1,980
            1.0
            1,685
            1.0Total
                operating expenses
            26,388
            12.9
            33,239
            20.4Operating
                income
            22,295
            10.8
            5,736
            3.5Other
                income (expense):Interest
                expense
            (7,515)
            (3.6)
            (7,213)
            (4.4)Other,
                net
            297
            0.1
            794
            0.5Income
                before income tax expense and minority interest
            15,077
            7.3
            (683)
            (0.4)Minority
                interest in net income of subsidiary
            (129)
            (0.0)
            (160)
            (0.1)Income
                tax provision(benefit)
            6,486
            3.2
            (457)
            (0.3)Net
                income
            $
                8,462
            4.1
            $
                (386)
            (0.2)Basic
                and diluted earnings per share
            $
                10.23
            
            $
                (0.47)Weighted
                average common shares outstanding
            826,948
            
            826,948</TABLE>





*Three
      Months Ended June 30, 2006 Compared to Three Months Ended July 1, 2005*





Sales
      increased 26.0% or $23.4 million to $113.5 million in the second quarter of
      2006
      compared to $90.1 million in the second quarter of 2005. Grain equipment sales
      increased by 31.8% during the second quarter of 2006 as compared to the second
      quarter 2005 due to higher volume. Swine equipment sales increased 36.9% to
      $23.7 million in the second quarter of 2006 compared to $17.3 million in the
      second quarter of 2005 due to an improved swine production market that allows
      producers to upgrade equipment. Poultry equipment sales remained flat at $19.5
      million in the second quarter of 2006 compared to the second quarter of 2005.
      Sales volume was positively influenced by a higher percentage of orders placed
      under the winter program that were shipped in the second quarter. 
 The winter program provided deeper discounts which led to lower net
      pricing on some product lines year over year in the second quarter.





Cost
      of
      goods sold increased 25.3% or $17.4 million to $86.1 million or 75.8% of sales
      in the second quarter of 2006 compared to $68.7 million or 76.2% of sales in
      the
      second quarter of 2005. Cost of goods sold after extraordinary and non-recurring
      expenses related to the inventory fair value step up of $2.6 million in the
      second quarter of 2005, resulted in a year over year increase of 30.3% or $20.0
      million. This increase is primarily due to higher volume including some
      associated premium costs (e.g. overtime, outsourcing of components, and
      additional labor costs).





Gross
      profit increased to $27.5 million in the second quarter of 2006 or 24.2% of
      sales from $21.4 million or 23.8% of sales in the same period of 2005. This
      increase was primarily due to the reasons cited above.


15





Operating
      expenses decreased 44.2% or $10.3 million to $13.1 million in the second quarter
      of 2006 from $23.4 million in the same period of 2005. Operating expenses after
      extraordinary and non-recurring expenses related to the change in ownership
      of
      the Company of $11.9 million in the second quarter of 2005 resulted in a year
      over year increase of 13.9% or $1.6 million. The increase was primarily due
      to
      higher distribution expenses incurred due to higher volume, additional costs
      associated with the establishment of the current management team and higher
      support costs including legal, consulting, and management fees.





Operating
      income increased to $14.4 million in the second quarter of 2006 from a loss
      of
      $2.0 million in the second quarter of 2005. Operating income margins increased
      to 12.7% of sales in 2006 from (2.2%) in 2005.





Interest
      expense increased $0.2 million in the second quarter of 2006 as compared to
      the
      second quarter of 2005 due to higher borrowing costs.





Income
      tax expense increased $5.4 million to $4.4 million in the second quarter of
      2006
      from a tax benefit of $1.0 million in the same period of 2005. This increase
      is
      due to the Company changing from a “C” Corporation on May 16, 2005 from an “S”
Corporation.





Net
      income increased by $10.4 million to $6.0 million for the second quarter of
      2006
      from a loss of $4.4 million in the same period of 2005.








*Six
      Months Ended June 30, 2006 Compared to Six Months Ended July 1, 2005*





Sales
      increased 26.4% or $43.0 million to $205.8 million in the first six months
      of
      2006 compared to $162.8 million in the first six months of 2005. Grain equipment
      sales increased by 24.5% during the first six months of 2006 as compared to
      the
      first six months 2005 due to higher volume. Swine equipment sales increased
      47.5% to $44.6 million in the first six months of 2006 compared to $30.2 million
      in the first six months of 2005 due to an improved swine production market
      that
      allows producers to upgrade equipment. Poultry equipment sales increased 13.9%
      to $41.4 million in the first six months of 2006 compared to $36.4 million
      in
      the first six months of 2005 primarily due to increased volume. Sales volume
      was
      positively influenced by a higher percentage of orders placed under the winter
      program that were shipped in the first six months.   The winter
      program provided deeper discounts which led to lower net pricing on some product
      lines year over year in the second quarter.





Cost
      of
      goods sold increased 26.9% or $33.3 million to $157.1 million or 76.3% of sales
      in the first six months of 2006 compared to $123.8 million or 76.1% of sales
      in
      the first six months of 2005. Cost of goods sold after extraordinary and
      non-recurring expenses related to the inventory fair value step up of $2.6
      million in the first six months of 2005, resulted in a year over year increase
      of 29.6% or $35.9 million. This increase is primarily due to higher volume
      including some associated premium costs (e.g. overtime, outsourcing of
      components, and additional labor costs).





Gross
      profit increased to $48.7 million in the first six months of 2006 or 23.7%
      of
      sales from $39.0 million or 23.9% of sales in the same period of 2005. This
      increase was primarily due to the reasons cited above. In addition, the mix
      of
      grain products was unfavorable as compared to 2005.





Operating
      expenses decreased 20.6% or $6.8 million to $26.4 million in the first six
      months of 2006 from $33.2 million in the same period of 2005. Operating expenses
      after extraordinary and non-recurring expenses related to the change in
      ownership of the Company of $11.9 million in the first six months of 2005
      resulted in a year over year increase of 23.4% or $5.0 million. The increase
      was
      primarily due to the increase in amortization expense of $1.0 million, an
      increase to the bad debt reserve, higher distribution expenses incurred due
      to
      higher volume, additional costs associated with the establishment of the current
      management team and higher support costs including legal, consulting, and
      management fees.





Operating
      income increased to $22.3 million in the first six months of 2006 from $5.7
      million in the first six months of 2005. Operating income margins increased
      to
      10.8% of sales in 2006 from 3.5% in 2005.





Interest
      expense increased $0.3 million in the first six months of 2006 as compared
      to
      the first six months of 2005 due to higher borrowing costs.


16


Income
      tax expense increased $6.9 million to $6.5 million in the first six months
      of
      2006 from a tax benefit of $0.4 million in the same period of 2005. This
      increase is due to the Company changing from a “C” Corporation on May 16, 2005
      from an “S” Corporation.





Net
      income increased by $8.8 million to $8.5 million for the first six months of
      2006 from a loss of $0.4 million in the same period of 2005.





**Liquidity
      and Capital Resources**





The
      Company has historically funded capital expenditures, working capital
      requirements, debt service, stockholder dividends and stock repurchases from
      cash flow from its operations, augmented by borrowings made under the Company's
      credit facility and the sale of the Company's notes.





The
      Company's working capital requirements for its operations are seasonal, with
      investments in working capital typically building in the second and third
      quarters and then declining in the first and fourth quarters. The Company
      defines working capital as current assets less current liabilities. As of June
      30, 2006, the Company had $62.3 million of working capital, an increase of
      $10.8
      million from working capital as of December 31, 2005. The increase in working
      capital was primarily due to increases in cash, accounts receivable and
      inventory and decreases in accrued warranty, accrued interest and current
      maturities of long-term debt of $28.5 million, partially offset by decreases
      in
      prepaids, income tax receivable and increases in accounts payable, payroll
      and
      payroll related expenses, accrued workers compensation, other accrued expenses
      and customer deposits of $17.7 million.





Cash
      flows from operating activities were consistent in the first six months of
      2006
      and 2005 and provided $5.9 million and $6.0 million, respectively.





Investing
      activities used $6.4 million and $2.4 million in cash flow in the first six
      months of 2006 and 2005, respectively. The cash was used primarily for the
      purchase of property, plant and equipment.




Financing
      activities provided $2.6 million and used $2.7 million in cash flow in the
      first
      six months of 2006 and 2005, respectively. The cash was used primarily to pay
      down debt.





The
      Company believes that existing cash, cash flow from operations and available
      borrowings under its refinanced revolving credit facility will be sufficient
      to
      support its working capital, capital expenditures and debt service requirements
      for the foreseeable future. As of June 30, 2006, the Company had approximately
      $45.2 million of availability under the credit facility.





***Revolving
      Credit Facility***





On
      May
      16, 2005, concurrently with the issuance of $110,000,000 of 12% Senior Notes
      due
      2013 and the closing of the acquisition of The GSI Group, Inc. (the "Company")
      by GSI Holdings Corp. ("GSI Holdings"), an affiliate of Charlesbank Equity
      Fund
      V, Limited Partnership, the Company refinanced its existing credit facility
      with
      a five-year asset-backed revolving credit facility provided by lenders led
      by
      Wachovia Capital Finance Corporation (Central) ("Wachovia"), as the agent.
      The
      maximum amount of revolving credit available under the Company's refinanced
      credit facility (the "Credit Facility") is $60.0 million and the Company has
      the
      option to increase the facility in increments of $5.0 million up to a maximum
      of
      $75.0 million (subject to compliance with the covenants in the indenture).
      Up to
      $15 million of the facility is available for issuances of letters of
      credit.





The
      Credit Facility provides floating rate revolving loans bearing interest at
      a
      rate equal to 0.0% to 0.5% over Wachovia's prime rate or 1.50% to 2.00% over
      LIBOR, in each case based on the excess availability under the borrowing base
      from time to time.





The
      Company's obligations under its Credit Facility are secured by a first priority
      lien on, and pledge of, substantially all of its and any subsidiary guarantors'
      current and future assets. In addition, GSI Holdings pledged all of its shares
      of the Company's common stock, as well as any rights that it may have under
      the
      stock purchase agreement with the Company's selling stockholders, as additional
      collateral security.





The
      Credit Facility contains certain covenants that are substantially similar to,
      but generally no more restrictive than, the covenants under the Company's
      previous credit facility. The Company's ability to make borrowings
      under


17


the
      Credit Facility is subject to customary representations, warranties and
      covenants. The Credit Facility also contains various customary events of
      default.








***Senior
      Notes due 2013***





On
      May
      16, 2005, concurrently with the refinancing of its existing revolving credit
      facility with Wachovia Capital Finance Corporation and the closing of the
      acquisition of The GSI Group, Inc. (the "Company") by GSI Holdings Corp. ("GSI
      Holdings"), an affiliate of Charlesbank Equity Fund V, Limited Partnership,
      the
      Company issued and sold $110,000,000 aggregate principal amount of Senior Notes
      due 2013 (the "Notes"). Payment on the Notes is guaranteed on an unsecured
      basis
      by GSI Holdings and by all of the Company's domestic material subsidiaries.
      None
      of the Company's domestic subsidiaries are currently material subsidiaries.
      The
      Notes were issued under an Indenture among the Company, the Guarantors and
      U.S.
      Bank National Association, as trustee (the "Indenture").





The
      Notes
      have a fixed annual interest rate of 12%, which will be paid semiannually in
      arrears on May 15 and November 15, commencing on November 15, 2005.





Prior
      to
      May 15, 2008, the Company may redeem up to 35% of the Notes at a redemption
      price of 112.000% of the principal amount, plus accrued and unpaid interest
      from
      the proceeds of certain equity offerings; *provided* that:
      (i)
      at least 65% of the aggregate principal amount of Notes originally issued under
      the Indenture (excluding Notes held by the Company and its subsidiaries) remains
      outstanding immediately after the occurrence of such redemption and (ii) the
      redemption occurs within 90 days of the date of the closing of such equity
      offering. Except pursuant to the preceding sentence, the Notes will not be
      redeemable at the Company's option prior to May 15, 2009.





On
      or
      after May 15, 2009, the Company may redeem all or a part of the Notes upon
      not
      less than 30 nor more than 60 days' notice, at the redemption prices (expressed
      as percentages of principal amount) listed below plus accrued and unpaid
      interest and liquidated damages, if any, on the Notes redeemed, to the
      applicable redemption date, if redeemed during the twelve-month period beginning
      on May 15 of the years indicated below, subject to the rights of holders of
      Notes on the relevant record date to receive interest on the relevant interest
      payment date: 2009 at a redemption price of 106.000%; 2010 at a redemption
      price
      of 103.000%; and 2011 and thereafter at a redemption price of
      100.000%.





Upon
      a
      change of control, as defined in the Indenture, the Company is required to
      offer
      to purchase all of the Notes then outstanding for cash at 101% of the aggregate
      principal amount thereof plus accrued and unpaid interest and liquidated
      damages, if any, on the Notes repurchased to the date of purchase, subject
      to
      the rights of holders of Notes on the relevant record date to receive interest
      due on the relevant interest payment date.





Also
      on
      May 16, 2005, the Company issued a call for redemption for all $100 million
      principal amount of its existing 10-1/4% senior subordinated notes due 2007
      at a
      price of 101.729% plus accrued interest from May 1, 2005 to the date of
      redemption.





The
      Company purchased $7.4 million of its outstanding bonds from Charlesbank, an
      affiliate of its parent, on May 12, 2006 and immediately retired them. The
      bonds
      were purchased at a 1% premium.





**Inflation**





The
      Company believes that inflation has not had a material effect on its results
      of
      operations or financial condition during recent periods.





**Critical
      Accounting Policies**





There
      have been no material changes to the critical accounting policies since December
      31, 2005.


18





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





The
      Company is subject to market risk associated with adverse changes in interest
      rates and foreign currency exchange rates. The Company does not hold any market
      risk sensitive instruments for trading purposes. At June 30, 2006, principal
      exposed to interest rate risk was limited to $19.7 million in variable rate
      debt. The interest rates on the Company's various debt instruments range from
      4.5% to 12.0%. The Company measures its interest rate risk by estimating the
      net
      amount by which potential future net earnings would be impacted by hypothetical
      changes in market interest rates related to all interest rate sensitive assets
      and liabilities. A 1% change in interest rates would have a $0.2 million impact
      on the Company's results of operations.





At
      June
      30, 2006, approximately 15.4% of sales were derived from international
      operations with exposure to foreign currency exchange rate risk. The Company
      mitigates its foreign currency exchange rate risk principally by establishing
      local production facilities in the markets it serves and by invoicing customers
      in the same currency as the source of the products. The Company also monitors
      its foreign currency exposure in each country and implements strategies to
      respond to changing economic and political environments. The Company's exposure
      to foreign currency exchange rate risk relates primarily to the financial
      position and the results of operations of its Brazilian subsidiary. The
      Company's exposure to such exchange rate risk as it relates to the Company's
      financial position and results of operations would be adversely impacted by
      devaluation of the Brazilian Real per U.S. dollar. These amounts are difficult
      to accurately estimate due to factors such as the inherent fluctuation of
      inter-company account balances, balance sheet accounts and the existing economic
      uncertainty and future economic conditions in the international
      marketplace.








**ITEM
      4. CONTROLS AND PROCEDURES**





**Overview**





In
      connection with the preparation of its Annual Report on Form 10-K for the fiscal
      year ended December 31, 2005, the Company's management identified material
      weaknesses in the Company's internal controls over financial reporting. As
      defined by the Public Company Accounting Oversight Board ("PCAOB") in Auditing
      Standard No. 2, a material weakness is a significant deficiency, or combination
      of significant deficiencies, that result in more than a remote likelihood that
      a
      material misstatement of the annual or interim financial statements will not
      be
      prevented or detected.





The
      identified material weaknesses in the Company's internal controls over financial
      reporting have resulted in insufficient controls relating to financial statement
      preparation and SEC reporting, inventory accounting, accounts payable cut-off,
      accrued expenses and segregation of duties. In addition, the Company has
      determined that the Company's control environment at December 31, 2004 lacked
      certain controls related to the prevention of improper accounting entries.
      These
      material weaknesses resulted in restatements being recorded in the Company's
      financial statements for the fiscal years ended December 31, 2004, 2003 and
      2002. The Company's management has discussed the material weaknesses with its
      independent registered public accounting firm, BKD, LLP, and the Company's
      Board
      of Directors, and more recently the Audit Committee of the Board of Directors.
      BKD, LLP issued a "material weakness" letter in connection with its audit of
      the
      Company's financial statements for the fiscal year ended December 31, 2005.
      The
      conclusions of Company management regarding the effectiveness of the Company’s
      disclosure controls and procedures as of June 30, 2006, the end of the period
      covered by this Quarterly Report on Form 10-Q, are covered in more detail in
      the
      following paragraph.





**Disclosure
      Controls and Procedures**





The
      Company maintains disclosure controls and procedures that are designed to ensure
      that information required to be disclosed in the reports it files or submits
      under the Securities Exchange Act of 1934, as amended, is recorded, processed,
      summarized and reported, within the time periods specified in the SEC's rules
      and forms, and that such information is accumulated and communicated to our
      management, including the Company's Chief Executive Officer and Chief Financial
      Officer, as appropriate, to allow timely decisions regarding disclosure. The
      Company's management, with the participation of its Chief Executive Officer
      and
      Chief Financial Officer, has performed an evaluation of the Company's disclosure
      controls and procedures as of June 30, 2006, the end of the period covered
      by
      this Quarterly Report on Form 10-Q. Based on that evaluation, which included
      a
      review of the matters discussed above, the Company's Chief Executive Officer
      and
      Chief Financial Officer concluded that the


19


Company's
      disclosure controls and procedures, while the Company has made some
      improvements, were not effective as of the end of the period covered by this
      Quarterly Report on Form 10-Q.





**Changes
      in Internal Controls**





In
      the
      first six months of 2006, new accounting staff at the management level were
      added, others were reassigned, and the CFO became more familiar with the
      Company, its finances and accounting needs. The Company's management believes,
      however, that substantial remediation measures are required in order to improve
      the Company's internal controls. The Company believes that the material
      weaknesses identified above resulted in part from inadequate staffing and
      training within the Company's finance and accounting group, and the Company
      believes that the process of preparing this Quarterly Report on Form 10-Q and
      the related review of the Company's financial statements for the periods ended
      June 30, 2006 and July 1, 2005 has resulted in a significant improvement in
      the
      finance and accounting staff's familiarity with the accounting and financial
      treatment of the issues identified above. Although the Company believes that
      progress has been made in addressing the material weaknesses in its internal
      controls discussed above, the Company's management intends to continue to work
      to improve its internal controls.





20


**PART
      II**


**OTHER
      INFORMATION**





**ITEM
      1. LEGAL PROCEEDINGS.**





There
      are
      no legal proceedings pending against the Company, which, in the opinion of
      management, would have a material adverse effect on the Company's business,
      financial position or results of operations.








**ITEM
      6. EXHIBITS.**





(a) **Exhibits:**





A
      list of
      the exhibits included as part of this Form 10-Q is set forth in the Index to
      Exhibits that immediately precedes such exhibits, which is incorporated herein
      by reference.





21


**SIGNATURES**





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





The
      GSI
      Group, Inc.





By: /s/
      John Henderson


Chief
      Financial Officer







**Date:
      August 14,** **2006**





22


**Exhibit
      31.1**





**CERTIFICATIONS**





I,
      Richard Christman, certify that:





1.
      I have
      reviewed this Quarterly Report on Form 10-Q of The GSI Group, Inc.;





2.
      Based
      on my knowledge, this report does not contain any untrue statement of a material
      fact or omit to state a material fact necessary to make the statements made,
      in
      light of the circumstances under which such statements were made, not misleading
      with respect to the period covered by this report;





3.
      Based
      on my knowledge, the financial statements, and other financial information
      included in this report, fairly present in all material respects the financial
      condition, results of operations and cash flows of the registrant as of, and
      for, the periods presented in this report;





4.
      The
      registrant's other certifying officer and I are responsible for establishing
      and
      maintaining disclosure controls and procedures (as defined in Exchange Act
      Rules
      13a-15(e) and 15d-15(e)) for the registrant and have:





a)
      Designed such disclosure controls and procedures, or caused such disclosure
      controls and procedures to be designed under our supervision, to ensure that
      material information relating to the registrant, including its consolidated
      subsidiaries, is made known to us by others within those entities, particularly
      during the period in which this report is being prepared;





b)
      [Paragraph omitted pursuant to SEC Release nos. 33-8392 and 34-49313.]





c)
      Evaluated the effectiveness of the registrant's disclosure controls and
      procedures and presented in this report our conclusions about the effectiveness
      of the disclosure controls and procedures, as of the end of the period covered
      by this report based on such evaluation; and





d)
      Disclosed in this report any change in the registrant's internal control over
      financial reporting that occurred during the registrant's most recent fiscal
      quarter that has materially affected, or is reasonably likely to materially
      affect, the registrant's internal control over financial reporting;
      and





5.
      The
      registrant's other certifying officer and I have disclosed, based on our most
      recent evaluation of internal control over financial reporting, to the
      registrant's auditors and the audit committee of registrant's board of directors
      (or persons performing the equivalent functions):





a)
      All
      significant deficiencies and material weaknesses in the design or operation
      of
      internal control over financial reporting which are reasonably likely to
      adversely affect the registrant's ability to record, process, summarize and
      report financial information; and





b)
      Any
      fraud, whether or not material, that involves management or other employees
      who
      have a significant role in the registrant's internal control over financial
      reporting.





Date:
      August 14, 2006








/s/
      Richard Christman


Chief
      Executive Officer


23





**Exhibit
      31.2**





**CERTIFICATIONS**





I,
      John
      Henderson, certify that:





1.
      I have
      reviewed this Quarterly Report on Form 10-Q of The GSI Group, Inc.;





2.
      Based
      on my knowledge, this report does not contain any untrue statement of a material
      fact or omit to state a material fact necessary to make the statements made,
      in
      light of the circumstances under which such statements were made, not misleading
      with respect to the period covered by this report;





3.
      Based
      on my knowledge, the financial statements, and other financial information
      included in this report, fairly present in all material respects the financial
      condition, results of operations and cash flows of the registrant as of, and
      for, the periods presented in this report;





4.
      The
      registrant's other certifying officer and I are responsible for establishing
      and
      maintaining disclosure controls and procedures (as defined in Exchange Act
      Rules
      13a-15(e) and 15d-15(e)) for the registrant and have:





a)
      Designed such disclosure controls and procedures, or caused such disclosure
      controls and procedures to be designed under our supervision, to ensure that
      material information relating to the registrant, including its consolidated
      subsidiaries, is made known to us by others within those entities, particularly
      during the period in which this report is being prepared;





b)
      [Paragraph omitted pursuant to SEC Release nos. 33-8392 and 34-49313.]





c)
      Evaluated the effectiveness of the registrant's disclosure controls and
      procedures and presented in this report our conclusions about the effectiveness
      of the disclosure controls and procedures, as of the end of the period covered
      by this report based on such evaluation; and





d)
      Disclosed in this report any change in the registrant's internal control over
      financial reporting that occurred during the registrant's most recent fiscal
      quarter that has materially affected, or is reasonably likely to materially
      affect, the registrant's internal control over financial reporting;
      and





5.
      The
      registrant's other certifying officer and I have disclosed, based on our most
      recent evaluation of internal control over financial reporting, to the
      registrant's auditors and the audit committee of registrant's board of directors
      (or persons performing the equivalent functions):





a)
      All
      significant deficiencies and material weaknesses in the design or operation
      of
      internal control over financial reporting which are reasonably likely to
      adversely affect the registrant's ability to record, process, summarize and
      report financial information; and





b)
      Any
      fraud, whether or not material, that involves management or other employees
      who
      have a significant role in the registrant's internal control over financial
      reporting.





Date:
      August 14, 2006








/s/
      John Henderson


Chief
      Financial Officer


24





**Exhibit
      32.1**





CERTIFICATION


PURSUANT
      TO 18 U.S.C. SECTION 1350,


AS
      ADOPTED PURSUANT TO SECTION 906


OF
      THE
      SARBANES-OXLEY ACT OF 2002







In
      connection with the accompanying Quarterly Report on Form 10-Q of The GSI Group,
      Inc., a Delaware corporation (the "Company"), for the quarter ended June 30,
      2006, as filed with the Securities and Exchange Commission on the date hereof
      (the "Report"), and pursuant to 18 U.S.C. Section 1350, as adopted pursuant
      to
      Section 906 of the Sarbanes-Oxley Act of 2002, Richard Christman, as Chief
      Executive Officer of the Company, and John Henderson, as Chief Financial Officer
      of the Company, hereby certify that:





(1)
      The
      Report fully complies with the requirements of Section 13(a) or 15(d) of the
      Securities Exchange Act of 1934; and





(2)
      The
      information contained in the Report fairly presents, in all material respects,
      the financial condition and results of operations of the Company.





Dated:
      August 14, 2006





/s/
      RICHARD CHRISTMAN


Richard
      Christman


Chief
      Executive Officer








/s/
      JOHN HENDERSON


John
      Henderson


Chief
      Financial Officer














This
      certification shall not be deemed "filed" by the Company for purposes of Section
      18 of the Securities Exchange Act of 1934. In addition, this certification
      shall
      not be deemed to be incorporated by reference into any filing under the
      Securities Act of 1933 or the Securities Exchange Act of 1934.





A
      signed
      original of this written statement required by Section 906 of the Sarbanes-Oxley
      Act of 2002 has been provided to the Company and will be retained by the Company
      and furnished to the Securities and Exchange Commission or its staff upon
      request.





25





**INDEX
      TO EXHIBITS**


**<TABLE><CAPTION>**


**<BTB>****Exhibit****No.**
            **Document
                Description****<S>**3.1*
            Amended
                and Restated Articles of Incorporation of The GSI Group, Inc., as
                amended
                as of October 23, 1997.3.2*
            By-Laws
                of The GSI Group, Inc, as adopted on September 4, 2001.31.1
            Certification
                of Chief Executive Officer.31.2
            Certification
                of Chief Financial Officer.32.1
            Section
                906 Certification.


**</TABLE>**





*
            Incorporated
                by reference from the Company's Registration Statement of Form S-4
                (Reg.
                No. 333-43089) filed with the Commission pursuant to the Securities
                Act of
                1933, as amended.








26