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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

For the quarterly period ended October 2, 2004

OR

For the transition period from              to             

Commission File Number: 000-0-1649

NEWPORT CORPORATION

(Exact name of registrant as specified in its charter)

1791 Deere Avenue, Irvine, California 92606

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (949) 863-3144

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  ¨    No  x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes  x    No  ¨

As of October 29, 2004, 42,895,374 shares of the registrant’s sole class of common stock were outstanding.

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NEWPORT CORPORATION

FORM 10-Q

INDEX

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

NEWPORT CORPORATION

Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

See accompanying notes.

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NEWPORT CORPORATION

Consolidated Balance Sheets

(In thousands, except share data)

(Unaudited)

See accompanying notes.

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NEWPORT CORPORATION

Consolidated Statements of Cash Flows

(Unaudited)

See accompanying notes.

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NEWPORT CORPORATION

Notes to Consolidated Financial Statements

October 2, 2004

1. Basis of Presentation

The accompanying consolidated financial statements include the financial statements of the Company and its wholly owned subsidiaries. These financial statements are unaudited and have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments (consisting of normal and recurring accruals and acquisition-related items) considered necessary for a fair presentation have been included.

The accompanying consolidated financial statements do not include certain footnotes and financial presentations normally required under generally accepted accounting principles and, therefore, should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003. The results for the interim period are not necessarily indicative of results for the full year ending January 1, 2005. The December 31, 2003 balances reported herein are derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

Effective in the first quarter of 2004, the Company changed to a conventional 52/53-week accounting fiscal year. The Company’s fiscal year will end on the Saturday closest to December 31, and its fiscal quarters will end on the Saturday closest to the end of each corresponding calendar quarter. As a result, for fiscal 2004, the Company’s first, second and third quarters ended on April 3, 2004, July 3, 2004 and October 2, 2004, respectively. The Company’s fiscal year will end on January 1, 2005.

Certain prior period amounts have been reclassified to conform to the current period presentation.

2. Acquisition

In July 2004, the Company acquired all of the issued and outstanding capital stock of Spectra-Physics, Inc. and certain related entities (collectively, Spectra-Physics). Spectra-Physics manufactures high-power semiconductor, solid-state and gas lasers, as well as other photonic components and devices used in a wide range of applications, including scientific research, industrial and microelectronic manufacturing and medical diagnostics. The combination creates a leading photonics company with an integrated technology mix.

The transaction was accounted for using the purchase method. The Company’s results of operations for 2004 include the results of operations of Spectra-Physics from the date of acquisition on July 16, 2004.

The purchase price for Spectra-Physics was determined by arms-length negotiation between management and Thermo Electron Corporation, Spectra-Physics’ former parent, taking into account a number of factors, including the value of the assets, the historical and projected financial performance of Spectra-Physics and the valuations of certain recently acquired companies with comparable businesses and financial performance.

The Company prepared a preliminary purchase price allocation for the acquisition in the third quarter of 2004 based on a preliminary valuation of intangible assets, an estimate of pension accounting pending a final actuarial valuation and preliminary income tax accounting. In addition, the Company is in the process of finalizing its exit plans related to certain acquired entities and has recorded a liability based upon preliminary plans approved by the Company’s Board of Directors. The Company expects that these items will be resolved by the end of the second quarter of 2005. The excess of the purchase price over the estimated fair value of the net assets acquired of approximately $178.0 million was recorded as goodwill, which is generally not deductible for tax purposes. The purchase agreement is subject to a net asset adjustment, whereby the purchase price is adjusted based upon the value of the net assets at the closing date compared with the net assets at December 31, 2003. The Company has estimated that this adjustment will result in payment to the Company of approximately $25 million, which is included in prepaid expenses and other current assets in the accompanying consolidated balance sheet, and it is reflected in the figures below.

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NEWPORT CORPORATION

Notes to Consolidated Financial Statements

October 2, 2004

Below is a summary of the purchase price, assets acquired and liabilities assumed:

The number of shares of the Company’s common stock issued was determined by dividing $50 million by the 20-day average closing price of the Company’s common stock ending two days before the acquisition date of July 16, 2004. The fair value of the Company’s common stock issued was determined using an average price of $14.93, which was the average closing price of the Company’s common stock two days before and after the measurement date of July 14, 2004.

The debt is valued at approximately $46 million, based upon a discount in order to reflect a market rate of interest for similar debt with similar characteristics.

The Company valued the purchased intangible assets acquired using a preliminary valuation. Identifiable intangible assets consist of (in thousands):

The Company has also estimated that $0.3 million of the purchase price represents purchased in-process technology that has not yet reached technological feasibility and has no alternative future use.

The financial information below summarizes the combined results of operations of the Company and Spectra-Physics, on a pro forma basis, as though the companies had been combined as of the beginning of each period presented. This pro forma financial information is presented for information purposes only and is not necessarily indicative of the results of operations that would have been achieved had the acquisition taken place at the beginning

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NEWPORT CORPORATION

Notes to Consolidated Financial Statements

October 2, 2004

of each period presented. The pro forma condensed combined statement of operations for the three months ended October 2, 2004 includes the historical results of the Company including Spectra-Physics from the date of acquisition on July 16, 2004, plus the historical results of Spectra-Physics from July 4, 2004 to July 16, 2004. The pro forma condensed combined statement of operations for the nine months ended October 2, 2004 includes these amounts plus the historical results of Spectra-Physics from January 1, 2004 through July 3, 2004. The pro forma condensed combined statement of operations for the three and nine months ended September 30, 2003 includes the historical results of the Company, plus the historical results of Spectra-Physics for the three and nine months ended September 27, 2003.

3. Revenue Recognition

Revenue is recognized after all significant obligations have been met, collectibility is probable and title has passed, which typically occurs upon shipment or completion of services. Revenue for products that require installation for which the installation is essential to functionality or is not deemed inconsequential or perfunctory are recognized upon completion of installation. Revenues for products that require installation where installation is not essential to functionality and is deemed inconsequential or perfunctory are recognized upon shipment with estimated installation costs accrued. However, if a portion of the revenue is not payable until installation is complete, the Company defers revenue up to the amount that is not payable. Revenues for training are deferred until the service is completed. Revenues for extended service contracts are recognized over the related contract periods.

Customers generally have 30 days from the original invoice date (generally 60 days for international customers) to return a standard catalog product purchase for exchange or credit. Catalog products must be returned in the original condition and meet certain other criteria. Product returns of catalog items have historically been insignificant and are charged against revenue in the period returned. Custom, option-configured and certain other products as defined in the terms and conditions of sale cannot be returned. For certain non-catalog products, the Company establishes a sales return reserve based on historical product returns.

4. Accounts and Notes Receivable

The Company records reserves for specific receivables deemed to be at risk for collection, as well as a reserve based on the Company’s historical collections experience. The Company estimates the collectibility of customer receivables on an ongoing basis by reviewing past due invoices. A considerable amount of judgment is required in assessing the ultimate realization of these receivables, including the current credit-worthiness of each customer.

Certain of the Company’s Japanese customers provide the Company with promissory notes on the due date of the receivable. The payment date of the promissory notes is generally 90 days from the original receivable due date. Subsequently, certain of these promissory notes are sold with recourse to one of four banks within Japan that the Company does business with as part of line of credit agreements. Such transactions are conducted in the ordinary course of business. For balance sheet presentation purposes, amounts due to the Company under such promissory notes are reclassified from accounts receivable to current notes receivable. At October 2, 2004, total promissory notes receivable amounted to $5.1 million. Promissory notes sold with recourse are included in both current notes receivable and short-term obligations until the underlying note obligations are ultimately satisfied by payment of the note obligation by the customers to the banks. At October 2, 2004, such discounted note obligations included in overdraft borrowings were $3.2 million. The Company did not have any notes receivable or notes sold with recourse outstanding at December 31, 2003.

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NEWPORT CORPORATION

Notes to Consolidated Financial Statements

October 2, 2004

5. Derivative Instruments

The Company recognizes all derivative financial instruments in the consolidated financial statements at fair value regardless of the purpose or intent for holding the instrument. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. The Company does not engage in currency speculation; however, the Company uses forward exchange contracts to mitigate the risks associated with certain foreign currency transactions entered into in the ordinary course of business, primarily foreign currency denominated receivables and payables. Such contracts do not qualify for hedge accounting and, accordingly, changes in fair values are reported in the statements of operations. The forward exchange contracts generally require the Company to exchange U.S. dollars for foreign currencies at maturity, at rates agreed to at the inception of the contracts. If the counterparties to the exchange contracts (AA or A+ rated banks) do not fulfill their obligations to deliver the contracted currencies, the Company could be at risk for any currency-related fluctuations. Transaction gains and losses are included in the statements of operations in interest and other income, net.

There were no foreign exchange contracts outstanding at October 2, 2004 or December 31, 2003.

6. Income Taxes

The Company provides for income taxes in interim periods based on the estimated effective income tax rate for the complete fiscal year. The income tax provision (benefit) is computed on the pretax income (loss) of the consolidated entities located within each taxing jurisdiction based on current tax law. Deferred taxes result from the future tax consequences associated with temporary differences between the amount of assets and liabilities recorded for tax and financial accounting purposes. A valuation allowance for deferred tax assets is recorded to the extent the Company cannot determine, in accordance with the provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS No. 109), that the ultimate realization of net deferred tax assets is more likely than not.

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers taxable income in carryback years, the scheduled reversal of deferred tax liabilities, tax planning strategies and projected future taxable income in making this assessment. As of October 2, 2004, due to uncertainties surrounding the realization of the Company’s cumulative federal and state net operating losses, the Company has recorded a valuation allowance against its gross deferred tax assets. For the foreseeable future, the Federal tax provision related to future earnings will be substantially offset by a reduction in the valuation reserve, and any future pretax losses will not be offset by a tax benefit due to the uncertainty of the recoverability of the deferred tax assets. Accordingly, current and future tax expense will consist primarily of certain required state income taxes and taxes in certain foreign jurisdictions.

The Company determined that a gross deferred tax liability is required to be established in order to account for differences between the tax and book basis of the acquired intangibles (other than goodwill) of Spectra-Physics. The gross deferred tax liability of Spectra-Physics is equal to the Company’s recorded standalone net deferred tax asset of approximately $14.9 million (recorded in prior periods) plus a deferred tax asset recorded in the third quarter of approximately $8.0 million, which was reflected as a reduction of goodwill. As a result, the Company’s recorded deferred tax assets equal the acquired deferred tax liability, and net to zero on the accompanying consolidated balance sheet.

7. Discontinued Operations

In March 2003, the Company shut down its Plymouth, Minnesota operation and liquidated the majority of the remaining assets. Results for 2003 include the treatment of the Company’s former metrology business and its Minnesota operation as discontinued operations, reflecting the completed divestitures of those operations.

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NEWPORT CORPORATION

Notes to Consolidated Financial Statements

October 2, 2004

8. Inventories

Inventories are stated at the lower of cost, determined on either a first in, first-out (FIFO) or average cost basis, or fair market value and include materials, labor and manufacturing overhead. The Company writes down excess and obsolete inventory to net realizable value. In assessing the ultimate realization of inventories, the Company makes judgments as to future demand requirements and compares those requirements with the current or committed inventory levels. Amounts required to reduce the carrying value of inventory to net realizable value are recorded as a charge to cost of sales.

Inventories consist of the following:

9. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following:

10. Warranty

Unless otherwise stated in the Company’s product literature or in its agreements with customers, products sold by the Company’s Photonics and Precision Technologies Division generally carry a one-year warranty from the original invoice date on all product material and workmanship. Products of such division sold to original equipment manufacturer (OEM) customers generally carry longer warranties, typically 15 to 24 months. Products sold by the Company’s Lasers Division generally carry warranties that vary by product and product component, but generally range from 90 days to two years. In certain cases, such warranties are limited by amount of usage of the product. Defective products will be either repaired or replaced, generally at the Company’s option, upon meeting certain criteria. The Company accrues a provision for the estimated costs that may be incurred for warranties relating to a product as a component of cost of sales at the time revenue for that product is recognized.

The activity in accrued warranty obligations is as follows:

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NEWPORT CORPORATION

Notes to Consolidated Financial Statements

October 2, 2004

Such amounts are included in accrued expenses and other current liabilities in the accompanying consolidated balance sheets.

11. Accrued Restructuring Costs

In the third quarter of 2004, the Company increased its estimate of the required liability for facility consolidations by $0.7 million to reflect settlements of its remaining lease obligations for certain leases as well as revised estimates of future sublease income.

As of October 2, 2004, $1.1 million of facility-related accruals remained under the Company’s 2002 restructuring plan. All severance actions were completed in 2003 and a total of 331 employees were terminated under this plan.

The following table summarizes the Company’s accrued restructuring costs under its 2002 restructuring plan:

The facility consolidation reserves will be paid over the associated lease terms, which expire at various dates between 2005 and 2008. At October 2, 2004 and December 31, 2003, $0.7 million and $1.1 million, respectively, of accrued restructuring costs were expected to be paid within one year and are reflected in current liabilities; and $0.4 million and $0.6 million, respectively, of accrued restructuring costs are included in long-term accrued restructuring costs and other liabilities in the accompanying consolidated balance sheets.

In connection with the acquisition of Spectra-Physics, the Company began to formulate an exit plan to consolidate certain locations and such preliminary plan was approved by the Company’s Board of Directors. The Company is still finalizing this plan, which will include employee severance, relocation and facility closure costs. The Company expects to finalize such plan by the end of the second quarter of 2005.

The following table summarizes the activity in the accrued restructuring costs related to the purchase of Spectra-Physics, which primarily involve the payment of cash:

The facility consolidation reserves will be paid over the associated lease terms, which expire at various dates between 2007 and 2011. At October 2, 2004, $3.6 million of these accrued restructuring costs were expected to be paid within one year and are reflected in current liabilities; and $2.7 million of accrued restructuring costs are included in long-term accrued restructuring costs and other liabilities in the accompanying consolidated balance sheets.

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NEWPORT CORPORATION

Notes to Consolidated Financial Statements

October 2, 2004

12. Short-Term Obligations

At October 2, 2004, the Company had in place a $5.0 million revolving line of credit expiring December 31, 2004. Certain of the marketable securities that are being managed by the lending institution collateralize the line of credit. The line bears interest at the prevailing prime rate, or the prevailing London Interbank Offered Rate (2.49% at October 2, 2004) plus 1.5%, at the Company’s option, and an unused line fee of 0.25% per year. At October 2, 2004, there were no balances outstanding under the line of credit, with $4.5 million available under the line, after considering outstanding letters of credit totaling $0.5 million.

At October 2, 2004, the Company had in place two revolving lines of credit of 1.5 billion yen ($13.5 million at October 2, 2004) at two Japanese banks expiring as follows: $9.9 million on November 30, 2004 and $3.6 million on March 31, 2005. The lines are not secured and bear interest at the prevailing bank rate. At October 2, 2004, we had $13.5 million outstanding under these lines of credit, with no amounts available for borrowing. In addition to these lines of credit, the Company had three lines of credit of 800 million yen ($7.2 million at October 2, 2004) to be used to sell notes receivable with recourse, which bear interest at the bank’s prevailing rate. These lines have no expiration date. At October 2, 2004, we had $3.2 million outstanding under these lines, with $4.0 million available for the sale of notes receivable. The weighted average interest rate on all borrowings under these lines was 1.7%.

13. Interest and Other Income (Expense), Net

Interest and other income (expense), net, consist of the following:

In the third quarter of 2004, the Company determined that a minority interest investment made in prior years in a semiconductor component manufacturer had incurred an other-than-temporary reduction in value. As a result, the Company wrote down the investment to its net realizable value, and incurred a loss of $1.4 million. Such amount is included in other expense, net above for both the three and nine months ended October 2, 2004.

14. Accumulated Other Comprehensive Income and Comprehensive Loss

Accumulated other comprehensive income consists of the following:

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NEWPORT CORPORATION

Notes to Consolidated Financial Statements

October 2, 2004

The components of comprehensive loss, net of related tax, are as follows:

15. Net Loss Per Share

The following table sets forth the numerator and denominator used in the computation of net loss per share:

Common stock equivalents of 1,456 and 1,847, respectively, have been excluded from the denominator for purposes of calculating diluted loss per share for the three and nine months ended October 2, 2004, and common stock equivalents of 2,033 and 2,376, respectively, have been excluded from the denominator for purposes of calculating diluted loss per share for the three and nine months ended September 30, 2003, as their inclusion would be antidilutive due to the net losses incurred.

16. Stock Based Compensation

The Company applies the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related Interpretations in accounting for its stock-based compensation and complies with the disclosure provisions of Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure (SFAS No. 148) and Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). Accordingly, no compensation expense is recognized for employee stock options with exercise prices greater than or equal to the Company’s stock price at the date of grant. Costs related to restricted stock grants, representing the difference between the grant date fair value of the award and the purchase price, if any, of the related shares, are fixed at the date of grant and amortized over the vesting period. Pro forma amounts adjusted for the effect of recording compensation cost related to the Company’s stock option and employee stock purchase plans determined

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NEWPORT CORPORATION

Notes to Consolidated Financial Statements

October 2, 2004

based upon the fair value of awards under these plans as of the grant date, consistent with the methodology prescribed under SFAS No. 148 and SFAS No. 123, are presented below:

The fair value of each option granted in 2004 was estimated as of the date of the grant using the Black-Scholes option pricing model with the following weighted-average assumptions: no annualized dividend yield; expected annual volatility of 64.3%; risk-free interest rate of 3.4%; expected life of 5 years; and expected turnover rate of 12.9%.

17. Defined Benefit Pension Plans

Defined Benefit Pension Plans

Several of the Company’s non-U.S. subsidiaries have defined benefit pension plans covering substantially all full-time employees at those subsidiaries. Some of the plans are unfunded, as permitted under the plans and applicable laws. For financial reporting purposes, the calculation of net periodic pension costs is based upon a number of actuarial assumptions, including a discount rate for plan obligations, an assumed rate of return on pension plan assets and an assumed rate of compensation increase for employees covered by the plan. All of these assumptions are based upon management’s judgment, considering all known trends and uncertainties. Actual results that differ from these assumptions would impact future expense recognition and the cash funding requirements of our pension plans. Net periodic benefit costs for the plans in aggregate included the following components:

The above information includes only the period from the acquisition of Spectra-Physics on July 16, 2004.

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NEWPORT CORPORATION

Notes to Consolidated Financial Statements

October 2, 2004

18. Segment Reporting

A new business segment, Lasers, has been added as a result of the Spectra-Physics acquisition. Newport’s previously reported Industrial and Scientific Technologies Division (ISTD) has been combined with Spectra-Physics’ Photonics business to create a new business segment, Photonics and Precision Technologies (PPT). All prior period financial information has been reclassified into these new segments. In the first quarter of 2004, the Company reclassified certain fiber optic communications product lines from its Advanced Packaging and Automation Systems (APAS) Division to the former ISTD. All prior periods have been restated to reflect this change in business segment reporting. Selected segment financial information follows: