
<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
                            ----------------------
                                   FORM 10-K
                                        

         [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

                  For the Fiscal Year Ended December 31, 1998

                                      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. Employer
        of incorporation or organization)             Identification No.)
 
     1004 E. Illinois Street, Assumption, Illinois          62510
        (Address of principal executive offices)          (Zip Code)
 
      Registrant's telephone number, including area code: (217) 226-4421
 
       Securities registered pursuant to Section 12(b) of the Act: None

       Securities registered pursuant to Section 12(g) of the Act: None


    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 if disclosure of delinquent filers pursuant to Item
405 or Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
Form 10-K. [X]

 
     Aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant. $0

     Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. Common stock, par
value $0.01 per share, 2,000,000 shares outstanding as of March 29, 1999.


                  Documents Incorporated by Reference:  None

                                       1
<PAGE>
 
<TABLE>
<CAPTION>
                               TABLE OF CONTENTS
                                                                           Page
                                                                           ----
PART I
<S>        <C>                                                              <C>
  Item 1.  Business.........................................................  3
  Item 2.  Properties.......................................................  9
  Item 3.  Legal Proceedings................................................ 10
  Item 4.  Submission of Matters to a Vote of Security Holders.............. 10
 
PART II
  Item 5.  Market for the Registrant's Common Equity and Related 
           Stockholder Matters.............................................. 11
  Item 6.  Selected Financial Data.......................................... 12
  Item 7.  Management's Discussion and Analysis of Financial Condition 
           and Results of Operations........................................ 13
 
  Item 7A. Quantative and Qualitative Disclosure About Market Risk.......... 18
  Item 8.  Financial Statements and Supplementary Data...................... 19
  Item 9.  Changes in and Disagreements with Accountants on Accounting 
           and Financial Disclosure......................................... 44
 
 
PART III
  Item 10. Directors and Executive Officers of the Registrant............... 44
  Item 11. Executive Compensation........................................... 45
  Item 12. Security Ownership of Certain Beneficial Owners 
           and Management................................................... 47
  Item 13. Certain Relationships and Related Transactions................... 47
 
PART IV
  Item 14. Exhibits, Financial Statement Schedules and Reports on 
           Form 8-K......................................................... 48 
</TABLE>
                                       2

<PAGE>
 
                                    PART I

ITEM 1. BUSINESS.

Note on Forward-Looking Statements

   This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Forward-looking statements are
statements other than historical information or statements of current condition.
Some forward-looking statements may be identified by use of terms such as
"believes," "anticipates," "intends" or "expects." These forward-looking
statements relate to the plans, objectives and expectations of The GSI Group,
Inc. (the "Company") for future operations. In light of the risks and
uncertainties inherent in all future projections, the inclusion of forward-
looking statements in this report should not be regarded as a representation by
the Company or any other person that the objectives, plans or expectations of
the Company will be achieved. The Company's plans, objectives and expectations
are difficult to forecast and could differ materially from those projected in
the forward-looking statements.

General

   The Company is a leading manufacturer and supplier of agricultural equipment
and services worldwide. The Company believes that it is the largest global
provider of both (i) grain storage bins and related drying and handling systems
and (ii) swine feed storage, feed delivery, confinement and ventilation systems.
The Company is also one of the largest global providers of poultry feed storage,
feed delivery, watering, ventilation, nesting, egg-handling and hatching
systems. The Company markets its agricultural products in approximately 75
countries through a network of over 1,650 independent dealers to grain, swine
and poultry producers primarily under its GSI(R), AP/TM/ and Cumberland(R) brand
names. The Company's current market position in the industry reflects both the
strong, long-term relationships the Company has developed with its customers as
well as the quality and reliability of its products.

   The primary users of the Company's grain storage, drying and handling
products are farm operators or commercial businesses, such as the 
Archer-Daniels-Midland Company and Cargill, Inc., that operate feed mills, grain
elevators, port storage facilities and commercial grain processing facilities.
The Company believes that its grain storage, drying and handling equipment is
superior to that of its principal competitors on the basis of strength,
durability, reliability, design efficiency and breadth of product offering. The
Company's feeding and ventilation systems are used primarily by growers that
raise swine and poultry, typically on a contract basis for large integrators
such as Murphy Family Farms, Perdue Farms Incorporated and Tyson Foods, Inc.
Because swine and poultry growers are partially compensated by integrators based
on the efficiency with which they convert feed to meat (the "feed-to-meat
ratio"), they seek to purchase systems which minimize the feed-to-meat ratio. As
a result of its proprietary designs, the Company believes that its swine and
poultry systems are the most effective in the industry in serving this customer
objective.

   The industry in which the Company operates is characterized both domestically
and internationally by a few large companies with broad product offerings and
numerous small manufacturers of niche product lines. Domestically, the Company
intends to build on its established presence in the grain, swine and poultry
markets. Internationally, the Company intends to capitalize on opportunities
arising from still-developing agricultural industries. The Company believes that
less functionally sophisticated and efficient grain storage systems used by
facilities located outside the U.S. and Western Europe, which experience
relatively high levels of grain spoilage and loss, are likely to be replaced by
more modern systems. The Company also believes that the population growth
occurring in the Company's international markets will result in consumers
devoting larger portions of their income to improved and higher-protein diets,
stimulating demand for poultry, and to a lesser extent, pork. The Company
believes that it is well-positioned to capture increases in worldwide demand for
its products resulting from these industry trends because of its leading brand
names, broad and diversified product lines, strong distribution network and 
high-quality product. The economic uncertainty experienced by the international 
markets in the past 18 months has led to a slowdown in these industry trends.

   The Company was incorporated in Delaware on April 30, 1964. The Company's
principal executive office is located at 1004 East Illinois Street, Assumption,
Illinois 62510 and its telephone number is (217) 226-4421.


                                       3
<PAGE>
 
Company Strengths

   Market Leader. The Company believes that it is the largest global provider of
both (i) grain storage bins and related drying and handling systems and (ii)
swine feed storage, feed delivery, confinement and ventilation systems. The
Company is also one of the largest global providers of poultry feed storage,
feed delivery, watering, ventilation, nesting, egg-handling and hatching
systems.

   Provider of Fully-Integrated Systems. The Company offers a broad range of
products that permits customers to purchase all of their grain, swine and
poultry production needs from one supplier. The Company believes that providing
fully-integrated systems significantly lowers total production costs and
enhances producer productivity by offering compatible products designed to
promote synergies and achieve maximum operating results. Dealers who purchase
fully-integrated systems also benefit from lower administrative and shipping
costs and the ease of dealing with a single supplier. The Company intends to
maintain its position as a provider of fully-integrated systems by continuing to
offer the most complete line of products available within its markets and by
developing and introducing new products within its existing lines.

   Brand Name Recognition and Reputation for Quality Products and Service.
Through its manufacturing expertise and experience, the Company has established
recognition in its markets for the GSI(R), AP/TM/ and Cumberland(R) brand names.
The Company seeks to protect the reputation for high quality, reliability and
specialized services that are associated with such brand names through quality
control and customer feedback programs. The Company believes that its reputation
and recognized brand names, along with its extensive distribution network, will
assist it in its efforts to further penetrate both the domestic and
international markets in which the Company operates.

   Effective and Established Distribution Network. The Company believes that its
development of a highly effective and established distribution network affords
it significant competitive advantages. The Company's distribution network
consists of over 1,650 independent dealers that market the Company's products in
approximately 75 countries throughout the world. The breadth and scope of the
Company's distribution network makes its products readily available in each of
the Company's markets and lowers transportation costs for its customers. Dealers
are carefully selected and trained to ensure high levels of customer service. In
addition, the Company has experienced a very low turn-over rate of its dealers
since the Company's inception, which promotes consistency and stability to
customers.

   Long-Term Alliances with Customers. The Company has a history of developing
long-term alliances with customers who are market leaders in both the industries
and the geographic markets they serve. The Company works closely with customers
through all stages of product development in order to tailor products and
systems to meet each customer's unique needs, making substitutions with
competitor products more difficult. The Company's commitment to product quality,
dedication to customer service and responsiveness to changing customer needs
have enabled the Company to develop and strengthen long-term alliances with its
customers.

   Flexible Manufacturing Facilities. The Company's facilities are designed to
be easily reconfigured to adapt to demand changes for any or all of the
Company's products. The Company's primary manufacturing facility, located in
Assumption, Illinois, consists of approximately 675,000 square feet and operates
on a 24-hour basis during peak production periods. The Company's facilities
employ state-of-the-art machines that have enhanced production efficiency.

   Company Operated and Owned by Experienced Management Team. The Company is led
by an experienced management team, the members of which have each worked in the
agricultural products industry for an average of 16 years. Craig Sloan, a
founder and the Chief Executive Officer of the Company, and each of the other
members of the Company's senior management team have invested in the Company and
together own all of its voting common stock. The Company believes that the
agricultural expertise of its management team, coupled with the corporate
culture promoted by a management-owned company, permit it to establish strong
customer relationships and respond quickly to market opportunities.


Business Strategy

   The Company's objective is to capitalize on its strengths through the
implementation of its business strategy, which includes the following principal
elements:

                                       4
<PAGE>
 
   Capitalize on Opportunities in International Markets. The Company intends to
continue to leverage its worldwide brand name recognition, leading market
positions and international distribution network to capture the demand for its
products that exists in the international marketplace. The Company believes that
increasing the diversity of both its customer base and geographic coverage by
expanding its international operations will mitigate the effect of future
reductions in demand within any of its individual product lines, or within a
particular geographic selling region.

   Continue Development of Proprietary Product Innovations. The Company's
research and development efforts focus on the development of new and
technologically advanced products to respond to customer demands, changes in the
marketplace and new technology. The Company employs a strategy of working
closely with its customers and capitalizing on existing technology to improve
existing products and develop new value-added products. The Company intends to
continue to actively develop product improvements and innovations to more
effectively serve its customers.

   Trim Expenses and Improve Profitability. The Company intends to focus on
improving its financial performance by reducing non-strategic expenses and
streamlining the processes at all levels of the organization.

Acquisition of Business

   On June 30, 1998, the Company acquired all of the capital stock of Avemarau
Equipamentos Agricolas Ltda. ("Avemarau"), South America's largest manufacturer
and supplier of poultry feeding equipment.

   The acquisition of Avemarau will expand the Company's international presence
by making GSI the leading manufacturer and supplier of poultry equipment in
South America. The Company intends to manufacture and sell its Cumberland(R)
product line, including its HI-LO(R) poultry feeding systems, its
Cumberland/Clark drinkers and its bulk feed tanks, in South America through
Avemarau. Avemarau's manufacturing capabilities and distribution network will
also provide the Company with access to the expanding hog equipment market in
Brazil.

Industry Overview

   Demand for the Company's products is driven by the overall worldwide level of
grain, swine and poultry production as well as the increasing focus both
domestically and internationally on improving productivity in these industries.
These markets are driven by a number of factors, including consumption trends
affected by economic and population growth and government policies.

   Demand for grain and the required infrastructure for grain storage, drying
and handling is driven by several factors, including the need for grain for
worldwide production of swine, poultry and beef. The Company believes that less
functionally sophisticated and efficient grain storage facilities located
outside the U.S. and Western Europe, which experience higher levels of grain
spoilage and loss, are over time likely to be replaced by more modern equipment.
The Company also believes that these dynamics will continue to support domestic
and international demand for the Company's grain storage, drying and handling
systems. However, the recent economic weakness experienced by many international
markets is currently depressing demand in those markets.

   Demand for the Company's swine and poultry feeding equipment and feed storage
and delivery systems is impacted by the rate of economic and population growth
occurring in international markets. As disposable incomes increase in these
international markets, consumers have in the past and should in the future
devote larger portions of their income to improved and higher protein-based
diets. In the past, this trend has stimulated stronger demand for meat,
specifically poultry and, to a lesser extent, pork, as these meats provide more
cost-effective sources of animal protein than beef. The recent economic weakness
experienced by many international markets and the impact of environmental
regulations in the U.S. has led to a dramatic decrease in the demand for the
Company's hog equipment.

   The Company's sales of grain equipment have historically been affected by
feed and grain prices, acreage planted, crop yields, demand, government
policies, government subsidies and other factors beyond the Company's control.
Weather conditions also can adversely impact the agricultural industry and delay
planned construction activity, resulting in fluctuating demand for the Company's
grain equipment and delayed or lost revenues. Increases in feed and grain prices
have in the past resulted in a decline in sales of feeding, watering and
ventilation systems.

                                       5
<PAGE>
 
The Company's sales of swine and poultry equipment historically have been
affected by the level of construction activity by swine and poultry producers,
which is affected by feed prices, environmental regulations and domestic and
international demand for pork and poultry.


Products

   The Company manufactures and markets (i) grain storage bins and related
drying and handling equipment systems, (ii) swine feed storage, feed delivery,
confinement and ventilation systems and (iii) poultry feed storage, feed
delivery, watering, ventilation, nesting, egg-handling and hatching systems. The
Company offers a broad range of products that permits customers to purchase
their grain, swine and poultry production equipment needs from one supplier. The
Company believes that its ability to offer integrated systems provides it with a
competitive advantage by enabling producers to purchase complete, integrated
production systems from a single distributor who can offer high-quality
installation and service. 

 Grain Product Line

   The Company's grain equipment consists of the following products:

   Grain Storage Bins. The Company manufactures and markets a complete line of
over 1,000 models of both flat and hopper bottomed grain storage bins with
capacities of up to 650,000 bushels. The Company markets its bins to both farm
and commercial end users under its GSI(R) brand name. The Company's grain
storage bins are manufactured using high-yield, high tensile, galvanized steel
and are assembled with high strength, galvanized bolts and anchor brackets. The
Company's grain storage bins offer efficient design enhancements, including
patented walk-in doors and a roof design that provides specialized vents for
increased efficiency, extruded lips for protection against leakage, large and
accessible eave and peak openings for ease of access, and reinforced supportive
bends to increase rigidity. The Company believes that its grain storage bins are
the most reliable and durable in the industry.

   Grain Drying Equipment. To meet the need to dry grain for storage, the
Company manufactures and markets a complete line of over 100 models of grain
drying devices with capacities of up to 10,000 bushels per hour. The Company
markets its grain drying equipment to both farm and commercial end users under
its GSI(R) and Airstream(R) brand names. The Company's drying equipment, which
includes fans, heaters, top dryers, portable dryers, stack dryers and tower
dryers, are manufactured using galvanized steel and high-grade electrical
components and utilize patented control systems, which offer computerized
control of all dryer functions from one panel.

   Grain Handling Equipment. The Company manufactures and markets a complete
line of grain handling equipment to complement its grain storage and drying
product offerings. The Company markets its grain handling equipment, which
includes bucket elevators, conveyors and augers, to both farm and commercial end
users under its GSI(R) and Grain King(R) brand names. The Company's grain
handling equipment offers ease of integration into Company or competitor systems
and enables the Company to offer a fully-integrated product line to grain
producers.

 Swine Product Line

   The Company's swine equipment consists of the following products:

   Feeding Systems. The Company manufactures and markets its swine feeding
products under its AP/TM/ brand name. The Company designs and implements custom
swine feeding systems to fit both the general industry needs of the different
types of swine producers and the specialized needs of individual swine
producers. The Company's swine feeding systems generally consist of a feed
storage bin located outside of the swine building and a feed delivery system,
which conveys the feed to and through the building to drop feed dispensers
suspended within the building. The drop feed dispensers provide individualized
feeding through automatic times. The Company's swine feed storage bins are
manufactured with precision die-cut, high tensile corrugated steel and assembled
with an exclusive water tight sealing system and specially die-formed eaves, and
include the Auto-Lok/TM/ access system, which allows for efficient systems
monitoring. The Company's swine feed delivery systems consist of the Flex-
Flo/TM/ System and the Chain Disk System. The Flex-Flo/TM/ System uses high-
quality tensile steel augers and precision control devices to reach all drop
feeders within a system. The Chain Disk System handles high capacities of feed
at long distances with multiple turns. The Company believes that its swine drop
feeders are superior to its
                                       6
<PAGE>
 
competitors' products due to their ease of installation and maintenance, ability
to handle high volumes of feed, accurate eye-level scales and strong, durable
all-plastic construction that eliminates corrosion.

   Ventilation Systems. The Company manufactures and markets ventilation systems
for swine buildings under its AP/TM/ and Airstream(R) brand names. These systems
consist of fans, heating and evaporative cooling systems, winches, inlets and
other accessories (including computer based automated control devices) that
regulate temperature and air flow. Proper ventilation systems are crucial for
minimizing the feed-to-meat conversion ratio by reducing stress caused by
extreme temperature fluctuation, allowing for higher density production and
providing optimum swine health through disease prevention. The Company's swine
ventilation systems produce high levels of air output at low levels of power
consumption, adapt to a wide array of specialty fans and other accessories,
operate with little maintenance or cleaning and provide precision monitoring of
environmental control.
 
 Poultry Product Line

   The Company's poultry equipment consists of the following products:

   Feeding Systems. The Company manufactures and markets its poultry feeding
systems under its Cumberland(R) brand name. The Company manufactures feeding
systems that are custom tailored to both the general industry needs of different
types of poultry producers and to the specialized needs of individual poultry
producers. The Company's poultry feeding systems consist of a feed storage bin
located outside the poultry house, a feed delivery system that delivers the feed
from the feed storage bin into the house and an internal feed distribution
system that delivers feed to the birds. The Company's poultry feed storage bins
contain a number of patented features designed to maximize capacity, manage the
quality of stored feed, prevent rain and condensation from entering feed storage
bins and provide first-in, first-out material flow, thereby keeping feed fresh
to prevent spoilage, and blended to provide uniform quality rations. The
Company's poultry feed delivery systems use non-corrosive plastic and galvanized
steel parts specially engineered for durability and reliable operations and
specialized tubing and auguring or chain components that allow feed to be
conveyed up, down and around corners. The Company believes that its patented 
HI-LO(R) pan feeder is superior to competitor products due to its unique ability
to adjust from floor feeding for young chicks to regulated feed levels for other
birds.

   Watering Systems. The Company manufactures and markets nipple watering
systems for poultry producers under its Cumberland(R) brand name. The ability of
a bird to obtain water easily and rapidly is an essential factor in facilitating
weight gain. The Company's poultry watering system consists of pipes that
distribute water throughout the house to drinking units supported by winches,
cables and other components. The water is delivered through a regulator designed
to provide differential water pressure according to demand. The Company's
poultry watering systems are distinguished by their toggle action nipples, which
transmit water from nipple to beak without causing undue stress on the bird or
excess water to be splashed onto the floor. The watering nipples produced by the
Company also are designed to allow large water droplets to form on the cavity of
the nipple, thereby attracting young birds to drink, which ultimately promotes
weight gain.

   Ventilation Systems. The Company manufactures and markets ventilation systems
for poultry producers under its Cumberland(R) brand name. Equipment utilized in
such systems include fiberglass and galvanized fans, the Komfort Kooler
evaporative cooling systems, manual and automated curtain coolers, heating
systems and automated controls for complete ventilation, cooling and heating
management. The Company believes its poultry ventilation products are reliable
and easy to assemble in the field, permit energy-efficient airflow management
and are well-suited for international sales because they ship compactly and
inexpensively and assemble with little hardware and few tools.

   Nesting and Egg-Handling Systems. The Company manufactures and markets
nesting and egg-handling systems for poultry producers under its Cumberland(R)
brand name. These systems consist of mechanical nests and egg collection tables.
The Company's nesting and egg-handling systems are manufactured using high-
yield, high tensile galvanized steel and are designed to promote comfort for
nesting birds and efficiency for production personnel. The Company believes that
its nesting and egg-handling systems are among the most reliable and cost-
effective in the poultry industry.

   Hatching Systems. The Company manufactures and markets commercial incubation
systems for the poultry industry, with capacities of up to 115,200 eggs, under
its Cumberland(R) brand name. The Company provides incubation systems for
producers that grow each of the following types of poultry: breeders (chickens
grown to lay
                                       7
<PAGE>
 
eggs); broilers (chickens grown for human consumption); and turkey. The Company
believes that its incubation products are distinguished by their efficient use
of space, reliable control panels, effective airflow mechanisms, versatility and
durability, ease of access and sophistication of tracking devices.

   In 1998, 1997 and 1996, no single class of the Company's products accounted
for 10% or more of the Company's net sales.

Product Distribution

   The Company distributes its products primarily through a network of U.S. and
international independent dealers who offer targeted geographic coverage in key
grain, swine and poultry producing markets throughout the world. The Company's
dealers sell products to grain, swine and poultry producers, agricultural
companies and various other farm and commercial end-users. The Company believes
that its distribution network is one of the strongest in the industry, providing
its customers with high levels of service. Since its inception, the Company has
experienced a very low turn-over rate of its dealers. The Company believes this
has resulted in a reputation of consistency in its products and stability with
its customers. The Company further believes that the high-level of commitment
its dealers have to the Company is evidenced by the fact that many of the
Company's dealers choose not to sell products of the Company's competitors.

   The Company also maintains a sales force to provide oversight services for
the Company's distribution network, interact with integrators and end users,
recruit additional dealers for the Company's products, and educate the dealers
on the uses and functions of the Company's products. The Company further
supports and markets its products with a technical service and support team,
which provides training and advice to dealers and end users regarding
installation, operation and service of products and, when necessary, on-site
service.

Competition

   The market for the Company's products is competitive. Domestically and
internationally, the Company competes with a variety of manufacturers and
suppliers that offer only a limited number of the products offered by the
Company. The Company believes that only one of its competitors, CTB
International Corp., offers products across most of the Company's product lines.

   Competition is based on the price, value, reputation, quality and design of
the products offered and the customer service provided by distributors, dealers
and manufacturers of the products. The Company believes that its leading brand
names, diversified product lines, strong distribution network and high quality
products enable it to compete effectively. The Company further believes that its
ability to offer integrated systems to grain, swine and poultry producers, which
significantly lowers total production costs and enhances producer productivity,
provides it with a competitive advantage. Integrated equipment systems offer
significant benefits to dealers, including lower administrative and shipping
costs and the ease of dealing with a single supplier for all of their customer
needs. In addition, the Company's dealers provide producers with high quality
service, installation and repair.

New Product Development

   The Company has a product development and design engineering staff, most of
whom are located in Assumption, Illinois. Expenditures by the Company for
product research and development were approximately $2.7 million, $1.6 million
and $1.2 million for the years ended December 31, 1998, 1997 and 1996,
respectively. The Company charges research and development costs to operations
as incurred.

Raw Materials

   The primary raw materials used by the Company to manufacture its products are
steel and polymer materials, including PVC pipe, polypropylene and polyethylene.
The Company also purchases various component parts that are integrated into the
Company's products. The Company is not dependent on any one of its suppliers and
in the past has not experienced difficulty in obtaining materials or components.
In addition, materials and components purchased by the Company are readily
available from alternative suppliers. The Company has no long-term supply
contracts for materials or components.

                                       8
<PAGE>
 
Regulatory and Environmental Matters

  Like other manufacturers, the Company is subject to a broad range of federal,
state, local and foreign laws and requirements, including those governing
discharges to the air and water, the handling and disposal of solid and
hazardous substances and wastes, the remediation of contamination associated
with releases of hazardous substances at the Company's facilities and offsite
disposal locations, workplace safety and equal employment opportunities.
Expenditures made by the Company to comply with such laws and requirements
historically have not been material.

Backlog

  Backlog is not a significant factor in the Company's business because most of
the Company's products are delivered within a few weeks of their order. The
Company's backlog at December 31, 1998 was $24.6 million compared to $29.4
million at December 31, 1997. The Company believes that all such backlog will be
filled by the end of 1999.

Patents and Trademarks

  The Company protects its technological and proprietary developments. The
Company currently has several active U.S. and foreign patents, trademarks and
various licenses for other intellectual property. While the Company believes its
patents, trademarks and licensed information have significant value, the Company
does not believe that its competitive position or that its operations are
dependent on any individual patent or trademark or group of related patents or
trademarks.

Employees

  As of December 31, 1998, the Company had 1,799 employees, of which 1,666 were
permanent and 133 were seasonal. The Company's employees are not represented by
a union. Management believes that its relationships with the Company's employees
are good.

 

ITEM 2. PROPERTIES.

  The principal properties of The GSI Group as of March 12, 1999, were as
follows:

<TABLE>
<CAPTION>
                           Location                                 Description of Property
                           --------                                 -----------------------
<S>                                                              <C>
Assumption, Illinois...........................................  Manufacturing/Sales
Paris, Illinois................................................  Manufacturing/Assembly
Newton, Illinois...............................................  Manufacturing/Assembly
Vandalia, Illinois.............................................  Assembly
DuQuoin, Illinois..............................................  Manufacturing/Assembly
Marau, Brazil..................................................  Manufacturing/Sales
Geneva, Indiana................................................  Sales/Warehouse
Penang, Malaysia...............................................  Manufacturing/Sales/Warehouse
Fourways, South Africa.........................................  Sales/Warehouse
Sioux City, Iowa...............................................  Sales/Warehouse
Sambeek, The Netherlands.......................................  Sales/Warehouse
Queretero, Mexico..............................................  Sales/Warehouse
Mason City, Iowa...............................................  Manufacturing/Sales
Watertown, South Dakota........................................  Sales/Warehouse
Garrett, Indiana...............................................  Sales/Warehouse
Oakland, Illinois..............................................  Sales/Warehouse
West Memphis, Arkansas.........................................  Sales/Warehouse
Hampton, Nebraska..............................................  Sales/Warehouse
</TABLE>

  The corporate headquarters for the Company is located in Assumption, Illinois.

                                       9

<PAGE>

  The Company moved out of its Mt. Carmel, Illinois facility in 1998 as a result
of a reduced need for manufacturing capacity.
 
  The Company's owned facilities are subject to mortgages. The Company's leased
facilities are leased through operating lease agreements with varying expiration
dates. For information on operating leases, see Note 12 to the Consolidated
Financial Statements included in Item 8 hereof.

  The Company believes that its facilities are suitable for their present and
intended purposes and have adequate capacity for the Company's current levels of
operation.

ITEM 3. LEGAL PROCEEDINGS.

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



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
 
  No matters were submitted to a vote of security holders of the Company during
the fourth quarter of the fiscal year ended December 31, 1998.

                                       10
<PAGE>
 
                                    PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
        STOCKHOLDER MATTERS.

  There is no established public trading market for any class of the Company's
Common Stock. As of March 29, 1999 the Company has 16 holders of its Common
Stock. See Item 12, "Security Ownership of Certain Beneficial Owners and
Management".

  The Company generally has not paid dividends in the past, and does not intend
to pay dividends in the future, except to enable its stockholders to pay taxes
resulting from the Company's status as a subchapter S corporation. During the
years ended December 31, 1998, and 1997, the Company declared dividends totaling
$1.1 million and $16.1 million, respectively. The Company is subject to certain
restrictions on the payment of dividends contained in the indenture governing
the Company's 10 1/4 % Senior Subordinated Notes due 2007 (the "Notes") and in
the Company's credit facility with LaSalle National Bank (the "Credit
Facility"). Future dividends, if any, will be at the discretion of the Board of
Directors and will depend upon, among other things, the Company's operations,
capital requirements, surplus, general financial condition, contractual
restrictions and such other factors as the Board of Directors may deem relevant.


                                      11
<PAGE>
 
ITEM 6. SELECTED FINANCIAL DATA.

  Set forth below is certain selected historical consolidated financial data for
the Company as of and for the years ended December 31, 1994, 1995, 1996, 1997
and 1998. The selected historical consolidated financial data for the years
indicated were derived from the consolidated financial statements of the
Company, which were audited by Arthur Andersen LLP. The information set forth
below should be read in conjunction with Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements and notes thereto included in Item 8 hereof.

<TABLE>
<CAPTION>
                                                                          Years Ended December 31,
                                                    ---------------------------------------------------------------------
                                                      1994(1)           1995          1996          1997          1998
                                                    -----------       ---------     ---------     ---------     ---------
<S>                                                 <C>               <C>           <C>           <C>           <C>
Income Statement:
 Net sales..........................................   $130,852        $141,191      $178,537      $220,758      $259,998
 Cost of sales......................................    106,037         115,004       135,696       164,607       197,907
                                                       --------        --------      --------      --------      --------
 Gross profit.......................................     24,815          26,187        42,841        56,151        62,091
 Selling, general and administrative expenses.......     19,497          22,176        28,787        35,189        50,245
                                                       --------        --------      --------      --------      --------
 Operating income...................................      5,318           4,011        14,054        20,962        11,846
 Interest expense...................................     (1,934)         (2,894)       (3,590)       (6,174)      (12,946)
 Write-off of affiliate receivable (2)..............         --          (3,423)           --            --            --
 Other income (expense), net........................        461             548           674           943         1,117
                                                       --------        --------      --------      --------      --------
 Income (loss) from continuing operations...........      3,845          (1,758)       11,138        15,731            17
 Income (loss) from discontinued operations.........       (554)            280          (482)           --            --
 Extraordinary gain (loss) on extinguishment
  of debt...........................................       (279)             --            --         2,119            --
 Provision for income taxes.........................         --              --          (157)         (288)          260
                                                       --------        --------      --------      --------      --------
  Net income (loss).................................   $  3,012        $ (1,478)     $ 10,499      $ 17,562      $    277
                                                       ========        ========      ========      ========      ========

Basic and Diluted Earnings Per Share:
 Continuing operations..............................   $   2.14        $  (0.98)     $   5.78      $   7.72      $   0.14
 Discontinued operations............................      (0.31)           0.16         (0.25)           --            --
 Extraordinary item.................................      (0.16)             --            --          1.06            --
                                                       --------        --------      --------      --------      --------
  Net income (loss).................................   $   1.67        $  (0.82)     $   5.53      $   8.78      $   0.14
                                                       ========        ========      ========      ========      ========
</TABLE>


(1)  The Company signed an agreement to sell the working capital and fixed
     assets of its Heritage Vinyl Division in December 1995 and completed the
     sale in January 1996. The Company's 1994 and prior year financial
     statements were restated to reflect this discontinued operation. See Note 6
     to Consolidated Financial Statements included in Item 8 hereof.
(2)  The write-off of the affiliate receivable resulted from a significant
     customer, who is an affiliate of the Company, ceasing distribution
     operations and selling its only division in December 1995. The write-off of
     the affiliate receivable represents the portion of the remaining receivable
     due that was not collectible. See Note 14 to Consolidated Financial
     Statements included in Item 8 hereof.

                                      12
<PAGE>
 
ITEM 7. 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 8 hereof.

General

     The Company is a leading manufacturer and supplier of agricultural
equipment and services worldwide. The Company's grain, swine and poultry
products are used by producers and purchasers of grain, and by producers of
swine and poultry. Fluctuations in grain and feed prices directly impact sales
of the Company's grain equipment. Because the primary cost of producing swine
and poultry is the cost of the feed grain consumed by animals, fluctuations in
the supply and cost of grain to users of the Company's products in the past has
impacted sales of the Company's swine and poultry equipment. The Company
believes, however, that its diversified product offerings mitigate some of the
effects of fluctuations in the price of grain since the demand for grain
storage, drying and handling equipment tends to increase during periods of
higher grain prices, which somewhat offsets the reduction in demand during such
periods for the Company's products by producers of swine and poultry. However,
the Company believes that low swine prices and environmental regulations will
for the foreseeable future continue to effect negatively the sales of its swine
equipment, and, therefore, its overall results of operations and financial
condition.

     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 net sales and net income have historically been
lower during the first and fourth fiscal quarters as compared to the second and
third quarters.

     Although the Company's sales are primarily denominated in U.S. dollars and
are not generally affected by currency fluctuations (except for the Company's
Brazilian operation), the production costs, profit margins and competitive
position of the Company 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 net sales. In 1998 and 1997, the Company's international sales
accounted for 32.8% and 26.4% of net sales, respectively. During 1997, the
Company opened manufacturing and sales facilities in Malaysia, South Africa,
Brazil and Mexico to promote international expansion. The cost of establishing
these facilities has been significant and has had an adverse effect on the
Company's results of operations. In June 1998, the Company acquired a
manufacturer and supplier of poultry feeding equipment in Brazil. Subsequent to
year-end, the Brazilian Real experienced a devaluation (1.2098 Brazilian
Reals/U.S. Dollar at December 31, 1998 as compared to 1.7525 Brazilian
Reals/U.S. Dollar at March 29, 1999). The effect of the devaluation is a
reduction in the Company's equity and results of operations. While the
devaluation has not adversely affected shipments from the Company's Brazilian
operation, further deterioration in the Brazilian economy could have this
effect.

  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 the Company's international operations. For
example, the recent financial crises in many countries in Southeast Asia and in
Brazil have caused some agricultural producers to cancel orders or have led to
the inability of such producers to secure necessary lines of credit to buy
agricultural commodities and/or equipment. While this trend has not led to
material cancellations of orders by the Company's customers, the Company
believes that it has contributed to a decline in the number of new orders that
the Company has received from customers located in such region.
  
     The primary raw materials used by the Company to manufacture its products
are steel and polymers. Fluctuations in the prices of steel and, to a lesser
extent, polymer materials can impact the Company's cost of sales. During 1998,
the Company continued to benefit from modest price decreases in steel and
polymers. There can be no assurances that these price decreases will continue or
that prices for these materials will not increase in the future.

     The Company currently operates as a subchapter S corporation and,
accordingly, is not subject to federal income taxation for the periods for which
financial information has been presented herein. Because the Company's

                                      13
<PAGE>
 
stockholders are subject to tax liabilities based on their pro rata shares of
the Company's income, the Company's policy is to make periodic distributions to
its stockholders in amounts equal to such tax liabilities.

  For the first quarter of 1999, the financial results of the Company will
significantly underperform the results from prior first quarters due to a
dramatic reduction in sales of its domestic hog equipment without corresponding
cost reductions. Management is currently in the process of significantly
reducing non-strategic costs throughout the Company.

Results of Operations

 Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

  Net sales increased 17.8% or $39.2 million to $260.0 million in 1998 compared
to $220.8 million in 1997. The increase resulted from the acquisition of David
Manufacturing Company ("DMC") and Avemarau and increased sales of grain storage
products, offset by lost sales from the shut down of the Company's North
Carolina retail stores and the reduced demand for swine equipment caused by
historically low swine prices and environmental regulations. The acquisitions of
DMC and Avemarau increased sales by $24.5 million and $13.8 million,
respectively. International sales increased $27.0 million to $85.2 million in
1998 from $58.2 million in 1997.

  Gross profit increased to $62.1 million in 1998 or 23.9% of net sales from
$56.2 million or 25.4% of net sales in 1997. This decrease in the gross profit
percentage of net sales reflected the impact of cost inefficiencies associated
with the introduction of two new product lines and an increase in fixed overhead
costs.

  Selling, general and administrative expenses increased 42.8% or $15.1 million
to $50.2 million in 1998 from $35.2 million in 1997. This increase resulted from
the acquisition of DMC and Avemarau and increases in international operations
staffing. As a percentage of net sales, selling, general and administrative
expenses increased to 19.3% in 1998 from 15.9% in 1997.

  Operating income decreased to $11.8 million in 1998 from $21.0 million in
1997. Operating income margins decreased to 4.6% of net sales in 1998 from 9.5%
in 1997. This decrease was attributable to the increased selling, general and
administrative expenses and reduced margins. The impact of the increased sales
volume was offset by the start-up costs associated with the introduction of two
new product lines.

  Interest expense increased $6.8 million for 1998. This increase was primarily
due to interest expense on the Company's Senior Subordinated Notes, due 2007,
issued in November 1997.

  Net income decreased 98.4% or $17.3 million to $0.3 million for 1998 from
$17.6 million in 1997.

 Year Ended December 31, 1997 Compared to Year Ended December 31, 1996

  Net sales increased 23.6% or $42.2 million to $220.8 million in 1997 compared
to $178.5 million 1996. Of this 23.6% increase, 5.5% was a result of increased
sales of grain storage products resulting primarily from historically high
domestic grain prices in 1996 and 13.0% was a result of increased domestic sales
of swine and poultry equipment attributable to continuing strong construction
demand for larger swine facilities. International sales of $58.2 million in 1997
were essentially flat compared to sales of $55.5 million in 1996. Sales in
Europe and Canada increased by $6.5 million and $3.7 million, respectively, due
to stronger market penetration. These increases were offset by decreased
Mideastern and Asian sales of $4.5 million and $5.0 million, respectively,
primarily due to the completion of turn-key grain storage projects in 1996.

  Gross profit increased to $56.2 million in 1997 or 25.4% of net sales compared
to $42.8 million or 24.0% of net sales in 1996. This increase reflected the
impact of increased sales, as well as the benefit of price increases in the
grain drying and farm storage equipment product lines. These positive impacts
were offset by a change in sales mix towards lower margin products within the
swine product line.

  Selling, general and administrative expenses increased 22.2% or $6.4 million
to $35.2 million in 1997 from $28.8 million in 1996. This increase was primarily
due to a $4.3 million increase in selling, general and administrative
compensation attributable to increased staffing and an increase in bad debt
reserve of $1.2 million. As a percentage of net sales, selling, general and
administrative expenses decreased to 15.9% in 1997 compared to 16.1% in 1996.

                                      14
<PAGE>
 
     Operating income increased 49.2% or $6.9 million to $21.0 million in 1997
compared to $14.1 million in 1996. Operating income margins increased to 9.5% of
net sales in 1997 from 7.9% in 1996. These increases were attributable to the
23.6% increase in sales and were offset by increased selling, general and
administrative expenses.

     Interest expense increased $2.6 million for 1997, reflecting borrowings
used to fund the Company's redemption of certain shares of its voting common
stock in June 1996 as well as interest expense on the Notes. See Item 13,
"Certain Relationships and Related Transactions-Management Buyout."

     Net income increased 67.3% or $7.1 million to $17.6 million for 1997
compared to $10.5 million in 1996. This increase was due to increased net sales
and gross profit margin partially offset by increased interest expense.

 Year Ended December 31, 1996 Compared to Year Ended December 31, 1995

  Net sales increased 26.4% or $37.3 million to $178.5 million in 1996 compared
to $141.2 million in 1995. Of this 26.4% increase, 4.7% was a result of
increased sales of grain storage products resulting primarily from historically
high domestic grain prices, 8.5% was a result of increased sales of swine
equipment resulting primarily from strong construction demand for larger swine
facilities, and 13.2% was a result of increased international sales of swine,
poultry and grain storage equipment resulting primarily from regional market
penetration in Canada of $7.6 million and successful bids on turn-key grain
storage projects in the Mideast of $7.5 million.

     Gross profits increased to $42.8 million in 1996 or 24.0% of net sales
compared to $26.2 million in 1995 or 18.5% of net sales. The increase in gross
profit reflected the impact of increased sales, together with operating
efficiencies and the return of certain raw material prices to levels more
consistent with recent historical levels. The operating efficiencies were
attributable to the implementation of a gain share program for the Company's
production associates, which the Company believes led to the development of more
efficient labor processes. The positive impacts of the above items were
partially offset by a change in sales mix towards newly-introduced, lower margin
products within the swine product line.

     Selling, general and administrative expenses increased 29.8% or $6.6
million to $28.8 million in 1996 from $22.2 million in 1995. As a percentage of
net sales, selling, general and administrative expenses increased to 16.1% in
1996 from 15.7% in 1995. These increases were primarily a result of the
introduction of a two-year employee bonus incentive program driven by total
company profitability and increased staffing in the international
sales/engineering functions, partially offset by the elimination of certain non-
essential positions in corporate functions and an increase in distribution
expense.

     Operating income increased 250.4% or $10.0 million to $14.1 million for
1995 compared to $4.0 million for 1995. Operating income margins increased in
1996 to 7.9% of net sales in 1996 from 2.8% in 1995. These increases were
attributable to the 26.4% increase in net sales and improved gross margins and
were offset by increased selling, general and administrative expenses.

  Interest expense increased $0.7 million for 1996, reflecting additional
borrowings used to fund the Company's redemption of certain shares of its voting
common stock in June 1996. See Item 13, "Certain Relationships and Related
Transactions-Management Buyout." Interest income was essentially flat in 1996
compared to 1995.

     Net income increased $12.0 million to $10.5 million in 1996 compared to a
loss of $1.5 million in 1995. This increase was due to increased operating
income and the negative impact in 1995 of the $3.4 million write-off of an
affiliate receivable. There was no write-off of an affiliate receivable in 1996.

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 various credit
agreements and the sale of the Company's 10 1/4% Senior Subordinated 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. As of December 31,
1998, the Company had $49.3 million of working capital, an increase of $0.2
million from working capital as of December 31, 1997. This slight increase in
working capital was primarily due to increased accounts

                                      15
<PAGE>
 
receivable of $13.8 million primarily due to the shipment of two major projects
near year-end. This increase was offset by decreases in other current assets and
increases in accounts payable and accrued expenses.

  Operating activities generated $3.4 million and $1.7 million in cash in 1998
and 1996, respectively, and used $3.6 million in cash in 1997. The increase in
cash flow from operating activities from 1997 to 1998 of $7.0 million was
primarily the result of a decrease in inventories and other current assets of
$32.0 million, offset by decreases of net income of $17.3 million and increases
of accounts receivable of $11.6 million, compared to 1997. The decrease in cash
flow from operating activities from 1996 to 1997 of $5.3 million was primarily
the result of an increase in inventories and vendor deposits of $22.6 million,
offset by increases in accounts payable and net income of $5.3 million and $7.1
million, respectively, compared to 1996. In addition, changes in accounts
receivable decreased $5.2 million compared to 1996.

  The Company's capital expenditures totaled $18.0 million, $9.7 million and
$3.8 million in 1998, 1997 and 1996, respectively. Capital expenditures have
primarily been for machinery and equipment and the purchase and expansion of
facilities. The increase in 1998 and 1997 reflects the Company's continued
expansion and the conversion of leased to purchased assets. In 1998, other
investing activity that resulted in significant cash used was the acquisition of
Avemarau and the related non-compete agreement for $12.8 million. In 1997, other
investing activity that resulted in significant cash used was the acquisition of
DMC for $17.9 million, net of $0.2 million cash acquired. In 1996, other
investing activities that resulted in significant cash flow included $8.0
million in proceeds from the sale of net assets of a discontinued business, $2.1
million in payments received on notes receivable, and $1.4 million in proceeds
from sales of fixed assets.

  Cash provided by financing activities in 1998 consisted primarily of $35.0
million from the term note with LaSalle National Bank (see Item 8, "Financial
Statements and Supplementary Data, Notes to Consolidated Financial Statements-
Note 8) partially offset by $18.7 million in repayment of former shareholder
loans and long term-debt and $6.4 million of dividends. Cash provided by
financing activities in 1997 consisted primarily of $94.8 million from the
offering of the Notes partially offset by $29.3 million in repayment of long-
term debt and borrowing under the line of credit and $16.3 million of dividends.
Cash used in financing activities in 1996 consisted primarily of $25.5 million
for the acquisition of treasury stock partially offset by $17.5 million in
proceeds from former stockholder loans and $2.3 million in proceeds from the
issuance of common stock.

  The Company believes that existing cash, cash flow from operations and
available borrowings under the amended Credit Facility will be sufficient to
support its working capital, capital expenditures and debt service requirements
for the foreseeable future.

Year 2000 Issues

  The year 2000 issue is the result of computer programs using two digits rather
than four to define the applicable year. Such software may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in
system failures or miscalculations leading to disruptions in the Company's
operations (the "year 2000" or "Y2K" issue). If the Company or its significant
suppliers or customers fail to make necessary modifications, conversions and
contingency plans on a timely basis, the year 2000 issue could have a material
adverse effect on the Company's business, operations, cash flow and financial
condition. However, the effect cannot be quantified at this time because the
Company cannot accurately estimate the magnitude, duration or ultimate impact of
noncompliance by suppliers, customers and third parties that have no direct
relationship to the Company. The Company believes that its competitors face a
similar risk.

  In 1997, the Company began identifying non-compliant software and identified
three categories of software and systems that require attention:

  (1)  information technology ("IT") systems, such as mainframes, PCs, networks
       and production control systems
  (2)  non-IT systems, such as equipment, machinery, climate control and
       security systems, which may contain microcontrollers with embedded
       technology, and
  (3)  supplier and customer IT and non-IT systems

  The Company intends to fix or replace non-compliant IT and non-IT software and
systems. The failure to address these systems issues on a timely basis may
result in a disruption of the manufacturing process and the Company's ability to
efficiently conduct business. Currently, the Company's compliance projects are
at different phases of completion. Domestic IT system projects are approximately
85% complete and domestic non-IT system

                                      16
<PAGE>
 
projects are approximately 50% complete. All IT and non-IT system projects for
the Company's international subsidiaries are 100% complete. The Company's
current target is to complete its domestic IT and non-IT system projects by June
30, 1999. The Company has not fully assessed the cost associated with these
compliance projects. However, based upon current information, the Company
expects these costs to range from $0.2 to $0.5 million.

  The Company is also assessing the compliance of its major customers and
suppliers. The Company is in the process of conducting formal communications
with its significant suppliers and customers to determine the extent to which it
may be affected by those third parties' Y2K compliance plans. The Company
believes that customers and suppliers present the area of greatest risk in part
because of the Company's limited ability to influence actions of third parties
and in part because of the Company's inability to estimate the level and impact
of noncompliance by these third parties. Issues with a significant portion of
the Company's customers in processing and paying invoices could impact the
Company's cash flows and financial liquidity. A prolonged interruption in the
supply of essential services or products could adversely effect the Company's
operations and ability to generate revenues. In the event that the Company
identifies potential problems with a service provider or supplier, it will
attempt to obtain services and products from other available sources.

  Finally, the Company is developing contingency plans that assume some
estimated level of noncompliance by, or business disruption to, suppliers and
customers. The contingency plans will include development of the capabilities to
process critical transactions manually. The Company intends to have contingency
plans finalized by the third quarter of 1999.

Inflation

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

                                      17
<PAGE>
 
ITEM 7A.  QUANTITATIVE AND QUALITATAIVE DISCLOSURES ABOUT MARKET RISK

  Not applicable.

                                      18
<PAGE>
 
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

     INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF THE GSI GROUP, INC. AND
                                 SUBSIDIARIES

<TABLE>
<CAPTION>
                                                                                                          Page
                                                                                                         -----
<S>                                                                                                      <C>
Report of Independent Public Accountants............................................................      20
Consolidated Balance Sheets as of December 31, 1998 and 1997........................................      21
Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996..........      22
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, 1997 and
   1998.............................................................................................      23
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996..........      24
Notes to Consolidated Financial Statements..........................................................      25
</TABLE>

                                       19
<PAGE>
 
                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of
The GSI Group, Inc.
 
  We have audited the accompanying consolidated balance sheets of The GSI Group,
Inc. and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

  In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The GSI
Group, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.

ARTHUR ANDERSEN LLP

Chicago, Illinois
February 24, 1999
 

                                      20
<PAGE>
 
                         PART I - FINANCIAL INFORMATION
                                        
                      THE GSI GROUP, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                                        
                           December 31, 1998 and 1997
                (In thousands, except share and per share data)

<TABLE>
<CAPTION>
                                Assets                                             1998               1997
                                ------                                             ----               ----
<S>                                                                              <C>                <C>
Current Assets:
 Cash and cash equivalents............................................           $  1,192           $ 18,572
 Accounts receivable, net.............................................             36,969             23,214
 Inventories, net.....................................................             49,219             46,882
 Prepaids.............................................................              2,820              8,165
 Other................................................................              4,773              3,155
                                                                                 --------           --------
   Total current assets...............................................             94,973             99,988
                                                                                 --------           --------
Notes Receivable......................................................              1,084              1,084
                                                                                 --------           --------
Long-Term Retainage...................................................              3,570                579
                                                                                 --------           --------
Property, Plant and Equipment, net....................................             50,257             36,143
                                                                                 --------           --------
Other Assets:
 Goodwill, net........................................................             12,646              7,991
 Other intangible assets, net.........................................              7,541                564
 Deferred financing costs, net........................................              4,063              3,514
 Other................................................................                514                246
                                                                                 --------           --------
   Total other assets.................................................             24,764             12,315
                                                                                 --------           --------
   Total assets.......................................................           $174,648           $150,109
                                                                                 ========           ========
                 Liabilities and  Stockholders' Equity
                 -------------------------------------
Current Liabilities:
 Accounts payable.....................................................           $ 14,459           $ 11,948
 Dividend payable.....................................................                 --              5,300
 Payroll and payroll related expenses.................................              4,950              3,843
 Deferred income taxes................................................              1,049              1,234
 Billings in excess of costs..........................................              4,983                485
 Accrued warranty.....................................................              2,527              1,992
 Other accrued expenses...............................................              7,549              6,590
 Customer deposits....................................................              5,631              4,883
 Current maturities of long-term debt.................................              4,572             14,663
                                                                                 --------           --------
   Total current liabilities..........................................             45,720             50,938
                                                                                 --------           --------
Long-Term Debt, less current maturities...............................            134,216            101,868
                                                                                 --------           --------
Deferred Income Taxes.................................................              1,678              2,087
                                                                                 --------           --------
Commitments and Contingencies

Stockholders' Deficit:
 Common stock, $.01 par value, voting (authorized 6,900,000 shares;
  issued 6,633,652 shares; outstanding 1,800,000 shares)..............                 18                 18
 Common stock, $.01 par value, nonvoting (authorized 1,100,000 shares;
  issued 1,059,316 shares; outstanding 200,000 shares)................                  2                  2
 Paid-in capital......................................................              2,473              2,473
 Accumulated other comprehensive loss.................................             (2,203)              (869)
 Retained earnings....................................................             18,277             19,125
 Treasury stock, at cost, voting (4,833,652 shares)...................            (25,524)           (25,524)
 Treasury stock, at cost, nonvoting (859,316 shares)..................                 (9)                (9)
                                                                                 --------           --------
   Total stockholders' deficit........................................           $ (6,966)          $ (4,784)
                                                                                 --------           --------
   Total liabilities and stockholders' equity.........................           $174,648           $150,109
                                                                                 ========           ========
</TABLE>

 The accompanying notes to financial statements are an integral part of these
                                balance sheets.

                                      21
<PAGE>
 
                     THE GSI GROUP, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS

             For the Years Ended December 31, 1998, 1997 and 1996
                (In thousands, except share and per share data)


<TABLE>
<CAPTION>
                                                                                 1998              1997               1996
                                                                              ----------        -----------        -----------
<S>                                                                          <C>                <C>                <C>
Net Sales.............................................................        $  259,998         $  220,758         $  178,537
Cost of Sales.........................................................           197,907            164,607            135,696
                                                                              ----------         ----------         ----------
Gross profit..........................................................            62,091             56,151             42,841
Selling, General and Administrative Expenses..........................            50,245             35,189             28,787
                                                                              ----------         ----------         ----------
  Operating income....................................................            11,846             20,962             14,054
Other Income (Expense):
  Interest expense....................................................           (12,946)            (6,174)            (3,590)
  Interest income.....................................................               409                654                264
  Gain on sale of fixed assets........................................               384                 17                349
  Foreign currency exchange gain (loss)...............................               203               (132)                --
  Other, net..........................................................               121                404                 61
                                                                              ----------         ----------         ----------
  Income before income taxes, discontinued operation and
    extraordinary item................................................                17             15,731             11,138
                                                                              ----------         ----------         ----------
Income Tax Expense (Benefit)..........................................              (260)               288                157
                                                                              ----------         ----------         ----------
  Income before discontinued operation and
    extraordinary item................................................               277             15,443             10,981
                                                                              ----------         ----------         ----------
Discontinued Operation:
  Loss on sale of discontinued business...............................                --                 --               (482)
                                                                              ----------         ----------         ----------
    Income before extraordinary item..................................               277             15,433             10,499
                                                                              ----------         ----------         ----------
Extraordinary Item:
  Gain on early extinguishment of debt................................                --              2,119                 --
                                                                              ----------         ----------         ----------
    Net income........................................................        $      277         $   17,562         $   10,499
                                                                              ----------         ----------         ----------

Basic and Diluted Earnings Per Share:
  Continuing operations...............................................             $0.14              $7.72         $     5.78
  Discontinued operation..............................................                --                 --              (0.25)
  Extraordinary item..................................................                --               1.06                 --
                                                                              ----------         ----------         ----------
    Net income........................................................             $0.14              $8.78         $     5.53
                                                                              ----------         ----------         ----------

Weighted Average Common Shares Outstanding............................         2,000,000          2,000,000          1,900,000
                                                                              ==========         ==========         ==========
</TABLE>


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

                                       22
<PAGE>
 
                      THE GSI GROUP, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
              For the Years Ended December 31, 1996, 1997 and 1998
              ----------------------------------------------------
                       (In thousands, except share data)
<TABLE>
<CAPTION>
                                                        Common Stock
                                       ---------------------------------------------
                                                 Voting                Nonvoting                       Accumulated
                                       ---------------------------------------------                      Other   
                                                                                        Additional    Comprehensive
                                           Shares                  Shares                Paid-In          Income   
                                           Issued       Amount     Issued     Amount     Capital          (Loss)
                                       ----------------------------------------------------------------------------
 
<S>                                      <C>            <C>        <C>        <C>       <C>           <C>
Balance, December 31, 1995.............   1,800,000       $ 18           -        $-        $  182          $     -
     Treasury stock purchased..........  (1,460,158)       (15)          -         -            15                -
 Stock split -
  Voting common stock..................     785,158          8           -         -            26                -
  Nonvoting common stock...............           -          -     200,000         2             7                -
 Stock sold pursuant to four
  purchase agreements..................     675,000          7           -         -         2,243                -
 Net income............................           -          -           -         -             -                -
 Dividends.............................           -          -           -         -             -                -
Balance, December 31, 1996.............   1,800,000         18     200,000         2         2,473                -
                                       ------------       ----     -------        --        ------          -------
 Net income............................           -          -           -         -             -                -
 Other comprehensive                              -          -           -         -             -                -
  income (loss)-foreign currency
  translation adjustments..............           -          -           -         -             -             (869)
 Dividends.............................           -          -           -         -             -                -
                                       ------------       ----     -------        --        ------          -------
Balance, December 31, 1997.............   1,800,000         18     200,000         2         2,473             (869)
 Net income............................           -          -           -         -             -                -
 Other comprehensive
  income (loss)-foreign currency
  translation adjustments..............           -          -           -         -             -           (1,334)
 Dividends.............................           -          -           -         -             -                -
                                       ------------       ----     -------        --        ------          -------
Balance, December 31, 1998.............   1,800,000       $ 18     200,000        $2        $2,473          $(2,203)
                                       ============       ====     =======        ==        ======          =======
</TABLE>
<TABLE>
<CAPTION>
                                                                Treasury Stock
                                            -------------------------------------------------
                                                         Voting                 Nonvoting
                                            -------------------------------------------------
<S>                                 <C>          <C>          <C>           <C>        <C>        <C>               <C>
                                                                                                      Total         Comprehensive
                                    Retained                                                      Stockholders'        Income    
                                    Earnings      Shares       Amount       Shares     Amount        Equity            (Loss)
                                  -----------------------------------------------------------------------------------------------
 
Balance, December 31, 1995........  $ 12,687             -     $      -           -       $ -          $ 12,887
     Treasury stock purchased.....         -     1,460,158      (25,490)          -         -           (25,490)
 Stock split -
  Voting common stock.............         -     3,373,494          (34)          -         -                 -
  Nonvoting common stock..........         -             -            -     859,316        (9)                -
 Stock sold pursuant to four
  purchase agreements.............         -             -            -           -         -             2,250
 Net income.......................    10,499             -            -           -         -            10,499            10,499
                                                                                                                          -------
 Comprehensive income.............                                                                                        $10,499
                                                                                                                          =======
 Dividends........................    (5,527)            -            -           -         -            (5,527)
                                  ----------     ---------     --------     -------       ---          --------
Balance, December 31, 1996........    17,659     4,833,652      (25,524)    859,316        (9)           (5,381)
 Net income.......................    17,562             -            -           -         -            17,562            17,562
 Other comprehensive
  income (loss)-foreign currency
  translation adjustments.........         -             -            -           -         -              (869)             (869)
                                                                                                                          -------
 Comprehensive income.............                                                                                        $16,693
                                                                                                                          =======
 Dividends........................   (16,096)            -            -           -         -           (16,096)
                                  ----------     ---------     --------     -------       ---          --------
Balance, December 31, 1997........    19,125     4,833,652      (25,524)    859,316        (9)           (4,784)
 Net income.......................       277             -            -           -         -               277               277
 Other comprehensive
  income (loss)-foreign currency
  translation adjustments.........         -             -            -           -         -            (1,334)           (1,334)
                                                                                                                          -------
 Comprehensive loss...............                                                                                        $(1,057)
                                                                                                                          =======
 Dividends........................    (1,125)            -            -           -         -            (1,125)
                                  ----------     ---------     --------     -------       ---          --------
Balance, December 31, 1998........  $ 18,277     4,833,652     $(25,524)    859,316       $(9)         $ (6,966)
                                  ==========     =========     ========     =======       ===          ========
</TABLE>
                                       23
<PAGE>
 
                      THE GSI GROUP, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

              For the Years Ended December 31, 1998, 1997 and 1996
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                      1998             1997              1996
                                                                                    --------         --------          --------
Cash Flows From Operating Activities:
<S>                                                                                <C>                <C>               <C>
 Net Income..............................................................          $    277          $ 17,562          $ 10,499
 Adjustments to reconcile net income to cash provided
  by operating activities:
   Depreciation and amortization.........................................             5,944             3,499             3,153
   Amortization of deferred financing costs..............................               623               137                --
   Gain on sale of assets................................................              (384)              (17)             (349)
   Gain on early retirement of debt--noncash portion.....................                --            (2,299)               --
   Deferred taxes........................................................              (594)               --                --
   Loss on sale of discontinued business.................................                --                --               482
   Changes in assets and liabilities, net of acquisitions:
     Accounts receivable.................................................           (13,489)           (1,893)           (7,056)
     Inventories.........................................................               303           (19,429)           (2,010)
     Other current assets................................................             4,139            (8,091)           (2,924)
     Accounts payable....................................................               838             3,120            (2,178)
     Accrued expenses and payroll and payroll related expenses...........             5,036             2,925             3,669
     Customer deposits...................................................               748                --                --
     Other...............................................................                --               908            (1,575)
                                                                                   --------          --------          --------
      Net cash flows provided by (used in) operating activities..........             3,441            (3,578)            1,711
                                                                                   --------          --------          --------
 
Cash Flows From Investing Activities:
 Capital expenditures....................................................           (17,964)           (9,655)           (3,834)
 Proceeds from sale of discontinued business.............................                --                --             7,982
 Proceeds from sale of fixed assets......................................             1,837                --                --
 Payments received on notes receivable...................................                --               261             2,130
 Acquisition of Clark Products, Inc., net of cash acquired...............                --              (866)               --
 Acquisition of David Manufacturing Co., net of cash acquired............                --           (17,684)               --
 Acquisition of Avemarau Equipamentos Agricolas Ltda., net of
  cash acquired..........................................................            (5,220)               --                --
 Payment for noncompete agreement with former stockholders of
  Avemarau Equipamentos Agricolas Ltda...................................            (7,590)               --                --
 Other...................................................................              (754)             (145)            1,998
                                                                                   --------          --------          --------
      Net cash flows provided by (used in) investing activities..........           (29,691)          (28,089)            8,276
                                                                                   --------          --------          --------
 
Cash Flows From Financing Activities:
 Proceeds from former shareholder loans..................................                --                --            17,490
 Payments on former shareholder loans....................................           (14,312)               --                --
 Proceeds from issuance of long-term debt................................            35,495            99,231             4,000
 Payments on long-term debt..............................................            (4,388)          (13,019)           (2,511)
 Deferred financing costs................................................              (762)           (4,458)               --
 Net payments under line-of-credit agreement.............................            (1,125)          (16,299)           (4,773)
 Proceeds from issuance of common stock..................................                --                --             2,250
 Purchase of treasury stock..............................................                --                --           (25,490)
 Dividends...............................................................            (6,426)          (16,322)               --
 Other...................................................................               388              (384)             (401)
                                                                                   --------          --------          --------
      Net cash flows provided by (used in) financing activities..........             8,870            48,749            (9,435)
                                                                                   --------          --------          --------
 
Increase (Decrease) In Cash and Cash Equivalents.........................          $(17,380)         $ 17,082          $    552
Cash and Cash Equivalents, beginning of period...........................            18,572             1,490               938
                                                                                   --------          --------          --------
Cash and Cash Equivalents, end of period.................................          $  1,192          $ 18,572          $  1,490
                                                                                   ========          ========          ========
</TABLE>
                                                                                
  The accompanying notes to financial statements are an integral part of these
                                   statements

                                       24
<PAGE>
 
                     THE GSI GROUP, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   Nature of Operations

     The GSI Group, Inc., a Delaware corporation, and its subsidiaries (the
"Company") manufacture and sell equipment for the agricultural industry.  The
Company's product lines include: grain storage bins and related drying and
handling equipment systems and swine and poultry feed storage and delivery,
ventilation, and watering systems.  The Company's headquarters and main
manufacturing facility is in Assumption, Illinois, with other manufacturing
facilities in Illinois and Iowa.  In addition, the Company has manufacturing and
assembly operations in Brazil, Malaysia and Canada and selling and distribution
operations in South Africa, The Netherlands and Mexico.

2.   Summary of Significant Accounting Policies

     Basis of Consolidation

     The accompanying financial statements reflect the consolidated results of
The GSI Group, Inc. and its subsidiaries. All intercompany transactions and
balances have been eliminated.

     Use of Estimates

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.

     Cash and Cash Equivalents

     The Company considers all short-term investments with original maturities
of three months or less to be cash equivalents.

     Concentration of Credit Risk

     The carrying value for current assets and current liabilities reasonably
approximates fair value due to the short maturity of these items.

     The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and cash equivalents and trade accounts
receivable. The Company places its cash and temporary investments with high
quality financial institutions. At times, such investments may be in excess of
the FDIC insurance limit. Temporary investments are valued at the lower of cost
or market and at the balance sheet dates approximate fair market value. The
Company primarily serves customers in the agricultural industry. This risk
exposure is limited due to the large number of customers comprising the
Company's customer base and its dispersion across many geographic areas. The
Company grants unsecured credit to its customers. In doing so, the Company
reviews a customer's credit history before extending credit. In addition, the
Company routinely assesses the financial strength of its customers, and, as a
consequence, believes that its trade accounts receivable risk is limited.

     Inventories
  
     Inventories are stated at the lower of cost or market. Cost includes the
cost of materials, labor and factory overhead. The cost of domestic inventories
was determined using the last-in, first-out link-chain method and the cost of
international inventories was determined using the first-in, first-out method.
Had the domestic inventories been determined using the first-in, first-out
method at December 31, 1998 and 1997, the reported value of such inventories
would have been increased by approximately $1.3 million and $2.5 million,
respectively. Inventories and cost of sales are based in part on accounting
estimates relating to differences resulting from periodic physical inventories.

                                      25

<PAGE>
 
     Property, Plant and Equipment

     Property, plant and equipment are stated at cost less accumulated
depreciation.  The cost of property, plant and equipment acquired as part of a
business acquisition represents the estimated fair market value of such assets
at the acquisition date.  Depreciation is provided using the straight-line
method over the following estimated useful lives.

<TABLE>
<CAPTION>
                                                              Years
                                                           ------------
<S>                                                        <C>
        Building and Improvements........................      7-39
        Machinery and Equipment..........................      3-20
        Office Equipment and Furniture...................      3-10
</TABLE>

     Repairs and maintenance are charged to expense as incurred. Gains or losses
resulting from sales or retirements are recorded as incurred, at which time
related costs and accumulated depreciation are removed from accounts.

     Property, plant and equipment under capital leases are amortized over the
shorter of the estimated useful life of the asset or the term of the lease.

     Research and Development

     Costs associated with research and development are expensed as incurred.
Such costs incurred were $2.7 million, $1.6 million and $1.2 million for the
years ended December 31, 1998, 1997 and 1996, respectively.

     Intangible Assets

     The excess of purchase costs over amounts allocated to identifiable assets
and liabilities of businesses acquired ("goodwill") is amortized on the 
straight-line basis over periods ranging from 15 to 40 years. Goodwill is
recorded net of accumulated amortization. Should events or circumstances occur
subsequent to the acquisition of a business which bring into question the
realizable value or impairment of the related goodwill, the Company will
evaluate the remaining useful life and balance of goodwill and make appropriate
adjustments. The Company's principal considerations in determining impairment
include the strategic benefit to the Company of the particular business as
measured by undiscounted current and expected future operating cash flows of
that particular business cash flows. Should an impairment be identified, a loss
would be reported to the extent that the carrying value of the related goodwill
exceeds the fair value of that goodwill as determined by valuation techniques
available in the circumstances. Other intangible assets, which consist of
patents and non-compete agreements are recorded net of accumulated amortization
and are being amortized on a straight-line basis over periods ranging from 3 to
17 years.

     Deferred Financing Costs

     Costs incurred in connection with obtaining financing are capitalized and
amortized over the maturity period of the debt.

     Revenue Recognition

     Revenue is recorded when products are shipped.  Provisions are made at that
time, when applicable, for installation and warranty costs to be incurred.

     Revenues on long term fixed price contracts are recognized using the
percentage of completion method. Percentage of completion is determined by
relating the actual costs incurred to date to the total estimated cost for each
contract. If the estimate indicates a loss on a particular contract, a provision
is made for the entire estimated loss without reference to the percentage of
completion. Retainages are included as current and noncurrent assets in the
accompanying consolidated balance sheets. Revenue earned in excess of billings
is comprised of revenue recognized on certain contracts in excess of contractual
billings on such contracts. Billings in excess of costs are classified as a
current liability.

                                      26

<PAGE>
 
  Translation of Foreign Currency

   The Company translates the financial statements of its foreign subsidiaries
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 52,
"Foreign Currency Translation."  The Company's foreign operations are reported
in the local currency and translated to U.S. dollars, except for Mexico which is
in a highly inflationary environment and therefore utilize the U.S. dollar as
the functional currency.  The balance sheets of the Company's foreign
operations, excluding Mexico, are translated at the exchange rate in effect at
the end of the periods presented.  The revenues and expenses of the Company's
foreign operations, excluding Mexico, are translated at the average rates in
effect during the period.

  Reclassification

   Certain reclassifications have been made to prior-year amounts to conform to
the current-year presentation.

  Financial Information About Industry Segments

   The Company operates in primarily one industry segment, which includes the
design, manufacture and sale of agricultural equipment.

  Comprehensive Income

   During the first quarter of 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"),
which requires companies to report all changes in equity during a period, except
those resulting from investment by owners and distributions to owners, in a
financial statement for the period in which they are recognized.  The Company
has chosen to disclose Comprehensive Income, which encompasses net income and
foreign currency translation adjustments, as part of the Consolidated Statements
of Stockholders' Equity.

  Thirteen Week Fiscal Periods

   Beginning with the first quarter of 1998, the Company adopted thirteen week
fiscal quarter periods for operational and financial reporting purposes.  The
Company's year end will continue to be December 31.


3.  Trade Receivables Allowance

     The following summarizes trade receivables allowance activity for the years
ended December 31, 1996, 1997 and 1998 (in thousands):

<TABLE>
<CAPTION>
                                                                        Amount
                                                                        ------
<S>                                                                     <C>
December 31, 1995..............................................         $  620
    Increase to operating expense..............................            816
    Charge to allowance........................................           (793)
                                                                        ------
December 31, 1996..............................................            643
    Increase to operating expense..............................          1,712
    Charge to allowance........................................           (519)
                                                                        ------
December 31, 1997..............................................          1,836
    Increase to operating expense..............................            601
    Charge to allowance........................................           (642) 
                                                                        ------
December 31, 1998..............................................         $1,795
                                                                        ======
</TABLE>
                                                                                
4.  Business Segment

     In January 1998, the Company adopted SFAS No. 131, "Disclosure About
Segments of an Enterprise and Related Information."  The Company has no
separately reportable segments in accordance with this standard.  Under the
enterprise wide disclosure requirements of SAFS 131, the Company reports net
sales, in thousands, by each 

                                       27
<PAGE>
 
group of product lines. Amounts for the years ended December 31, 1998, 1997 and
1996 are as shown in the table below (in thousands).

<TABLE>
<CAPTION>
                                                    December 31,
                                         1998           1997           1996
                                     -------------  -------------  -------------
<S>                                  <C>            <C>            <C>
Grain product line                        $131,230       $ 88,555       $ 85,324
Swine product line                          75,102         88,511         57,348
Poultry product line                        53,666         43,692         35,865
                                          --------       --------       --------
     Net sales                            $259,998       $220,758       $178,537
                                          ========       ========       ========
</TABLE>
    For the years ended December 31, 1998, 1997 and 1996, sales in Brazil were
$15.9, $0.1 and $0.1 million, respectively.  Long-lived assets in Brazil
were $4.6 and $0.2 million at December 31, 1998 and 1997, respectively.

5.  Risks and Uncertainties

   The Company believes that historically low swine prices will effect
negatively the sales of its swine equipment, and, therefore, its results of
operations and financial condition.

   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 the Company's international operations. For
example, the recent financial crises in many countries in Southeast Asia has
caused some agricultural producers to cancel orders or have led to the inability
of such producers to secure necessary lines of credit to buy agricultural
commodities and/or equipment. While this trend has not led to material
cancellations of orders by the Company's customers, the Company believes that it
has contributed to a decline in the number of new orders that the Company has
received from customers located in such region.

   Subsequent to year-end the Brazilian Real experienced a devaluation (1.2098
Brazilian Reals/U.S. Dollar at December 31, 1998 as compared to 2.0099 Brazilian
Reals/U.S. Dollar at February 24, 1999).  The effect on the Brazilian
subsidiary is as follows (in thousands):

<TABLE>
<CAPTION>
                                           December 31, 1998     February 24, 1999
                                           -----------------     -----------------
<S>                                        <C>                   <C>
Net working capital................             $ 4,482               $ 2,698
Net loss...........................                (869)                 (601)
</TABLE>

   Any further deterioration in Brazil's economy could have an adverse effect on
the Company's results of operations and financial conditions.

6.  Discontinued Operations

   In 1995, in order to concentrate on its core businesses, the Company made a
decision to sell its Heritage Vinyl Products Division ("Division").  The
agreement to sell the Division was signed in December 1995 and the sale of the
Division closed on January 11, 1996.  The sale of the net assets of the Division
resulted in net proceeds to the Company of $8.0 million.  The gain on the sale
was $2.8 million.  A charge of $482,000 was recorded in 1996 to adjust certain
retained assets to net realizable value.

7.  Detail Of Certain Assets
<TABLE>
<CAPTION>
                                                                       As of December 31,
                                                                 -------------------------------
                                                                     1998              1997
                                                                 ------------      -------------
Accounts Receivable                                                      (In thousands)
                                                                 -------------------------------
<S>               <C>                                            <C>               <C>
                  Trade receivables............................     $ 38,764           $ 25,050
                  Allowance for doubtful accounts..............       (1,795)            (1,836)
                                                                 -----------     --------------
                    Total......................................     $ 36,969           $ 23,214
                                                                 ===========     ==============
Inventories
                  Raw materials................................     $ 11,817           $  8,883
                  Work-in-process..............................       14,330             12,464
                  Finished goods...............................       23,072             25,535
                                                                 -----------     --------------
</TABLE>

                                       28
<PAGE>

<TABLE> 
<CAPTION> 
<S>                                                            <C>               <C> 
                    Total......................................     $ 49,219           $ 46,882
                                                               =============     ==============
Property, Plant and Equipment
                  Land.........................................     $    865           $    895
                  Buildings and improvements...................       18,866             18,799
                  Machinery and equipment......................       41,237             34,897
                  Office equipment and furniture...............        5,322              4,514
                  Construction-in-progress.....................       10,104              1,364
                                                               -------------     --------------
                                                                      76,394             60,469
                  Accumulated depreciation.....................      (26,137)           (24,326)
                                                               -------------     --------------
                  Property, plant and equipment, net...........     $ 50,257           $ 36,143
                                                               =============     ==============
Intangible Assets
                  Goodwill.....................................     $ 13,286           $  8,182
                  Accumulated amortization.....................         (640)              (191)
                                                               -------------     --------------
                    Total......................................     $ 12,646           $  7,991
                                                               =============     ==============
 
                  Non-compete agreements.......................     $  8,227           $  1,525
                  Accumulated amortization.....................         (991)            (1,324)
                                                               -------------     --------------
                    Total......................................     $  7,236           $    201
                                                               =============     ==============
 
                  Patents and other intangible assets..........     $    453           $    438
                  Accumulated amortization.....................         (148)               (75)
                                                               -------------     --------------
                    Total......................................     $    305           $    363
                                                               =============     ==============
Deferred Financing Costs
                  Deferred financing costs.....................     $  4,612           $  3,728
                  Accumulated amortization.....................         (549)              (214)
                                                               -------------     --------------
                    Total......................................     $  4,063           $  3,514
                                                               =============     ==============
</TABLE>

8.  Supplemental Cash Flow Information

  The Company paid approximately $13.0, $5.2 and $2.8 million in interest during
the years ended December 31, 1998, 1997 and 1996, respectively.  The Company
paid income taxes of $1,340,358, $237,745 and $4,567 during the years ended
December 31, 1998, 1997 and 1996, respectively.  In connection with the purchase
of Avemarau Equipamentos Agricolas Ltda., a note of $7.0 million was issued and
cash of $12.8 million was paid in exchange for the purchase of stock and 
non-compete agreements.

9.  Long-Term Debt

  Long-term debt at December 31, 1998 and 1997 consisted of the following (in
thousands):

<TABLE>
<CAPTION>
                                                                                  1998             1997
                                                                               ----------         ------- 
<S>                                                                            <C>                <C>
Citizens National Bank IRB with variable interest at 6.5% until March, 2000,
  at which time rate is subject to periodic adjustments based on U.S. Treasury
  Note rates, due $14 monthly plus interest with unpaid principal balance due
  April, 2010, secured by certain real estate and improvements in Paris, 
  Illinois.................................................................... $   1,875          $  2,042
Various noncompete, license and patent agreement payable,
  noninterest-bearing and payable in varying amounts through 2003.............        65                78
Notes to former stockholders payable in varying amounts each May and
  November through November, 2006, with interest at 8%........................        --            14,312
LaSalle National Bank revolving line of credit................................        --                --
LaSalle National Bank term note...............................................    32,500                --
Clark Products, Inc. promissory note bearing interest at 10%; due $14
  monthly through June, 2001, secured by certain equipment and intangibles....       429               600
10.25% senior subordinated notes payable, principal due November, 2007, net
  of unamortized debt discounts of $1,467; amortization of debt discounts was
  $159 and $15 for the years ended December 31, 1998 and 1997, respectively;
  interest is payable semi-annually in May and November.......................    98,533            98,374
</TABLE> 

                                       29
<PAGE>

<TABLE> 
<CAPTION> 
<S>                                                                               <C>         <C> 
Note payable to the former shareholders of Avemarau Equipamentos Agricolas
   Ltda., noninterest-bearing and payable in four equal annual installments
   beginning December 1998 through December 2001; interest imputed at 8%,
    face amount of note is 8.0 million Brazilian Reals                            3,900                --
Various notes payable, bearing interest at rates ranging from 14.63% to
 19.63% and payable in varying amounts through 2002                                 991                --
City of Assumption promissory note bearing interest at 5%; due $9 monthly
 through December, 2003, secured by a $495 letter of credit                         495                --
Norwest Bank Iowa revolving line of credit whereby outstanding borrowings
 may not exceed the lessor of the borrowing base defined as a percentage of
 eligible accounts receivable and inventory or $6,250 ($6,250 at December 31,
 1997); interest was payable monthly at the bank's base rate (8.5% at 
 December 31, 1997) and was secured by all assets of DMC and the personal 
 guarantees of certain members of management up to $150 each, plus interest 
 and all costs of collection; at December 31, 1997 DMC has $250 of letters 
 of credit reducing the overall availability of the line to $6,000; matured 
 on March 31, 1998                                                                   --             1,125
                                                                            -----------     -------------
          Total.............................................................    138,788           116,531
Less -
          Current maturities................................................     (4,572)          (14,663)
                                                                            -----------     -------------
          Total long-term debt..............................................   $134,216          $101,868
                                                                            ===========     =============
</TABLE>
                                                                                
  Maturities of long-term debt during the next five years and thereafter are as
follows (in thousands):

<TABLE>
<S>                                                                 <C>
1999..............................................................           $  4,572
2000..............................................................              4,348
2001..............................................................              4,251
2002..............................................................             25,752
2003..............................................................                289
Thereafter........................................................             99,576
                                                                             --------
  Total...........................................................           $138,788
                                                                             ========
</TABLE>
                                                                                
  In October 1997, the former stockholders and the Company entered into an
agreement to modify the terms of the former stockholder debt.  Accordingly,
during the fourth quarter of 1997, the Company recorded an extraordinary gain of
approximately $2.1 million related to the early extinguishment of debt.  The
extraordinary gain resulted primarily from a discount on the notes.  Of the
$53.2 million of indebtedness repaid, $14.3 million due former stockholders was
paid in January 1998.  Associated with the early retirement of the above
referenced debt was $143,595 of deferred financing costs that have been written
off.

  In November 1997, the Company issued $100 million of Senior Subordinated Notes
("Notes") which are due in 2007.  The Notes represent unsecured senior
subordinated obligations of the Company.  Upon occurrence of a change in control
(as defined), the Company is required to repurchase the Notes at a price equal
to 101% of the principal amount thereof plus accrued and unpaid interest, if
any, to the date of purchase.  The net proceeds to the Company from the offering
of the Notes were $94.8 million, after deducting the initial purchasers'
discount and other related expenses.  The Company used the net proceeds of the
Offering to repay certain notes and other indebtedness of $53.2 million,
purchase 100% of the capital stock of David Manufacturing Co. ("DMC") for
approximately $17.9 million, purchase leased facilities in Mt. Olive and Warsaw,
North Carolina for $1.5 million, pay a dividend to holders of the Company's
capital stock of $7.0 million and used $15.2 million for general corporate
purposes.  The indenture governing the Notes provides for certain restrictive
financial and non-financial covenants.  The more significant of the covenants
restrict the ability of the Company to dispose of assets, incur additional
indebtedness, pay dividends or make distributions and other payments affecting
subsidiaries.  The Company was in compliance with all covenants as of December
31, 1998.

  At December 31, 1997, the Company's revolving line of credit with LaSalle
National Bank had a maximum borrowing level of $40.0 million.  Borrowings bore
interest at a floating rate per annum equal to (at the Company's option) 0.55%
to 1.45% over LIBOR based on certain ratios of the Company or the prime rate and
were secured by substantially all assets of the Company.  The overall level of
borrowings available under this revolving line of credit were reduced by
outstanding letters of credit, DMC revolving credit loans outstanding and debt
of FarmPRO, Inc. guaranteed by the Company.  At December 31, 1997, the Company
had $5.0 million of standby letters of credit, $1.1 

                                       30
<PAGE>
 
million of DMC revolving credit loans and $6.0 million of guaranteed FarmPRO
debt reducing the overall availability of the line to $27.9 million. This
revolving line of credit terminates on October 31, 2000.

  In March 1998, LaSalle National Bank committed to refinance the Norwest Bank
Iowa revolving line of credit with a new revolving line providing for borrowings
up to $5.0 million, which reduces availability under the Company's existing
revolving line by the outstanding amounts borrowed.  The new revolving line bore
interest at a floating rate per annum equal to (at the Company's option) 0.55%
to 1.45% over LIBOR based on certain ratios of the Company or the prime rate.
The new revolving line was secured by substantially all of the assets of the
Company and will terminate on February 1, 2002.  Accordingly, borrowings of
approximately $1.1 million at December 31, 1997 were classified as long-term
debt.  This revolving line of credit was refinanced with the August 19, 1998
amendment of the Company's credit facility.

  On August 19, 1998, LaSalle National Bank amended the existing credit facility
by providing for revolving credit borrowings up to a maximum of $55 million
(limited based on a borrowing base which includes accounts receivable and
inventory) and a $35 million term loan.  Borrowings bear interest at a floating
rate per annum equal to (at the Company's option) 0.75% to 1.75% over LIBOR
based on certain ratios of the Company or the prime rate.  At December 31, 1998,
the term loan and revolving line of credit bore interest at rates ranging from
7.06% to 7.19%.  The term loan was payable in quarterly principal installments
of $1.3 million plus interest over five years with a seven year amortization
schedule.  The amended credit facility required the Company to maintain certain
financial covenants including debt to EBITDA ratio, debt service coverage ratio
and certain levels of EBITDA. Borrowings under the facility are secured by
substantially all of the assets of the Company including the capital stock of
any existing or future subsidiaries. The overall level of borrowings available
under the revolving line of credit are reduced by outstanding letters of credit,
DMC revolving credit loans outstanding and debt of FarmPRO, Inc. guaranteed by
the Company.  On October 30, 1998, LaSalle and the Company amended the credit
facility to reduce the maximum borrowing under the revolving line to $25
million.  At December 31, 1998, the Company had $5.8 million of standby letters
of credit, no DMC revolving credit loans and $6.0 million of guaranteed
available FarmPRO debt reducing the overall availability of the line to $13.2
million.  The credit facility terminates on August 1, 2003.

  On February 4, 1999, LaSalle National Bank amended the existing credit
facility to provide for revolving loans up to a maximum of $27.5 million
(limited based on a borrowing base which includes accounts receivable, inventory
and principal reductions of the LaSalle National Bank term loan) and a $32.5
million term loan.  The borrowings bear interest at a floating rate per annum
equal to (at the Company's option) 1.75% to 3.00% over LIBOR or 0.25% to 0.50%
over the banks floating rate based on the Senior Debt to EBITDA ratio of the
Company.  The term loan is payable in quarterly principal installments of $0.6
million plus interest over three years and matures on February 1, 2002.  As the
principal amount outstanding on the term loan is reduced, the availability on
the revolving loans is increased maintaining a total commitment of $60.0 million
under this facility.  The amended credit facility agreement requires the Company
to maintain a certain Senior Debt to EBITDA ratio, Tangible Net Worth and
certain levels of capital expenditures. These covenants are retroactive and were
reset in February 1999 to December 31, 1998.  Borrowings under the new facility
are secured by substantially all of the assets of the Company including the
capital stock of any existing or future subsidiaries.  The credit facility
expires on February 1, 2002.  The Company was in compliance with or obtained
waivers for all covenants at December 31, 1998.

  The fair value of long-term debt approximates carrying value based on the
borrowing rate currently available to the Company for borrowing with similar
terms and maturities.

10.  Employee Benefit Plans

  The Company has a defined contribution plan covering virtually all full-time
employees.  Under the plan, Company contributions are discretionary.  During
1998 and 1997, the Company provided a 25% matching contribution up to 1% of the
employees' compensation.  Employer contributions to this plan were $205,183,
$79,000 and zero during 1998, 1997 and 1996, respectively.
 
11.  Income Tax Matters

  The GSI Group, Inc. ("GSI") has elected to be treated as an S corporation for
income tax purposes.  Accordingly, no provision for federal income taxes related
to GSI has been recorded. Earnings or losses of GSI are 

                                       31
<PAGE>
 
reported on the personal income tax returns of the stockholders. At December 31,
1998 all of the Company's foreign subsidiaries are eligible foreign entities
which have elected to be classified as a partnership or disregarded as a
separate entity under U.S. Treasury Regulation Section 301.7701. As a result,
earnings or losses of the foreign subsidiaries are not subject to U.S. tax
except as reported on the personal income tax returns of the stockholders. Prior
to 1998, certain foreign subsidiaries were not eligible foreign entities.
Dividends sufficient to pay the resulting income taxes of the owners are
declared and paid as needed. A wholly owned subsidiary of GSI, DMC, is taxed
pursuant to the C Corporation provisions of the Internal Revenue Code.
Accordingly, provisions for federal taxes related to DMC have been recorded.
Both GSI and DMC are subject to certain state taxes.

     The income tax provision differs from the amount of income tax determined
by applying the U.S. Federal income tax rate to pretax income for the years
ended December 31, 1998, 1997 and 1996 (in thousands):

<TABLE>
<CAPTION>
                                                                         1998                1997                1996
<S>                                                                <C>                 <C>                 <C>
U.S. Federal statutory rate......................................         $   6             $ 5,349             $ 3,787
Increase (decrease) in income taxes resulting from:
  Non-taxable S Corporation (income) losses......................            10              (5,833)             (3,703)
  Foreign rate differences and losses with no tax
   benefits......................................................            --                 426                 (84)
  Tax differences resulting from acquisition of DMC..............          (609)                 --                  --
  Nondeductible goodwill amortization............................            37                  --                  --
  Effective tax rate differences.................................            (5)                 --                  --
  State and other income taxes...................................           301                 346                 157
                                                                 --------------      --------------      --------------
                                                                          $(260)            $   288             $   157
                                                                 ==============      ==============      ==============
</TABLE>

     The following is a summary of the Company's provision for income taxes (in
thousands):

<TABLE>
<CAPTION>
                                                                        Year Ended December 31,
                                                                 -----------------------------------
                                                                   1998          1997         1996
                                                                 --------      -------       -------
<S>                                                              <C>           <C>           <C>
Current
    Federal................................................      $     10      $   --        $   --
    State and local........................................           324          288           157
                                                                 --------      -------       -------
                                                                      334          288           157
                                                                 --------      -------       -------

Deferred
     Federal...............................................          (405)         --            --
     State and local.......................................          (189)         --            --
                                                                 --------      -------       -------
                                                                     (594)         --            --
                                                                 --------      -------       -------
          Total provision..................................      $   (260)     $   288       $   157
                                                                 --------      -------       -------
</TABLE>

     The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes". Such
approach results in the recognition of deferred tax assets and liabilities for
the expected future tax consequences of temporary differences between the book
carrying amounts and the tax basis of assets and liabilities.

     The components of deferred tax assets and liabilities at December 31, 1998
and 1997 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                                         1998             1997
                                                                                    ------------     ------------
Deferred tax assets:
<S>                                                                                   <C>              <C>
  Tax loss carryforwards............................................................      $   52           $   84
  Allowance for doubtful accounts...................................................          11               20
  Inventory reserves................................................................           6               40
  Estimated product liability.......................................................          22               37
  Accrued vacations.................................................................          38               54
                                                                                    ------------     ------------
                                                                                          $  129           $  235
                                                                                    ============     ============

Deferred tax liabilities:
  Property and equipment............................................................       1,671            2,087
  Inventory.........................................................................       1,185            1,469
                                                                                    ------------     ------------
                                                                                          $2,856           $3,556
                                                                                    ------------     ------------
Net Deferred tax liability..........................................................      $2,727           $3,321
                                                                                    ============     ============
</TABLE>

     DMC has tax loss carryforwards of $52, which begin to expire in the year
2018. These deferred tax assets and liabilities relate primarily to the book and
tax differences pertaining to DMC, which was acquired during 1997. 

12.       Commitments and Contingencies

     The Company is involved in various legal matters arising in the normal
course of business which, in the opinion of management, will not have a material
effect of the Company's financial position or results of operations.

     The Company has month to month leases for several buildings and paid
rentals in 1998, 1997 and 1996 of $852,634, $811,245 and $592,000, respectively.
The Company also leases equipment and vehicles under operating lease
arrangements. Total lease expense related to the equipment and vehicle leases
for the years ended December 31, 1998, 1997 and 1996 was $2.0 million, $2.7
million and $2.1 million, respectively.

     Operating lease commitments for the next five years and thereafter are as
follows (in thousands):

                                      32
<PAGE>
 
<TABLE>

<S>                                                                <C>
1999.............................................................      $1,515
2000.............................................................       1,261
2001.............................................................       1,104
2002.............................................................         952
2003.............................................................         763
Thereafter.......................................................         328
                                                                 ------------
Total............................................................      $5,923
                                                                 ============
</TABLE>

     The Company has two contracts with the Syrian government and one with the
Yemen Company for Industrial Development to manufacture and supervise the
assembly of grain handling systems. Other current and long-term assets include
$5.9 million of retainage withheld until completion of the projects and the
meeting of certain performance criteria. These assets are secured by letters of
credit totaling $5.9 million and are expected to be collected by the year 2000. 
At December 31, 1998, the Company anticipated that certain contracts would
result in losses that were estimated to be $0.6 million. These losses have been
accrued in the accompanying financial statements.

     The Company has entered into employment agreements with certain executives
that provide for minimum aggregate annual payments of $715,000. The agreements
terminate as of the earliest of : (i) June 6, 2001; (ii) the last day of the
month in which the executive's death occurs; or (iii) ninety days after the date
the Company gives the executive notice of termination. If employment is
terminated due to permanent disability, the executives will continue to receive
annual salary and other benefits until such time that the executive sells his
stock. If employment is terminated without cause after December 6, 1999 the
executive will at a minimum, immediately upon such termination, receive a
severance payment equal to the greater of: (i) eighteen months of salary at the
executive's then current rate or (ii) in the case of certain stockholders, a
range from $375,000 to $594,682. There is no provision for severance payments if
the executive is terminated without cause prior to December 6, 1999.

     In December 1997, the Company entered into a Cooperative Agreement
("Agreement") with Usina Mecanica Carioca S.A. ("Usimeca") which provides for
Usimeca to transfer to the Company (i) all Usimeca's rights, title and interest
in and to a certain technology, (ii) a non-exclusive license to use this
technology in Brazil and (iii) Usimeca's distribution network and customer base.
Payments due to Usimeca are as follows: (i) $200,000 due on closing of the
agreement, (ii) $50,000 minimum royalty payment per year for five years, and
(iii) a royalty payment of 2.5% of annual gross sales, as defined, in excess of
$2 million for five years and 2.5% of annual gross sales, as defined, for years
six and seven, if renewed. The Agreement provides for a limit on aggregate
royalty payments of $1.0 million. The initial term of the Agreement is five
years, which is renewable for an additional two-year period if the $1.0 million
limit has not been met. If the Company decides to cease its activities in Brazil
before the end of the initial term, the Company shall pay Usimeca the difference
between the total amount of royalties already paid and a guaranteed minimum of
$450,000. The Agreement also provides for Usimeca to provide marketing and
technical assistance (management services) to the Company for a six-month
period, which is then renewable on a month-to-month basis. The fee for these
management services is $10,000 per month. The Company did not renew these
services subsequent to the initial six-month period. In addition, the Agreement
provides for Usimeca to supply its products, as defined, to the Company for a
period of two years at a firm price, as defined.

13.       Regional Information

     The Company is engaged in the manufacture and sale of equipment for the
agricultural industry. The Company's product lines include: grain storage bins
and related drying and handling equipment systems and swine and poultry feed
storage and delivery, ventilation, watering and confinement systems. The
Company's products are sold primarily to independent dealers and distributors
and are marketed through the Company's sales personnel and network of
independent dealers. Users of the Company's products include farmers, feed
mills, grain elevators, grain processing plants and poultry/swine integrators.
Net sales by each major geographic region are as follows (in millions):

<TABLE>
<CAPTION>
                                                                      1998               1997              1996
                                                                --------------     --------------    --------------
<S>                                                               <C>                <C>               <C>
United States...................................................        $174.8             $162.6            $123.0
Asia............................................................           4.3               13.7              18.7
Canada..........................................................          19.2               16.9              13.2
Latin America...................................................          31.5               10.9              10.2
Mideast.........................................................          21.7                5.7              10.2
Europe..........................................................           7.0                9.0               2.5
All other.......................................................           1.5                2.0               0.7
</TABLE>
                                      33
<PAGE>
<TABLE>
<S>                                                                    <C>                <C>                <C>
                                                                --------------     --------------    --------------
                                                                        $260.0             $220.8            $178.5
                                                                ==============     ==============    ==============
</TABLE>
14.    Related-Party Transactions

     The Company makes sales in the ordinary course of business to Sloan
Implement Company, Inc., a supplier of agricultural equipment that is owned by
certain family members of a shareholder of the Company. Such transactions
generally consist of sales of grain equipment and amounted to $131,495, $173,192
and $129,009 for 1998, 1997 and 1996, respectively.

     The Company has made payments to Sloan Transport, Inc., a company formerly
owned by a stockholder of the Company and certain members of his family, for the
use of a private plane. There were no payments made in 1998 and 1997. Payments
in the amount of $76,854 were made for the year ended 1996. In 1996, Sloan
Transport, Inc. sold all of its assets and was dissolved.

     A significant customer and an affiliate of the Company, Carolina Agri-
Systems, Inc. ("CASI"), ceased distribution operations in North Carolina and
sold its only other operation, Farmer Boy Ag, Inc. ("FBA") in December 1995. As
a result of this event, the Company received from CASI the proceeds from the
sale and inventory the Company previously sold to CASI. The remaining receivable
due from CASI of $3.4 million was written off in the year ended December 31,
1995. In connection with this transaction, the Company entered into an agreement
to lease two facilities that were owned by CASI. Lease payments to CASI during
1996 and 1997 were $204,000 and $153,000, respectively. During 1997, the Company
purchased these leased facilities for $1.5 million. The Company believes this
transaction was negotiated at arm's-length in the normal course of business.
CASI was dissolved in January 1998.

     After the sale of FBA noted above, FBA's name was changed to FarmPRO, Inc.
("FarmPRO"). As part of the proceeds of the sale, CASI received a note of $1.4
million from the purchasers of FarmPRO, which was subsequently assigned to the
Company. The note receivable is a 10 year note with quarterly interest payments
calculated at a rate of 9%. The note provides for principal payments equal to 5%
of the outstanding principal amount commencing on the last day of the first
calendar quarter in which the balance sheet deficit of FarmPRO is reduced to
zero. The balance of this note receivable and accounts receivable from FarmPRO
was $1.9 million and $3.9 million as of December 31, 1998 and 1997,
respectively. Also in 1995, the Company and FarmPRO entered into a long-term
supply agreement pursuant to which FarmPRO agreed to purchase 90% of its
equipment requirements from the Company. During 1997, the long-term supply
agreement was amended. As a result of this amendment the Company agreed to (i)
guarantee FarmPRO borrowings under a line of credit agreement limited to amounts
borrowed up to $6.0 million and (ii) provide administrative services to FarmPRO
for two years at no charge. In connection with such guarantee, the Company
received an option to purchase up to 60% of the common stock of FarmPRO at a
formula price which approximates fair market value. The amount of the guaranteed
borrowings at December 31, 1998 and 1997 were $2.5 million and $4.4 million,
respectively. Sales to FarmPRO were $8.1 million, $16.5 million and $12.8
million in 1998, 1997 and 1996, respectively.

     The Company and its stockholders entered into certain agreements relating
to the rights of the stockholders with respect to their ownership of the
Company's shares (the "Stockholder Agreements"). These agreements generally (i)
provide that the holders of a majority of the stock may sell all of their shares
at any time if the other stockholders are entitled to participate in such sale
on the same terms and conditions, and that the holders of a majority of the
stock may require the other stockholders to sell all their stock at the same
time on the same terms and conditions, (ii) establish that the stockholders are
restricted in their ability to sell, pledge or transfer such shares, (iii) grant
rights of first refusal, first to the Company and then to all non-transferring
stockholders, with respect to the transfer of any share, (iv) require that an
affirmative vote by a majority of the Company's voting stockholders is required
to approve certain corporate matters and (v) establish procedures for the
optional purchase of shares by the Company (subject to compliance with the terms
of the Indenture) or any remaining voting stockholders upon the death, permanent
disability or termination of employment of any stockholder. Each of the
stockholders is covered by life insurance policies, the proceeds of which
generally will be used to fund the purchase of shares from the estate of a
deceased stockholder. The Stockholder Agreements also (i) provide that the
holders of a majority of the Company's shares may cause the Company to register
their shares in an underwritten public offering and (ii) grant piggy-back
registration rights to the stockholders in the event of an underwritten public
offering.


15.       Unaudited Quarterly Information

                                      34
<PAGE>
 
<TABLE>
<CAPTION>
                                                       First              Second            Third              Fourth
                                                      Quarter            Quarter           Quarter             Quarter
                                                 --------------      --------------    --------------     --------------
                                                                  (In thousands, except per share date)
1998:
<S>                                                <C>                 <C>               <C>                <C>
  Net Sales......................................       $52,161             $64,386           $86,043            $57,408
  Gross profit...................................        12,007              15,351            19,090             15,643
  Net income (loss)..............................          (921)              1,479             1,584             (1,865)
  Basic and diluted net income (loss)
     per share...................................          (.46)                .74               .79               (.93)
                                                 ==============      ==============    ==============     ==============

1997:
  Net Sales......................................       $33,603             $58,558           $79,804            $48,793
  Gross profit...................................         7,006              15,344            19,648             14,153
  Net income (loss)..............................          (985)              5,674             8,435              4,438
  Basic and diluted net income (loss)
     per share...................................          (.49)               2.84              4.21               2.22
                                                 ==============      ==============    ==============     ==============

1996:
  Net Sales......................................       $26,051             $46,500           $64,929            $41,057
  Gross profit...................................         6,473              11,257            14,260              9,851
  Net income (loss)..............................          (978)              3,745             6,039              1,693
  Basic and diluted net income (loss)
     per share...................................          (.54)               2.08              3.02                .85
                                                 ==============      ==============    ==============     ==============
</TABLE>


16.       Acquisitions

     In February 1997, the Company completed the acquisition of certain assets
and liabilities of Clark Products, Inc. This acquisition complements the
Company's poultry equipment product line and was accounted for as a purchase.
Accordingly, the purchased assets and assumed liabilities have been recorded at
their estimated fair market values at the date of the acquisition, resulting in
goodwill of $1.6 million.

     On November 5, 1997, the Company acquired all of the capital stock of David
Manufacturing Co. ("DMC") for approximately $17.9 million in cash. DMC is a
manufacturer and supplier of grain drying and handling equipment. The
acquisition was recorded in accordance with the purchase method of accounting
and accordingly, the acquired assets and assumed liabilities have been recorded
at their estimated fair market values at the date of acquisition. The purchase
price exceeded the fair market value of net assets acquired resulting in
goodwill of approximately $6.4 million.

     The following summarized unaudited pro forma financial information assumes
the DMC acquisition had occurred on January 1, 1996:

<TABLE>
<CAPTION>
                                                             1997                      1996
                                                     -------------------       -------------------
                                                                      (Unaudited)                         
                                                          (In thousands, except per share data)
<S>                                                    <C>                       <C>
Net sales............................................           $248,919                  $203,321
Net income...........................................             15,234                     4,600
Basic and diluted earnings per share.................               7.62                      2.42
</TABLE>


     These amounts include DMC's actual results for 1996 and for the first ten
months of 1997 prior to the acquisition. Results for the two months after the
acquisition are included in the Company's results of operations. The pro forma
results do not necessarily represent results that would have occurred had the
acquisition taken place on the basis assumed above, nor are they indicative of
the results of future operations.

     On June 30, 1998, the Company acquired all of the capital stock of Avemarau
Equipamentos Agricolas Ltda. ("Avemarau"), a Brazilian manufacturer and supplier
of poultry feeding equipment. The purchase price for Avemarau stock consisted of
a cash down payment of $5.4 million and deferred payments of approximately $5.8

                                      35
<PAGE>
 
million payable through December 31, 2001. The stock purchase agreement also
calls for aggregate contingent payments to the former stockholders of up to $5.3
million (based on net profit as defined), however, management believes the
probability of any contingent payments is remote. Further the Company paid
approximately $7.6 million to the former stockholders of Avemarau for covenants
not to compete. The noncompete agreements have a five year term which commences
on the employees' termination date. The Company also agreed to provide a minimum
of $5.2 million for capital equipment over the next four years. The acquisition
was recorded in accordance with the purchase method of accounting and
accordingly, the acquired assets and assumed liabilities have been recorded at
their estimated fair market values at the date of acquisition. The purchase
price exceeded the fair market value of net assets acquired resulting in
goodwill of approximately $6.9 million which is being amortized over 15 years.
The purchase price was based on preliminary estimates and will be adjusted for
any overstated assets or unrecorded liabilities in excess of $125,000. The
results of operations have been included in the Company's consolidated results
of operations since the date of acquisition.

     On May 1, 1998, the Company entered into a joint venture with Resintech
Engineering SDN BHD ("RE") to form Resintech-GSI International, SDN BHD
("Resintech"), a partnership, to sell, fabricate structural steel systems for
and install grain storage projects in Southeast Asia. The Company made an
initial capital contribution of $491,283 resulting in 40% ownership. The Company
is also required to pay to RE $150,000 within one year of the formation of
Resintech and 20% of Resintech's after-tax profit each year beginning in 1998
and until a total of $400,000 is paid. The $491,283 has been recorded as an
investment in a joint venture and is included in Other Assets in the Company's
consolidated balance sheets. The Company accounts for its investment in
Resintech under the equity method. Concurrent with the formation of the joint
venture, the Company entered into an Asset Purchase Agreement ("Asset
Agreement") with Resintech and RE and a Supply Agreement with Resintech. The
Asset Agreement calls for the purchase of RE's assets, as defined, by Resintech.
The Supply Agreement is by and between the Company and Resintech pursuant to
which, Resintech will purchase directly from the Company 100% of Resintech's
equipment requirements at a specified price, as defined. The term of the Supply
Agreement is from the date of the formation of the joint venture through the
effective date of the termination and dissolution of Resintech, as defined.

                                      36
<PAGE>
 
17.       Guarantor Subsidiaries

The Company's payment obligation under the Notes are fully and unconditionally
guaranteed on a joint and several basis by DMC, GSI/Cumberland de Mexico S. de
R.L. de C.V., GSI/Cumberland BV, GSI/Cumberland SA (Pty) Ltd., GSI/Cumberland
Sdn. Bhd., Cumberland do Brazil Ltda. and Avemarau ( the "Guarantor
Subsidiaries"). The Guarantor Subsidiaries are direct wholly-owned subsidiaries
of the Company. The obligations of the Guarantor Subsidiaries under their
guarantees are subordinated to such subsidiaries' obligations under their
guarantee of the LaSalle National Bank credit facility.

Presented below is unaudited condensed consolidating financial information for
The GSI Group, Inc. ("Parent Company") and the Guarantor Subsidiaries. In the
Company's opinion, separate financial statements and other disclosures
concerning the Guarantor Subsidiaries would not provide additional information
that is material to investors.

Investments in subsidiaries are accounted for by the Parent Company using the
equity method of accounting.  Earnings of subsidiaries are, therefore, reflected
in the Parent Company's investments in and advances to/from subsidiaries account
and earnings.  The elimination entries eliminate investments in subsidiaries and
intercompany balances and transactions.

                                      37
<PAGE>
 
17.       Guarantor Subsidiaries (Continued)

<TABLE>
<CAPTION>

                                  SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
                                                   DECEMBER 31, 1998
                                                    (In thousands)


                                                      Parent          Guarantor
                                                     Company         Subsidiaries      Eliminations        Consolidated
                                                     -------         ------------      ------------        ------------

                                                     ASSETS

<S>                                               <C>                   <C>                <C>                <C>
Current assets:
   Cash and  cash equivalents................       $    379             $    813           $     --           $  1,192
   Accounts receivable, net..................         34,208               11,017             (8,256)            36,969
   Inventories, net..........................         29,285               20,934             (1,000)            49,219
   Other current assets......................          8,102                2,021             (2,530)             7,593
                                                    --------             --------           --------           --------

   Total current assets......................         71,974               34,785            (11,786)            94,973

Property, plant and equipment, net...........         36,387               13,870                 --             50,257
Goodwill.....................................          1,625               11,021                 --             12,646    
Investment in and advances to/from
   subsidiaries..............................         48,969              (17,645)           (31,324)                --
Other long-term assets.......................          9,192                7,580                 --             16,772
                                                    --------            ---------           --------           --------

   Total assets..............................       $168,147             $ 49,611           $(43,110)          $174,648
                                                    ========             ========           ========           ========

                                        LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Current portion of long-term debt.........       $  2,840             $  1,732           $     --           $  4,572
   Accounts payable..........................          9,713               20,300            (15,554)            14,459
   Accrued liabilities.......................         23,669                3,020                 --             26,689
                                                    --------             --------           --------           --------
   Total current liabilities.................         36,222               25,052            (15,554)            45,720

Long-term debt...............................        129,602                4,614                 --            134,216
Other long-term liabilities..................             --                1,678                 --              1,678
                                                    --------             --------           --------           --------

   Total liabilities.........................        165,824               31,344            (15,554)           181,614

Stockholders' equity:
   Common stock..............................             20               15,922            (15,922)                20
   Additional paid-in capital................          2,473                   --                 --              2,473
   Accumulated other comprehensive income....             --               (2,203)                --             (2,203)
   Retained earnings (deficit)...............         25,363                4,548            (11,634)            18,277
   Treasury stock, at cost...................        (25,533)                  --                 --            (25,533)
                                                    --------             --------           --------           --------

   Total stockholders' equity (deficit)......          2,323               18,267            (27,556)            (6,966)
                                                    --------             --------           --------           --------

Total liabilities and stockholders' equity...       $168,147             $ 49,611           $(43,110)          $174,648
                                                    ========             ========           ========           ========
</TABLE>

                                      38
<PAGE>
 
17.       Guarantor Subsidiaries (Continued)

<TABLE>
<CAPTION>
                                      SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
                                                      DECEMBER 31, 1997
                                                        (In thousands)


                                                            Parent      Guarantor
                                                           Company   Subsidiaries   Eliminations      Consolidated
                                                           -------   ------------   ------------      ------------
                                                           ASSETS
                                                           ------
<S>                                                        <C>        <C>           <C>            <C>
Current assets:
   Cash and cash equivalents.................              $ 18,177    $   395        $     --         $ 18,572
   Accounts receivable, net..................                24,734      2,950          (4,470)          23,214
   Inventories, net..........................                34,105     13,345            (568)          46,882
   Other current assets......................                10,738        582              --           11,320
                                                           --------    -------        --------         --------
   Total current assets......................                87,754     17,272          (5,038)          99,988

Property, plant and equipment, net...........                27,479      8,664              --           36,143
Goodwill.....................................                 1,657      6,334              --            7,991
Investment in and advances to/from
   subsidiaries..............................                21,183     (8,581)        (12,602)              --
Other long-term assets.......................                 5,871        116              --            5,987
                                                           --------    -------         -------         --------
   Total assets..............................              $143,944    $23,805        $(17,640)        $150,109
                                                           ========    =======        ========         ========

                                        LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Current portion of long-term debt.........             $ 14,663     $    --        $     --         $ 14,663
   Accounts payable..........................               11,123       5,295         (4,470)           11,948
   Accrued liabilities.......................               20,232       4,095              --           24,327
                                                          --------     -------        --------         --------

   Total current liabilities.................               46,018       9,390         (4,470)           50,938

Long-term debt...............................              100,743       1,125              --          101,868
Other long-term liabilities..................                   --       2,087              --            2,087
                                                          --------     -------        --------         --------

   Total liabilities.........................              146,761      12,602         (4,470)          154,893

Stockholders' equity:
   Common stock..............................                   20       1,536         (1,536)               20
   Additional paid-in capital................                2,473          --              --            2,473
   Accumulated other comprehensive income....                   --        (869)             --             (869)
   Retained earnings (deficit)...............               20,223      10,536        (11,634)           19,125
   Treasury stock, at cost...................              (25,533)         --              --          (25,533)
                                                          --------     -------        --------         --------

   Total stockholders' equity (deficit)......               (2,817)     11,203        (13,170)           (4,784)
                                                          --------     -------        --------         --------

Total liabilities and stockholders' equity..              $143,944     $23,805        $(17,640)        $150,109
                                                          ========     =======        ========         ========
</TABLE>

                                      39
<PAGE>
 
17. Guarantor Subsidiaries (Continued)

         SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
                         YEAR ENDED DECEMBER 31, 1998
                                (In thousands)
 
 <TABLE>
<CAPTION>
                               Parent    Guarantor
                              Company   Subsidiaries  Eliminations  Consolidated
                              --------  ------------  ------------  ------------
<S>                           <C>       <C>           <C>           <C>
Net sales...................  $222,057     $48,121      $(10,180)     $259,998
Cost of sales...............   166,985      38,978        (8,056)      197,907
                              --------     -------      --------      --------
  Gross profit..............    55,072       9,143        (2,124)       62,091
Selling, general and
 administrative expenses....    36,086      14,159            --        50,245
                              --------     -------      --------      --------
  Operating income (loss)...    18,986      (5,016)       (2,124)       11,846
Interest expense............   (11,371)     (1,575)           --       (12,946)
Other income (expense)......     1,054          63            --         1,117
                              --------     -------      --------      --------
Income (loss) before income
 taxes......................     8,669      (6,528)       (2,124)           17
Provision (benefit) for
 income taxes...............       280        (540)           --          (260)
                              --------     -------      --------      --------
Income (loss) before equity
 in income of consolidated
 subsidiaries...............     8,389      (5,988)       (2,124)          277
Equity in income of
 consolidated subsidiaries..    (5,988)         --         5,988            --
                              --------     -------      --------      --------
Net income (loss)...........  $  2,401     $(5,988)     $  3,864      $    277
                              ========     =======      ========      ========
</TABLE>

                                       40
<PAGE>
 
17. Guarantor Subsidiaries (Continued)

         SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
                         YEAR ENDED DECEMBER 31, 1997
                                (In thousands)
 
<TABLE>
<CAPTION>
                               Parent    Guarantor
                              Company   Subsidiaries  Eliminations  Consolidated
                              --------  ------------  ------------  ------------
<S>                           <C>       <C>           <C>           <C>
Net sales...................  $220,096     $ 6,372       $(5,710)      $220,758
Cost of sales...............   164,495       5,258        (5,146)       164,607
                              --------     -------       -------       --------
  Gross profit..............    55,601       1,114          (564)        56,151
Selling, general and
 administrative expenses....    32,814       2,375            --         35,189
                              --------     -------       -------       --------
  Operating income (loss)...    22,787      (1,261)         (564)        20,962
Interest expense............    (6,159)        (15)           --         (6,174)
Other income (expense)......     1,074        (131)           --            943
                              --------     -------       -------       --------
Income (loss) before income
 taxes......................    17,702      (1,407)         (564)        15,731
Provision (benefit) for
 income taxes...............       357         (69)           --            288
                              --------     -------       -------       --------
Income (loss) before
 extraordinary item and
 equity in income of
 consolidated subsidiaries..    17,345      (1,338)         (564)        15,443
Gain on early extingushment
 of debt....................     2,119          --            --          2,119
                              --------     -------       -------       --------
Income (loss) before equity
 in income of consolidated
 subsidiaries...............    19,464      (1,338)         (564)        17,562
Equity in income of
 consolidated subsidiaries..    (1,338)         --         1,338             --
                              --------     -------       -------       --------
Net income (loss)...........  $ 18,126     $(1,338)      $   774       $ 17,562
                              ========     =======       =======       ========
</TABLE>

                                       41
<PAGE>
 
17.  Guarantor Subsidiaries (Continued)

          SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
                         YEAR ENDED DECEMBER 31, 1998
                                (In thousands)
  

<TABLE>
<CAPTION>
                                                            Parent         Guarantor
                                                           Company        Subsidiaries       Eliminations      Consolidated
                                                           --------       ------------       ------------      ------------
<S>                                                        <C>            <C>                <C>               <C>
Cash flows from operating activities....................   $  6,493           $ (3,052)        $      --          $  3,441
                                                           --------           --------         ---------          --------
Cash flows from investing activities:
    Capital expenditures................................    (12,974)            (4,990)               --           (17,964)
    Other...............................................      1,682            (13,409)               --           (11,727)
                                                           --------           --------         ---------          --------

    Net cash provided by (used in) investing
    activities..........................................    (11,292)           (18,399)               --           (29,691)
                                                           --------           --------         ---------          --------
Cash flows from financing activities:
    Advances (to) from affiliates.......................    (24,531)            24,531                --                --
    Net borrowings (payments) on debt...................     18,332             (2,662)               --            15,670
    Dividends...........................................     (6,426)                --                --            (6,426)
    Other...............................................       (374)                --                --              (374)
                                                           --------           --------          --------          --------

    Net cash provided by (used in) financing
    activities..........................................    (12,999)            21,869                --             8,870
                                                           --------           --------          --------          --------
Change in cash and cash equivalents.....................    (17,798)               418                --           (17,380)
Cash and cash equivalents, beginning of period..........     18,177                395                --            18,572
                                                           --------           --------          --------          --------
Cash and cash equivalents, end of period................   $    379           $    813                --          $  1,192
                                                           ========           ========          ========          ========
</TABLE>


                                       42
<PAGE>
 
17.  Guarantor Subsidiaries (Continued)

          SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
                         YEAR ENDED DECEMBER 31, 1997
                                (In thousands)

<TABLE>
<CAPTION>


                                                        Parent            Guarantor
                                                        Company         Subsidiaries        Eliminations      Consolidated
                                                        -------         ------------        ------------      ------------
<S>                                                     <C>             <C>                 <C>               <C>
Cash flows from operating activities.................   $  (283)        $ (3,295)            $       --        $  (3,578)
                                                        -------         --------             ----------        ---------
Cash flows from investing activities:
   Capital expenditures..............................    (8,766)            (889)                    --           (9,655)
   Other.............................................   (18,434)              --                     --          (18,434)
                                                        -------         --------             ----------        ---------
   Net cash provided by (used in)
   investing activities..............................   (27,200)            (889)                    --          (28,089)
                                                        -------         --------             ----------        ---------
Cash flows from financing activities:
   Advances (to) from affiliates.....................    (4,459)           4,459                     --               --
   Net borrowings (payments) on debt.................    69,913               --                     --           69,913
   Dividends.........................................   (16,322)              --                     --          (16,322)
   Other.............................................    (4,842)              --                     --           (4,842)
                                                        --------        --------             ----------        ---------
Net cash provided by (used in) financing
   activities........................................    44,290            4,459                     --           48,749
                                                        -------         --------             ----------        ---------
Change in cash and cash equivalents..................    16,807              275                     --           17,082
Cash and cash equivalents, beginning of period.......     1,370              120                     --            1,490
                                                        -------         --------             ----------        ---------
Cash and cash equivalents, end of period.............   $18,177         $    395                     --          $18,572
                                                        =======         ========             ==========        =========
</TABLE>


                                       43
<PAGE>
 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.

         Not applicable.


                                   PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

     The following table sets forth certain information concerning the executive
officers and directors of the Company:

<TABLE>
<CAPTION>
                       Name                           Age                               Office
                       ----                           ---                               ------
<S>                                                   <C>       <C>
Craig Sloan.......................................    48            Chief Executive Officer and Director
Jorge Andrade.....................................    47            President, Chief Operating Officer and Director
John W. Funk......................................    39            Executive Vice President, Chief Financial Officer,
                                                                      General Counsel, Secretary and Director
Howard G. Buffett.................................    44            Chairman of the Board of Directors
Eugene A. Wiseman.................................    49            President of GSI Division
David L. Vettel...................................    40            President of GSI International Division
Allen A. Deutsch..................................    48            President of AP Division
Christopher V. van Rossem.........................    43            President of GSI/Cumberland International  and
                                                                      Cumberland Hatchery Systems Divisions
Tom Huls..........................................    45            President of Cumberland Division
Russell C. Mello..................................    37            Vice President, Finance, Assistant Secretary and
                                                                      Assistant Treasurer
</TABLE>

     Craig Sloan joined the Company in November 1971. Mr. Sloan has been Chief
Executive Officer since December 1993. From December 1974 to December 1993, he
served as President of Grain Systems, Inc., a former subsidiary of the Company.
Mr. Sloan has been a Director of the Company since December 1972.

     Jorge Andrade joined the Company in April 1993. Mr. Andrade has been Chief
Operating Officer since January 1995. Mr. Andrade also has been President since
April 1996. From April 1993 to December 1994, he served as President of the
Cumberland Division. From March 1987 to March 1993, he served as Executive Vice
President of Chick Master Incubator Company, an international manufacturer of
high-capacity incubators for poultry. Mr. Andrade has been a Director of the
Company since April 1996.

     John W. Funk joined the Company in December 1995 and has been General
Counsel since that time. Mr. Funk also has been Executive Vice President, Chief
Financial Officer and Secretary since April 1996. From May 1994 to December
1995, he served as Chief Operating Officer of Behnke & Company, Inc., a
commercial insurance agency. From October 1988 to January 1994, he served as In-
House Counsel to A. E. Staley Manufacturing Company, a grain processing company.
From September 1985 to October 1988, he was an associate at the New York law
firm of Brown & Wood. Mr. Funk has been a Director of the Company since April
1996.

     Howard G. Buffett joined the Company in September 1995. Mr. Buffett has
been Chairman of the Board since June 1996. From September 1995 to June 1996, he
served as President of International Operations. From February 1992 to July
1995, he served as Corporate Vice President and Assistant to the Chairman of the
Archer-Daniels-Midland Company, a processor of agricultural products. Mr.
Buffett has been a Director of the Company since September 1995. Mr. Buffett
also is a Director of Berkshire Hathaway, Inc., Coca-Cola Enterprises, Inc.,
Lindsay manufacturing Company, and Vision Solutions, Inc.

     Eugene A. Wiseman joined the Company in October 1978. Mr. Wiseman has been
President of the GSI Division since December 1996. From December 1994 to
December 1996, he served as Vice President of the GSI

                                      44

<PAGE>
 
Division. From March 1990 to December 1994, he served as Division Manager of the
GSI Division. Prior thereto, Mr. Wiseman held various sales and management
positions.

     David L. Vettel joined the Company in November 1993.  Mr. Vettel has been
President of the GSI International Division since December 1995.  From November
1993 to December 1995, he served as Vice President of the GSI International
Division.  From November 1991 to November 1993, he served as International Sales
Manager of Chief Industries, Inc., a manufacturer of steel buildings and grain
storage bins.

     Allen A. Deutsch joined the Company in January 1993.  Mr. Deutsch has been
President of the AP Division since June 1996.  From April 1995 to June 1996, he
served as Vice President of the AP Division.  From January 1993 to April 1995,
he served as National Sales Manager of the AP Division.  From August 1983 to
January 1993, he served as Sales Manager of AAA Associates, Incorporated, a
manufacturer and marketer of livestock ventilation systems, which business was
acquired by the Company in January 1993.

     Christopher V. van Rossem joined the Company in October 1993 and has been
President of the GSI/Cumberland International Division since that time.  Mr. van
Rossem also has been President of the Cumberland Hatchery Systems Division since
August 1997.  From June 1989 to October 1993, he served as Sales Manager of
Chick Master Incubator Co., an international manufacturer of high-capacity
incubators for poultry, where he managed the company's United States and
Canadian sales department.

     Thomas Huls joined the Company in 1992.  Mr. Huls has been President of the
Cumberland Division since April of 1998.  From July of 1992 to April of 1998, he
served as a District Manager for the Cumberland Division.  From October of 1989
to July 1992, he was Sales Manager for Cumberland's largest distributor.  From
January of 1985 to October of 1989, he served as a District Manager for Big
Dutchman, Inc., a manufacturer of poultry feeding equipment.

     Russell C. Mello joined the Company in March 1995.  Mr. Mello has been Vice
President, Finance and Assistant Secretary and Assistant Treasurer since
September 1996.  From March 1995 to September 1996, he served as the Controller
of the GSI Division.  From December 1993 to March 1995, he served as Manager of
Business Planning of Emerson Hermetic Motor Division, a division of Emerson
Electric Company, a manufacturer of commercial and industrial motors.  From
March 1990 to December 1993, he served as Controller of Copeland Electric, Inc.,
a subsidiary of Emerson Electric Company.

     The Company's bylaws provide that the number of directors shall be four.
Each director is elected to serve until the next annual meeting and until his or
her successor has been elected and qualified or until his or her earlier
resignation or removal.  Executive officers are elected by the Board of
Directors and serve until their successors have been elected and qualified or
until their earlier resignation or removal.

ITEM 11. EXECUTIVE COMPENSATION.

     The following table sets forth in summary form all compensation for all
services rendered in all capacities to the Company for the year ended December
31, 1998 of the Company's Chief Executive Officer and the other four most highly
compensated executive officers of the Company (the "Named Executives").


                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                                                     All Other
           Name & Principal Position                      Year                Annual Compensation                 Compensation(1)
           -------------------------                  ------------     ---------------------------------       ---------------------
                                                                          Salary              Bonus
                                                                       -------------     ---------------
<S>                                                  <C>               <C>               <C>                    <C>
Craig Sloan..........................................     1998           $170,000            $    -                  $1,616       
 Chief Executive Officer and Director
Jorge Andrade........................................     1998           $160,000            $45,000                 $1,651
 President, Chief Operating Officer and Director
John W. Funk.........................................     1998           $150,000            $16,250                 $1,543
 Chief Financial Officer, General Counsel, Secretary
</TABLE>

                                       45
<PAGE>

<TABLE> 
<CAPTION> 

<S>                                                             <C>      <C>              <C>                        <C>
 and Director
Howard G. Buffett.......................................        1998     $235,000         $100,000                   $ -
 Chairman of the Board
Christopher van Rossem..................................        1998     $127,692         $ 19,572                   $958
 President of GSI/Cumberland International Division
</TABLE>
 
(1) Consists of matching contributions by the Company to Company sponsored
    401(k) plans.

Employment Agreements

  The Company has entered into employment agreements with Messrs. Sloan,
Andrade, Funk and Buffett (each, and "Executive").  The terms of each
Executive's employment agreement are substantially the same.  Each agreement
provides for a specified minimum annual base salary, subject to increases
determined by the Company's Board of Directors, and participation in any profit
sharing, retirement, insurance or other benefit plans maintained by the Company.

  The employment agreement of each Executive will terminate as of the earliest
of: (i) June 6, 2001; (ii) the last day of the month in which the Executive's
death occurs; or (iii) ninety days after the date the Company gives the
Executive's notice of termination if such termination is for "cause", due to the
Executive being "permanently disabled" (as such terms are defined in the
employment agreement).  The Company may not terminate an Executive, with or
without cause, unless such termination has been authorized by a resolution
adopted by the Board at a meeting duly called and held, and where the Executive
is given prior written notice of the basis for his termination and an
opportunity to be heard by the Board at such meeting.  In addition, the
Executive may not be terminated for cause unless: (i) the Company has followed
the foregoing procedures and (ii) the Executive is given an opportunity to cure
any of the actions or omissions which form the basis for his termination within
30 days of the adoption of the Board resolution described above.   If employment
is terminated due to permanent disability, the Executive will continue to
receive an annual salary (less any benefits paid during the period of his
disability, under the Company's disability insurance programs) and other
benefits until such time that the Executive sells his stock to the Company
pursuant to the terms of certain stockholder agreements among the holders of the
Company's voting stock.  See "Certain Relationships and Related Transactions-
Management Buyout-Stockholder Agreements."  If employment is terminated without
cause after December 6, 1999, the Executive will receive at a minimum,
immediately upon such termination, a severance payment equal to the greater of:
(i) eighteen months salary at the Executive's then current rate; or (ii) in the
case of Mr. Sloan, $594,682; in the case of Messrs. Andrade and Buffett,
$450,000; and in the case of Mr. Funk, $375,000.  There is no provision for
severance payments if employment is terminated without cause prior to December
6, 1999.

  Each employment agreement also provides that during the Executive's employment
with the Company, and for two years thereafter, the Executive will not be
employed by or otherwise engage in any business that is in competition with the
Company, except that the Executive may; (i) invest in such business where the
stock of such business is traded on a national securities exchange and the
Executive owns less that 1% of the equity of such business; (ii) serve on the
board of directors of any corporation on which the Executive is serving as of
the date of his termination.  If the Executive is terminated by the Company
without cause, the foregoing covenant not to compete is null and void.

Compensation Committee Interlocks and Insider Participation

  The Company did not have a Compensation Committee during 1998.  All members of
the Company's Board of Directors participated in deliberations regarding
executive officer compensation during 1998.  See "Certain Relationships and
Related Transactions."  During 1998, no member of the Company's Board of
Directors served as a director or a member of the compensation committee of any
other company of which any executive officer served as a member of the Company's
Board of Directors.

                                       46
<PAGE>
 
Director Compensation

  Each director of the Company will receive an annual fee of $10,000 plus a fee
or $5,000 for each Board of Directors meeting attended, with such attendance
fees being capped at $40,000, in the aggregate, per year.  The Directors have
agreed to waive these fees in 1999.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

  The following table sets forth certain information as of March 29, 1999 with
respect to the shares of the Company's voting common stock and non-voting common
stock beneficially owned by (i) each person or group that is known by the
Company to beneficially own more that 5% of the outstanding Common Stock, (ii)
each director of the Company, (iii) each Named Executive and (iv) all directors
and executive officers of the Company as a group.

<TABLE>
<CAPTION>
                                                                                                    Non-Voting
                                                            Voting Common Stock                    Common Stock
                                                     ------------------------------      ------------------------------
                                                         Number of    Percentage of        Number of    Percentage of
        Name and Address of Beneficial Owner              Shares          Voting            Shares        Non-Voting
        ------------------------------------         ---------------  --------------     -------------  --------------
<S>                                                    <C>            <C>                <C>            <C>
Craig Sloan (1)......................................      1,175,000          65.28%            54,100          27.05%
Jorge Andrade (1)....................................        300,000          16.67%                --             --
John W. Funk (1).....................................        225,000          12.50%                --             --
Howard G. Buffett (1)................................        100,000           5.55%                --             --
Christopher van Rossem (1)...........................                                           15,773           7.89%
Directors and executive officers as a group                                             
   (10 persons in group).............................      1,800,000         100.00%           129,020          64.51%
</TABLE>

(1)  The address of each stockholder is c/o The GSI Group, Inc., 1004 East
     Illinois Street, Assumption, Illinois 62510, (217) 226-4421.
(2)  The Company has 200,000 shares of non-voting common stock outstanding.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

  The Company and the holders of the Company's voting common stock ("voting
stockholders") have entered into a Stock Restriction and Buy-Sell Agreement and
the stockholders have entered into a Stock Restriction and Cross Purchase
Agreement (the "Stockholder Agreements").  The Stockholder Agreements define the
rights of the voting stockholders with respect to their ownership of the
Company's shares.  These agreements generally (i) provide that the holders of a
majority of the stock may sell all of their shares at any time if the other
stockholders are entitled to participate in such sale on the same terms and
conditions, and that the holders of a majority of the stock may require the
other voting Stockholders to sell all their stock at the same time on the same
terms and conditions, (ii) establish that the voting Stockholders are restricted
in their ability to sell, pledge or transfer such shares, (iii) grant rights of
first refusal, first to the Company and then to all non-transferring
stockholders, with respect to the transfer of any shares, (iv) require that an
affirmative vote by a majority of the Company's voting stock is required to
approve certain corporate matters and (v) establish procedures for the optional
purchase of shares by the Company (subject to compliance with the terms of the
Indenture) or any remaining voting Stockholders upon the death, permanent
disability or termination of employment of any voting Stockholder.  Each of the
voting Stockholders is covered by life insurance policies, the proceeds of which
generally will be used to fund the purchase of shares from the estate of a
deceased voting Stockholder.  The Stockholder Agreements also (i) provide that
the holders of a majority of the Company's shares may cause the Company to
register their shares in an underwritten public offering and (ii) grant piggy-
back registration rights to the voting Stockholders in the event of an
underwritten public offering.

  In addition, the Company, the voting Stockholders and each of the holders of
the Company's non-voting common stock have entered into an agreement that (i)
provides that the holders of non-voting common stock are 

                                       47
<PAGE>
 
entitled to sell their shares on the same terms and conditions in the event the
voting Stockholders transfer a majority of the voting stock, (ii) provides that
the holders of the non-voting common stock must under certain circumstances
agree to sell their shares on the terms and conditions approved by the Company's
Board of Directors, (iii) established that the holders of the non-voting common
stock are restricted in their ability to sell, pledge or transfer such shares,
(iv) grants rights of first refusal, first to Craig Sloan and then to the other
voting Stockholders, with respect to the transfer of any non-voting common stock
to other non-voting stockholders and (v) establishes procedures for the optional
purchase of shares by Mr. Sloan, the other voting Stockholders and the Company
(subject to compliance with the terms of the Indenture) upon the death,
permanent disability or termination of employment of any holder of non-voting
common stock. The agreement also grants piggy-back registration rights to the
holders of non-voting common stock in the event of an underwritten public
offering.

  The Company makes sales in the ordinary course of business to Sloan Implement
Company, Inc., a supplier of agricultural equipment that is owned by certain
family members of Craig Sloan.  Such transactions generally consist of sales of
grain equipment and amounted to $131,495 for 1998.  The Company believes that
these transactions were, and future transactions with Sloan Implement Company,
Inc. will be, on terms no less favorable to the Company than could have been
obtained from an independent third party in arm's length transactions.

  From time to time the Company extends demand loans to its officers and
directors for the payment of taxes incurred as a result of the Company's
subchapter S status.  The annual interest rate on such loans is based on the
prime rate.  No such loans were outstanding during 1998.


                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

  (a)(1)  Financial Statements:

  See "Index to Financial Statements of The GSI Group, Inc. and Subsidiaries"
set forth in Item 8 hereof.

  (a)(2)  Financial Statement Schedules:

  Schedules not listed above have been omitted because they are inapplicable or
the information required to be set forth therein is provided in the Consolidated
Financial Statements or the notes thereto.

  (a)(3)  Exhibits:

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

(b)  Reports on Form 8-K:

  The GSI Group, Inc. did not file any Current Reports on Form 8-K during its
fiscal quarter ended December 31, 1998.

                                       48
<PAGE>
 
                                   SIGNATURES

  Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange
Act of 1934, The GSI Group, Inc. has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in Assumption, Illinois on
March 29, 1999.

                                     The GSI Group, Inc.

                                     By:         /s/ Craig Sloan
                                         -----------------------------------
                                                     Craig Sloan
                                         Director and Chief Executive Officer

  Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Registrant in
the capacities indicated on March 29, 1999.

<TABLE>
<CAPTION>
                       Signature                                                   Title
                       ---------                                                   -----
 <C>                                                       <S>
                  /s/ Craig Sloan                          Director and Chief Executive Officer (Principal
-------------------------------------------------------      Executive Officer)
                      Craig Sloan                          
 
                 /s/ John W. Funk                          Director, Chief Financial Officer, Secretary and
-------------------------------------------------------      General Counsel (Principal Financial Officer)
                     John W. Funk                              
 
                 /s/ Jorge Andrade                         Director and Chief Operating Officer
-------------------------------------------------------      
                     Jorge Andrade
 
               /s/ Howard G. Buffett                       Chairman of the Board of Directors
-------------------------------------------------------
                   Howard G. Buffett
 
             /s/  Russell  C. Mello                        Vice President, Finance, Assistant Secretary and
-------------------------------------------------------      Assistant Treasurer (Principal Accounting
                  Russell  C. Mello                          Officer)
</TABLE>

                                       49
<PAGE>
 
                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>

 Exhibit
   No.                                         Document Description
----------  ---------------------------------------------------------------------------------------------
 <C>        <S>
   2.1**    Stock Purchase Agreement, dated June 30, 1998, by and among Cumberland do Brasil Ltda.,
            Avemarau Equipamentos Agricolas Ltda. and the stockholders of Avemarau Equipamentos
            Agricolas Ltda.
 
   2.2**    Agreement for Non-Competition, dated June 30, 1998, by and among the stockholders of
            Avemarau Equipamentos Agricolas Ltda. and The GSI Group, Inc.
 
   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.
 
   3.3*     Restated Articles of Incorporation of David Manufacturing Co., as amended as of February 17,
            1987
 
   3.4*     By-Laws of David Manufacturing Co.
 
   4.1*     Indenture, dated November 1, 1997, between The GSI Group, Inc. and LaSalle national Bank, as
            Trustee, including forms of the Old Notes and the New Notes issued pursuant to such
            Indenture.
 
   4.2*     First Supplemental Indenture, dated December 19, 1997, between The GSI Group, Inc. and
            LaSalle National Bank, as Trustee, amending Indenture dated November 1, 1997, between The
            GSI Group, Inc. and LaSalle National Bank, as Trustee, to qualify such Indenture under the
            Trust Indenture Act of 1939.
 
   4.3*     Second Supplemental Indenture dated December 19, 1997, executed by David Manufacturing Co.,
            amending Indenture dated November 1, 1997, between The GSI Group, Inc. and LaSalle National
            Bank, as Trustee, to add David Manufacturing Co. as a Guarantor under such Indenture.
 
   4.4*     Registration Rights Agreement, dated November 1, 1997, among The GSI Group, Inc., David
            Manufacturing Co., Merrill Lynch, Pierce Fenner & Smith Incorporated and Morgan Stanley &
            Co. Incorporated.
 
   4.5*     Agreement of The GSI Group, Inc. to furnish the Securities and Exchange Commission with a
            copy of certain instruments relating to long-term debt of The GSI Group, Inc. upon request.

 10.1       Fourth Amended and Restated Loan and Security Agreement dated February 4, 1999 between The
            GSI Group, Inc., as borrower, and LaSalle National Bank, as lender.
 
 10.10*     Amended and Restated Employment Agreement, dated as of January 1, 1997, between The GSI
            Group, Inc. and John C. Sloan.
 
 10.11*     Amended and Restated Employment Agreement, dated as January 1, 1997, between The GSI Group,
            Inc. and Jorge Andrade.
 
 10.12*     Amended and Restated Employment Agreement, dated as of January 1, 1997, between The GSI
            Group, Inc. and John Funk.
 
 10.13*     Amended and Restated Employment Agreement, dated as of January 1, 1997, between The GSI
            Group, Inc. and Howard Buffett.
 
 10.14*     Stock Restriction and Buy-Sell Agreement, dated June 6, 1996, between The GSI Group, Inc.
            and John C. Sloan, Jorge Andrade, John Funk and Howard Buffett.
 
 10.15*     First Amendment to Stock Restriction and Buy-Sell Agreement, dated July 15, 1996, between
            The GSI Group, Inc. and John C. Sloan, Jorge Andrade, John Funk and Howard Buffett.
</TABLE> 

                                       50
<PAGE>

<TABLE> 
<CAPTION> 
 Exhibit
   No.                                         Document Description
----------                                     --------------------
<S>         <C>
  10.16*    Second Amendment to Stock Restriction and Buy-Sell Agreement, dated October 2, 1997, between
            The GSI Group, Inc. and John C. Sloan, Jorge Andrade, John Funk and Howard Buffett.

  10.17*    Stock Restriction and Buy-Sell Agreement, dated January 1, 1997, between The GSI Group,
            Inc., John C. Sloan, Jorge Andrade, John Funk and Howard Buffett and the Non Voting
            Shareholders.

  10.18*    First Amendment to Stock Restriction and Buy-Sell Agreement, dated as of November 5, 1997,
            between The GSI Group, Inc., John C. Sloan, Jorge Andrade, John Funk and Howard Buffett and
            the Non Voting Shareholders.

  10.19*    Stock Restriction and Cross-Purchase Agreement, dated Jun 6, 1996, among John C. Sloan,
            Jorge Andrade, John Funk and Howard Buffett.

   10.2*    Guaranty, dated November 26, 1997, executed by The GSI Group, Inc. in favor of Mercantile
            Bank National Association.

  10.20*    First Amendment to Stock Restriction and Cross-Purchase Agreement, dated July 15, 1996,
            among John C. Sloan, Jorge Andrade, John Funk and Howard Buffett.

  10.21*    Second Amendment to Stock Restriction and Cross-Purchase Agreement, dated as of October 2,
            1997, among John C. Sloan, Jorge Andrade, John Funk and Howard Buffett.

  10.22***  Third Amended and Restated Loan and Security Agreement, dated August 19, 1998 between The
            GSI Group, Inc., as borrower, and LaSalle National Bank, as lender.

  10.23***  First Amendment to Third Amended and Restated Loan and Security Agreement dated October 30,
            1998 between The GSI Group, Inc., as borrower, and LaSalle National Bank, as lender.

  10.3*     Stock Purchase Agreement, dated November 5, 1997, between and among The GSI Group, Inc.,
            David Manufacturing Company, David Service Company, the Stockholders of David Manufacturing
            Company and the Stockholders of David Service Company.

  10.4*     Lease, dated April 29, 1997, between The GSI Group, Inc. and Richard and Priscilla Perry
            relating to property located in Mt. Carmel, Illinois.

  10.5*     Lease with Option to Purchase, dated July 12, 1996, between The GSI Group, Inc. and Edgar
            County Bank & Trust Company, as Trustee for Trust No. 455-232 relating to property located
            in Paris, Illinois.

  10.6*     Letter, dated September 15, 1997, from Luis F. Pacheco of Trench, Rossi e Watanabe,
            attorneys at law, to Ricardo S. Santana of Cumberland do Brasil Ltda. summarizing the terms
            of the lease, dated September 1, 1997, between Cumberland do Brasil Ltda. and Cruzeiro do
            Sul relating to property leased by The GSI Group, Inc. in Nova Odessa, Brazil.

  10.7*     Agreement, dated April 9, 1997, between GSI/Cmberland Sdn. Bhd. and Ban Leng Fibre Sdn. Bhd.
            relating to property located in Penang, Malaysia.

  10.8*     Lease Agreement, dated November 1, 1996, between The GSI Group, Inc., successor by
            acquisition to Clark Products, Inc. and Riddle Valley Industrial Park related to property
            located in Lenni, Pennsylvania.

  10.9*     Asset Purchase Agreement, dated December 20, 1995, by and among The GSI Group, Inc.,
            Jannock, Inc. and Heritage Vinyl Products Inc.
</TABLE> 
                                       51
<PAGE>

<TABLE> 
<CAPTION> 
 
 Exhibit
   No.                          Document Description
----------                      --------------------
<C>         <S> 
   12.1     Computation of Ratio of Earnings to Fixed Charges.
   21.1     List of Subsidiaries of The GSI Group, Inc.
   27.1     Financial Data Schedule
</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.

**  Incorporated by reference from the Company's Form 8-K filed with the
   Commission pursuant to the Securities Act of 1934, as amended.

***  Incorporated by reference from the Company's Form 10-Q filed with the
   Commission pursuant to the Securities Act of 1934.

                                       52
<PAGE>
 
   SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(D) OF THE ACT BY REGISTRANT WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT.
                                      
   The Company did not send an annual report or proxy statement to security
holders covering 1998.

                                       53
