`
 
 **UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 Washington,
        D.C. 20549
 
 
 **FORM
        10-Q**
 
 [
        X ]
        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 SECURITIES
        EXCHANGE ACT OF 1934
 
 For
        the
        Quarterly Period Ended September 29, 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)**(217)
                  226-4421**(Registrant’s
                  telephone number, including area code)
 
 Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or 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 issuer'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 November 13, 2006.
 
  
  1
   
 
 
 
 **TABLE
                  OF CONTENTS****Page**Forward-Looking
                  Statements .....................................................................
              3**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
              14Item
                  3.
              Quantitative
                  and Qualitative Disclosure About Market Risk
              21Item
                  4.
              Controls
                  and Procedures
              21**PART
                  II - Other Information**Item
                  1.
              Legal
                  Proceedings
              23Item
                  1A.
              Risk
                  Factors..........................................................................................
              *Item
                  2.
              Unregistered
                  Sales of Equity 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
              23
 
 
  
 *
        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>**
              
              **Sept
                  29,**
              
              **December
                  31,****Assets**
              
              **2006**
              
              **2005**Current
                  Assets:Cash
                  and cash equivalents
              $
              6,544
              $
              2,522Accounts
                  receivable, net
              
              47,951
              
              35,801Inventories,
                  net
              
              55,424
              
              46,746Prepaids
              
              1,906
              
              2,961Income
                  tax receivable
              
              --
              
              1,499Deferred
                  taxes
              
              5,497
              
              4,645Other
              
              2,052
              
              3,165Total
                  current assets
              
              119,374
              
              97,339Property,
                  Plant and Equipment, net
              
              39,155
              
              33,933Other
                  Assets:Goodwill
              
              39,162
              
              39,162Other
                  intangible assets, net
              
              48,455
              
              51,684Deferred
                  taxes
              
              4,245
              
              323Deferred
                  financing costs, net
              
              4,083
              
              5,105Other
              
              120
              
              102Total
                  other assets
              
              96,065
              
              96,376Total
                  assets
              $
              254,594
              $
              227,648**Liabilities
                  and Stockholder’s Equity**Current
                  Liabilities:Accounts
                  payable
              $
              28,016
              $
              20,989Accrued
                  interest
              
              4,459
              
              1,722Payroll
                  and payroll related expenses
              
              9,711
              
              6,683Accrued
                  warranty
              
              2,284
              
              2,335Accrued
                  workers compensation
              
              4,883
              
              4,539Other
                  accrued expenses
              
              7,011
              
              3,449Customer
                  deposits
              
              8,320
              
              5,256Current
                  maturities of long-term debt
              
              95
              
              876Total
                  current liabilities
              
              64,779
              
              45,849Long-Term
                  Debt,less
                  current maturities
              
              111,720
              
              119,306Minority
                  Interest
              
              2,994
              
              2,654Stockholder’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
              
              1,424
              
              762Retained
                  earnings
              
              17,337
              
              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
              
              75,101
              
              59,839Total
                  liabilities and stockholder’s equity
              $
              254,594
              $
              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 Ended**
              
              **Nine
                  Months Ended****Successor**
              
              
              **Successor**
              
              **Predecessor****May
                  17-**
              
              **Jan.
                  1 -****Sept
                  29,**
              
              **Sept
                  30,**
              
              **Sept
                  29,**
              **Sept
                  30,**
              
              **May
                  16,**<S>
              
              **2006**
              
              **2005**
              
              **2006**
              **2005**
              
              **2005**Sales
              
              $127,564
              
              $
                  107,723
              
              $
                  333,364
              $
                  155,901
              
              $
                  114,635Cost
                  of sales
              
              97,430
              
              78,394
              
              254,157
              118,676
              
              83,733Warranty
                  expense
              
              248
              
              280
              
              638
              622
              
              519Total
                  cost of sales......
              
              97,678
              
              78,674
              
              254,795
              119,298
              
              83,214Gross
                  profit
              
              29,886
              
              29,049
              
              78,569
              36,603
              
              31,421Selling,
                  general andadministrative
                  expenses
              
              14,026
              
              14,110
              
              38,238
              20,653
              
              25,568Amortization
                  expense
              
              1,052
              
              1,950
              
              3,228
              2,912
              
              166Total
                  operating expenses
              
              15,078
              
              16,060
              
              41,466
              23,565
              
              25,734Operating
                  income
              
              14,808
              
              12,989
              
              37,103
              13,038
              
              5,687Other
                  income (expense):Interest
                  expense
              
              (3,632)
              
              (3,705)
              
              (11,147)
              (5,680)
              
              (5,238)Interest
                  income......
              
              148
              
              145
              
              418
              199
              
              134Other,
                  net
              
              (813)
              
              137
              
              (786)
              170
              
              573Income
                  from continuingoperations
                  before income taxexpense
                  and minority interest
              
              10,511
              
              9,566
              
              25,588
              7,727
              
              1,156Minority
                  interest in net incomeof
                  subsidiary
              
              (20)
              
              (119)
              
              (149)
              (174)
              
              (105)Income
                  tax expense
              
              4,353
              
              4,075
              
              10,839
              2,503
              
              1,115Net
                  income (loss)
              
              $
                  6,138
              
              $
                  5,372
              
              $
                  14,600
              $
                  5,050
              
              $
                  (64)Basic
                  and diluted earnings pershare
              
              $
                  7.42
              
              $
                  6.50
              
              $
                  17.66
              $
                  6.11
              
              $
                  (0.08)Weighted
                  average commonshares
                  outstanding
              
              826,948
              
              826,948
              
              826,948
              826,948
              
              826,948Comprehensive
                  IncomeNet
                  income
              
              $
                  6,138
              
              $
                  5,372
              
              $
                  14,600
              $
                  5,050
              
              $
                  (64)Cumulative
                  currencytranslation
                  adjustment
              
              (228)
              
              1,061
              
              662
              1,645
              
              536Comprehensive
                  income
              
              $
                  5,910
              
              $
                  6,433
              
              $
                  15,262
              $
                  6,695
              
              $
                  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****Nine****Months**
              **May
                  17 -**
              
              **January
                  1 -****Ended**
              **Sept
                  30,**
              
              **May
                  16,****Sept
                  29, 2006**
              **2005**
              
              **2005**Cash
                  Flows From Operating Activities:Net
                  income
              $
                  14,600
              $
                  5,050
              
              $
                  (64)Adjustments
                  to reconcile net income to cash providedby
                  operating activities:Depreciation
                  and amortization
              7,653
              4,190
              
              2,070Amortization
                  of deferred financing costs
              513
              279
              
              572Gain
                  on sale of property and equipment
              (37)
              (20)
              
              (84)Non-cash
                  charges related to inventoryfair
                  value adjustment
              --
              661
              
              --Deferred
                  taxes
              (4,774)
              (196)
              
              (69)Minority
                  interest in net income of subsidiaries
              149
              174
              
              105Minority
                  interest compensation expense
              191
              463
              
              779Loss
                  on bond repurchase.......................................
              933
              --
              
              --Stock-based
                  compensation
              --
              --
              
              2,842Changes
                  in:Accounts
                  receivable, net
              (12,150)
              (10,492)
              
              (11,388)Inventories,
                  net
              (8,678)
              18,188
              
              (6,968)Other
                  current assets
              3,667
              (668)
              
              5,159Accounts
                  payable
              7,027
              (528)
              
              5,388Accrued
                  expenses and payroll related expenses
              9,620
              10,066
              
              3,130Customer
                  deposits
              3,064
              (1,548)
              
              (1,449)Net
                  cash flows provided by operating activities
              21,778
              25,619
              
              23Cash
                  Flows From Investing Activities:Capital
                  expenditures
              (9,369)
              (2,569)
              
              (2,046)Proceeds
                  from sale of property and equipment
              151
              80
              
              268Other
              42
              (68)
              
              (48)Net
                  cash flows used in investing activities
              (9,176)
              (2,557)
              
              (1,826)Cash
                  Flows From Financing Activities:Payments
                  on long-term debt
              (13,481)
              (100,035)
              
              (90)Proceeds
                  from stockholder loan
              --
              --
              
              12Payments
                  on stockholder loan
              --
              (5,012)
              
              --Proceeds
                  from issuance of long-term debt
              --
              110,000
              
              --Net
                  borrowing (repayments)under line of credit agreement
              4,690
              (37,705)
              
              10,369Net
                  proceeds of equity contributed
              --
              15,326
              
              --Payment
                  of deferred financing costs
              --
              (5,568)
              
              (485)Dividends
                  paid
              --
              --
              
              (7,913)Other
              165
              1,477
              
              50Net
                  cash flows provided by (used in) financing activities
              (8,626)
              (21,517)
              
              1,943Effect
                  of Exchange Rate Changes on Cash
              46
              (69)
              
              (7)Increase
                  In Cash and Cash Equivalents
              $
                  4,022
              $1,476
              
              $
                  133Cash
                  and Cash Equivalents,beginning
                  of period
              2,522
              2,437
              
              2,304Cash
                  and Cash Equivalents,end
                  of period
              $
                  6,544
              $
                  3,913
              
              $
                  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 September 29, 2006 and the results
        of
        operations and cash flows for the successor period of nine months ended
        September 29, 2006 and May 17-September 30, 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 nine months ended September
        29, 2006 and May 17 - September 30, 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.
 
 During
        the period ended September 29, 2006 the Company began reporting research
        and
        development expenses as part of selling, general and administrative expenses.
        All periods shown have been presented with this change for comparability.
        There
        was no effect on net income.
 
 *Recent
        Accounting Pronouncements*
 
 In
        September 2006, the FASB issued SFAS No. 157, *“Fair
        Value Measurements”* (“SFAS
        No. 157”). SFAS No. 157 defines fair value, establishes a framework for
        measuring fair value in generally accepted accounting principles (“GAAP”), and
        expands disclosures about fair value measurements. This statement applies
        under
        other accounting pronouncements that require or permit fair value measurement
        where the FASB has previously determined that under those pronouncements
        fair
        value is the appropriate measurement. This statement does not require any
        new
        fair value measurements, but may require companies to change current practice.
        This statement is effective for fiscal years beginning after November 15,
        2007
        and to the interim periods within those fiscal years. The Company is currently
        evaluating the impact of the adoption of SFAS No. 157.
  7
  
 In
        June
        2006, the FASB issued Interpretation (“FIN”) No. 48, *“Accounting
        for Uncertainty in Income Taxes-an Interpretation of FASB Statement No.
        109* .”
This
        Interpretation prescribes a recognition threshold and measurement attribute
        for
        the financial statement recognition and measurement of a tax position taken
        or
        expected to be taken in a tax return, and provides guidance on derecognition,
        classification, interest and penalties, accounting in interim periods,
        disclosure and transition. This Interpretation is effective for fiscal years
        beginning after December 15, 2006. The Company is currently evaluating the
        impact of this Interpretation on its financial position and results of
        operations.
 
 
 **2.**  **Detail
        of Certain Assets and Liabilities**
 **<TABLE><CAPTION>**
 <BTB>
              
              **(Unaudited)****Sept
                  29,**
              
              **December
                  31,****2006**
              
              **2005**<S>
              
              **(In
                  thousands)***Accounts
                  Receivable*Trade
                  receivables
              $
                  50,986
              
              $
                  37,747Allowance
                  for doubtful accounts
              (3,035)
              
              (1,946)Total
              $
                  47,951
              
              $
                  35,801*Inventories*Raw
                  materials
              $
                  20,409
              
              $
                  16,039Work-in-process
              9,337
              
              8,758Finished
                  goods
              25,678
              
              21,949Total......................................................
              $
                  55,424
              
              $
                  46,746*Property,
                  Plant and Equipment*Land
              $
                  599
              
              $
                  594Buildings
                  and improvements
              14,076
              
              12,817Machinery
                  and equipment
              29,021
              
              24,279Office
                  equipment and furniture
              3,583
              
              2,523Construction-in-progress
              3,605
              
              86850,884
              
              41,081Accumulated
                  depreciation
              (11,729)
              
              (7,148)Property,
                  plant and equipment, net
              $
                  39,155
              
              $
                  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
              (9,325)
              
              (6,096)Total
              $
                  48,455
              
              $
                  51,684*Deferred
                  Financing Costs*Deferred
                  financing costs
              $
                  4,978
              
              $
                  5,570Accumulated
                  amortization
              (895)
              
              (465)Total
              $
                  4,083
              
              $
                  5,105*Accrued
                  Warranty*Beginning
                  balance
              $
                  2,335
              
              $
                  2,764Increase
                  to expense
              638
              
              1,630Charge
                  to reserve
              (689)
              
              (2,059)Ending
                  balance
              $
                  2,284
              
              $
                  2,335
 
  8
  
 **3.
        Supplemental Cash Flow Information**
 
 The
        Company paid $7.5 million, $0.5 million and $6.0 million in interest during
        the
        successor period of nine months ended September 29, 2006 and May 17 - September
        30, 2005 and the predecessor period ended May 16, 2005, respectively. The
        Company paid $9.9 million, $1.9 million and $0.2 million in income taxes
        during
        the successor period of nine months ended September 29, 2006 and May 17 -
        September 30, 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.
 
 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 a number of covenants that, among other things,
        restrict our ability to dispose of assets, incur additional indebtedness,
        pay or
        make dividends or distributions to the Company’s stockholders, create liens on
        assets, enter into sale and leaseback transactions and otherwise restrict
        our
        general corporate activities. The Company is also required to comply with
        specified financial ratios and tests including a fixed charge coverage
        ratio.
 
 As
        of
        September 29, 2006 the Company had $13.9 million of revolving loans outstanding
        and $5.9 million of standby letters of credit which reduced the overall
        availability under the credit facility to $45.0 million. As of September
        29,
        2006 the Company had expensed as Cost of Sales $1.2 million related to the
        standby letters of credit under the credit facility.
 
 
 ***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.
  9
  
 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. The Company purchased $5.0 million of its
        outstanding bonds on August 25, 2006 and immediately retired them. The bonds
        were purchased at fair market value.
 
  10
  
 **5.
        Income Taxes**
 
 The
        following table represents the unaudited successor and predecessor income
        taxes
        for the first nine months of 2006 and 2005.
 <TABLE><CAPTION>
 **Successor**
              
              **Predecessor**<BTB>
              Nine
                  Months as of
                Sept
                  29, 2006
              
              May
                  17,2005 -
                Sept
                  30,2005
              
              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.
              $
                  21,348
              $
                  10,281
              
              $
                  4,952
              $
                  2,148
              
              $
                  (564)
              $
                  495Brazil
              1,475
              481
              
              1,541
              393
              
              1,051
              336Malaysia
              889
              77
              
              503
              2
              
              (317)
              (10)Mexico
              1,181
              --
              
              389
              (3)
              
              432
              256China
              (100)
              --
              
              (8)
              --
              
              242
              --Poland
              (168)
              --
              
              (30)
              --
              
              (2)
              --South
                  Africa
              814
              --
              
              206
              (37)
              
              209
              38Total
              $
                  25,439
              $
                  10,839
              
              $
                  7,553
              $
                  2,503
              
              $
                  1,051
              $
                  1,115Current
                  income taxes
              
              $
                  15,613
              
              
              $
                  2,699
              
              
              $
                  1,184Deferred
                  income taxes
              
              (4,774)
              
              
              (196)
              
              
              (69)Total
              
              $
                  10,839
              
              
              $
                  2,503
              
              
              $
                  1,115
 
 Successor
              
              PredecessorNine
                  Months as of
                Sept
                  29, 2006
              
              May
                  17, 2005-
                Sept
                  30, 2005
              
              Jan
                  1,2005 - May16,2005Income
                  taxes at U.S. statutory rate
              $
                  8,907
              
              
              $
                  2,644
              
              
              $
                  368Effect
                  of conversion to “C” corporation
              --
              
              
              (990)
              
              
              --State
                  income taxes
              1,858
              
              
              551
              
              
              77Foreign
                  tax rate differential-federal
              558
              
              
              977
              
              
              620Other
              (484)
              
              
              (679)
              
              
              50Total
              
              $
                  10,839
              
              
              $
                  2,503
              
              
              $
                  1,115</TABLE>
 
  11
  
 The
        following table represents the successor and predecessor income taxes for
        the
        third quarter of 2006 and 2005.
 <TABLE><CAPTION>
 **Successor**<BTB>
              Three
                  Months as of
                Sept
                  29, 2006
              
              Three
                  Months as of
                Sept
                  30, 2005Income/(Loss)
              Income
                  Tax
              
              Income/(Loss)
              Income
                  TaxBefore
              Expense/
              
              Before
              Expense/Income
                  Taxes
              (Benefit)
              
              Income
                  Taxes
              (Benefit)<S>U.S.
              $
                  9,322
              $
                  4,262
              
              $
                  7,763
              $
                  3,827Brazil
              197
              63
              
              1,048
              250Malaysia
              289
              28
              
              371
              1Mexico
              515
              --
              
              171
              (3)China
              (4)
              --
              
              (27)
              --Poland
              (28)
              --
              
              (18)
              --South
                  Africa
              200
              --
              
              139
              --Total
              $
                  10,491
              $
                  4,353
              
              $
                  9,447
              $
                  4,075Current
                  income taxes
              
              $
                  8,095
              
              
              $
                  2,199Deferred
                  income taxes
              
              (3,742)
              
              
              1,876Total
              
              $
                  4,353
              
              
              $
                  4,075
 
 SuccessorThree
                  Months as of
                Sept
                  29, 2006
              
              Three
                  Months as of
                Sept
                  30, 2005Income
                  taxes at U.S. statutory rate
              $
                  3,675
              
              
              $
                  3,306State
                  income taxes
              767
              
              
              690Foreign
                  tax rate differential-federal
              91
              
              
              870Other
              (180)
              
              
              (791)Total
              
              $
                  4,353
              
              
              $
                  4,075
 
 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.
  12
  
 **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 nine 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 -**
              
              **January
                  1-****Sept
                  29, 2006**
              **Sept
                  30, 2005**
              
              **May
                  16, 2005**<S>Grain
                  product line
              $
                  202,256
              $
                  93,125
              
              $
                  67,234Swine
                  product line
              71,491
              29,590
              
              20,789Poultry
                  product line
              59,617
              33,186
              
              26,612Sales
              $
                  333,364
              $
                  155,901
              
              $
                  114,635
 </TABLE>
 For
        the
        first nine months of 2006 and 2005, sales in Brazil were $30.6 million and
        $27.4
        million, respectively. Long-lived assets in Brazil were $6.7 million at
        September 29, 2006.
 
 
  13
  
 **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 nine months of 2006 and 2005, the Company's
        international sales accounted for 30.9% and 30.8%, 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 nine months ended September 29, 2006, and our review of
        the
        business and operations during such periods as compared to the same periods
        of
        2005.
  14
  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****Sept
                  29 , 2006**
              **Sept
                  30, 2005****(Unaudited)**
              **(Unaudited)**<BTB><S>**Amount**
              **%**
              **Amount**
              **%**Sales
              $
                  127,564
              100.0
              $
                  107,723
              100.0Cost
                  of sales
              97,430
              76.4
              78,394
              72.8Warranty
                  expense
              248
              0.2
              280
              0.3Total
                  cost of sales
              97,678
              76.6
              78,674
              73.0Gross
                  profit
              29,886
              23.4
              29,049
              27.0Selling,
                  general and administrative expenses
              14,026
              11.0
              14,110
              12.3Amortization
                  expense
              1,052
              0.8
              1,950
              1.8Total
                  operating expenses
              15,078
              11.8
              16,060
              14.9Operating
                  income
              14,808
              11.6
              12,989
              12.1Other
                  income (expense):Interest
                  expense
              (3,632)
              (2.8)
              (3,705)
              (3.4)Interest
                  income
              148
              0.1
              145
              0.1Other,
                  net
              (813)
              (0.6)
              137
              (0.1)Income
                  before income tax expense and minority interest
              10,511
              8.2
              9,566
              8.9Minority
                  interest in net income of subsidiary
              (20)
              0.0
              (119)
              (0.1)Income
                  tax provision
              4,353
              3.4
              4,075
              3.8Net
                  income
              $
                  6,138
              4.8
              $
                  5,372
              5.0Basic
                  and diluted earnings per share
              $
                  7.42
              
              $
                  6.50Weighted
                  average common shares outstanding
              826,948
              
              826,948</TABLE>
   15
  
 The
        following table sets forth a summary of the Company's operations and their
        percentages of total revenue for the nine month periods indicated based on
        the
        aggregation of historical predecessor and successor accounting (dollars in
        thousands):
 
 <TABLE><CAPTION>
 **Nine
                  months ended****Sept
                  29, 2006**
              **Sept
                  30, 2005****(Unaudited)**
              **(Unaudited)**<BTB><S>**Amount**
              **%**
              **Amount**
              **%**Sales
              $
                  333,364
              100.0
              $
                  270,536
              100.0Cost
                  of sales
              254,157
              76.2
              202,409
              74.8Warranty
                  expense
              638
              0.2
              103
              0.0Total
                  cost of sales
              254,795
              76.4
              202,512
              74.9Gross
                  profit
              78,569
              23.6
              68,024
              25.1Selling,
                  general and administrative expenses
              38,238
              11.5
              46,221
              17.1Amortization
                  expense
              3,228
              1.0
              3,078
              1.1Total
                  operating expenses
              41,466
              12.4
              49,299
              18.2Operating
                  income
              37,103
              11.1
              18,725
              6.9Other
                  income (expense):Interest
                  expense
              (11,147)
              (3.3)
              (10,918)
              (4.0)Interest
                  income
              418
              0.1
              333
              0.1Other,
                  net
              (786)
              (0.2)
              743
              0.3Income
                  before income tax expense and minority interest
              25,588
              7.7
              8,883
              3.3Minority
                  interest in net income of subsidiary
              (149)
              (0.0)
              (279)
              (0.1)Income
                  tax provision
              10,839
              3.3
              3,618
              1.3Net
                  income
              $
                  14,600
              4.4
              $
                  4,986
              1.8Basic
                  and diluted earnings per share
              $
                  17.66
              
              $
                  6.03Weighted
                  average common shares outstanding
              826,948
              
              826,948</TABLE>
 
 *Three
        Months Ended September 29, 2006 Compared to Three Months Ended September
        30,
        2005*
 
 Sales
        increased 18.4% or $19.8 million to $127.6 million in the third quarter of
        2006
        compared to $107.7 million in the third quarter of 2005. Grain equipment
        sales
        increased $18.3 million or 28.5% to $82.4 million during the third quarter
        of
        2006 compared to the $64.1 million in the third quarter 2005, due to higher
        volume. Expectations for a positive harvest, a movement to increase farm
        storage
        and higher international sales contribute to this growth. Swine equipment
        sales
        increased 33.2% to $26.9 million in the third quarter of 2006 compared to
        $20.2
        million in the third quarter of 2005 due to an improved swine production
        market
        that allows producers to upgrade equipment. Swine commodity prices remain
        positive. Poultry equipment sales decreased 22.2 % to $18.2 million in the
        third
        quarter of 2006 compared to $23.4 million in the third quarter of 2005.
        Declining poultry meat prices contributed to this market decline.
 
 Cost
        of
        goods sold increased 24.2% or $19.0 million to $97.7 million or 76.6% of
        sales
        in the third quarter of 2006 compared to $78.7 million or 73.0% of sales
        in the
        third quarter of 2005. Cost of goods sold after extraordinary and non-recurring
        expenses related to the inventory fair value step up of $2.0 million in the
        third quarter of 2005, resulted in a year over year increase of 27.4% or
        $21.0
        million. This increase is primarily due to higher volume including some
        associated premium costs (e.g. overtime, outsourcing of components, and
        additional labor costs.), material cost increases and higher cost relative
        to
        international sales.
 
 Gross
        profit increased to $29.9 million in the third quarter of 2006 or 23.4% of
        sales
        from $29.0 million or 27.0% of sales in the same period of 2005. This increase
        was primarily due to the reasons cited above.
  16
  
 Operating
        expenses decreased 6.1% or $1.0 million to $15.1 million in the third quarter
        of
        2006 from $16.1 million in the same period of 2005. Amortization expense
        decreased by $0.9 million for the period. Operating expenses in the third
        quarter 2005 included extraordinary and non-recurring expenses of $1.9 million
        related primarily to the change in ownership of the Company. In the three
        months
        ended September 29, 2006, excluding the extraordinary costs in 2005, operating
        expenses increased $1.8 million. This included: 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 $14.8 million in the third quarter of 2006 from $13.0
        million in the third quarter of 2005. Operating income margin decreased to
        11.6%
        of sales in 2006 from 12.1% in 2005.
 
 Interest
        expense decreased $0.1 million in the third quarter of 2006 as compared to
        the
        third quarter of 2005.
 
 Other,
        Net increased $1.0 million primarily due to the cost related to the
        extinguishment of debt.
 
 Income
        tax expense increased $0.3 million to $4.4 million in the third quarter of
        2006
        from a tax expense of $4.1 million in the same period of 2005.
  Net
        income increased by $0.7 million to $6.1 million for the third quarter of
        2006
        from $5.4 million in the same period of 2005.
 
 *Nine
        Months Ended September 29, 2006 Compared to Nine Months Ended September 30,
        2005*
 
 Sales
        increased 23.2% or $62.8 million to $333.3 million in the first nine months
        of
        2006 compared to $270.5 million in the first nine months of 2005. Grain
        equipment sales increased 26.1% during the first nine months of 2006 to $202.3
        million as compared to $160.4 the first nine months 2005 due to higher 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. Expectations for a positive harvest,
        a movement to increase farm storage and higher international sales contribute
        to
        the sale growth. Swine equipment sales increased 41.9% to $71.5 million in
        the
        first nine months of 2006 compared to $50.4 million in the first nine months
        of
        2005 due to an improved swine production market that allows producers to
        upgrade
        equipment. Swine commodity prices remain positive and weather conditions
        were
        favorable early in the year. Poultry equipment sales remained flat at $59.6
        million in the first nine months of 2006 compared to $59.8 million in the
        first
        nine months of 2005.
 
 Cost
        of
        goods sold increased 25.8% or $52.3 million to $254.8 million or 76.4% of
        sales
        in the first nine months of 2006 compared to $202.5 million or 74.9% of sales
        in
        the first nine months of 2005. Cost of goods sold after extraordinary and
        non-recurring expenses related to the inventory fair value step up of $4.6
        million in the first nine months of 2005, resulted in a year over year increase
        of 26.8% or $53.9 million. This increase is primarily due to higher volume
        including associated premium costs (e.g. overtime, outsourcing of components,
        and additional labor costs.), material cost increases and higher cost relative
        to international sales.
 
 Gross
        profit increased to $78.6 million in the first nine months of 2006, or 23.6%
        of
        sales, from $68.0 million, or 25.1% of sales, in the same period of 2005.
        This
        increase was primarily due to the reasons cited above.
 
 Operating
        expenses decreased 15.9% or $7.8 million to $41.5 million in the first nine
        months of 2006 from $49.3 million in the same period of 2005. In 2005, operating
        expenses included extraordinary and non-recurring expenses of $13.4 million
        related primarily to the change in ownership of the Company. In 2006, excluding
        the extraordinary costs in 2005, operating expenses increased by $5.6 million
        which included: higher distribution expenses related to higher sales 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 $37.1 million in the first nine months of 2006 from $18.7
        million in the first nine months of 2005. Operating income margins increased
        to
        11.1% of sales in 2006 from 6.9% in 2005.
 
 Interest
        expense increased $0.2 million in the first nine months of 2006 as compared
        to
        the first nine months of 2005 due to higher borrowing costs, offset by less
        debt.
  17
  
 
 Other,
        Net increased 1.5 million primarily due to the cost related to the
        extinguishment of debt.
 
 Income
        tax expense increased $7.2 million to $10.8 million in the first nine months
        of
        2006 from $3.6 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 $9.6 million to $14.6 million for the first nine months
        of
        2006 from $5.0 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
        September 29, 2006, the Company had $54.6 million of working capital, an
        increase of $3.1 million from working capital as of December 31, 2005. The
        increase in working capital was primarily due to increases in cash, accounts
        receivable, inventory and deferred taxes and decreases in accrued warranty
        and
        current maturities of long-term debt of $26.5 million, partially offset by
        decreases in prepaids, income tax receivable, other current assets and increases
        in accounts payable, payroll and payroll related expenses, accrued interest,
        accrued workers compensation, other accrued expenses and customer deposits
        of
        $23.4 million.
  Cash
        flows from operating activities decreased $3.9 million in the first nine
        months
        of 2006 compared to 2005 and provided $21.8 million and $25.6 million,
        respectively.
 
 Investing
        activities used $9.2 million and $4.4 million in cash flow in the first nine
        months of 2006 and 2005, respectively. The cash was used primarily for the
        purchase of property, plant and equipment.
  Financing
        activities used $8.6 million and used $19.6 million in cash flow in the first
        nine 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 September 29, 2006, the Company had
        approximately $45.0 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.
  18
  
 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 a number of covenants that, among other things,
        restrict our ability to dispose of assets, incur additional indebtedness,
        pay or
        make dividends or distributions to the Company’s stockholders, create liens on
        assets, enter into sale and leaseback transactions and otherwise restrict
        our
        general corporate activities. The Company is also required to comply with
        specified financial ratios and tests including a fixed charge coverage
        ratio.
 
 As
        of
        September 29, 2006 the Company had $13.9 million of revolving loans outstanding
        and $5.9 million of standby letters of credit which reduced the overall
        availability under the credit facility to $45.0 million. As of September
        29,
        2006 the Company had expensed as Cost of Sales $1.2 million related to the
        standby letters of credit under the credit facility.
  ***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. The Company purchased $5.0 million of its
        outstanding bonds on August 25, 2006 and immediately retired them. The bonds
        were purchased at fair market value.
  19
  
 **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.
  20
  
 **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 September 29, 2006,
        principal exposed to interest rate risk was limited to $14.2 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
        $0.1 million impact on the Company's results of operations.
 
 At
        September 29, 2006, approximately 13.6% 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. The Company's management has
        discussed the material weaknesses with its independent registered public
        accounting firm, BKD, LLP, the Audit Committee of the Board of Directors
        and the
        Company's 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
        September 29, 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 September 29, 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 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.
  21
  
 
 **Changes
        in Internal Controls**
 
 In
        the
        first nine 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
        September 29, 2006 and September 30, 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.
 22
 
  **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.
 
  23
  **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:
        November 13, 2006**
 
  24
  **Exhibit
        31.1**
 
 **CERTIFICATIONS**
 
 I,
        William Branch, 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:
        November 13, 2006
 
 
 /s/
        William Branch
 Chief
        Executive Officer and Chairman of the Board
  25
  
 **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:
        November 13, 2006
 
 
 /s/
        John Henderson
 Chief
        Financial Officer
  26
  
 **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 September
        29, 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, William Branch,
        as
        Interim Chief Executive Officer of the Company and Chairman of the Board,
        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:
        November 13, 2006
 
 /s/
        WILLIAM BRANCH
 William
        Branch
 Chief
        Executive Officer and Chairman of the Board
 
 
 /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.
 
 27
  
 **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 and Chairman of the Board.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.
 
 28