<PAGE>
 
               UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                      ***

                                   FORM 10-K

        (Mark One)

        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
        ACT OF 1934  For the fiscal year ended             December 31, 1996
                                                ----------------------------

                                       OR

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

   For the transition period from  ___________________ to __________________

                       Commission File Number     0-1649
                                                 -------


 
                              NEWPORT CORPORATION
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

               Nevada                                   094-0849175
--------------------------------------------------------------------------------
   (State or other jurisdiction                      (I.R.S. Employer
    of incorporation or organization)                 Identification No.)

    1791 Deere Avenue, Irvine, CA                           92606
--------------------------------------------------------------------------------
(Address of principal executive offices)                 (Zip Code)

     Registrant's telephone number, including area code     (714) 863-3144
                                                            --------------

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

          Securities registered pursuant to Section 12(g) of the Act:

                   Common Stock, Stated Value $0.35 per Share
                   ------------------------------------------
                                (Title of Class)

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
of 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]

The aggregate market value of the voting stock held by non-affiliates of the
Registrant was $78,746,000 as of March 10, 1997.

The number of shares outstanding of each of the issuer's classes of common stock
as of March 10, 1997, was 8,919,494.


                      DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 28, 1997, are incorporated by reference into Part
III.


                              Page 1 of 40 Pages

                Exhibit Index on Sequentially Numbered Page 37
<PAGE>
 
     This Annual Report on Form 10-K contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934 and the Company intends that such
forward-looking statements be subject to the safe harbors created thereby.


                                     PART I

ITEM 1 BUSINESS
------ --------

GENERAL DESCRIPTION OF BUSINESS
-------------------------------

Newport Corporation, together with its consolidated subsidiaries (the "Company"
or "Newport"), is a leading global supplier of high precision components,
instruments, micropositioning and measurement products and systems to the fiber
optics communications, computer peripherals, semiconductor equipment and
scientific research markets. The Company designs, manufactures and markets
components and systems which enhance productivity and capabilities of automated
assembly and test and measurement for high precision manufacturing and
engineering applications. With nearly thirty years experience in research
laboratory products and systems, the Company also provides sophisticated
equipment to commercial, academic and governmental research institutions world-
wide. Certain of the Company's products and systems also incorporate proprietary
software developed by the Company or by third parties for the Company's use.

The trend towards miniaturization in computer, telecommunications and other
industries has placed greater demands on the manufacturing operations within
these industries.  As component sizes decrease, such components are required to
be manufactured on a more precise level.  In addition, customers are demanding
increasingly sophisticated product offerings.  As a result, suppliers of
precision components, such as hard disk drives, semiconductor wafers and fiber
optic communications equipment are being driven to manufacture products within
extremely narrow tolerances.  This requires ultraprecise motion and vibration
control and precision measurement components and systems.  The Company's
products enable manufacturers to manufacture and test sophisticated components
to satisfy the demands for reduced size and increased functionality.

For nearly three decades Newport has serviced the needs of research laboratories
for precision equipment. In 1991, the Company acquired the micro-positioning
business of Micro-Controle S.A. and commenced its evolution from a provider of
discreet components for research applications to a company that manufactures
both components and integrated systems for research and commercial applications.
The acquisition also provided the Company with a significant manufacturing and
distribution base in Europe. In February 1995, the Company acquired RAM Optical
Instrumentation, Inc. ("ROI") in order to increase its participation in the
computer peripherals and semiconductor test and measurement markets. The
acquisition of ROI also increased the Company's expertise in developing software
and manufacturing integrated systems. In March 1995, the Company acquired Light
Control Instruments, Inc. ("LCI"), a participant in the fiber optic test and
measurement market. The acquisition of LCI expanded the Company's fiber optic
product offering by adding laser diode test equipment to the Company's
internally developed product line. In January 1996, the Company acquired
MikroPrecision Instruments, Inc. ("MikroPrecision") further increasing its
participation in the semiconductor equipment and computer peripherals market. As
a result of its internal growth and strategic acquisitions, Newport is a leading
supplier of high precision optics, instruments, micro-positioning and
measurement products and systems to manufacturers of fiber optic communications
equipment, computer peripherals and semiconductor equipment world-wide. In
addition, the Company continues to focus its core strengths in research test and
measurement equipment to provide ultra-precision motion and measurement
technologies for research applications. The Company seeks to leverage its
expertise in research laboratory equipment to continue to expand its product
offerings for commercial applications.

                                     Page 2
<PAGE>
 
MARKETS
-------

FIBER OPTIC COMMUNICATIONS EQUIPMENT

     Traditional wireline telecommunications networks are increasingly being
replaced or supplemented by fiber optic transmission lines in order to increase
network capacity.  Fiber optic technology is also being increasingly utilized in
local and wide area networks and for data communication within mainframe
computers.  High volume production of optoelectronic components used in fiber
optic networks, however, has been limited by the method in which manufacturers
of these devices manipulate strands of optical fiber.  Optical fibers must be
aligned within extremely narrow tolerances to allow pulses of light to be
transmitted from a laser diode source though the communications line.  In order
for the light pulses to be transmitted efficiently, optical fibers must be
aligned within nanometer scale tolerances.  Current manual techniques result in
low production yields and inconsistent quality.  In addition, the Company
believes that as network suppliers are required to increase production and focus
on technological innovations in fiber optics, they will increasingly seek out
"turn-key" assembly automation and test and measurement systems from third party
suppliers such as the Company.

     Newport's AutoAlign(TM), Orion(TM) and LaserWeld(TM) systems integrate the
Company's ultraprecise motion and vibration control components with optical
instrumentation to provide software controlled turn-key systems that permit the
automated alignment and connection of optical fibers within extremely narrow
tolerances and thus substantially increase productivity.

     The Company also manufactures laser diode burn-in and characterization
equipment that allows diode manufacturers to age and test laser diodes more
efficiently.  These devices are the sources of light in fiber optic networks.
Introduced in 1996, the Company's laser diode test equipment can burn-in and
test hundreds of laser diodes at one time.

COMPUTER PERIPHERALS

     Manufacturers of computer hard disk drives and other peripheral equipment
such as printers and scanners are required to manufacture their products within
extremely narrow tolerances.  In the hard disk drive market, the demand for test
and measurement products is being driven primarily by two factors.  First,
increased requirements of data density are driving manufacturers to produce
smaller disk drives with increased storage capacity, thus heightening the need
for ultra-precise test equipment.  Second, the growth in demand for data storage
devices and the increased usage of offshore production facilities has increased
the demand for high precision automated test and measurement equipment to
facilitate quality control.  In addition, competitive factors within the
computer peripherals industry are causing manufacturers to provide products with
greater functionality and minimal product failure rates, thus requiring more
capable inspection equipment.  Manufacturers also seek highly precise solutions
in an effort to maximize the life cycles of their products. As a result, the
Company believes that data storage manufacturers are increasing their investment
in ultraprecise automated inspection systems to test all components used in the
design and manufacture of sophisticated disk drive equipment.

     The disk drive market is also being driven by the increased need for ultra-
smooth surfaces on the disk and disk slider in hard drives.  High storage
densities in disk drives require narrower spacing between the disk drive heads
and the disk surface, thus requiring smoother surfaces on the head and disk to
prevent inadvertent contact and resultant disk failure.  The Company's precision
optics, mechanical components and vibration isolation technology are integrated
into hard disk texturing machines to create "landing zones" on hard disks for
disk drive heads to allow for head/disk contact without such failure.

     Newport's high precision optical and mechanical components and vibration
isolation platforms as well as its precision motion sub-assemblies and
integrated systems are used by manufacturers of disk drives, and other computer
peripheral devices for test, measurement, inspection and calibration
applications. The Company's Polaris(TM) system meets the automated inspection
needs and throughput requirements of disk drive head manufacturers. The Company
also has developed the LaserMAP(TM) system which combines laser and video
technology to allow for automated dimensional measurement of the

                                     Page 3
<PAGE>
 
suspension system which holds the heads in the disk drive assembly. The LaserMAP
system has also been applied to critical dimensional measurement applications in
the semiconductor and medical device markets.

SEMICONDUCTOR EQUIPMENT

     The market for semiconductors, or computer chips, continues to grow as
personal computers, personal digital assistants and other computer equipment
increasingly penetrate the world-wide landscape.  Also adding significantly to
this market is the increased demand for highly functional electronics devices
that require semiconductor technology.  Increased demand for greater performance
and smaller size has driven the requirement for reduced chip size and increased
sophistication in chip design.  Reduced size and increased sophistication, in
turn, has rendered semiconductors more susceptible to minute manufacturing
defects, thus resulting in increased demand for precision equipment that
improves manufacturing and quality control.

     Newport provides high precision vibration isolation systems and mechanical
components to Original Equipment Manufacturers ("OEMs") and chip manufacturers
for integration into wafer stepper machines that transfer multiple circuit
patterns onto computer chip wafers.  The Company's products also enable
manufacturers to detect and classify chip defects more accurately and thereby
increase manufacturing efficiency.  The Company's products are also sold to
manufacturers of equipment which can detect and measure sub-micron defects in
semiconductors as well as perform semiconductor and thin film head profiling.

RESEARCH LABORATORY EQUIPMENT

     The Company has been a leader in servicing the needs of the research
laboratory equipment market for nearly three decades and continues to provide
precise test and measurement equipment to commercial, academic and governmental
research institutions world-wide.  The Company seeks to provide a broad
portfolio of components, instruments and systems, including vibration isolation
products and systems, mechanical components and accessories, laser-quality
optics and optomechanical components and optical instruments, that fulfill a
wide variety of research functions.  The research laboratory equipment market
continues to provide the Company with a significant base of assets, technology
and employees enabling the Company to expand its presence in other markets.

PRODUCTS
--------

The Company manufactures and distributes two major product groups, broadly
defined by the Company as Laser Electro-Optical equipment and peripherals and
Precision Systems.

Laser Electro-Optical equipment and peripherals consist of Vibration Isolation
Products, Components, Optics and Instruments and accounted for approximately 56%
of the Company's 1996 sales.

     Vibration Isolation Products.  Laser and certain other high technology
     ----------------------------                                          
     experiments and applications require a relatively vibration-free
     environment. The Newport isolation systems provide a working surface for
     experiments and applications with greatly reduced vibration environments
     due to noise, ground motion and excitations caused by external forces or
     active components mounted to the table itself. The Company's isolation
     systems provide dynamically rigid surfaces using internally damped
     honeycomb tops mounted on pneumatic supports. The Company's product line
     includes over 350 standard vibration isolation systems in addition to the
     capability to manufacture custom systems. While these products are built to
     rigid quality standards, they are comprised of standard materials and
     consequently, there are no unusual supply requirements.

     Components.  Newport offers a comprehensive line of mechanical components
     ----------                                                               
     compatible with, and complementary to, its vibration isolation systems.
     These mechanical components include products such as mirror mounts,
     holders, positioners, and other accessories which are basic building blocks
     for experimental or prototype laser and optical systems. The Company has
     developed and sells components for fiber optics, telecommunications and
     sensors experimentation. Newport's products 

                                     Page 4
<PAGE>
 
     include a micro interferometer, laser-to-fiber couplers and fiber optic
     positioners. The Company's line of fiber optic components includes selected
     products manufactured by third parties.

     Optics.  The Company manufactures and markets a line of laser-quality
     ------                                                               
     optics and optomechanical components.  This product line includes lenses,
     mirrors, prisms, laser beam expanders, collimators, attenuators, variable
     beamsplitters and spatial filters.  The Company has the capability to
     provide custom coatings for specific applications.

     Instruments.  Newport offers several lines of electronic instruments to
     -----------                                                            
     complement its other products serving optical laboratories.  These products
     are concentrated in the areas of light measurement and control, light
     sources and holography.  The Company not only designs and manufactures a
     majority of its electronic products but also distributes the products of
     others.  Examples of the electronics instruments manufactured or
     distributed by the Company include power meters, laser diode instruments,
     spectrum analyzers, electronic shutters and modulators, lasers, lamps and
     accessories.

Precision Systems consist primarily of Motion Control Devices and Systems,
Process Automation Workstations for Photonics Packaging and Video-Based
Measurement and Inspection Systems.  These products accounted for approximately
44% of the Company's 1996 sales.

     Motion Control Devices and Systems.  Newport offers an extensive line of
     ----------------------------------                                      
     manually operated and motorized positioning devices for both research and
     industrial applications.  Examples of these products include linear and
     rotational stages; elevational devices and actuators, as well as simple and
     programmable motion controllers for stepping and DC motors.  The Company
     also manufactures a line of positioning sub-systems, for both laboratory
     and industrial applications.  Newport's system integration capability
     allows it to serve application-specific research, test and measurement, and
     inspection markets and to satisfy a wide variety of industrial process
     application needs.

     Process Automation Workstations for Photonics Manufacturing.  Newport has
     -----------------------------------------------------------              
     developed several advanced process automation workstations for packaging
     and testing of photonics devices used in communications and sensing
     applications. Integrating core vibration control, motion control, and light
     measurement instrumentation technologies, the Company's AutoAlign system
     utilizes sophisticated control software to completely automate fiber optic
     alignment and device characterization for any photonic device.  The
     LaserWeld system adds laser-welded attachment capability and is the
     industry's only industrial-class laser welding workstation for automated
     pigtailing of opto-electronic components, and features Newport's
     proprietary LaserHammer(TM) weld-adjustment technology and fully automated
     process sequencing capabilities.

     Video-Based Measurement and Inspection Systems.  Through the Company's
     ----------------------------------------------                        
     wholly-owned subsidiary, ROI, Newport offers a line of video-based
     measurement and inspection systems and accessories.  These products include
     video direct microscopes, Sprint, OMIS II(TM) and OMIS III(TM) optical
     measurement inspection systems, Polaris magnetic head pole geometry system
     and LaserMAP software.  The Polaris magnetic head pole geometry system is
     specifically designed to measure pole geometry features on thin film disk
     drive sliders. The LaserMAP software integrates video and laser technology
     for critical dimensional measurement applications in the semiconductor,
     electronic packaging, computer peripherals and medical device markets.

SALES AND MARKETING
-------------------

The Company's products are sold to thousands of companies and institutions
throughout the world and are marketed by means of a technical catalog, a
technically trained marketing staff and a worldwide network of subsidiary sales
offices and sales representatives.

The Company has an interactive site on the World Wide Web
(http://www.newport.com). This marketing venture specifically addresses the
large Internet-savvy portion of the Company's customer base - those in academia
and research. As the World Wide Web gains acceptance within the Company's other
core markets, this tool will provide even greater advantages to the Company and
our customers. Available on
                                     Page 5
<PAGE>
 
the Company's World Wide Web site are the latest products, a literature and
information request format, technical/tutorial and application related material,
market surveys, sales information (including its catalogs), and comprehensive
company and financial overviews.

Newport's principal marketing tool for the scientific market is its
comprehensive catalog of products.  This document, numbering approximately 600
pages, provides detailed product information as well as extensive technical and
applications data.  During 1996 the Company decided that the catalog could be
more effective if it targeted specific customer groups, particularly as the
Company targets specific industrial market segments.  Consequently catalog
updates planned for 1997 will be accomplished through the issuance of a series
of individual product line catalogs, namely a separate catalog for photonics,
motion control, vibration control, optics and opto-mechanical components.  These
catalogs are further augmented by new product brochures and customer
newsletters.  The catalogs are mailed to more than 100,000 potential customers
worldwide.

The Company also publishes separate short-form catalogs that target specific
market areas, such as comprehensive French-, German- and Japanese-language
catalogs.  Newport advertises in technical journals serving many technical
disciplines.  Selected product literature is published in Chinese, French,
German and Japanese.

Further product exposure and contact with existing and potential clients are
developed and maintained at trade shows and technical conferences.

For the Company's U.S. markets, components and systems are marketed through an
internal marketing staff and Company-employed field sales organization as well
as a nation-wide network of distributors and sales representatives.  The Company
selects sales representatives based on the knowledge of the Company's markets
and contacts with potential customers.  As of December 31, 1996, the Company had
fifty-one domestic sales representatives and distributors.

For its international markets, Newport uses a Company-employed marketing staff
in France, Germany, the United Kingdom, Switzerland, Italy, the Netherlands,
Canada and Taiwan.  Newport uses approximately thirty-four independent sales
representatives and distributors for international sales.  International sales
accounted for approximately 42%, 46% and 47% in 1996, 1995 and 1994,
respectively.  As a result of conducting business internationally, the Company
is subject to various risks, which include:  a greater difficulty of
administering its business globally; compliance with multiple and potentially
conflicting regulatory requirements such as export requirements, tariffs and
other barriers; difficulties in staffing and managing foreign operations; longer
accounts receivable cycles; currency fluctuations; export control restrictions;
overlapping or differing tax structures; political and economic instability and
general trade restrictions. There can be no assurance that any of the foregoing
factors will not have a material adverse effect on the Company's business,
results of operations or financial condition.

The Company's sales and marketing efforts for its larger systems are focused on
establishing and developing long-term relationships with potential customers.  A
significant portion of the markets targeted by the Company for growth have been
served to date by the internal manufacturing operations of components and
systems manufacturers.  The Company believes that as end-users continue to
require reduced size and increased functionality in fiber optic, computer
peripherals and semiconductor assembly and test equipment, such manufacturers
will increasingly seek outside solutions for highly precise manufacturing and
inspection applications.

Sales cycles for such system products can be lengthy, and can range up to seven
months.  Sales are typically made through standard purchase orders which can be
subject to cancellation, postponement or other types of delays. No single
unaffiliated customer accounted for more than 5% of the Company's sales in 1996.
Sales and orders for the Company's products historically have generally not been
affected by significant seasonal demand.

The Company has commenced a telemarketing initiative.  This new program targets
new product brochures to potential customers, coordinates new order leads with
salesmen and utilizes focused mailing lists for 

                                     Page 6
<PAGE>
 
selected niche markets. In addition, the Company is focusing its advertising
into market niches related to high growth, high technology industries such as
fiber optic communications for which the Company has developed the AutoAlign and
LaserWeld fiber alignment and packaging systems.

COMPETITION
-----------

The Company competes principally in several specialized market segments against
a limited number of companies, some of which are more established, enjoy higher
name recognition and posses far greater financial, technological and marketing
resources than the Company while others are relatively small and highly
specialized firms.  In general, the Company currently competes on the basis of
the performance and quality of its products, including reliability, as well as
on price and timely manufacture and delivery.  The Company also competes with
the internal equipment manufacturing operations of many of its potential
customers.  While the Company attempts to convince such potential customers that
it would be more efficient to outsource their equipment needs, there can be no
assurance that the Company will be successful in penetrating this portion of
these markets.  Further, there can be no assurance that any of such potential
customers will not market its internally manufactured equipment to third parties
and thereby compete directly with the Company.  In the research laboratory
equipment market, increasing budgetary constraints are expected to give low-cost
providers a competitive advantage, notwithstanding reduced quality and
performance.  In addition, because of the fragmented nature of this market,
general equipment manufacturers may gain a market presence without specifically
targeting the market.

There can be no assurance that the Company will be able to compete successfully
in the future against existing or new competitors, or that new competitors, some
of which may have substantially greater financial, technical and marketing
resources than the Company, will not seek to enter the market served by the
Company's products.

MANUFACTURING
-------------

The Company assembles, tests and packages its components and systems at its
domestic manufacturing facilities located in Irvine and San Luis Obispo,
California, and Plymouth, Minnesota.  The Company's international manufacturing
facilities are located in France.  For information regarding the Company's
operations by geographic area, refer to Note 13 of Notes to Consolidated
Financial Statements.  A portion of the Company's research and development
facilities, its corporate headquarters and other critical business operations
are located near major earthquake faults.  Operating results could be materially
affected in the event of an earthquake or other natural disasters.

The Company's manufacturing processes are diverse and consist of: purchasing raw
materials, principally stainless steel, aluminum and glass; processing the raw
materials into components, subassemblies and finished products; purchasing
components, assembling and testing components and subassemblies; and, for its
larger products, assembling the subassemblies and components into integrated
systems.  The Company seeks to design and manufacture components internally for
its integrated systems, although on a limited basis the Company purchases
completed products from certain suppliers and resells those products through its
distribution system.  Most of these purchase-pass-through products are produced
to the Company's specifications and carry the Company's logo.

The Company currently procures various components from  single-sources due to
unique component designs as well as certain quality and performance
requirements.  If single-sourced components were to become unavailable or were
to become unavailable on terms satisfactory to the Company, the Company would be
required to purchase comparable components from other sources.  If for any
reason the Company could not obtain comparable replacement components from other
sources in a timely manner, the Company's business, results of operations or
financial condition could be adversely affected.

RESEARCH AND PRODUCT DEVELOPMENT
--------------------------------


The Company continually seeks to improve its technological position through
internal research and product development and licensing and acquisitions of
complementary technologies.  The computer peripherals, 

                                     Page 7
<PAGE>
 
semiconductor equipment and fiber optic telecommunications equipment markets, as
well as the other markets for the Company's products, are characterized by
technological advances, evolving industry standards and new product
introductions and enhancements. The Company attempts to enhance its existing
products and develop and introduce innovative new products to satisfy customer
needs. As the Company's business continues to evolve towards systems
integration, the Company regularly investigates new ways to combine components
manufactured at its various operations in new ways to produce innovative
technological solutions for the markets it serves. The Company is investing in a
number of programs to develop new products and product enhancements to
complement its AutoAlign fiber alignment system for the fiber optic
communications market. During 1995 the Company developed a prototype LaserWeld
packaging system for manufacturing optoelectronic devices for the high growth
fiber optic communication industry. During 1996 it introduced the ORION
packaging system, a semiautomated single-mode fiber alignment system. The
Company introduced the Polaris magnetic head pole geometry measurement system
for the disk drive industry and LaserMAP software which integrates laser
metrology into its video inspection systems for applications in the electronics
packaging industry. The Company also introduced a series of X-ray goniometers
for sale to the high energy physics research market. In addition, during 1996
the Company introduced a number of new products for the photonics research
market and the traditional Laser Electro-Optical market. Management is committed
to continued product development and intends to increase R&D spending by
approximately $1 million in 1997 over 1996 for development of new products and
product improvements.

There can be no assurance that the Company's research and development efforts
will be successful, that its new products will be developed on a timely basis
and will achieve customer acceptance or that its customers' products will
achieve market acceptance. Failure to develop, or introduce on a timely basis,
new products or product enhancements that achieve market acceptance could
materially adversely affect the Company's business, operating results or
financial condition.

INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
--------------------------------------------

The Company has a number of patents, trademarks, exclusive marketing rights and
licenses.  Although these rights are considered to have value the Company
believes that its business relies primarily on its product performance,
experience and marketing skill, and is not dependent upon patent rights.
Although the Company continues to implement protective measures, including
requiring all employees and certain key suppliers and consultants to the Company
to sign nondisclosure agreements, and intends to defend its proprietary rights,
policing unauthorized use of the Company's technology or products is difficult
and there can be no assurance that these measures will be successful.  In
addition, there can be no assurance that infringement, invalidity, right to use
or ownership claims by third parties will be asserted in the future, which
claims could materially adversely affect the Company's business, operating
results or financial condition, regardless of the outcome.

EMPLOYEES
---------

As of December 31, 1996, the Company had 746 employees worldwide.  None of the
Company's employees are represented by a union.  The Company believes that its
relationship with its employees is good.

BACKLOG
-------

The consolidated backlog of all the Company's products was $20.7 million, $19.3
million and $16.7 million at December 31, 1996, 1995 and 1994, respectively.  A
significant portion of the products manufactured by the Company are manufactured
for inventory with the goal of being able to make shipments upon receipt of an
order.  The remainder of the Company's products are made to order with typical
lead times of three to twelve weeks.  Because of these short response times and
because orders are cancelable with little or no penalty, the Company does not
believe that its backlog of orders at any particular date is a meaningful
indicator of the Company's sales for any succeeding period.

                                     Page 8
<PAGE>
 
As a result of manufacturing products in advance of receiving orders, the
Company may at any given time have excess levels of inventory.  Such excess
levels of inventories increase the Company's expenses and the amount of the
Company's resources invested in working capital.  In addition, as the Company's
markets are characterized by rapid technological change, excess inventory levels
increase the risk of product obsolescence.

INVESTMENTS
-----------

Apart from the ownership of subsidiaries detailed in Exhibit 21 of this Form 10-
K, Newport has minority ownership interests in several domestic companies
involved in manufacturing laser-related and other high technology products.

ITEM 2 PROPERTIES
------ ----------

The Company's headquarters and principal California manufacturing operations are
located at 1791 Deere Avenue, Irvine, California.  The Company leases the Deere
Avenue property under a fifteen-year lease expiring in March 2007.  In addition,
the Company has manufacturing operations in leased facilities at San Luis
Obispo, California and Plymouth, Minnesota and leases office space in Mountain
View, California for its Western Region sales, service and application center.
The Company leases sales and service offices in Germany, England, Switzerland,
Italy, the Netherlands, Canada and Taiwan, with leases expiring at various dates
through 2011. The Company's centralized European distribution center is located
at leased facilities in the Netherlands. The Company acquired in 1991, in
connection with the acquisition of Micro-Controle, a building and land in Garden
City, New York and several properties and buildings at various locations in
France. During the first quarter of 1995 the Company relocated its New York
manufacturing operations to Irvine, California and has leased the Garden City,
New York property.

ITEM 3 LEGAL PROCEEDINGS
------ -----------------

The Company is not a party to any material legal proceedings other than ordinary
routine litigation incidental to its business.

ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------ ---------------------------------------------------

No matters were submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 1996.


                                    PART II

ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER
------ ---------------------------------------------------------------------
MATTERS
-------

Price Range of Common Stock
---------------------------

The Company's common stock is traded on the Nasdaq National Market under Nasdaq
symbol NEWP.  As of December 31, 1996, the Company had 1,659 common stockholders
of record.  Refer to Note 15, Supplementary Quarterly Consolidated Financial
Data (Unaudited), of Notes to Consolidated Financial Statements on page 35 for
quarterly share price and dividend payments.

Sales of Unregistered Securities
--------------------------------

None.

                                     Page 9
<PAGE>
 
ITEM 6 SELECTED FINANCIAL DATA
------ -----------------------

The following table presents selected financial data of the Company and its
subsidiaries as of and for the years ended December 31, 1996, 1995, 1994 and
1993, the five months ended December 31, 1992 and the year ended July 31, 1992,
restated to include financial information of ROI and LCI which were accounted
for as poolings of interests

(In thousands, except percent, per share and employment information):

<TABLE>
<CAPTION>
                                                          1996        1995        1994       1993       1992T*      1992
                                                       ----------   ---------   --------   ---------   --------   ---------
<S>                                                    <C>          <C>         <C>        <C>         <C>        <C>
FOR THE YEAR:
Net sales                                               $119,910    $101,961    $94,201     $93,573    $39,398    $ 94,925
Cost of sales                                             67,103      55,421     51,811      51,747     21,887      53,378
                                                        --------    --------    -------     -------    -------    --------
   Gross profit                                           52,807      46,540     42,390      41,826     17,511      41,547
Selling, general and administrative                       36,741      34,441     32,240      31,735     14,161      34,699
Research and development                                   8,204       6,765      5,371       5,219      2,498       6,471
Restructuring expense and other special charges                -           -          -       6,263          -      13,795
                                                        --------    --------    -------     -------    -------    --------
   Income (loss) from operations                           7,862       5,334      4,779      (1,391)       852     (13,418)
Interest expense                                          (1,931)     (1,593)    (1,782)     (2,321)    (1,540)     (2,911)
Other income, net                                            477       1,137      1,839       1,463        905       2,021
                                                        --------    --------    -------     -------    -------    --------
   Income (loss) before income taxes                       6,408       4,878      4,836      (2,249)       217     (14,308)
Income tax provision (benefit)                             1,705       1,003      1,654         951        744        (333)
                                                        --------    --------    -------     -------    -------    --------
   Net income (loss)                                    $  4,703    $  3,875    $ 3,182     $(3,200)   $  (527)   $(13,975)
                                                        ========    ========    =======     =======    =======    ========
 
Percent to sales:  
    Gross profit                                            44.0        45.6       45.0        44.7       44.4        43.8
    Selling, general and administrative                     30.6        33.8       34.2        33.9       35.9        36.6
    Research and development                                 6.9         6.6        5.7         5.6        6.3         6.8
    Income (loss) from operations                            6.5         5.2        5.1        (1.5)       2.2       (14.1)
    Net income (loss)                                        3.9         3.8        3.4        (3.4)      (1.3)      (14.7)
 
PER SHARE:
Net income (loss) per share                             $   0.53    $   0.45    $  0.38     $ (0.38)   $ (0.06)   $  (1.67)
Dividends paid per share                                    0.04        0.04       0.04        0.04       0.04        0.16
Equity per share                                            6.46        6.06       5.53        5.20       5.66        5.78
 
AT YEAR END:
Cash and marketable securities                          $  3,375    $  1,524    $ 3,624     $ 4,311    $ 3,436    $  6,593
Customer receivables, net                                 23,418      20,547     18,755      16,946     18,678      21,065
Inventories                                               28,954      22,744     21,432      21,655     24,531      27,452
Other current assets                                       6,782       4,088      4,512       4,941      5,939       7,603
                                                        --------    --------    -------     -------    -------    --------
 Current assets                                           62,529      48,903     48,323      47,853     52,584      62,713
Investments and other assets                               5,191       4,557      4,441       5,185      5,177       5,074
Property, plant and equipment                             24,045      22,327     23,044      24,145     30,415      31,175
Goodwill, net                                             11,612       8,161      8,846       8,852      9,747      10,893
                                                        --------    --------    -------     -------    -------    --------
   Total assets                                         $103,377    $ 83,948    $84,654     $86,035    $97,923    $109,855
                                                        ========    ========    =======     =======    =======    ========
                                             
Current liabilities                                     $ 20,787    $ 20,330    $26,604     $24,085    $29,358    $ 34,893
Long-term debt                                            23,464       9,899     11,117      16,005     19,246      24,704
Other liabilities                                          1,697       1,032        282       2,302      2,083       2,054
Stockholders' equity                                      57,429      52,687     46,651      43,643     47,236      48,204
                                                        --------    --------    -------     -------    -------    --------
   Total liabilities and equity                         $103,377    $ 83,948    $84,654     $86,035    $97,923    $109,855
                                                        ========    ========    =======     =======    =======    ========
                                             
MISCELLANEOUS STATISTICS                      
Working capital                                         $ 41,742    $ 28,573    $21,719     $23,768    $23,226    $ 27,820
Common shares outstanding                                  8,890       8,699      8,441       8,400      8,345       8,345
Worldwide employment at end of period                        746         662        650         676        743         805
Sales per employee (annualized)                         $    161    $    155    $   142     $   132    $   122    $    140
</TABLE>

* Transition period of five months ended December 31, 1992 because of change in
  year end.

                                    Page 10
<PAGE>
 
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
------ -----------------------------------------------------------------------
OF OPERATIONS
-------------

This Item contains forward-looking statements that involve risks and
uncertainties and the Company's actual results could differ materially from
those anticipated in such statements, as a result of various factors including
those described below in "Additional Factors That May Affect Future Operating
Results."

OVERVIEW
--------

The following is management's discussion and analysis of certain significant
factors which have affected the results of operations and financial condition of
the Company during the period included in the accompanying financial statements.
This discussion should be read in conjunction with the financial statements and
associated notes.  This discussion includes the impact of the acquisition of RAM
Optical Instrumentation, Inc. ("ROI") and Light Control Instruments, Inc.
("LCI") which were accounted for using the pooling of interests method and
MikroPrecision Instruments, Inc. ("MikroPrecision") which was accounted for
using the purchase method, as described more fully in Note 2 to the financial
statements on page 27 of this Form 10-K.

RESULTS OF OPERATIONS
---------------------

FINANCIAL ANALYSIS   The following table sets forth, for the periods indicated,
------------------
certain income and expense items expressed as a percentage of the Company's 
total sales and as period-to-period percentage increases or decreases:

<TABLE> 
<CAPTION> 
                                                                 Period-to-Period
                                 Percentage of Total Sales      Increase (Decrease)
                               ------------------------------   --------------------
                                 1996       1995       1994       1996        1995
                               --------   --------   --------   ---------   --------
<S>                            <C>        <C>        <C>        <C>         <C>
Net sales                        100.0%     100.0%     100.0%       17.6%       8.2%
Cost of sales                     56.0       54.4       55.0        21.1        7.0
                                 -----      -----      -----
                              
     Gross profit                 44.0       45.6       45.0        13.5        9.8
Selling, general and          
  administrative expense          30.6       33.8       34.2         6.7        6.8
Research and                  
  development expense              6.9        6.6        5.7        21.2       26.0
                                 -----      -----      -----
                              
     Income from operations        6.5        5.2        5.1        47.4       11.6
Interest expense                  (1.6)      (1.5)      (1.9)       21.2      (10.6)
Other income, net                  0.4        1.1        2.0       (58.0)     (38.2)
                                 -----      -----      -----
                              
     Income before income taxe     5.3        4.8        5.2        31.4        0.9
Income tax provision               1.4        1.0        1.8        70.0      (39.4)
                                 -----      -----      -----
                              
     Net income                    3.9        3.8        3.4        21.4       21.8
                                 =====      =====      =====
</TABLE>

NET SALES    For 1996, 1995 and 1994, the Company's net sales totaled $119.9
---------                                                                   
million, $102.0 million and $94.2 million, respectively.  Net sales for 1996
increased $17.9 million compared with 1995, represented by increases of $14.3
million in domestic markets and $3.6 million (net of $0.8 million unfavorable
exchange rate effect) in international markets.  Net sales for 1995 increased
$7.8 million compared with 1994, with increases of $5.6 million in domestic
markets and $0.6 million in international markets combined with a $1.6 million
favorable exchange rate effect on foreign currency denominated sales.

Domestic sales totaled $69.8 million, $55.5 million and $49.9 million for 1996,
1995 and 1994, respectively. For 1996, sales increased $14.3 million compared
with 1995. The increase was attributable principally to sales revenue at
MikroPrecision ($7.7 million) for which there were no comparable amounts in 1995
and increases in sales of vibration isolation and precision motion systems to
the semiconductor equipment, fiber optic communications and computer peripherals
markets. Sales for 1995 increased $5.6 million compared with sales for 1994. The
increase was attributable principally to increased sales revenue at ROI and LCI
and to growth across core product lines.

                                    Page 11
<PAGE>
 
International sales totaled $50.1 million, $46.5 million and $44.3 million for
1996, 1995 and 1994, respectively. For 1996, sales increased $3.6 million
attributable principally to increases in the Pacific Rim countries ($6.0
million) for the most part because of sales into fiber optic communication and
computer peripherals markets. These increases were partially offset by declines
in Europe ($2.5 million), primarily France where funding for research equipment
was reduced, including the previously mentioned $0.8 million unfavorable
exchange rate effect. The increase in 1995 compared with 1994 was attributable
principally to strengthened sales in the major markets of Europe and the $1.6
million favorable exchange rate effect offset in part by declines in sales to
the Pacific Rim.

The order rate in the U.S. continues to show strength in response to the
increasing sales and marketing emphasis on higher growth market niches in the
fiber optic communications, semiconductor equipment and computer peripherals
industries and on new products introduced in 1996.  Management expects
improvements in sales to the United States and the Pacific Rim in 1997 as the
Company continues to focus on these higher growth markets.  However, although
the order rate in Europe is showing some improvement, the recent strengthening
of the U.S. dollar may offset the improvement.  Overall, management anticipates
that net sales in 1997 will increase over 1996; however, such growth is
dependent on many factors and cannot be assured.

OPERATING INCOME    Total costs and expenses for 1996, 1995 and 1994 were $112.0
----------------                                                                
million, $96.7 million and $89.4 million, respectively.

Gross margin when stated as a percentage of sales was 44.0%, 45.6% and 45.0% for
1996, 1995 and 1994, respectively.  The decrease in gross margin in 1996 from
1995 was attributable primarily to the addition of sales of products
manufactured by MikroPrecision, which typically have lower margins than the
Company's other products.  Management anticipates that, despite MikroPrecision's
lower margin products, which are expected to comprise an increasing proportion
of the Company's net sales, the Company's overall gross margin will improve in
1997 as a result of increased sales volume and continued productivity
improvements Company-wide.

Selling, general and administrative (SG&A) expenses totaled $36.7 million, $34.4
million and $32.2 million for 1996, 1995 and 1994, respectively.  SG&A expenses
represented 30.6%, 33.8% and 34.2% of net sales in 1996, 1995 and 1994,
respectively.  Although SG&A expenses increased in 1996, they decreased as a
percentage of sales due primarily to the higher sales volume.  The 1996 increase
($2.3 million) was attributable primarily to expenses incurred at MikroPrecision
for which there were no comparable expenses in 1995 ($1.4 million) and to
adverse determination of an appeal of litigation in France dating prior to the
acquisition of Micro Controle S.A. ($0.6 million) offset in part by a favorable
exchange rate effect in Europe of $0.2 million.  The increase in 1995 was
attributable in large part to expenses related to an acquisition which was not
consummated ($0.5 million), severance expenses ($0.4 million), the strengthening
of the Company's operating management in Europe ($0.3 million) and an
unfavorable exchange rate effect ($0.7 million).  Management anticipates SG&A
expenses in total will increase in 1997 but will decline as a percent of sales
as a result of anticipated increased sales volume.

Research and development (R&D) expenses totaled $8.2 million, $6.8 million and
$5.4 million for 1996, 1995 and 1994, respectively.  R&D expenses represented
6.9%, 6.6% and 5.7% of net sales in 1996, 1995 and 1994, respectively.  The
increases in R&D expenses in 1996 compared with 1995 and 1995 compared with
1994, were attributable primarily to increased personnel costs related to the
development of a number of new products and product enhancements to complement
the AutoAlign fiber alignment system, including the ORION semiautomated single-
mode fiber alignment system for the fiber optic communications market,
improvements to the LaserWeld packaging workstation, development of laser diode
burn-in and characterization systems and new products and software by the
Company's ROI and MikroPrecision subsidiaries. Management is committed to
continued product development and intends to increase R&D spending by more than
$1 million in 1997 over 1996 for development of new products and product
improvements. R&D is expected to remain approximately the same as a percentage
of net sales due to the anticipated sales growth. The Company is dependent to a
significant extent upon its ability to enhance its existing products and to
introduce innovative new products that gain market acceptance. There can be no

                                    Page 12
<PAGE>
 
assurance, however, that the Company will be successful in selecting,
developing, manufacturing new products or in enhancing its existing products so
as to achieve such market acceptance.

Operating income totaled $7.9 million, $5.3 million and $4.8 million for 1996,
1995 and 1994, respectively.  Operating income represented 6.5%, 5.2% and 5.1%
of net sales in 1996, 1995 and 1994, respectively.  Management anticipates that
operating income will improve in 1997, both in total and as a percentage of net
sales, primarily as a result of anticipated net sales growth exceeding expense
growth.

INTEREST EXPENSE    Interest expense totaled $1.9 million, $1.6 million and $1.8
----------------                                                                
million for 1996, 1995 and 1994, respectively.  The increase in interest expense
for 1996 was primarily the result of additional debt incurred to finance the
acquisition of MikroPrecision.  The decrease in interest expense for 1995 was
attributable to a reduction in the average debt outstanding and reduced interest
rates, offset in part by the impact of the strengthening of the French franc
against the U.S. Dollar.  The Company anticipates interest expense for 1997 will
remain approximately the same as 1996 because there are no significant scheduled
principal payments, and because the majority of the Company's debt is at fixed
interest rates.

OTHER INCOME, NET    Interest and dividend income totaled $0.1 million for each
-----------------                                                              
of the years 1996, 1995 and 1994.  Exchange gains were less than $0.1 million
for 1996 and 1995 and approximated $0.2 million for 1994.  The Company recorded
investment gains totaling $0.8 million and $1.4 million in 1995 and 1994,
respectively.  No investment gains were recorded in 1996.

TAXES BASED ON INCOME    The effective tax rates for 1996, 1995 and 1994 were
---------------------                                                        
26.6%, 20.6% and 34.2%, respectively.  The increase in the effective tax rate
for 1996 compared with 1995 was primarily the result of lower utilization of
state net operating losses ("NOLs") and foreign operating losses and a lower
valuation allowance reduction which were partially offset by a benefit from the
conversion of foreign subsidiaries to U.S. partnerships.  The decrease in the
effective tax rate for 1995 compared with 1994 results largely from a reduction
in valuation allowance and the utilization of state NOLs.  Management
anticipates that the Company's effective tax rate will increase in 1997,
comparable to the Company's effective rate in 1994.

EMPLOYMENT    Worldwide employment of the Company totaled 746, 662 and 650 at
----------                                                                   
December 31, 1996, 1995 and 1994, respectively.  The increase in employment at
December 31, 1996, was a result of the acquisition of MikroPrecision and
increased production to meet sales requirements.  Sales per employee
approximated $161,000, $155,000 and $142,000 during 1996, 1995 and 1994,
respectively.

STOCKHOLDERS' EQUITY    Stockholders' equity increased from $46.7 million ($5.53
--------------------                                                            
per share) as of December 31, 1994, to $52.7 million ($6.06 per share) as of
December 31, 1995 and to $57.4 million ($6.46 per share) as of December 31,
1996.  The increases in 1996 and 1995 were attributable to the respective year
earnings, issuance of stock under stock option and purchase plans and unrealized
translation gains in 1995, offset in part by dividend payments and translation
losses in 1996. The Company paid dividends totaling $0.3 million during each of
the years 1996, 1995 and 1994.  This represents 4 cents per share during each of
the respective periods.

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

Net cash provided by operating activities of $3.4 million and $5.7 million in
1996 and 1995, respectively, was primarily attributable to the Company's
operating income for the respective years plus non-cash items, principally
depreciation and amortization, offset in part by changes in operating assets and
liabilities. Customer receivables rose 18.5% during 1996, while sales grew by
17.6%. Inventories increased 27.3% in 1996 over 1995 levels in part because of
production planning associated with higher sales levels and the Company's goal
of maintaining competitive manufacturing lead times. The Company believes that
it must maintain certain levels of inventory in order to ensure that the lead
times to its customers remain competitive, however the growth in inventory
increases the risk that the Company will have to write down inventory in the
future due to obsolescence if the Company does not correctly anticipate market
demand for certain of its products. Accounts payable increased 60.8% in 1996
compared with 1995 because of increases in material purchases to support the
growth in net sales.

                                    Page 13
<PAGE>
 
Net cash used in investing activities of $10.5 million in 1996 was attributable
principally to the Company's purchases of property, plant and equipment and to
the acquisition of MikroPrecision.  Net cash used in investing activities of
$1.0 million in 1995 was attributable principally to the Company's purchases of
property, plant and equipment, partially offset by proceeds from sales of
investments and marketable securities.  Capital expenditures for plant
improvements and new equipment, aggregated $5.8 million, $2.5 million and $2.1
million for 1996, 1995 and 1994, respectively.

Net cash provided by financing activities of $9.0 million in 1996 was
attributable principally to proceeds from a private placement of $20.0 million
senior notes, sold at par to a U.S. insurance company.  The notes are unsecured,
carry an 8.25% annual coupon and mature in May 2004.  Additionally, the Company
issued common stock in connection with stock option exercises.  The proceeds of
these financing activities were offset in part by cash paid to reduce certain
long-term debt and short-term borrowings.  Net cash used in financing activities
of $6.0 million in 1995 was attributable principally to cash paid to reduce
debt, partially offset by proceeds from the issuance of common stock in
connection with stock option exercises.

In October 1996, the Company modified its bank credit agreement increasing to
$20.0 million the unsecured line of credit to support the Company's domestic
operation while the 10.0 million French franc ($2.0 million) unsecured line of
credit to support the Company's European requirements remained in place.  This
modified credit agreement resulted in a reduction of interest to prime, or LIBOR
plus 1.0%, a reduction in the unused line fee from 37.5 basis points to 25.0
basis points and extension of the maturity of the line to December 31, 1999.  At
December 31, 1996, the amount outstanding under this line of credit was $0.4
million with $17.4 million available after considering outstanding letters of
credit.

The Company believes its current working capital position together with
estimated cash flows from operations and its existing financing availability are
adequate for operations in the ordinary course of business at least through
1997, including anticipated capital expenditures and debt payment requirements.

Although the Company has no present agreements or commitments with respect to
any material acquisitions of other businesses, products, product rights or
technologies, the Company continues to evaluate acquisitions of products,
technologies or companies that complement the Company's business and may make
such acquisitions in the future, and there can be no assurance that the Company
will not need to obtain additional sources of capital to finance any such
acquisitions.

ADDITIONAL FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
-----------------------------------------------------------

The Company's future operating results, and stock price, may be affected by a
number of factors that could cause actual results to differ from those stated
herein.  These factors include the following:

RAPID TECHNOLOGICAL CHANGE; NEW PRODUCT DEVELOPMENT

    The computer peripherals, semiconductor equipment and fiber optic
communications equipment markets, as well as the other markets for the Company's
products, are characterized by rapid technological advances, evolving industry
standards and new product introductions and enhancements.  Demand for certain of
the Company's products is dependent upon the market acceptance of the products
manufactured by the Company's customers, and there can be no assurance that such
market acceptance will be achieved. The Company is also dependent to a
significant extent upon its ability to enhance its existing products, to predict
the needs of its customers and to develop and introduce innovative new products
on a timely basis that gain market acceptance. Failure to develop, or introduce
on a timely basis, new products or product enhancements that meet its customers'
needs and achieve market acceptance could materially adversely affect the
Company's business, operating results and financial condition. Although the
Company maintains an active development program to improve its product
offerings, there can be no assurance that the Company will be successful in
selecting, developing, manufacturing and marketing new products or enhancing its
existing products on a timely or cost-effective basis.

                                    Page 14
<PAGE>
 
RISKS OF DOING BUSINESS IN INTERNATIONAL MARKETS

In 1996, 1995 and 1994, international revenues accounted for approximately 42%,
46% and 47%, respectively, of the Company's net sales.  The Company expects
that international revenues will continue to account for a significant
percentage of the Company's net sales for the foreseeable future.  As a result
of conducting business internationally, the Company is subject to various risks,
which include: a greater difficulty of administering its business globally;
compliance with multiple and potentially conflicting regulatory requirements
such as export requirements, tariffs and other barriers; difficulties in
staffing and managing foreign operations; longer accounts receivable cycles;
currency fluctuations; export control restrictions; overlapping or differing tax
structures; political and economic instability and general trade restrictions.
In addition, due to various factors, including the difficulty of assessing the
various political and economic factors that may affect the strength of foreign
economies, it is often difficult to project demand for the Company's products in
foreign countries.  There can be no assurance that any of the foregoing factors
will not have a material adverse effect on the Company's business, results of
operations or financial condition.

As a result of the Company's international sales and operations, fluctuations in
foreign exchange rates could affect the sales price in local currencies of the
Company's products in foreign markets, the U.S. dollar value of sales
denominated in foreign currencies as well as local costs and expenses of the
Company's foreign operations.  The Company uses forward exchange contracts, and
other risk management techniques, to hedge its exposure to currency fluctuations
relating to its intercompany transactions; however, its international
subsidiaries remain exposed to the economic risks of foreign currency
fluctuations.  There can be no assurance that such factors will not adversely
impact the Company's operations in the future or require the Company to modify
its current business practices.

DEPENDENCE ON RESEARCH BUDGETS OF CUSTOMERS

A substantial amount of the Company's net sales have historically been derived
from sales of its products to academic and governmental research institutions in
the United States and various foreign countries, and the Company anticipates
that sales to such institutions will continue to account for a significant
portion of the Company's net sales for the foreseeable future.  As such, the
Company's future performance is directly dependent in part upon the capital
expenditure budgets of its research institution customers and the continued
demand of such customers for the Company's products.  Many domestic and foreign
research institutions, including certain of the Company's customers, have
experienced constraints on their capital expenditure budgets due to factors such
as reduced governmental funding of research activities and reduced defense
spending.  The Company's operating results may in the future be subject to
period-to-period fluctuations as a consequence of such funding constraints, and
there can be no assurance that such constraints will not continue over time, or
that they will not have a material adverse effect on the Company's business,
operating results or financial condition.

COMPETITION

Intense competition exists among manufacturers of precise motion, measurement
and automation products, and the Company believes that competition in the
Company's markets from both new and existing competitors will increase in the
future.  The Company competes principally in several specialized market segments
against a limited number of companies, some of which are more established, enjoy
higher name recognition and possess far greater financial, technological and
marketing resources than the Company, while others are relatively small and
highly specialized firms.  The Company currently competes principally on the
basis of the performance and quality of its products, including reliability, as
well as on price and timely manufacture and delivery.  There can be no assurance
that the Company will be able to compete successfully in the future against
existing or new competitors, or that new competitors, some of which may have
substantially greater financial, technical and marketing resources than the
Company, will not seek to enter the markets served by the Company's products.
In addition, there can be no assurance that competitive pressures will not cause
the Company to reduce prices, which would negatively affect its gross margins.

                                    Page 15
<PAGE>
 
DEPENDENCE ON COMPONENT AVAILABILITY AND KEY SUPPLIERS

The Company's ability to meet customer demand depends in part upon its ability
to obtain adequate supplies of components from its vendors on a timely basis.
The Company currently procures various components from single-sources due to
unique component designs as well as certain quality and performance
requirements.  If such single-sourced components were to become unavailable or
were to become unavailable on terms satisfactory to the Company, the Company
would be required to purchase comparable components from other sources.  If for
any reason the Company could not obtain comparable replacement components from
other sources in a timely manner, the Company's business, results of operations
or financial condition could be adversely affected.  In addition, certain of the
Company's suppliers require long lead-times to deliver requested quantities of
components.  If the Company were unable to obtain sufficient quantities of
components used in the manufacture of its products, resulting delays or
reductions in product shipments could occur and could have a material adverse
effect on the Company's business, results of operations or financial condition.

FLUCTUATIONS IN OPERATING RESULTS

The Company's past operating results have been, and its future operating results
will be, subject to fluctuations resulting from a number of factors, including
the availability of government research funding; the demand for the products
sold by the Company's customers; the timing of new product introductions by the
Company or its competitors; variations in the mix of products sold by the
Company; changes in pricing policies by the Company, its competitors or
suppliers, including possible decreases in average selling prices of the
Company's products in response to competitive pressures; market acceptance of
any new or enhanced versions of the Company's products; the availability and
cost of key components; the availability of manufacturing capacity; and
fluctuations in general economic conditions.  The Company's overall gross
margins may vary significantly on a period-to-period basis.  In addition, gross
margins may be adversely affected by competitive pressures due to variations in
product mix.  Accordingly, there can be no assurance that the Company will be
able to sustain satisfactory gross margins.  The Company also may choose to
reduce prices or to increase spending in response to competition or to pursue
new market opportunities, all of which may adversely affect the Company's
business, operating results and financial condition.  As a result, the Company
believes that period-to-period comparisons of its results of operations are not
meaningful and cannot be relied upon as indications of future performance.  Due
to all of the foregoing factors, the Company's operating results may be below
the expectations of public market analysts and investors in some future
quarters, which would likely result in a decline in the trading price of the
Common Stock.

INTEGRATION OF ACQUISITIONS

The Company's recent growth primarily has been the result of strategic
acquisitions of complementary businesses.  Accordingly, the Company's future
operating results will be dependent on its ability to integrate various business
operations in an effective manner.  The Company intends to lengthen its broad
product offering by designing and marketing complete systems comprised of
components manufactured within its various operations.  There can be no
assurance that the Company will be successful in managing and integrating such
business operations.  In addition, the Company's acquisition-related growth will
continue to place additional demands on the Company's management and resources.

ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
------ -------------------------------------------

Consolidated financial statements of the Company as of December 31, 1996 and
1995 and for each of the three years in the period ended December 31, 1996, the
report of independent auditors thereon and the Company's unaudited quarterly
financial data for 1996 and 1995 are referenced in Item 14 herein.

ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
------ -------------------------------------------------------------------------
DISCLOSURE
----------

Not applicable.

                                    Page 16
<PAGE>
 
                                    PART III

ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
------- --------------------------------------------------

The information required hereunder is incorporated by reference to the Company's
Proxy Statement to be filed within 120 days of December 31, 1996 in connection
with its May 28, 1997, Annual Meeting of Stockholders.

ITEM 11 EXECUTIVE COMPENSATION
------- ----------------------

The information required hereunder is incorporated by reference to the Company's
Proxy Statement to be filed within 120 days of December 31, 1996 in connection
with its May 28, 1997, Annual Meeting of Stockholders.

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

The information required hereunder is incorporated by reference to the Company's
Proxy Statement to be filed within 120 days of December 31, 1996 in connection
with its May 28, 1997, Annual Meeting of Stockholders.

ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
------- ----------------------------------------------

There were no relationships or transactions required to be reported under Item
404 of Regulation S-K.

                                    Page 17
<PAGE>
 
                                    PART IV

ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K
------- ---------------------------------------------------------------- 

(a) 1. Financial Statements and Financial Statement Schedules
       ------------------------------------------------------

<TABLE>
       <S>                                                            <C>
       Report of Independent Auditors                                 21
                                                                        
       FINANCIAL STATEMENTS:                                            
       --------------------                                             
       Consolidated income statement                                    
         for the years ended December 31, 1996, 1995 and 1994         22
                                                                        
       Consolidated balance sheet                                       
         at December 31, 1996 and 1995                                23
                                                                        
       Consolidated statement of cash flows                             
         for the years ended December 31, 1996, 1995 and 1994         24
                                                                        
       Consolidated statement of stockholders' equity                   
         for the years ended December 31, 1996, 1995 and 1994         25
                                                                        
       Notes to consolidated financial statements                26 - 35
                                                                        
       FINANCIAL STATEMENT SCHEDULES:                                   
       -----------------------------                                    
                                                                        
       II - Consolidated valuation accounts                           36 
</TABLE>

       All other schedules are omitted as the required information is not
       present or is not present in amounts sufficient to require submission of
       the schedule, or because the information required is included in the
       consolidated financial statements or notes thereto.

    2. Exhibits
       -----------

       The exhibits set forth below are filed as part of this Annual Report:

<TABLE>
       <S>             <C>
       Exhibit 3.1     Restated Articles of Incorporation of Newport Corporation, a Nevada
                       corporation, as amended to date (incorporated by reference to exhibit in
                       the Company's 1987 Proxy Statement).

       Exhibit 3.2     Restated Bylaws of Newport Corporation, a Nevada corporation, as
                       amended to date (incorporated by reference to Exhibit 3.2 of the
                       Company's Annual Report on Form 10-K for the year ended July 31,
                       1992).

       Exhibit 10.1    Lease Agreement dated March 27, 1991, as amended, pertaining to
                       premises located in Irvine, California (incorporated by reference to
                       Exhibit 10.1 of the Company's Annual Report on Form 10-K for the year
                       ended July 31, 1992).

       Exhibit 10.3    1992 Incentive Stock Plan (incorporated by reference to exhibit in the
                       Company's 1992 Proxy Statement).*

       Exhibit 10.4    Loan and Security Agreement dated June 23, 1993, with exhibits and
                       Promissory Note (incorporated by reference to Exhibit 10.4 of the
                       Company's Form 10-Q for the quarter ended June 30, 1993).

       Exhibit 10.5    Acquisition of subsidiaries of Micro-Controle S.A., with exhibits
                       (incorporated by reference to Form 8-K filed June 28, 1991, and
                       amended July 23, 1992).
</TABLE> 

                                    Page 18
<PAGE>
 
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K
------- ----------------------------------------------------------------
(CONT'D)
-------- 

<TABLE> 
       <S>             <C>                                                                           <C>
       Exhibit 10.6    Acquisition of Micro-Controle S.A., with exhibits (incorporated by
                       reference to Form 8-K filed September 18, 1991, and amended July 23,
                       1992).

       Exhibit 10.7    Form of Severance Compensation Agreement between Newport
                       Corporation and certain Executive Officers (incorporated by reference to
                       Exhibit 10.7 of the Company's Annual Report on Form 10-K for the year
                       ended December 31, 1993).*

       Exhibit 10.8    Stock Purchase Agreement dated as of February 14, 1995, among
                       Newport Corporation as Purchaser, RAM Optical Instrumentation, Inc.
                       and Mark G. Arenal, Harry J. Brown, The Harry & Patricia Brown Living
                       Trust 1994, John G. Hartwell, and The John G. Hartwell Family Trust
                       Established 1/3/90 as Sellers (incorporated by reference to Exhibit 2.1 of
                       the Company's Form 8-K filed March 15, 1995).*

       Exhibit 10.9    Credit Agreement dated as of December 20, 1995 between Newport
                       Corporation and ABN AMRO Bank N.V., Los Angeles International
                       Branch (incorporated by reference to Exhibit 10.10 of the Company's
                       Annual Report on Form 10-K for the year ended December 31, 1995).

       Exhibit 10.10   Note Agreement dated as of May 2, 1996 between Newport Corporation
                       and The Prudential Insurance Company of America (incorporated by
                       reference to Exhibit 10.8 of the Company's Form 10-Q for the quarter
                       ended March 31, 1996).

       Exhibit 10.11   First Amendment to Credit Agreement dated as of October 31, 1996
                       between Newport Corporation and ABN AMRO Bank N.V., Los Angeles
                       International Branch (incorporated by reference to Exhibit 10.1 of the
                       Company's Form 10-Q for the quarter ended September 30, 1996).

       Exhibit 10.12   Severance Compensation Agreement dated as of April 8, 1996, between
                       Newport Corporation, a Nevada Corporation, and Robert J. Phillippy,
                       Vice President and General Manager (incorporated by reference to
                       Exhibit 10.2 of the Company's Form 10-Q for the quarter ended
                       September 30, 1996).*

       Exhibit 10.13   Severance Compensation Agreement dated as of May 1, 1996, between
                       Newport Corporation, a Nevada Corporation, and Robert G. Deuster,
                       President and Chief Executive Officer (incorporated by reference to
                       Exhibit 10.3 of the Company's Form 10-Q for the quarter ended
                       September 30, 1996).*

       Exhibit 21      Subsidiaries of Registrant                                                    38

       Exhibit 23      Consent of Independent Auditors                                               39

       Exhibit 27      Financial Data Schedule (Article 5 of Regulation S-X)                         40
</TABLE> 
-----------------
*Required to be filed pursuant to Item 14(a)(3) of Form 10-K


(b) Reports on Form 8-K
    -------------------
The Company filed no Reports on Form 8-K during the quarter ended December 31,
1996.

                                    Page 19
<PAGE>
 
                                  SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this amendment to be signed on its
behalf by the undersigned, thereunto duly authorized.

                              NEWPORT CORPORATION

<TABLE> 
<S>                                                                                       <C> 
/S/ROBERT G. DEUSTER                                                                      March 28, 1997
--------------------------------------------------------------------------------------------------------
Robert G. Deuster, President and Chief Executive Officer                                       Date
  (Principal Executive Officer)

/S/ROBERT C. HEWITT                                                                       March 28, 1997
--------------------------------------------------------------------------------------------------------
Robert C. Hewitt, Vice President, Chief Financial Officer and Secretary                        Date
  (Principal Financial and Accounting Officer)
</TABLE> 

                               POWER OF ATTORNEY

The undersigned directors and officers of Newport Corporation constitutes and
appoints Robert G. Deuster and Robert C. Hewitt, or either of them, as their
true and lawful attorney and agent with power of substitution, to do any and all
acts and things in our name and behalf in our capacities as directors and
officers and to execute any and all instruments for us and in our names in the
capacities indicated below, which said attorney and agent may deem necessary or
advisable to enable said corporation to comply with the Securities Exchange Act
of 1934, as amended, and any rules, regulations and requirements of the
Securities and Exchange Commission, in connection with this Annual Report on
Form 10-K, including specifically but without limitation, power and authority to
sign for us or any of us in our names in the capacities indicated below, any and
all amendments (including post-effective amendments) hereto; and we do hereby
ratify and confirm all that said attorney and agent shall do or cause to be done
by virtue hereof.

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

<TABLE>
<S>                                                                                 <C>            
/S/R. JACK APLIN                                                                    March 28, 1997 
--------------------------------------------------------------------------------------------------- 
R. Jack Aplin, Member of the Board                                                       Date      
                                                                                                   
/S/ROBERT L. GUYETT                                                                 March  28, 1997
--------------------------------------------------------------------------------------------------- 
Robert L. Guyett, Member of the Board                                                    Date      
                                                                                                   
/S/LOUIS B. HORWITZ                                                                 March  28, 1997
--------------------------------------------------------------------------------------------------- 
Louis B. Horwitz, Member of the Board                                                    Date      
                                                                                                   
/S/DAN L. MCGURK                                                                    March 28, 1997 
--------------------------------------------------------------------------------------------------- 
Dan L. McGurk, Member of the Board                                                       Date      
                                                                                                   
/S/C. KUMAR N. PATEL                                                                March  28, 1997
--------------------------------------------------------------------------------------------------- 
C. Kumar N. Patel, Member of the Board                                                   Date      
                                                                                                   
/S/RICHARD E. SCHMIDT                                                               March  28, 1997
--------------------------------------------------------------------------------------------------- 
Richard E. Schmidt, Chairman of the Board                                                Date      
                                                                                                   
/S/JOHN T. SUBAK                                                                    March  28, 1997
--------------------------------------------------------------------------------------------------- 
John T. Subak, Member of the Board                                                       Date       
</TABLE>

                                    Page 20
<PAGE>
 
                         Report of Independent Auditors



The Board of Directors and Stockholders
Newport Corporation


We have audited the accompanying consolidated balance sheet of Newport
Corporation as of December 31, 1996 and 1995, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1996.  Our audits also included the
financial statement schedule listed in the Index at Item 14(a).  These financial
statements and schedule are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these financial statements and
schedule 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 consolidated financial position of Newport
Corporation at December 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.




                                              ERNST & YOUNG LLP

Orange County, California
February 21, 1997

                                    Page 21
<PAGE>
 
                              NEWPORT CORPORATION
                         CONSOLIDATED INCOME STATEMENT

<TABLE>
<CAPTION>
(In thousands, except per share amounts)
                                                      Year Ended December 31,
                                                 -------------------------------
                                                   1996        1995       1994
                                                 --------    --------    -------
<S>                                              <C>         <C>         <C>
 
Net sales                                        $119,910    $101,961    $94,201
Cost of sales                                      67,103      55,421     51,811
                                                 --------    --------    -------
 
Gross profit                                       52,807      46,540     42,390
Selling, general and administrative expense        36,741      34,441     32,240
Research and development expense                    8,204       6,765      5,371
                                                 --------    --------    -------
 
Income from operations                              7,862       5,334      4,779
Interest expense                                   (1,931)     (1,593)    (1,782)
Other income, net                                     477       1,137      1,839
                                                 --------    --------    -------
 
Income before income taxes                          6,408       4,878      4,836
Income tax provision                                1,705       1,003      1,654
                                                 --------    --------    -------
 
Net income                                       $  4,703    $  3,875    $ 3,182
                                                 ========    ========    =======
 
Net income per share                             $   0.53    $   0.45    $  0.38
                                                 ========    ========    =======
 
Number of shares used to calculate
  net income per share                              8,877       8,679      8,469
                                                 ========    ========    =======
 
Dividends per share                              $   0.04    $   0.04    $  0.04
                                                 ========    ========    =======
</TABLE>

                            See accompanying notes

                                    Page 22
<PAGE>
 
                              NEWPORT CORPORATION
                           CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
(Dollars in thousands, except stated value per share)
                                                                        December 31,
                                                                    --------------------
                                                                      1996        1995
                                                                    ---------   --------
<S>                                                                 <C>         <C>
ASSETS
  Current assets:
  Cash and cash equivalents                                         $  3,375    $ 1,524
  Customer receivables, net                                           23,418     19,767
  Other receivables                                                    2,075        780
  Inventories                                                         28,954     22,744
  Deferred tax assets                                                  3,004      2,570
  Other current assets                                                 1,703      1,518
                                                                    --------    -------
 
      Total current assets                                            62,529     48,903
Investments and other assets                                           5,191      4,557
Property, plant and equipment, at cost, net                           24,045     22,327
Goodwill, net                                                         11,612      8,161
                                                                    --------    -------
                                                                    $103,377    $83,948
                                                                    ========    =======
LIABILITIES AND STOCKHOLDERS' EQUITY
  Current liabilities:
  Accounts payable                                                  $  8,128    $ 5,054
  Accrued payroll and related expenses                                 4,879      5,143
  Taxes based on income                                                1,373      1,261
  Current portion of long-term debt                                    1,236      5,286
  Other current liabilities                                            5,171      3,586
                                                                    --------    -------
 
      Total current liabilities                                       20,787     20,330
Long-term debt                                                        23,464      9,899
Other liabilities                                                      1,697      1,032
Commitments and contingencies
 
Stockholders' equity:
  Common stock, $.35 stated value, 20,000,000 shares authorized;
    8,890,000 shares issued and outstanding at December 31, 1996;
    8,699,000 shares at December 31, 1995                              3,110      3,045
  Capital in excess of stated value                                    8,959      7,609
  Unamortized deferred compensation                                     (548)      (369)
  Unrealized translation loss                                         (2,442)    (1,773)
  Retained earnings                                                   48,350     44,175
                                                                    --------    -------
 
      Total stockholders' equity                                      57,429     52,687
                                                                    --------    -------
                                                                    $103,377    $83,948
                                                                    ========    =======
</TABLE>

                            See accompanying notes

                                    Page 23
<PAGE>
 
                              NEWPORT CORPORATION
                      CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
(In thousands)
                                                                     Years Ended December 31,
                                                                 -------------------------------
                                                                   1996        1995       1994
                                                                 ---------   --------   --------
<S>                                                              <C>         <C>        <C>
OPERATING ACTIVITIES:
 Net income                                                      $  4,703    $ 3,875    $ 3,182
 Adjustments to reconcile net income to
  net cash provided by operating activities:
     Depreciation and amortization                                  6,062      4,940      4,622
     Net gains from sales of investments                                -       (832)    (1,685)
     Increase in provision for losses on
       receivables, inventories and investments                     1,226      1,940      1,129
     Deferred income taxes                                           (215)      (889)    (1,126)
     Other non-cash items, net                                        (84)       (94)       (96)
     Changes in operating assets and liabilities:
       Receivables                                                 (2,841)       561     (1,799)
       Inventories                                                 (6,596)    (2,492)       234
       Other current assets                                          (979)       232       (517)
       Accounts payable and other accrued expenses                  2,106     (2,488)    (3,358)
       Taxes based on income                                          112        (50)     2,203
       Translation gain (loss) related to operating activities         18      1,127        (19)
       Other, net                                                    (126)      (132)       222
                                                                 --------    -------    -------
Net cash provided by operating activities                           3,386      5,698      2,992
                                                                 --------    -------    -------
 
INVESTING ACTIVITIES:
 Purchases of property, plant and equipment                        (5,844)    (2,513)    (2,142)
 Disposition of property, plant and equipment                         201         50        434
 Acquisition of business, net of cash acquired                     (4,442)         -          -
 Proceeds from sales of investments
   and marketable securities                                            -      1,319      2,205
 Other, net                                                          (436)        97        164
                                                                 --------    -------    ------- 
Net cash provided by (used in) investing activities               (10,521)    (1,047)       661
                                                                 --------    -------    ------- 
 
FINANCING ACTIVITIES:
  Proceeds from debt placement                                     21,605          -          -
  Repayment of long-term borrowings                                (9,295)    (1,859)    (5,394)
  Increase (decrease) in short-term borrowings                     (3,942)    (5,512)     2,450
  Cash dividends paid                                                (351)      (312)      (299)
  Issuance of common stock under employee                                                      
   agreements including associated tax benefit                      1,013      1,675         99 
                                                                 --------    -------    ------- 
Net cash provided by (used in) financing activities                 9,030     (6,008)    (3,144)
                                                                 --------    -------    ------- 
 
Effect of foreign exchange rate changes on cash                       (44)      (133)       (32)
                                                                 --------    -------    -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                    1,851     (1,490)       477
Cash and cash equivalents at beginning of year                      1,524      3,014      2,537
                                                                 --------    -------    -------
CASH AND CASH EQUIVALENTS AT END OF YEAR                         $  3,375    $ 1,524    $ 3,014
                                                                 ========    =======    ======= 
</TABLE>
                            See accompanying notes

                                    Page 24
<PAGE>
 
                              NEWPORT CORPORATION
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
(In thousands)
                                                  Years Ended December 31,
                                               ------------------------------
                                                 1996       1995       1994
                                               --------   --------   --------
<S>                                            <C>        <C>        <C>
Common shares:
 Shares outstanding at beginning of year         8,699      8,441      8,400
 Issuance of common shares                         191        258         41
                                               -------    -------    -------
 Shares outstanding at end of year               8,890      8,699      8,441
                                               =======    =======    =======
Common stock:
 Balance at beginning of year                  $ 3,045    $ 2,954    $ 2,939
 Issuance of common stock                           49         80          7
 Grants of restricted stock, net                    16         11          8
                                               -------    -------    -------
 Balance at end of year                          3,110      3,045      2,954
                                               =======    =======    =======
Capital in excess of stated value:
 Balance at beginning of year                    7,609      5,771      5,554
 Issuance of common stock                          964      1,595         92
 Grants of restricted stock, net                   386        243        125
                                               -------    -------    -------
 Balance at end of year                          8,959      7,609      5,771
                                               =======    =======    =======
Unamortized deferred compensation:
 Balance at beginning of year                     (369)      (251)      (174)
 Grants of restricted stock, net                  (402)      (254)      (133)
 Amortization of deferred compensation             223        136         56
                                               -------    -------    -------
 Balance at end of year                           (548)      (369)      (251)
                                               =======    =======    =======
Unrealized gain on marketable securities:
 Balance at beginning of year                        -        343        979
 Change in unrealized gain                           -       (343)      (636)
                                               -------    -------    -------
 Balance at end of year                              -          -        343
                                               =======    =======    =======
Unrealized translation loss:
 Balance at beginning of year                   (1,773)    (2,778)    (3,384)
 Unrealized translation gain (loss)               (669)     1,005        606
                                               -------    -------    -------
 Balance at end of year                         (2,442)    (1,773)    (2,778)
                                               =======    =======    =======
Retained earnings:
 Balance at beginning of year                   44,175     40,612     37,729
 Dividends                                        (528)      (312)      (299)
 Net income                                      4,703      3,875      3,182
                                               -------    -------    -------
 Balance at end of year                         48,350     44,175     40,612
                                               =======    =======    =======
Total stockholders' equity                     $57,429    $52,687    $46,651
                                               =======    =======    =======
</TABLE>

                            See accompanying notes

                                    Page 25
<PAGE>
 
NOTE 1   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION  Newport Corporation is a global leader in the design, manufacture
and marketing of high precision components, instruments and integrated systems
for the fiber optic communications, semiconductor equipment, computer
peripherals and scientific research markets. The Company's high precision
products enhance productivity and capabilities of test and measurement and
automated assembly for precision manufacturing, engineering and research
applications.

CONSOLIDATION  The accompanying financial statements consolidate the accounts of
the Company and its wholly-owned subsidiaries.  The accounts of the Company's
subsidiaries in Europe have been consolidated using a one-month lag.  All
significant intercompany transactions and balances have been eliminated.
Certain reclassifications have been made to prior year amounts to conform to
current year presentation.

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 amounts reported in the financial statements and
accompanying notes.  Actual results could differ from those estimates.
Significant estimates made in preparing the consolidated financial statements
include the allowance for doubtful accounts, inventory obsolescence reserves,
income tax valuation allowance, investment reserves, litigation settlement costs
and future undiscounted cash flows used in the analysis of the impairment of
long-lived assets.

SALES  A sale is recorded when title passes to customers.

INCOME TAXES  The Company recognizes the amount of current and deferred taxes
payable or refundable at the date of the financial statements as a result of all
events that have been recognized in the financial statements and as measured by
the provisions of enacted laws.

DEPRECIATION AND AMORTIZATION  The cost of buildings, machinery and equipment,
and leasehold improvements is depreciated generally using an accelerated method
based on a declining balance formula over estimated useful lives ranging from
three to thirty one years.  Leasehold improvements are generally amortized over
the term of the lease.

NET INCOME PER SHARE  Net income per share is based on the weighted average
number of shares of common stock and the dilutive effects of common stock
equivalents (stock options), determined using the treasury stock method,
outstanding during the periods.

CASH AND CASH EQUIVALENTS  Cash and cash equivalents consist of cash-on-hand,
short-term certificates of deposit and other securities readily convertible to
cash with original maturities less than three months.

FAIR VALUES OF FINANCIAL INSTRUMENTS  Fair values of cash and cash equivalents,
short-term borrowings and the current portion of long-term debt approximate the
carrying value because of the short period of time to maturity.  The fair value
of long-term debt approximates its carrying value because their rates of
interest approximate current market rates.  The carrying amounts of the forward
exchange contracts, if any, equal fair value and are adjusted each balance sheet
date for changes in exchange rates.

INVESTMENTS  Nonmarketable investments are stated at cost, adjusted for the
Company's proportionate share of undistributed earnings.

INTANGIBLE ASSETS  Goodwill, representing the excess of the purchase price over
the fair value of the net assets of acquired entities, is amortized on a
straight-line basis over its estimated useful life of fifteen to twenty years.
Patents are amortized using the straight-line method over the lives of the
patents.  Licenses are amortized on a straight-line basis over the estimated
economic lives of the related assets.  At December 31, 1996, accumulated
amortization of intangible assets, principally goodwill, aggregated $3.0
million.

                                    Page 26
<PAGE>
 
FOREIGN CURRENCY  Balance sheet accounts denominated in foreign currency are
translated at exchange rates as of the date of the balance sheet and income
statement accounts are translated at average exchange rates for the period.
Translation gains and losses are accumulated as a separate component of
Stockholders' Equity.  The Company has adopted local currencies as the
functional currencies for its subsidiaries because their principal economic
activities are most closely tied to the respective local currencies.

The Company may enter into foreign exchange contracts as a hedge against foreign
currency denominated receivables.  It does not engage in currency speculation.
Market value gains and losses on contracts are recognized currently, offsetting
gains or losses on the associated receivables.  Foreign currency transaction
gains and losses are included in current earnings.  Foreign exchange contracts
totaled $1.2 million at December 31, 1996.  There were no foreign exchange
contracts at December 31, 1995.

STOCK OPTION PLANS  Effective January 1, 1996, the Company adopted the
disclosure-only provision of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (SFAS No. 123) and accordingly is
continuing to account for its plans under previous accounting standards.
Consequently, SFAS No. 123 did not have an impact on the Company's consolidated
results of operations or financial position.  However, pro forma disclosures of
net earnings and earnings per share were made in 1996 as if the SFAS No. 123
accounting standard had been adopted (Note 10).

NOTE 2    ACQUISITIONS

In February 1995, the Company acquired all the outstanding capital stock of RAM
Optical Instrumentation, Inc. ("ROI"), a manufacturer of video inspection
systems, in exchange for 1,251,000 shares of its common stock.  Additionally, an
option to purchase ROI common shares was exchanged for an option to purchase
72,975 shares of the Company's common stock.  In March 1995, the Company
acquired all the outstanding stock of Light Control Instruments, Inc. ("LCI"), a
manufacturer of laser-diode instruments, in exchange for 128,000 shares of the
Company's common stock.  These transactions have been accounted for as poolings
of interests.  Costs associated with these acquisitions totaling $0.1 million
were charged to operations in the first quarter of 1995.

On January 2, 1996, the Company acquired, for cash plus additional consideration
based upon future operating profit, substantially all the assets and selected
liabilities of MikroPrecision Instruments, Inc. ("MikroPrecision"), a
manufacturer of precision equipment for high technology industries such as
semiconductor and disk drive markets.  The company is located in Plymouth,
Minnesota, a suburb of Minneapolis, Minnesota.  The acquisition was accounted
for as a purchase.  Subsequent to the original agreement date, the Company and
seller agreed to a cash amount, independent of the future operating profit, for
total amounts due as additional consideration which has been recorded as
additional goodwill.  In connection with this acquisition the Company recorded
goodwill totaling $4.7 million.
 
NOTE 3    CUSTOMER RECEIVABLES

Customer receivables consist of the following:

<TABLE>
<CAPTION>
(In thousands)                               December 31,
                                          -----------------
                                           1996      1995
                                          -------   -------
<S>                                       <C>       <C>
Customer receivables                      $23,942   $20,304
Less allowance for doubtful accounts          524       537
                                          -------   -------
                                          $23,418   $19,767
                                          =======   =======
</TABLE>

The Company maintains adequate reserves for potential credit losses.  Such
losses have been minimal and within management's estimates.  Receivables from
customers are generally unsecured.

                                    Page 27
<PAGE>
 
NOTE 4    INVENTORIES

Inventories are stated at cost, determined on either a first-in, first-out
(FIFO) or average cost basis and do not exceed net realizable value.

Inventories consist of the following:

<TABLE>
<CAPTION>
(In thousands)                            December 31, 
                                          ------------ 
                                        1996      1995 
                                       -------   -------
<S>                                    <C>       <C>    
Raw materials and purchased parts      $10,705   $ 7,832
Work in process                          4,998     4,111
Finished goods                          13,251    10,801
                                       -------   -------
                                       $28,954   $22,744
                                       =======   =======
</TABLE>

NOTE 5    INCOME TAXES

The provision for taxes based on income consists of the following:

<TABLE>
<CAPTION>
(In thousands)                Years Ended December 31, 
                              ------------------------ 
                             1996      1995      1994
                            ------    ------    -------
<S>                         <C>       <C>       <C>
Current:                               
  Federal                   $1,541    $  935    $ 2,615
  State                        200        85        (35)
  Foreign                      179       303        200
Deferred:                             
  Federal                     (214)       74     (1,114)
  State                          5        14        (12)
  Foreign                       (6)     (408)         -
                            ------    ------    -------
                            $1,705    $1,003    $ 1,654
                            ======    ======    =======
</TABLE> 

The provision for taxes based on income differs from the amount obtained by
applying the statutory tax rate as follows:


<TABLE> 
<CAPTION> 
(In thousands)              
                                                                                   Years Ended December 31, 
                                                                                   ------------------------ 
                                                                                  1996      1995      1994  
                                                                                 ------    ------    -------
<S>                                                                              <C>       <C>       <C> 
Income tax provision at statutory rate                                           $2,179    $1,658    $ 1,644
Increase (decrease) in taxes resulting from:                                               
  Non deductible goodwill amortization                                              201       191        182
  Foreign losses not benefited                                                      167        90        168
  State income taxes, net of federal income tax benefit                             136       135        (22)
  Utilization of foreign losses                                                    (151)     (290)      (527)
  Reduction in valuation allowance                                                 (217)     (408)         -
  Conversion of foreign subsidiaries to U.S. Partnerships                          (276)        -          -
  Foreign Sales Corporation income                                                 (283)     (156)       (79)
  Utilization of state NOL, net of federal income tax benefit                         -      (105)         -
  Other, net                                                                        (51)     (112)       288
                                                                                 ------    ------    -------
                                                                                 $1,705    $1,003    $ 1,654
                                                                                 ======    ======    =======
</TABLE>

Deferred tax assets and liabilities determined in accordance with SFAS 109
reflect the impact of temporary differences between amounts of assets and
liabilities for tax and financial reporting purposes.  Such amounts are measured
by tax laws and the expected future tax consequences of net operating loss
carryforwards.

                                    Page 28
<PAGE>
 
In 1996 and 1995, the Company reduced the valuation allowance applicable to
foreign net operating loss carryforwards by approximately $217,000 and $408,000,
respectively, because of improvements in earnings of certain of its European
subsidiaries.

Temporary differences and net operating loss carryforwards which give rise to
deferred tax assets and liabilities recognized in the balance sheet are as
follows:

<TABLE>
<CAPTION>
(In thousands)                                                     December 31, 
                                                              --------------------- 
                                                                1996         1995 
                                                              -------       -------
<S>                                                           <C>           <C>
Deferred tax assets:
  Net operating loss carryforwards                            $ 9,440       $ 9,834
  Accrued restructuring liabilities                                 -         1,127
  Accruals not currently deductible for tax purposes            2,080         1,019
  Other                                                           154           100
  Valuation allowance                                          (8,670)       (9,375)
                                                              -------       -------
    Total deferred tax asset                                    3,004         2,705
                                                              -------       -------
Deferred tax liabilities:                                                   
  Accelerated depreciation methods used for tax purposes          851           922
  Other                                                           196           245
                                                              -------       -------
    Total deferred tax liability                                1,047         1,167
                                                              -------       -------
Net deferred tax asset                                        $ 1,957       $ 1,538
                                                              =======       =======
</TABLE>

The Company has foreign net operating loss carryforwards totaling approximately
$25.5 million at December 31, 1996, principally expiring in the years 2007
through 2010.  For financial reporting purposes, a valuation allowance has been
recorded primarily to offset the deferred tax asset related to foreign net
operating loss carryforwards.  Approximately $2.8 million of the valuation
allowance will be allocated to reduce goodwill when realized.  Approximately
$0.1 million and $0.3 million of the valuation allowance realized was allocated
to goodwill for 1996 and 1995, respectively.  Net income taxes paid for 1996,
1995 and 1994 totaled $1.8 million, $1.0 million and $0.3 million, respectively.

NOTE 6    PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, at cost, including capitalized lease assets,
consists of the following:

<TABLE>
<CAPTION>
(In thousands)                                                      December 31,                                             
                                                              ----------------------                       
                                                               1996           1995                         
                                                              -------        -------                       
<S>                                                           <C>            <C>                           
Land                                                          $ 2,155        $ 2,238                       
Buildings                                                      12,896         13,366                       
Leasehold improvements                                          8,462          7,500                       
Machinery and equipment                                        22,643         19,510                       
Office equipment                                                9,734          8,865                       
                                                              -------        -------                       
                                                               55,890         51,479                       
Less accumulated depreciation                                  31,845         29,152                       
                                                              -------        -------                       
                                                              $24,045        $22,327                       
                                                              =======        =======                        
</TABLE> 
 
NOTE 7    INVESTMENTS AND OTHER ASSETS
 
Investments and other assets consist of the following:

<TABLE> 
<CAPTION> 
(In thousands)                                                      December 31,                         
                                                              ----------------------                     
                                                               1996           1995                       
                                                              -------        -------                     
<S>                                                           <C>            <C>                          
Nonmarketable investments                                     $ 4,114        $ 3,966                     
Other assets                                                    1,077            591                     
                                                              -------        -------                     
                                                              $ 5,191        $ 4,557                     
                                                              =======        =======                      
</TABLE>

                                    Page 29
<PAGE>
 
Nonmarketable investments consist primarily of investments in private companies,
including a 25% interest in a U.S. supplier and a 29% interest in a company
active in laser and electro-optical technology, stated at cost, adjusted for the
Company's proportionate share of undistributed earnings. The Company made
purchases of approximately $4.5 million, $3.8 million and $3.8 million from the
U.S. supplier during 1996, 1995 and 1994, respectively.

Other assets consist primarily of patents and license agreements.

NOTE 8    LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
(Dollar amounts in thousands)                                             December 31,    
                                                                    ----------------------
                                                                     1996           1995  
                                                                    -------        -------
<S>                                                                <C>            <C>     
Credit agreements:
 Prime, maturing December 1999                                       $   400        $ 4,555
 PIBOR + 1.00%, maturing December 1999                                   213              -
Term notes:
 8.25% senior notes, maturing May 2004                                20,000              -
 PIBOR + 1.35%, repaid in February 1996                                    -          5,097
 LIBOR + 2.00%, repaid in March 1996                                       -          2,448
Capitalized lease obligations, payable in installments to 2005,
 in French francs                                                      2,552          2,991
Equipment loans                                                        1,535             94
                                                                     -------        -------
                                                                      24,700         15,185
Less current portion                                                   1,236          5,286
                                                                     -------        -------
                                                                     $23,464        $ 9,899
                                                                     =======        =======
</TABLE>

On December 20, 1995, the Company signed a credit agreement with a bank for a
$15.0 million unsecured line of credit to support the Company's domestic
operations as well as provide funds for the acquisition of MikroPrecision on
January 2, 1996, and a 10 million French franc ($2.0 million) unsecured line of
credit to support the Company's European requirements.  On October 31, 1996,
this credit agreement was amended to increase the borrowing capacity on the
unsecured line of credit for domestic operations to $20.0 million and change
applicable interest rates.  The amended credit agreement provides for interest
at prime, or LIBOR (London Interbank Offered Rate) plus 1.00%.  Proceeds from
the line were used to repay amounts owed on credit agreements with two U.S.
financial institutions.  The line has no annual facility fee and an unused line
fee of 0.25 percent.  At December 31, 1996, the amount outstanding under this
line of credit was $0.4 million and amounts available for borrowing under the
line totaled $17.4 million after considering outstanding letters of credit.  The
prime rate was 8.25% at December 31, 1996.  The weighted average interest rate
on the line of credit was 7.6% and 9.9% for 1996 and 1995, respectively.  Under
the terms of the agreement, the Company is required to comply with various
covenants, including covenants limiting the ability of the Company and its
subsidiaries to pledge assets or incur liens on assets, requiring the Company to
maintain specified ratios and levels of tangible net worth and net income, and
limiting the amount of capital expenditures and dividends.

During May 1996, the Company obtained $20.0 million of long-term financing from
an insurance company.  These senior notes, sold at par, are unsecured, carry an
8.25% annual coupon and mature in May 2004.  Interest is payable semiannually
and principal payments commence during November 1998.

Capitalized lease obligations of 13.2 million French francs (approximately $2.6
million) relate to real estate and equipment located in France.  The original
cost of assets under capital leases at December 31, 1996 and 1995, was 19.1
million French francs (approximately $3.7 million at December 31, 1996).
Accumulated amortization totaled 7.5 million French francs (approximately $1.4
million) and 6.7 million 

                                    Page 30
<PAGE>
 
French francs (approximately $1.4 million) at December 31, 1996 and 1995,
respectively. Required annual payments are as follows (In thousands):

<TABLE>
<CAPTION>
                                   Capitalized
                                      Lease     Borrowings and
 For years ending December 31,     Obligations    Term Notes
                                   -----------  --------------
<S>                                <C>           <C>
1997                                    $  494      $   935
1998                                       498        1,843
1999                                       502        3,339
2000                                       438        4,368
2001                                       376        5,163
Thereafter                               1,099        6,500
                                        ------      -------
                                         3,407
Less interest                              855
                                        ------
                                        $2,552      $22,148
                                        ======      =======
</TABLE>

Interest paid for 1996, 1995 and 1994, totaled $1.6 million, $1.4 million and
$1.5 million, respectively.

NOTE 9    COMMITMENTS

The Company leases certain of its manufacturing and office facilities and
equipment under non-cancelable operating leases.  Minimum rental commitments
under terms of these leases are as follows for years ending December 31 (In
thousands):
<TABLE>
<S>             <C>
1997            $2,390
1998             2,179
1999             2,052
2000             1,910
2001             1,853
Thereafter       9,839
</TABLE>

The principal lease expires in 2007.  Rental expense under all leases totaled
$2.6 million for each of the 1996, 1995 and 1994 years.


NOTE 10   STOCK OPTION PLANS

The Company's stock option plan provides that the number of shares available for
issuance as either stock options or restricted stock increases on the last day
of each fiscal year by an amount equal to 2% of the then outstanding shares.
Options have been granted to directors, officers and key employees at a price
not less than fair market value at the dates of grants for terms of not more
than ten years.  Accordingly, no charges have been made to income in accounting
for these options.  The tax benefits, if any, resulting from the exercise of
options are credited to capital in excess of stated value.  The fair market
value of restricted stock at date of grant is amortized to expense over the
vesting period of five years.

                                    Page 31
<PAGE>
 
The following table summarizes option plan and restricted stock activity for the
years ended December 31, 1996 and 1995:

<TABLE>
<CAPTION>
                                                          Under Plan                    Weighted Average
                                 Available    -----------------------------------        Exercise Price
                                for Option    Restricted                                of Option Shares
                                 or Award       Stock      Options       Total            Under Plan
                                -----------   ---------  ----------   -----------         ----------
<S>                             <C>           <C>        <C>          <C>                 <C>
Balance, December 31, 1994         568,973     50,750    1,002,756     1,053,506               $7.13
Authorized                         175,246          -            -             -                   -
Granted                           (361,475)    41,000      320,475       361,475                6.52
Exercised                                -    (10,000)    (155,520)     (165,520)               6.93
Forfeited                          157,446     (8,250)    (149,196)     (157,446)               7.73
                                  --------    -------    ---------     ---------
Balance, December 31, 1995         540,190     73,500    1,018,515     1,092,015                6.93
Authorized                         177,793          -            -             -                   -
Granted                           (376,000)    55,500      320,500       376,000                8.71
Exercised                                -    (22,250)     (64,585)      (86,835)               5.35
Forfeited                          120,939    (10,000)    (110,939)     (120,939)               8.24
                                  --------    -------    ---------     ---------
Balance, December 31, 1996         462,922     96,750    1,163,491     1,260,241               $7.37
                                  ========    =======    =========     =========     
</TABLE>
The weighted average per share fair value of restricted stock granted during
1996 and 1995 was $8.59 and $8.12, respectively.

At December 31, 1995, options on 648,265 shares were exercisable with a weighted
average exercise price of $6.89 per share.  The following table summarizes
information concerning options outstanding and exercisable at December 31, 1996
(Contractual life in years):

<TABLE>
<CAPTION>
                    Options Outstanding                               Options Exercisable
-----------------------------------------------------------    ---------------------------------- 
                              Weighted Average     Weighted                        Weighted     
                                  Remaining         Average                        Average      
    Range of        Number      Contractual        Exercise            Number      Exercise     
Exercise Prices   Outstanding      Life             Price            Exercisable    Price       
---------------   -----------  ---------------     --------          -----------   --------     
<S>               <C>               <C>             <C>              <C>          <C>
         $2.40        52,975        1.3             $ 2.40             52,975     $ 2.40        
  5.00 - 10.12     1,107,316        6.7               7.59            625,136       7.20        
         13.50         3,200        1.6              13.50              3,200      13.50        
                   ---------                                          -------                   
                   1,163,491                                          681,311                   
                   =========                                          =======                    
</TABLE>

The Company applies Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations in accounting for its
plans.  Accordingly, no compensation expense has been recognized for its stock-
based compensation plans other than for restricted stock awards.  Had
compensation cost for the Company's stock option plans been determined based
upon the fair value at the grant date for awards under these plans consistent
with the methodology prescribed under Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation, the Company's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below:

<TABLE>
<CAPTION>
                                          1996     1995
                                         ------   ------
<S>                                      <C>      <C>
     Net income - reported               $4,703   $3,875
                                         ======   ======
     Net income - pro forma              $4,332   $3,576
                                         ======   ======
     Earnings per share - reported       $ 0.53   $ 0.45
                                         ======   ======
     Earnings per share - pro forma      $ 0.49   $ 0.41
                                         ======   ======
</TABLE>

The fair value of each option grant in 1995 and 1996 was estimated on the date
of the grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: dividend yield of 0.40%; expected annual
volatility of 32.30%; risk-free interest rate of 6.30%; expected lives of 7
years; and expected turnover rate of 12.94%.  The weighted average per share
fair value of options granted in 1996 

                                    Page 32
<PAGE>
 
and 1995 was $4.26 and $3.81, respectively. The pro forma amounts shown for the
impact of SFAS No. 123 are not necessarily indicative of future results because
of the phase in rules and differences in number of grants, stock price and
assumptions for future years.

Effective January 1, 1995 the Company adopted an Employee Stock Purchase Plan
(the "Purchase Plan") to provide employees of the Company and selected
subsidiaries with an opportunity to purchase common stock through payroll
deductions.  The purchase price is the lower of 85% of the fair market value of
the stock on the first or last day of each quarter.  The Purchase Plan expires
on December 31, 2005.  An aggregate of 250,000 shares of common stock is
available for purchase under the Purchase Plan.  There were 79,869 and 70,850
shares issued under the Purchase Plan during 1996 and 1995, respectively.

NOTE 11   OTHER INCOME, NET

Other income, net, consisted of the following:

<TABLE>
<CAPTION>
 
(In thousands)                                       Years Ended December 31,
                                                     ------------------------
                                                      1996     1995     1994
                                                     ------   ------   ------
<S>                                                   <C>     <C>      <C>
Interest and dividend income                          $ 105   $   95   $  143
Exchange gains, net                                      27        8      175
Gains on sale of investments, net                         -      832    1,404
Other                                                   345      202      117
                                                      -----   ------   ------
                                                      $ 477   $1,137   $1,839
                                                      =====   ======   ======
</TABLE>

Marketable securities, which consisted of a publicly traded company's stock,
were sold in 1995.  Gross sale proceeds were $0.9 million and $1.2 million in
1995 and 1994, respectively.  Realized gains and losses on sale of these
securities are based on the difference between the selling price and historical
cost.  Realized gains of $0.8 million and $1.1 million for 1995 and 1994,
respectively, are reflected in gains on sale of investments, net.

NOTE 12   ADVERTISING

The Company expenses the costs of advertising as incurred, except for direct-
response advertising, which is capitalized and amortized over its expected
period of future benefits.  Direct-response advertising consists primarily of
sales brochures and catalogs.  The capitalized costs are amortized over
estimated future benefit periods ranging from three months to two years.

Advertising materials of $0.5 million and $0.6 million were reported as assets
at December 31, 1996 and 1995, respectively.  Advertising expense was $1.7
million, $1.6 million and $1.6 million for 1996, 1995 and 1994, respectively.

                                    Page 33
<PAGE>
 
NOTE 13   BUSINESS SEGMENT INFORMATION

The Company operates in one business segment.  It designs, manufactures and
markets on a worldwide basis high precision components, instruments and
integrated systems which enhance customer productivity and capabilities of
test and measurement and automated assembly for precision manufacturing,
engineering and research activities.  The Company's high precision products are
sold to the fiber optic communications, semiconductor equipment, computer
peripherals and scientific research markets.

Information concerning the Company's operations by geographic segment is as
follows:

<TABLE>
<CAPTION>
(In thousands)                                                           Years Ended December 31, 
                                                                     ---------------------------------
                                                                       1996         1995        1994
                                                                     --------     --------    --------
<S>                                                                  <C>          <C>         <C>
Sales to unaffiliated customers:                                                 
United States                                                        $ 86,217     $ 64,769    $ 59,211
Europe                                                                 31,700       35,087      30,926
Other areas                                                             1,993        2,105       4,064
                                                                     --------     --------    --------
                                                                     $119,910     $101,961    $ 94,201
                                                                     ========     ========    ========
Sales between geographic areas (based on invoiced prices):                       
United States                                                        $  8,428     $  7,233    $  7,784
Europe                                                                  7,960       11,489       9,095
Intercompany eliminations                                             (16,388)     (18,722)    (16,879)
                                                                     --------     --------    --------
                                                                     $     --     $     --    $     --
                                                                     ========     ========    ========
Income (loss) before taxes:                                                      
United States                                                        $  6,960     $  4,215    $  4,693
Europe                                                                   (540)         735        (244)
Other areas                                                               (52)         (46)        493
Intercompany eliminations                                                  40          (26)       (106)
                                                                     --------     --------    --------
                                                                     $  6,408     $  4,878    $  4,836
                                                                     ========     ========    ========
Assets:                                                                          
United States                                                        $116,428     $ 94,376    $ 91,129
Europe                                                                 37,958       40,160      48,516
Other areas                                                               978          770         720
Intercompany eliminations                                             (51,987)     (51,358)    (55,711)
                                                                     --------     --------    --------
                                                                     $103,377     $ 83,948    $ 84,654
                                                                     ========     ========    ========
</TABLE>

The Company's manufacturing facilities are located in the United States and
France.  United States revenues include exports to unaffiliated customers
totaling $16.4 million, $9.3 million and $9.3 million for 1996, 1995 and 1994,
respectively.

NOTE 14   DEFINED CONTRIBUTION PLAN

The Company sponsors a defined contribution plan.  Generally, all U.S. employees
are eligible to participate and contribute in this plan.  Contributions to the
plan are determined based on a percentage of contributing employees'
compensation.

Expense recognized for the plan totaled $0.9 million, $0.8 million and $0.9
million for 1996, 1995 and 1994, respectively.

                                    Page 34
<PAGE>
 
NOTE 15   SUPPLEMENTARY QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
(In thousands, except per share amounts)
                                                              Net
                                                             Income  Dividends    High       Low
                              Net     Gross        Net        Per      Per        Share      Share
   Three months ended        Sales    Profit      Income     Share     Share      Price      Price
-------------------------   -------   -------   ----------   -----   ---------   --------   -------
<S>                         <C>       <C>       <C>          <C>     <C>         <C>        <C>
    DECEMBER 31, 1996       $32,580   $14,794       $1,669   $0.19       $0.02   $ 9 3/8    $8
    SEPTEMBER 30, 1996       29,235    12,708        1,116    0.12          --     9 7/8     7 3/8
    JUNE 30, 1996            30,116    13,017          976    0.11        0.02    10 1/2     8 3/4 
    MARCH 31, 1996           27,979    12,288          942    0.11          --     9 1/4     7 1/2
 
    December 31, 1995        27,867    12,973        1,450    0.17          --     9 1/2     7 1/2 
    September 30, 1995       24,253    11,174          743    0.08        0.02    12 3/8     8 7/8  
    June 30, 1995            25,525    11,597          854    0.10          --     9 3/8     7 1/2
    March 31, 1995           24,316    10,796          828    0.10        0.02     9 1/8     7
</TABLE>

Net income per share is computed independently for each of the quarters
presented and the summation of quarterly amounts may not equal the total net
income per share reported for the year.

                                    Page 35
<PAGE>
 
                              NEWPORT CORPORATION
                                  Schedule II
                        Consolidated Valuation Accounts
<TABLE>
<CAPTION>
(In thousands)
                                         Balance at     Additions                                           Balance
                                          Beginning  Charged to Costs                     Other Charges      at End
         Description                      of Period    and Expenses    Write-Offs (1)    Add (Deduct) (2)  of Period
         -----------                    -----------  ----------------  --------------   ---------------    ---------
<S>                                         <C>           <C>            <C>                 <C>          <C>
 
Year ended December 31, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts              $  537        $   62         $   (59)             $ (16)      $  524
Reserve for inventory obsolescence            3,295         1,164            (290)              (104)       4,065
Reserve on investments                          457             -             (77)                 -          380
                                             ------        ------         -------              -----       ------
Total                                        $4,289        $1,226         $  (426)             $(120)      $4,969
                                             ======        ======         =======              =====       ======
 
Year ended December 31, 1995:
Deducted from asset accounts:
Allowance for doubtful accounts              $  460        $  190         $  (138)             $  25       $  537
Reserve for inventory obsolescence            3,380         1,750          (1,984)               149        3,295
Reserve on investments                          457             -               -                  -          457
                                             ------        ------         -------              -----       ------
Total                                        $4,297        $1,940         $(2,122)             $ 174       $4,289
                                             ======        ======         =======              =====       ======
 
Year ended December 31, 1994:
Deducted from asset accounts:
Allowance for doubtful accounts              $  717        $   90         $  (203)             $(144)      $  460
Reserve for inventory obsolescence            2,786           715            (313)               192        3,380
Reserve on investments                          133           324               -                  -          457
                                             ------        ------         -------              -----       ------
Total                                        $3,636        $1,129         $  (516)             $  48       $4,297
                                             ======        ======         =======              =====       ======
</TABLE>

(1)    Amounts are net of recoveries.

(2)    Amounts reflect the effect of exchange rate changes on translating
       valuation accounts of foreign subsidiaries in accordance with FASB
       Statement No. 52, "Foreign Currency Translation" and certain
       reclassifications between balance sheet accounts.

                                    Page 36
<PAGE>
 
                              NEWPORT CORPORATION
                                   FORM 10-K
                                 Exhibit Index
                                 -------------

<TABLE>
<CAPTION>
                                                                     Sequential
                                                                    Page Number
                                                                    -----------
<S>             <C>                                                     <C>

Exhibit 21      Subsidiaries of Registrant                              38

Exhibit 23      Consent of Independent Auditors                         39

Exhibit 27      Financial Data Schedule (Article 5 of Regulation S-X)   40
</TABLE>

                                    Page 37