10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC  20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2002

OR

o 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	94-0849175
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
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 x No o

As of September 30, 2002, 38,464,234 shares of the registrant’s sole class of common stock were outstanding.

Page 1

Exhibit Index on Sequentially Numbered Page 35

NEWPORT CORPORATION

FORM 10-Q

INDEX

		Page Number
PART I.  FINANCIAL INFORMATION
Item 1:	Financial Statements:
	Consolidated Statements of Operations and Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months ended September 30, 2002 and 2001	3
	Consolidated Balance Sheets at September 30, 2002 and December 31, 2001	4
	Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2002 and 2001	5
	Notes to Condensed Consolidated Financial Statements	6-13
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14-29
Item 3:	Quantitative and Qualitative Disclosures About Market Risk	30
Item 4:	Controls and Procedures	31
PART II.  OTHER INFORMATION
Item 1:	Legal Proceedings	31
Item 6:	Exhibits and Reports on Form 8-K	31-32
SIGNATURES		32
CERTIFICATIONS		33-34

Page 2

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

NEWPORT CORPORATION
Consolidated Statements of Operations and
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)

		Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands, except per share amounts)		2002			2001			2002			2001
Net sales		$	45,521		$	57,232		$	131,560		$	246,439
Cost of sales			58,610			59,460			115,554			165,263
Gross profit			(13,089	)		(2,228	)		16,006			81,176
Selling, general and administrative expense			15,274			13,956			39,048			46,067
Research and development expense			6,449			6,694			18,891			20,350
Restructuring and impairment charges			11,883			11,584			11,883			11,584
Acquisition and other non-recurring charges			—			—			—			10,683
Loss from operations			(46,695	)		(34,462	)		(53,816	)		(7,508	)
Interest and other income, net			2,547			3,035			7,235			10,426
Asset write-down			—			—			(6,490	)		—
Income (loss) from continuing operations before income taxes			(44,148	)		(31,427	)		(53,071	)		2,918
Income tax provision (benefit)			15,301			(10,246	)		13,531			1,306
Income (loss) from continuing operations			(59,449	)		(21,181	)		(66,602	)		1,612
Loss from discontinued operations, net of tax expense of $861 and $0 for the three and nine months ended September 30, 2002, respectively, and net of tax benefit of $2,294 and $4,446 for the three and nine months ended September 30, 2001, respectively			(9,112	)		(4,278	)		(13,477	)		(7,987	)
Cumulative effect of a change in accounting principle			—			—			(14,500	)		—
Net loss		$	(68,561	)	$	(25,459	)	$	(94,579	)	$	(6,375	)
Earnings (loss) per share, basic:
	Income (loss) from continuing operations	$	(1.55	)	$	(0.58	)	$	(1.76	)	$	0.04
	Loss from discontinued operations, net of tax	$	(0.24	)	$	(0.12	)	$	(0.36	)	$	(0.22	)
	Cumulative effect of a change in accounting principle		—			—		$	(0.38	)		—
	Net loss	$	(1.79	)	$	(0.70	)	$	(2.50	)	$	(0.18	)
Earnings (loss) per share, diluted:
	Income (loss) from continuing operations	$	(1.55	)	$	(0.58	)	$	(1.76	)	$	0.04
	Loss from discontinued operations, net of tax	$	(0.24	)	$	(0.12	)	$	(0.36	)	$	(0.21	)
	Cumulative effect of a change in accounting principle		—			—		$	(0.38	)		—
	Net loss	$	(1.79	)	$	(0.70	)	$	(2.50	)	$	(0.17	)
Number of shares used to calculate earnings (loss) per share:
	Basic		38,228			36,487			37,804			36,335
	Diluted		38,228			36,487			37,804			37,836
Stockholders’ equity, beginning of period		$	516,711		$	507,208		$	489,007		$	485,965
Net loss			(68,561	)		(25,459	)		(94,579	)		(6,375	)
Distributions to shareholders			—			—			—			(358	)
Other distributions to shareholders			—			—			—			(3,821	)
Other comprehensive income			1,902			2,756			6,022			795
Deferred compensation			17			412			53			673
Tax benefit (expense) of stock options			(1,621	)		33			—			2,960
Issuance of common stock			1,548			1,112			49,493			6,223
Stockholders’ equity, end of period		$	449,996		$	486,062		$	449,996		$	486,062

See accompanying notes

Page 3

NEWPORT CORPORATION
Consolidated Balance Sheets

(In thousands, except share data)			(Unaudited) September 30, 2002			December 31, 2001
ASSETS
Current assets:
	Cash and cash equivalents		$	7,950		$	7,107
	Marketable securities			270,751			274,494
	Customer receivables, net			28,045			35,833
	Inventories			55,283			96,424
	Deferred tax assets			—			11,091
	Assets of operations held for sale			4,382			—
	Other current assets			9,930			15,172
		Total current assets		376,341			440,121
Goodwill, net				57,360			27,056
Property, plant and equipment, net				39,756			45,460
Deferred tax assets				15,570			22,240
Investments and other assets				8,066			9,000
			$	497,093		$	543,877
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	7,763		$	12,939
	Accrued payroll and related expenses			8,923			12,813
	Current portion of long-term debt			2,224			6,189
	Accrued restructuring costs			12,177			5,460
	Deferred revenue			2,793			823
	Liabilities of operations held for sale			410			—
	Other current liabilities			10,293			12,579
		Total current liabilities		44,583			50,803
Long-term debt				2,253			3,409
Other liabilities				261			658
Commitments and contingencies
Stockholders’ equity:
	Common stock, $.1167 par value, 200,000,000 shares authorized; 38,464,234 shares issued and outstanding at September 30, 2002; 36,693,000 shares issued and outstanding at December 31, 2001			4,489			4,282
	Capital in excess of par value			438,812			389,526
	Unamortized deferred compensation			(240	)		(293	)
	Accumulated other comprehensive loss			(3,111	)		(9,133	)
	Retained earnings			10,046			104,625
Total stockholders’ equity				449,996			489,007
			$	497,093		$	543,877

See accompanying notes

Page 4

NEWPORT CORPORATION
Consolidated Statements of Cash Flows
(Unaudited)

				Nine Months Ended September 30,
(In thousands)				2002			2001
Operating activities:
	Net loss			$	(94,579	)	$	(6,375	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Depreciation and non-goodwill amortization			8,691			9,249
		Provision for losses on inventory			33,073			26,224
		Write-down of goodwill			14,500			—
		Provision for restructuring related charges			10,240			6,639
		Deferred income taxes, net			13,238			(10,800	)
		Loss on disposal of business			6,272			—
		Other noncash items, net			9,114			4,124
		Goodwill amortization			—			1,871
		Tax benefit of stock option exercises			—			2,960
		Changes in operating assets and liabilities:
			Receivables		4,724			12,151
			Income tax receivable		(402	)		3,922
			Inventories		3,165			(38,381	)
			Accounts payable and other accrued expenses		(11,335	)		(8,174	)
			Other, net		2,613			(5,447	)
Net cash used in operating activities					(686	)		(2,037	)
Investing activities:
	Purchases of property, plant and equipment, net				(6,207	)		(19,395	)
	Proceeds from sale of business				9,694			—
	Acquisition of businesses, net of cash acquired				(6,007	)		(12,833	)
	Purchases of marketable securities				(351,487	)		(473,962	)
	Sales of marketable securities				357,789			502,529
	Payments for equity investment				—			(1,250	)
	Purchase of intellectual property				(1,625	)		—
Net cash provided by (used in) investing activities					2,157			(4,911	)
Financing activities:
	Payments on long-term debt				(5,275	)		(4,861	)
	Cash dividends paid				—			(690	)
	Other distributions to shareholders				—			(3,821	)
	Issuance of common stock under employee agreements				4,233			4,484
		Net cash used in financing activities			(1,042	)		(4,888	)
Effect of foreign exchange rate changes on cash					414			(548	)
Net increase in cash and cash equivalents					843			(12,384	)
Cash and cash equivalents at beginning of period					7,107			16,861
Cash and cash equivalents at end of period				$	7,950		$	4,477
Cash paid in the period for:
	Interest			$	415		$	553
	Taxes				4,076			950

See accompanying notes

Page 5

NEWPORT CORPORATION
Notes to Condensed Consolidated Financial Statements
September 30, 2002
(Unaudited)

1.     Interim Reporting

General

The accompanying unaudited financial statements consolidate the accounts of the Company and its wholly owned subsidiaries. The unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information.

In the opinion of management, all adjustments necessary for a fair presentation of the information in the unaudited condensed consolidated financial statements have been made.  Other than those adjustments described in Notes 2, 3 and 4, all adjustments necessary for a fair presentation of the information are of a normal recurring nature. Operating results for the three- and nine-month periods ended September 30, 2002, are not necessarily indicative of the results that may be expected for the year ending December 31, 2002.  Although the Company believes that the disclosures in these financial statements are adequate to make the information presented not misleading, certain information and footnotes normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission, and consequently, these statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto, contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.

Earnings per Share

Basic earnings per share is computed using the weighted average number of shares of common stock outstanding during the periods, excluding restricted stock.  Diluted earnings per share is computed using the weighted average number of shares of common stock outstanding during the periods (excluding restricted stock) and including the dilutive effects of common stock equivalents (restricted stock and stock options) outstanding during the periods, determined using the treasury stock method.  Diluted loss per share excludes the antidilutive effects of common stock equivalents outstanding during the periods.

New Accounting Standards

On January 1, 2002, the Company adopted Financial Accounting Standards Board (FASB) Statement No. 141, Business Combinations (Statement 141).  Statement 141 eliminates the pooling-of-interests method of accounting for business combinations and changes the criteria to recognize intangible assets apart from goodwill.  The Company accounted for the acquisition of Micro Robotics Systems, Inc. (MRSI) (Note 3) in accordance with the provisions of Statement 141.

On January 1, 2002, the Company adopted FASB Statement No. 142, Goodwill and Other Intangible Assets (Statement 142).  Under Statement 142, goodwill is no longer amortized but is subject to impairment tests based upon a comparison of the fair value of each of the Company’s reporting units, as defined, and the carrying value of the reporting units’ net assets, including goodwill.  Statement 142 requires a review for impairment at least annually or when circumstances exist that would indicate an impairment of such goodwill. The Company intends to perform the annual impairment review in the fourth quarter of each year.  Pursuant to Statement 142, upon adoption the Company tested its goodwill for impairment and recorded an impairment charge of $14.5 million as the cumulative effect of a change in accounting principle in the first quarter of 2002.  Had the Company not amortized goodwill in the three- and nine-months ended September 30, 2001, net loss from continuing operations would have decreased approximately $0.4 million, or $0.01 per diluted share, and net income from continuing operations would have increased  $1.0 million, or $0.03 per diluted share, respectively.

Page 6

NEWPORT CORPORATION
Notes to Condensed Consolidated Financial Statements
September 30, 2002
(Unaudited)

1.     Interim Reporting (continued)

In 2001, the FASB issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (Statement 144), which the Company adopted on January 1, 2002.  Under Statement 144, assets held for sale will be included in discontinued operations if the operations and cash flows will be or have been eliminated from the ongoing operations of the entity and the entity will not have any significant continuing involvement in the operations of the component.  The discontinuance of the Company’s Industrial Metrology Systems Division and its Plymouth, Minnesota facility (Note 3) has been accounted for under the provisions of Statement 144.

In July 2002, the FASB issued Statement No. 146 "Accounting for Costs Associated with Exit or Disposal Activities" (Statement 146).  Statement 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)" (EITF 94-3).  The principal difference between Statement 146 and EITF 94-3 relates to the timing of the recognition of a liability for a cost associated with an exit or disposal activity.  Statement 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability for an exit cost as generally defined in EITF 94-3 is to be recognized at the date of an entity’s commitment to an exit plan. Statement 146 is effective for exit or disposal activities that are initiated after December 31, 2002.  As the actions described in Note 2 were initiated prior to December 31, 2002, they have been accounted for under EITF 94-3, and the associated cost has been recognized as of the date of the Board of Directors’ approval of management's cost reduction plan.  If any restructuring activities are undertaken in future years, they will be accounted for under Statement 146, and the associated costs will be recognized when the liability is incurred.

Foreign Currency

Balance sheet accounts denominated in foreign currencies are translated at the exchange rates as of the date of the balance sheet.  Income statement accounts denominated in foreign currencies are translated at the 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 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.  The Company 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 $1.1 million at September 30, 2002 and $6.3 million at December 31, 2001.

2.     Restructuring and Impairment Charges

During the third quarter of 2002, in response to the continued protracted downturn in the fiber optic communications market and the current uncertainty with respect to the pace of recovery in the semiconductor equipment market, the Board of Directors approved management's cost reduction plan to bring the Company’s operating costs in line with its current business outlook. 

Facility Consolidations

The planned actions include closing the Company’s Santa Ana, California facility and consolidating those operations into its Irvine, California facility.  In addition, the Company completed the closure of its San Luis Obispo, California facility as well as the consolidation of the former Design Technology facility in Billerica, Massachusetts into the MRSI facility, in North Billerica, Massachusetts. Included in restructuring and impairment charges for the three months ended September 30, 2002 is $9.2 million for these facility consolidations.  In addition, selling, general and administrative expenses in the third quarter of 2002 included $1.5 million of costs related to the closing of these facilities and the completion of the consolidation of the Garden Grove, California facility into the Irvine, California facility.

Page 7

NEWPORT CORPORATION
Notes to Condensed Consolidated Financial Statements
September 30, 2002
(Unaudited)

2.     Restructuring and Impairment Charges (continued)

Employee Severance

The Company plans to reduce its workforce by approximately 300 employees, 82 of which have been terminated as of September 30, 2002.  Approximately one-half of the workforce reduction results from combining the Company’s automation business into the new Advanced Packaging and Automation Systems (APAS) division and reducing the scope of the company’s investment in the fiber optic communications market.  Approximately one-quarter of the reductions result from the divestiture of the Company’s discontinued operations, and the remaining reductions result from further streamlining of the Company’s operations.  Restructuring and impairment charges for the three months ended September 30, 2002 included $3.1 million for employee severance and related termination costs.

Inventory Reserves

Certain legacy products have been rationalized and certain product development initiatives have been discontinued.  In addition, the reduced sales forecasts have increased the reserve requirements for slow moving inventory.  These factors resulted in an additional inventory reserve requirement of $28.7 million, which is included in cost of sales for the three months ended September 30, 2002.  In addition, the Company established a reserve of $1.0 million for consignment and demonstration inventory that it has deemed to be obsolete or slow moving, which is included in selling, general and administrative expenses for the third quarter of 2002.

Summary of Charges

The following table summarizes the Company’s accrued restructuring costs:

(In thousands)	Employee Severance			Facility Consolidations			Other			Total
Accrued restructuring at December 31, 2001	$	2,019		$	3,441		$	—		$	5,460
Restructuring and asset impairment charges		3,079			9,151			203			12,433
Cash payments		(2,241	)		(1,251	)		(31	)		(3,523	)
Non-cash write-offs		—			(1,471	)		(172	)		(1,643	)
Excess 2001 reserves		—			—			(550	)		(550	)
Accrued restructuring at September 30, 2002	$	2,857		$	9,870		$	(550	)	$	12,177

The restructuring and impairment charges, inventory reserves and other charges are classified in the accompanying consolidated statements of operations as follows:

(In thousands)	Cost of Sales		Restructuring and Impairment Charges		Selling, General and Administrative Expense		Total
Inventory reserves	$	28,686	$	—	$	—	$	28,686
Facility consolidation and severance		—		11,883		—		11,883
Other non-recurring charges		—		—		2,533		2,533
	$	28,686	$	11,883	$	2,533	$	43,102

Page 8

NEWPORT CORPORATION
Notes to Condensed Consolidated Financial Statements
September 30, 2002
(Unaudited)

2.      Restructuring and Impairment Charges (continued)

The restructuring and impairment charges, inventory reserves and other charges relate to the following business segments:

(In thousands)
Advanced Packaging and Automation Systems	$	28,967
Industrial and Scientific Technologies		13,678
Non-segment related		457
	$	43,102

Completion of 2001 Cost Reduction Initiatives

In the third quarter of 2001, the Company established restructuring reserves for cost reduction actions implemented at that time.  Those actions have been completed as of September 30, 2002, resulting in an excess restructuring reserve of $0.6 million.  This amount has been used to reduce the third quarter 2002 restructuring and asset impairment charges and the related accrued restructuring costs.

3.      Acquisition and Divestitures

Acquisition of Micro Robotics Systems, Inc.

On February 15, 2002, the Company acquired MRSI, a privately held manufacturer of high precision, fully automated assembly and dispensing systems for a diverse industry base including the communications and semiconductor equipment markets.  The acquisition expands the Company’s product offerings and technological capability for high precision, fully automated assembly and dispensing systems for advanced packaging applications in the fiber optic communications, microwave and semiconductor equipment markets.  MRSI’s operating results from the date of acquisition are included in the Advanced Packaging and Automation Systems reporting segment in Note 13.  Pro forma information is not presented, as it is not material to the Company’s consolidated net sales or net loss.

The Company finalized the purchase price allocation in the third quarter of 2002 based on the final valuation of the intangible assets and the final tax accounting.  The excess of the purchase price over the net assets acquired of $46.5 million was recorded as goodwill, which is not deductible for income tax purposes.

The following summarizes the amounts paid in the acquisition and the purchase price allocation:

(In thousands, except share amounts)
Consideration paid:
	997,284 shares of common stock, valued at the date of acquisition	$	23,117
	1,087,541 shares of common stock issuable upon the exercise of assumed stock options, valued at the difference between the Company’s stock price at date of acquisition and the option exercise price		22,080
	Cash paid		15,000
	Other costs, primarily professional fees		1,818
		$	62,015
Assets acquired and liabilities assumed:
	Current assets, including cash of $10,381		15,629
	Goodwill		46,480
	Other long-term assets		5,424
	Current liabilities		(5,518	)
		$	62,015

Page 9

NEWPORT CORPORATION
Notes to Condensed Consolidated Financial Statements
September 30, 2002
(Unaudited)

3.      Acquisition and Divestitures (continued)

Divestitures

During March 2002, the Company’s Board of Directors approved management’s plan to sell its Industrial Metrology Systems Division (IMSD) in order for the Company to more efficiently deploy its resources to those areas that are critical to product development efforts for its strategic markets.  The IMSD division consists of three businesses:  the contact measurement business, the non-contact metrology business and the measurement and calibration business. The contact measurement and non-contact metrology businesses have been sold for cash of approximately $10 million, of which $9.7 million has been received as of September 30, 2002.

During August 2002, to increase the Company’s efficiencies in product development and manufacturing efforts, the Company’s Board of Directors approved management’s plan to sell its facility in Plymouth, Minnesota, which manufactures high-precision motion stages for the semiconductor equipment, computer peripheral, fiber optic communications and life and health sciences markets.  The Company is in negotiations with several potential buyers of this operation.

The divestitures have been accounted for as discontinued operations pursuant to Statement 144, and accordingly, all prior periods presented have been adjusted to reflect the financial results of these operations as discontinued operations. 

The revenues, operating losses, net of tax and estimated loss recognized on divestitures are as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands)	2002			2001			2002			2001
Net sales	$	1,578		$	5,672		$	11,046		$	22,104
Operating losses, net of tax		(5,212	)		(4,278	)		(7,205	)		(7,987	)
Realized loss on sales		(380	)		—			(2,752	)		—
Write down of assets to estimated fair value		(3,520	)		—			(3,520	)		—

4.      Asset Write-Downs

In April 2002, the Company announced that two fiber optic component manufacturers in which it had made minority investments in prior years were experiencing severe financial difficulties.  One manufacturer has shut down its operations and liquidated its assets, resulting in the Company recognizing $3.3 million as an asset write-down in the second quarter of 2002.

The second manufacturer is in bankruptcy. Accordingly, the Company recorded a charge of $3.2 million in the second quarter of 2002 related to the write-down of this asset to its estimated liquidation value.  Should the final liquidation value received differ from the currently estimated fair value, the Company will record the difference as other income or expense.

5.      Marketable Securities

Marketable securities consist of money market funds, certificates of deposit, and commercial paper and funding agreements, U.S. agency notes, corporate notes and bonds, municipal bonds and asset-backed securities.  These securities are stated at fair value.  The difference between fair value and book value of marketable securities is included as a component of comprehensive income (loss) (Note 12).

Page 10

NEWPORT CORPORATION
Notes to Condensed Consolidated Financial Statements
September 30, 2002
(Unaudited)

6.      Customer Receivables

The Company maintains reserves for potential uncollectible accounts.  Historically, such losses have been minimal and within management’s estimates.  Receivables from customers are generally unsecured.

Customer receivables consist of the following:

(In thousands)	September 30, 2002		December 31, 2001
Customer receivables	$	28,769	$	37,193
Less allowance for doubtful accounts		724		1,360
	$	28,045	$	35,833

7.      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:

(In thousands)	September 30, 2002		December 31, 2001
Raw materials and purchased parts	$	29,490	$	43,352
Work in process		12,262		22,413
Finished goods		13,531		30,659
	$	55,283	$	96,424

8.      Property, Plant and Equipment

Property, plant and equipment consist of the following:

(In thousands)	September 30, 2002		December 31, 2001
Land	$	760	$	687
Buildings		4,440		4,010
Leasehold improvements		21,840		19,477
Machinery and equipment		51,282		56,575
Office equipment		23,396		24,552
		101,718		105,301
Less accumulated depreciation		61,962		59,841
	$	39,756	$	45,460

Page 11

NEWPORT CORPORATION
Notes to Condensed Consolidated Financial Statements
September 30, 2002
(Unaudited)

9.      Interest and Other Income, Net

Interest and other income, net, consist of the following:

	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands)	2002			2001			2002			2001
Interest and dividend income	$	2,326		$	2,980		$	7,026		$	10,405
Interest expense		(59	)		(269	)		(343	)		(824	)
Exchange gains (losses), net		(350	)		492			(382	)		472
Gains on sale of marketable securities, net		556			84			1,193			1,013
Other income (expense), net		74			(252	)		(259	)		(640	)
	$	2,547		$	3,035		$	7,235		$	10,426

10.      Income Taxes

Deferred tax assets and liabilities are determined in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, and 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 carry forwards.  Due to the uncertainty as to the timing and ultimate realization of the deferred tax assets, the Company established an income tax valuation reserve of $43.9 million in the third quarter of 2002.

11.      Credit Facilities

On September 25, 2002, the Company signed a credit agreement for a $5.0 million unsecured line of credit expiring September 1, 2003.  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 plus 1.5%, at the Company’s option, plus an unused line fee of 0.25% per year.  At September 30, 2002, 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.

On September 30, 2002, the Company terminated its existing $10.0 million unsecured line of credit expiring March 4, 2003 and its $5.0 million unsecured line of credit expiring March 5, 2004. 

12.      Comprehensive Income (Loss)

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

	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands)	2002			2001			2002			2001
Net loss	$	(68,561	)	$	(25,459	)	$	(94,579	)	$	(6,375	)
Foreign currency translation gain (loss)		1,823			1,405			1,748			(1,911	)
Unrealized gain on marketable securities		79			1,351			4,274			2,706
	$	(66,659	)	$	(22,703	)	$	(88,557	)	$	(5,580	)

13.      Segment Reporting

During the third quarter of 2002, the Company reorganized its operating segments.  The Company now operates in two business segments: Industrial and Scientific Technologies (ISTD) and Advanced Packaging and Automation Systems (APAS).  The former Fiber Optics and Photonics Division was reorganized into the APAS division, and the focus of APAS has been expanded to cover all automation equipment and technology developed and sold into all end markets, including the fiber optic components and semiconductor packaging markets. 

Page 12

NEWPORT CORPORATION
Notes to Condensed Consolidated Financial Statements
September 30, 2002
(Unaudited)

13.     Segment Reporting (continued)

The Kensington Laboratories unit in Richmond, California was moved from ISTD to APAS, and the optical power meter product line was moved from APAS to ISTD as part of the reorganization.  In connection with the reorganization, the Company also revised the manner in which it measures segment operating income to reflect how management evaluates the operating performance of the segments.  Operating income reported for each business segment now includes only the costs that are directly attributable to the operations of that segment, and excludes corporate expenses, interest expense, income taxes, and restructuring and other non-recurring charges.

Selected segment financial information follows:

(In thousands)	Industrial & Scientific Technologies		Advanced Packaging and Automation Systems			Total
Three Months Ended September 30, 2002:
Sales to external customers	$	28,234	$	17,287		$	45,521
Segment income (loss)		2,555		(3,538	)		(983	)
Three Months Ended September 30, 2001:
Sales to external customers	$	34,649	$	22,583		$	57,232
Segment income (loss)		5,320		(1,602	)		3,718
Nine Months Ended September 30, 2002:
Sales to external customers	$	91,384	$	40,176		$	131,560
Segment income (loss)		10,461		(14,148	)		(3,687	)
Nine Months Ended September 30, 2001:
Sales to external customers	$	148,705	$	97,734		$	246,439
Segment income		38,417		10,968			49,385

The following reconciles segment income (loss) to consolidated income (loss) from continuing operations before income taxes:

	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands)	2002			2001			2002			2001
Segment income (loss)	$	(983	)	$	3,718		$	(3,687	)	$	49,385
Unallocated operating expenses		(2,610	)		(3,879	)		(7,027	)		(11,909	)
Restructuring and impairment charges		(43,102	)		(34,301	)		(43,102	)		(34,301	)
Unallocated acquisition and other non-recurring charges		—			—			—			(10,683	)
Interest and other income, net		2,547			3,035			7,235			10,426
Asset write-downs		—			—			(6,490	)		—
Consolidated income (loss) from continuing operations before income taxes	$	(44,148	)	$	(31,427	)	$	(53,071	)	$	2,918

Page 13

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Three and Nine Months Ended September 30, 2002 and 2001

INTRODUCTORY NOTE

This Quarterly Report on Form 10-Q 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 we intend that such forward-looking statements be subject to the safe harbors created thereby.  For this purpose, any statements contained in this Form 10-Q that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements.  Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue” or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements.

The forward-looking statements included herein are based on current expectations and involve a number of risks and uncertainties.  These forward-looking statements are based on certain assumptions, including but not limited to that we will not lose a significant customer or customers or experience increased fluctuations of demand or cancellation or rescheduling of purchase orders or returns of products, that our markets will achieve their forecasted performance, that our products will remain accepted within their respective markets and will not be replaced by new technology, that competitive conditions within our markets will not change materially or adversely, that we will retain key technical and management personnel, that our forecasts will accurately anticipate market demand, that there will be no material adverse change in our operations or business, that fluctuations in foreign currency exchange rates do not have a material adverse impact on our competitive position in international markets, that we will not experience significant supply shortages with respect to purchased components, sub-systems or raw materials, that we will successfully integrate our acquired and any to-be-acquired companies, that terrorist activity and acts of war and the resulting economic uncertainty will not have a material adverse effect on our business or operating results, and that power interruptions and electricity rate increases will not have a material adverse effect on our business or operating results.  Assumptions relating to the foregoing involve judgments and risks with respect to, among other things, future economic, competitive and market conditions, including those in Europe and Asia and those related to our strategic markets, whether our products, particularly those targeting our strategic markets, will continue to achieve customer acceptance, and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control.  Although we believe that the assumptions underlying the forward-looking statements will be realized, our business and operations are subject to substantial risks that increase the uncertainty inherent in the forward-looking statements.  Certain of these risks are discussed in more detail under the subheading “RISKS RELATING TO OUR BUSINESS” on pages 23 through 29 of this 10-Q.  In light of the significant uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives or plans will be achieved.  We undertake no obligation to revise the forward-looking statements contained herein to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

The following is our discussion and analysis of certain significant factors that have affected our earnings and financial position during the periods included in the accompanying financial statements.  This discussion compares the three- and nine-month periods ended September 30, 2002, with the three- and nine-month periods ended September 30, 2001.  This discussion should be read in conjunction with the financial statements and associated notes.

2002 EVENTS

Restructuring and Impairment Charges

During the third quarter of 2002, in response to the continuing protracted downturn in the fiber optic communications market and the current uncertainty with respect to the pace of recovery in the semiconductor equipment market, our Board of Directors approved management’s cost reduction plan to bring our operating costs in line with our current business outlook.

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NEWPORT CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operation (Continued)
Three and Nine Months Ended September 30, 2002 and 2001

Facility Consolidations

The planned actions include closing our Santa Ana, California facility and consolidating those operations into the Irvine, California facility.  In addition, we completed the closure of the San Luis Obispo, California facility as well as the consolidation of the former Design Technology facility in Billerica, Massachusetts into the Micro Robotics Systems, Inc. (MRSI) facility, in North Billerica, Massachusetts.  Included in restructuring and impairment charges for the three months ended September 30, 2002 is $9.2 million for these facility consolidations.  In addition, selling, general and administrative expenses in the third quarter of 2002 included $1.5 million of costs related to the closing of these facilities and the completion of the consolidation of the Garden Grove, California facility into the Irvine, California facility.

Employee Severance

We plan to reduce our workforce by approximately 300 employees, 82 of which have been terminated as of September 30, 2002.  Approximately one-half of the workforce reduction results from combining the automation business into the new Advanced Packaging and Automation Systems division and reducing the scope of our investment in the fiber optic communications market.  Approximately one-quarter of the reductions result from the divestiture of our discontinued operations, and the remaining reductions result from further streamlining of our operations.  Restructuring and impairment charges for the three months ended September 30, 2002 included $3.1 million for employee severance and related termination costs.

Inventory Reserves

Certain legacy products have been rationalized and certain product development initiatives have been discontinued.  In addition, the reduced sales forecasts have increased the reserve requirements for slow moving inventory.  These factors resulted in an additional inventory reserve requirement of $28.7 million, which is included in cost of sales for the three months ended September 30, 2002.  In addition, we established reserves of $1.0 million for consignment and demonstration inventory that we have deemed to be obsolete or slow moving, and this charge is included in selling, general and administrative expenses in the third quarter of 2002.

Summary of Charges

The following table summarizes the accrued restructuring costs:

(In thousands)	Employee Severance			Facility Consolidations			Other			Total
Accrued restructuring at December 31, 2001	$	2,019		$	3,441		$	—		$	5,460
Restructuring and asset impairment charges		3,079			9,151			203			12,433
Cash payments		(2,241	)		(1,251	)		(31	)		(3,523	)
Non-cash write-offs		—			(1,471	)		(172	)		(1,643	)
Excess 2001 reserves		—			—			(550	)		(550	)
Accrued restructuring at September 30, 2002	$	2,857		$	9,870		$	(550	)	$	12,177

Page 15

NEWPORT CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operation (Continued)
Three and Nine Months Ended September 30, 2002 and 2001

The restructuring and impairment charges, inventory reserves and other charges are classified in the accompanying consolidated statements of operations as follows:

(In thousands)	Cost of Sales		Restructuring and Impairment Charges		Selling, General and Administrative Expense		Total
Inventory reserves	$	28,686	$	—	$	—	$	28,686
Facility consolidation and severance		—		11,883		—		11,883
Other non-recurring charges		—		—		2,533		2,533
	$	28,686	$	11,883	$	2,533	$	43,102

The restructuring and impairment charges, inventory reserves and other charges relate to the following business segments:

(In thousands)
Advanced Packaging and Automation Systems	$	28,967
Industrial and Scientific Technologies		13,678
Non-segment related		457
	$	43,102

Completion of 2001 Cost Reduction Initiatives

In the third quarter of 2001, we established restructuring reserves for cost reduction actions implemented at that time.  Those actions have been completed as of September 30, 2002, resulting in an excess restructuring reserve of $0.6 million.  This amount has been used to reduce the third quarter 2002 restructuring and asset impairment charges and the related accrued restructuring costs. 

Acquisition of Micro Robotics Systems, Inc.

On February 15, 2002, we acquired MRSI, a privately held manufacturer of high precision, fully automated assembly and dispensing systems for a diverse industry base including the communications and semiconductor equipment markets.  The acquisition expands our product offerings and technological capability for high precision, fully automated assembly and dispensing systems for advanced packaging applications in the fiber optic communications, microwave and semiconductor equipment markets.  MRSI’s operating results from the date of acquisition are included in the Advanced Packaging and Automation Systems operating segment.  Pro forma information is not presented, as it is not material to our consolidated net sales or net loss.

We finalized the purchase price allocation in the third quarter of 2002 based on the final valuation of the intangible assets and the final tax accounting.  The excess of the purchase price over the net assets acquired of $46.5 million was recorded as goodwill, which is not deductible for income tax purposes.

Page 16

NEWPORT CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operation (Continued)
Three and Nine Months Ended September 30, 2002 and 2001

The following summarizes the amounts paid in the acquisition and the purchase price allocation:

(In thousands, except share amounts)
Consideration paid:
	997,284 shares of common stock, valued at the date of acquisition	$	23,117
	1,087,541 shares of common stock issuable upon the exercise of assumed stock options, valued at the difference between our stock price at date of acquisition and the option exercise price		22,080
	Cash paid		15,000
	Other costs, primarily professional fees		1,818
		$	62,015
Assets acquired and liabilities assumed:
	Current assets, including cash of $10,381		15,629
	Goodwill		46,480
	Other long-term assets		5,424
	Current liabilities		(5,518	)
		$	62,015

Divestitures

During March 2002, the Board of Directors approved management’s plan to sell the Industrial Metrology Systems Division (IMSD) to more efficiently deploy resources to those areas that are critical to product development efforts for our strategic markets.  The IMSD division consists of three businesses:  the contact measurement business, the non-contact metrology business and the measurement and calibration business.  The contact measurement and non-contact metrology businesses have been sold for cash of approximately $10 million, of which $9.7 million has been received as of September 30, 2002. 

During August 2002, to increase efficiencies in product development and manufacturing efforts, the Board of Directors approved management’s plan to sell our facility in Plymouth, Minnesota, which manufactures high-precision motion stages for the semiconductor equipment, computer peripheral, fiber optic communications and life and health sciences markets.

The divestitures have been accounted for as discontinued operations pursuant to Financial Accounting Standards Board (FASB) Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (Statement 144), and accordingly, all prior periods presented have been adjusted to reflect the financial results of these operations as discontinued operations. 

Adoption of Accounting Standards

On January 1, 2002, we adopted FASB Statement No. 141, Business Combinations (Statement 141).  Statement 141 eliminates the pooling-of-interests method of accounting for business combinations and changes the criteria to recognize intangible assets apart from goodwill.  We accounted for the acquisition of MRSI in accordance with the provisions of Statement 141.

On January 1, 2002, we adopted FASB Statement No. 142, Goodwill and Other Intangible Assets (Statement 142).  Under Statement 142, goodwill is no longer amortized but is subject to impairment tests based upon a comparison of the fair value of each of our reporting units, as defined, and the carrying value of the reporting units’ net assets, including goodwill.  Statement 142 requires a review for impairment at least annually or when circumstances exist that would indicate an impairment of such goodwill.  We intend to perform the annual impairment review in the fourth quarter of each year.  Pursuant to Statement 142, upon adoption we tested our goodwill for impairment and recorded an impairment charge of $14.5 million as the cumulative effect of a change in accounting principle in the first quarter of 2002.  Had we not amortized goodwill in the three- and nine-months ended September 30, 2001, net loss from continuing operations would have decreased approximately $0.4 million, or $0.01 per diluted share, and net income from continuing operations would have increased  $1.0 million, or $0.03 per diluted share, respectively.

Page 17

NEWPORT CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operation (Continued)
Three and Nine Months Ended September 30, 2002 and 2001

In 2001, the FASB issued Statement No. 144, Accounting for the Impairment or Disposal of Long-lived Assets (Statement 144), which we adopted on January 1, 2002.  Under Statement 144, assets held for sale will be included in discontinued operations if the operations and cash flows will be or have been eliminated from the ongoing operations of the entity and the entity will not have any significant continuing involvement in the operations of the component.  The discontinuance of the Industrial Metrology Systems Division and the Plymouth, Minnesota facility (Note 3) has been accounted for under the provisions of Statement 144.

In July 2002, the FASB issued Statement No. 146 "Accounting for Costs Associated with Exit or Disposal Activities" (Statement 146).  Statement 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)" (EITF 94-3).  The principal difference between Statement 146 and EITF 94-3 relates to the timing of the recognition of a liability for a cost associated with an exit or disposal activity.  Statement 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred.  Under EITF 94-3, a liability for an exit cost as generally defined in EITF 94-3 is to be recognized at the date of an entity’s commitment to an exit plan.  Statement 146 is effective for exit or disposal activities that are initiated after December 31, 2002.  As the actions described in Note 2 were initiated prior to December 31, 2002, they have been accounted for under EITF 94-3, and the associated cost has been recognized as of the date of the Board of Directors’ approval of management's cost reduction plan.  If any restructuring activities are undertaken in future years, they will be accounted for under Statement 146, and the associated costs will be recognized when the liability is incurred.

Asset Write-downs

In April 2002, we announced that two fiber optic component manufacturers in which we had made minority investments in prior years were experiencing severe financial difficulties.  One manufacturer has shut down its operations and liquidated its assets, resulting in our recognizing $3.3 million as an asset write down in the second quarter of 2002.

The second manufacturer is in bankruptcy.  Accordingly, we recorded a charge of $3.2 million in the second quarter of 2002 related to the write-down of this asset to its estimated liquidation value.  Should the final liquidation value received differ from the currently estimated fair value, we will record the difference as other income or expense.

Income Taxes

Deferred tax assets and liabilities are determined in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, and 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 carry forwards.  Due to the uncertainty as to the timing and ultimate realization of the deferred tax assets, we established an income tax valuation reserve of $43.9 million in the third quarter of 2002.

Reorganization of Reportable Segments

During the third quarter of 2002, we reorganized our operating segments.  We now operate in two business segments: Industrial and Scientific Technologies (ISTD) and Advanced Packaging and Automation Systems (APAS).  The former Fiber Optics and Photonics Division was reorganized into the APAS division, and the focus of APAS has been expanded to cover all automation equipment technology developed and sold into all end markets, including the fiber optic components and semiconductor packaging markets. 

The Kensington Laboratories unit in Richmond, California was moved from ISTD to APAS, and the optical power meter product line was moved from APAS to ISTD as part of the reorganization.  In connection with the reorganization, we also revised the manner in which we measure segment operating income to reflect how management evaluates the operating performance of the segments.  Operating income reported for each business segment now includes only the costs that are directly attributable to the operations of that segment, and excludes corporate expenses, interest expense, income taxes, and restructuring and other non-recurring charges.

Page 18

NEWPORT CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operation (Continued)
Three and Nine Months Ended September 30, 2002 and 2001

RESULTS OF OPERATIONS

Net Sales  Net sales for the three- and nine-month periods ended September 30, 2002 were $45.5 million and $131.6 million, respectively, compared with $57.2 million and $246.4 million, for the three- and nine-month periods ended September 30, 2001, respectively.  The results represent decreases of 20.5% and 46.6%, respectively, when compared with the corresponding periods of the previous year.  The sales decreases for the three- and nine-month periods were due primarily to significant reductions in sales to the fiber optic communications and semiconductor equipment markets, which have experienced significant downturns from prior year levels.  The sales decrease was offset in part by MRSI sales, for which there were no corresponding sales in the 2001 periods.

Sales to the semiconductor equipment market for the three- and nine-month periods ended September 30, 2002 were $17.3 million and $49.7 million, respectively, reflecting decreases of $4.7 million, or 21.4%, and $24.6 million, or 33.1%, respectively, compared with the corresponding prior year periods.  Sales for the prior year periods reflected the strong demand by semiconductor manufacturers for capital equipment, which led to strong demand for the components, subsystems and robots we sell to this market, whereas the lower sales in the current year periods reflect the cyclical weakness in that market. 

Three and nine month sales to the fiber optic communications market totaled $6.9 million and $15.4 million, respectively, reflecting decreases of $7.7 million, or 52.7%, and $79.8 million, or 83.8%, respectively, compared with the corresponding periods in 2001.  Sales for the prior year periods reflected the increased demand for our products from fiber optic component manufacturers to build their manufacturing capacity to support the high component demand forecasted prior to the market downturn, whereas the lower sales in the current year periods reflect the continued low levels of capital spending in that market. 

Three and nine month sales to our other market segments, comprised primarily of aerospace/defense and research and computer peripherals, were $21.3 million and $66.5 million, respectively, reflecting an increase of $0.7 million, or 3.4%, and a decrease of $10.4 million, or 13.5%, respectively, compared with the corresponding prior year periods.  Sales from continuing operations to the research and aerospace customers during the nine months of 2002 were higher on a year-over-year basis, but this increase was offset by significantly lower sales to industrial customers supporting the telecommunications industry.

Domestic sales totaled $32.2 million and $94.9 million for the three- and nine-month periods ended September 30, 2002, respectively, reflecting decreases of $9.4 million, or 22.6%, and $77.8 million, or 45.0%, respectively, compared with the corresponding periods in 2001.  The decreases for the three- and nine-month periods were driven primarily by decreases in sales to the fiber optic communications and semiconductor equipment markets, due to the factors discussed above.  Domestic sales to the fiber optic communications market for the three and nine months ended September 30, 2002 were $4.2 million and $9.3 million, respectively, decreases of $3.0 million, or 41.7%, and $47.2 million, or 83.5%, respectively, compared with the corresponding periods in 2001.  Domestic sales to the semiconductor equipment market for the three and nine months ended September 30, 2002 were $15.9 million and $46.6 million, respectively, decreases of $5.2 million, or 24.6%, and $23.9 million, or 33.9%, respectively, compared with the corresponding periods in 2001.  Domestic sales to the other market segments for the three and nine months ended September 30, 2002 were $12.1 million and $39.0 million, respectively, decreases of $1.2 million, or 9.0%, and $6.7 million, or 14.7%, respectively, compared with the corresponding periods in 2001.

International sales totaled $13.3 million and $36.7 million for the three- and nine-month periods ended September 30, 2002, respectively, reflecting decreases of $2.3 million, or 14.7%, and $37.0 million, or 50.2%, respectively, compared with the corresponding prior year periods.  The decreases in sales for the three- and nine-month periods were driven primarily by decreases in sales to the fiber optic communications and semiconductor equipment markets due to the factors discussed above, although the impact of such factors on the sales to each geographic market varies based on the composition of our sales to that geographic market.  International sales to the fiber optic communications market were $2.7 million and $6.1 million for the three and nine months ended September 30, 2002, respectively, decreases of $4.7 million, or 63.5%, and $32.6 million, or 84.2%, respectively, compared with the corresponding periods in 2001.  International sales to the semiconductor equipment market for the three and nine months ended were $1.4 million and $3.1 million, respectively, an increase of $0.5 million, or 55.6%, and a decrease of $0.7 million, or 18.4%, respectively, compared with the corresponding periods in 2001.  International sales to the other market segments for the three and nine months ended September 30, 2002 were $9.2 million and $27.5 million, respectively, an increase of $1.9 million, or 26.0%, and a decrease of $3.7 million, or 11.9%, respectively,

Page 19

NEWPORT CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operation (Continued)
Three and Nine Months Ended September 30, 2002 and 2001

compared with the corresponding periods in 2001.  Geographically, sales to European customers in the three- and nine-month periods ended September 30, 2002 decreased $5.2 million, or 40.0%, and $23.8 million, or 51.5%, respectively, compared with the corresponding prior year periods.  Sales to Pacific Rim customers in the three- and nine-month periods ended September 30, 2002 increased $3.8 million, or 633.3%, and decreased $4.8 million, or 31.0%, respectively, compared with the corresponding prior year periods.  Three- and nine-month sales to Canadian customers decreased $0.6 million, or 46.2%, and $7.7 million, or 78.6%, respectively, compared with the corresponding periods in 2001.

We expect net sales from continuing operations to decrease in the fourth quarter compared with the third quarter due to the relatively low recent order intake levels, the impact of recent cancellations and the apparent delay in the semiconductor industry recovery.  Our business is subject to risks arising from market conditions in the semiconductor equipment and fiber optic communications markets, as well as from general economic conditions.  During the second half of 2001, the semiconductor equipment and fiber optic communications markets experienced severe downturns.  Additionally, the general economic recession has constrained capital spending in many of our end markets.  The downturn in the fiber optic communications market has continued and worsened in 2002.  We expect orders from and sales to the fiber optics communications market to remain depressed through 2003 and into 2004.  The semiconductor equipment market recovered slightly in the second and third quarters of 2002, but that recovery appears to have stalled.  Orders from semiconductor customers decreased during the past quarter, which we expect will delay the recovery in this market until 2003.  The precise timing and extent of any recovery from these conditions in the semiconductor equipment and fiber optic communications markets is difficult to predict and represents a significant uncertainty with respect to our future operating results.  We expect that our sales to the aerospace/defense and research markets will fluctuate from period to period in line with changes in overall research and defense spending levels, but will show a long-term growth trend in line with growth in the United States gross domestic product.  We have also initiated a program where we will license certain of our semiconductor equipment technology to other companies.  As a result, we will record any such license fees as revenue.  At this time, revenue generation from this program is expected to be minimal for the remainder of 2002 and into 2003.

Gross Margin  Gross margins for the three- and nine- month periods ended September 30, 2002 were (28.8%) and 12.2%, respectively, compared with gross margins of (3.9%) and 32.9% in the corresponding periods in 2001.  The cost of sales from continuing operations in the third quarter of 2002 included a charge of $28.7 million for excess and slow moving inventory related primarily to the continued weakness in the telecommunications industry.  A similar charge of $22.7 million was recorded in the corresponding period of 2001.  Excluding these charges, gross margin from continuing operations would have been 34.3% in the third quarter of 2002 versus 35.8% in the third quarter of 2001.  In addition to the inventory charge discussed above, gross margin in the third quarter of 2002 was negatively impacted by increased cost of goods sold.  Products sold in the current quarter were produced in prior periods when production volumes were low, resulting in an increased amount of overhead allocated to inventory.  In accordance with generally accepted accounting principles, these variances were capitalized when the inventory was produced and are expensed when the related products are sold.  We expect this negative impact on our gross margin to continue for the next several quarters.  A $0.5 million cancellation fee that we negotiated in the third quarter of 2002 with a customer offset some of this negative impact.  The gross margins for the 2001 periods reflected the positive leverage of the higher sales volumes and production activity during those periods.  Generally, we expect that our gross margin will fluctuate in future periods due to factors including absorption of fixed overhead due to sales volumes and production activity, product mix and the proportion of sales to OEM customers, material costs, changes in the carrying value of inventory and manufacturing efficiencies.  In particular, because a significant portion of our manufacturing overhead is fixed in the short term, the impact of increases or decreases in sales on our gross margin will likely not be in proportion to the changes in sales.

Selling, General and Administrative (SG&A) Expense  SG&A expenses for the three and nine months ended September 30, 2002 totaled $15.3 million, or 33.6% of net sales, and $39.0 million, or 29.7% of net sales, respectively, compared with $14.0 million, or 24.4% of sales, and $46.1 million, or 18.6% of sales, for the same periods in 2001, respectively.  SG&A expense from continuing operations in the 2002 third quarter included expenses of $2.5 million for non-recurring costs incurred in connection with the cost reduction and related initiatives discussed previously.  We expect that SG&A as a percentage of sales will fluctuate in the future based on our sales level in any given period.  Because a significant portion of our SG&A expenses are fixed in the short term, these fluctuations will likely not be in proportion to the change in sales.

Page 20

NEWPORT CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operation (Continued)
Three and Nine Months Ended September 30, 2002 and 2001

Research and Development (R&D) Expense R&D expenses for the three and nine months ended September 30, 2002 totaled $6.5 million, or 14.1% of net sales, and $18.9 million, or 14.4% of net sales, respectively, compared with $6.7 million, or 11.7% of net sales, and $20.4 million, or 8.3% of net sales, for the corresponding periods in 2001, decreases of $0.2 million, or 3.7%, and $1.5 million, or 7.2%, respectively.  The year-over-year decreases were primarily attributable to our efforts to maximize the focus and efficiency of our R&D efforts to reduce overall R&D expense, offset in part by the inclusion of R&D expenses associated with the operations of MRSI for which there were no comparable expenses recorded in 2001.

We expect that R&D expenses in the fourth quarter of 2002 will be slightly lower than the third quarter of 2002 due to our recent cost reduction actions.  We believe that the continued development and advancement of our key products and technologies is critical to our future success.  Accordingly, we intend to continue to invest in key R&D initiatives, while ensuring that the efforts are focused and the funds are deployed efficiently.  We expect that R&D expenses as a percentage of sales will fluctuate in the future based on our sales level in any given period.  Because of our commitment to continued product development, and because a significant portion of our R&D expenses are fixed in the short term, these fluctuations will likely not be in proportion to the change in sales.

Restructuring and Impairment Charges   Restructuring and impairment charges related to the cost reduction and related initiatives discussed previously totaled $11.9 million for the third quarter of 2002.  A similar charge of $11.6 million was recorded in the corresponding period of 2001 for cost reduction initiatives undertaken at that time.

Acquisition and Other Non-Recurring Charges  During the first quarter of 2001, we recorded non-recurring charges of $10.7 million.  These charges were comprised of $9.2 million for investment banking, legal and accounting fees related to our acquisition of Kensington Laboratories, Inc. (KLI) and a charge of $1.5 million related to the acceleration of stock options held by a retiring executive officer.

Interest and Other Income, Net of Interest Expense  Interest and other income, net of interest expense, totaled $2.5 million and $7.2 million, respectively, for the three and nine months ended September 30, 2002, compared with $3.0 million and $10.4 million for the three and nine months ended September 30, 2001.  The decreases in both periods on a year-over-year basis were due primarily to realized losses on investments, realized losses on foreign exchange transactions, reduced interest rate levels during the current year period and a slightly lower average cash balance.

Interest income will fluctuate based on cash balances and changes in interest rates.  At September 30, 2002, our outstanding debt totaled $4.5 million.  Although a majority of our debt is at fixed interest rates, we anticipate that interest expense for 2002 will decrease slightly from 2001 because the long-term debt was reduced by a scheduled principal payment of $2.5 million in the second quarter.  A second principal payment of $1.0 million is scheduled in the fourth quarter.

Asset Write-Down   In April 2002, we announced that two fiber optic component manufacturers in which we had made minority investments in prior years were experiencing severe financial difficulties.  One manufacturer has closed its operations and liquidated its assets, resulting in the recognition of $3.3 million as an asset write-down in the second quarter of 2002.

The second manufacturer is in bankruptcy.  Accordingly, we recorded a charge of $3.2 million in the second quarter of 2002 related to the write-down of this asset to its estimated liquidation value.  Should the final liquidation value received differ from the currently estimated fair value, we will record the difference as other income or expense.

Income Taxes  The effective tax rate from continuing operations for the three and nine months ended September 30, 2002, was a tax expense of 34.7% and 25.5%, respectively, versus a tax benefit of 32.6% and a tax expense of 44.8% for the corresponding prior year periods, respectively.  The 2002 expense resulted from a valuation reserve that was recorded against our deferred tax assets pursuant to Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, due to the uncertainty as to the timing and ultimate realization of those assets.  As such, we did not recognize any tax benefit on the losses recorded in the current period and recorded a valuation allowance against deferred tax assets previously recorded.  For the foreseeable future, the tax provision related to earnings will be substantially offset by a reduction in the valuation reserve.  Any future pretax losses will not be offset by a tax benefit due to uncertainty of the recoverability of the deferred tax asset.

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NEWPORT CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operation (Continued)
Three and Nine Months Ended September 30, 2002 and 2001

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in our operating activities of $0.7 million for the nine-month period ending September 30, 2002 was primarily attributable to the cash portion of our net loss, payments on accounts payable and accrued expenses, offset in part by collections of customer receivables and reductions in inventories.  Customer receivables decreased $7.8 million, or 21.8%, from December 31, 2001, due primarily to the reduction in customer receivables resulting from our divestitures and increased cash collections, offset in part by the addition of customer receivables relating to the MRSI acquisition.  Inventories decreased $41.1 million, or 42.6%, at September 30, 2002 compared with December 31, 2001, due primarily to the restructuring related reserves and the reduction in inventory from our divestitures, offset in part by the addition of inventory relating to the MRSI acquisition.

Net cash provided by investing activities of $2.2 million for the nine-month period ended September 30, 2002, was principally attributable to the cash proceeds from the divestiture of the two IMSD businesses and net proceeds from the sale of marketable securities, offset in part by the net cash paid to acquire MRSI, the acquisition of certain intellectual property and the net purchases of property, plant and equipment.

Net cash used in financing activities of $1.0 million for the nine-month period ended September 30, 2002, was principally attributable to scheduled payments on long-term borrowings and payments of shareholder notes to the former owners of KLI, offset in part by the proceeds from the issuance of common stock in connection with stock option and purchase plans.

At September 30, 2002, we had cash and cash equivalents of $8.0 million and marketable securities of $270.8 million.  These securities are divided into three portfolios, each managed by a professional investment management firm, under the oversight of the Investment Committee of our Board of Directors and our senior financial management team.  Such portfolio managers invest the funds allocated to them in accordance with our Investment Policy, which is reviewed regularly by the Investment Committee and our senior financial management.  We expect that our portfolio balances will fluctuate in the future based on factors such as cash used in or provided by ongoing operations, acquisitions or divestitures, investments in other companies, capital expenditures and contractual obligations, as well as changes in interest rates.

On September 25, 2002, we signed a credit agreement for a $5.0 million unsecured line of credit expiring September 1, 2003.  Certain of our 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 plus 1.5%, at our option, plus an unused line fee of 0.25% per year.  At September 30, 2002, 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.  On September 30, 2002, we terminated our existing $10.0 million unsecured line of credit expiring March 4, 2003 and our $5.0 million unsecured line of credit expiring March 5, 2004. 

Our outstanding debt consists of $2.2 million of the current portion of long-term debt and long-term debt of $2.3 million, $4.0 million of which is payable in four equal semi-annual installments through May 2004.

We believe that our current working capital position, together with estimated cash flows from operations and existing credit availability, will be adequate to fund operations in the ordinary course of business, anticipated capital expenditures, debt payment requirements and other contractual obligations, for the foreseeable future.  However, this belief is based upon many assumptions and is subject to numerous risks and there can be no assurance that we will not require additional funding in the future.

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

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NEWPORT CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operation (Continued)
Three and Nine Months Ended September 30, 2002 and 2001

RISKS RELATING TO OUR BUSINESS

Our operating results are difficult to predict, and if we fail to meet the expectations of investors and/or securities analysts, the market price of our common stock will likely decline significantly.

Our operating results in any given quarter have fluctuated and will likely continue to fluctuate.  These fluctuations are typically unpredictable and can result from numerous factors including:

• fluctuations in our customers’ capital spending, industry cyclicality and other economic conditions within the markets we serve;

• demand for our products and the products sold by our customers;

• the level of orders within a given quarter and preceding quarters;

• the timing and level of cancellations and delays of orders for our products;

• the timing of product shipments within a given quarter;

• our timing in introducing new products;

• variations in the mix of products we sell in each of the markets in which we do business;

• changes in our pricing policies or in the pricing policies of our competitors or suppliers;

• market acceptance of any new or enhanced versions of our products;

• the availability and cost of key components and raw materials we use to manufacture our products;

• our ability to manufacture a sufficient quantity of our products to meet customer demand;

• fluctuations in foreign currency exchange rates;

• timing of new product introductions by our competitors; and

• our levels of expenses.

We may in the future choose to reduce prices, increase spending, or add or eliminate products in response to actions by competitors or as an effort to pursue new market opportunities.  These actions may also adversely affect our business and operating results and may cause our quarterly results to be lower than the results of previous quarters.  We believe that quarter-to-quarter comparisons of results from operations, or any other similar period-to-period comparisons, should not be construed as reliable indicators of our future performance.  In any period, our results may be below the expectations of market analysts and investors, which would likely cause the trading price of our common stock to drop.

We are highly dependent on the semiconductor industry and on our customers who serve this volatile and unpredictable industry.

A substantial portion of our current and expected future business comes from sales of subsystem products to manufacturers of semiconductor fabrication and metrology equipment and sales of capital equipment to integrated semiconductor device manufacturers. The semiconductor market is characterized by sudden and severe cyclical variations in product supply and demand. The timing, severity and duration of these market cycles are difficult to predict, and we may not be able to respond effectively to these cycles. The continuing uncertainty in this market severely limits our ability to predict our business prospects or financial results in this market.

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NEWPORT CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operation (Continued)
Three and Nine Months Ended September 30, 2002 and 2001

During industry downturns, our revenues from this market may decline suddenly and significantly. Our ability to rapidly and effectively reduce our cost structure in response to such downturns is limited by the fixed nature of many of our expenses in the near term and by our need to continue our investment in next-generation product technology and to support and service our products. In addition, due to the relatively long manufacturing lead times for some of the systems and subsystems we sell to this market, we may incur expenditures or purchase raw materials or components for products we cannot sell. Accordingly, downturns in the semiconductor capital equipment market may materially harm our operating results. Conversely, when upturns in this market occur, we must be able to rapidly and effectively increase our manufacturing capacity to meet increases in customer demand that may be extremely rapid, and if we fail to do so we may lose business to our competitors and our relationships with our customers may be harmed.

The semiconductor capital equipment market is characterized by rapid technological change, frequent product introductions, changing customer requirements and evolving industry standards. Because our customers face uncertainties with regard to the growth and requirements of these markets, their products and components may not achieve, or continue to achieve, anticipated levels of market acceptance. If our customers are unable to deliver products that gain market acceptance, it is likely that these customers will not purchase our products or will purchase smaller quantities of our products. We often invest substantial resources in developing our systems and subsystems in advance of significant sales of these systems and/or subsystems to such customers. A failure on the part of our subsystem customers' products to gain market acceptance, or a failure of the semiconductor capital equipment market to grow would have a significant negative effect on our business and results of operations.

We rely on a limited number of customers for a significant portion of our sales to the semiconductor capital equipment market. Our top five customers in this market comprised approximately 76% and 60% of our sales to this market in the nine months ended September 30, 2002 and 2001, respectively, and our top two customers accounted for approximately 54% and 42%, respectively, of our sales to this market in these periods. If any of our principal customers discontinues its relationship with us, replaces us as a subsystem vendor for certain products or suffers downturns in its business, our business and results of operations could be harmed significantly. In addition, because a relatively small number of semiconductor capital equipment manufacturers dominate this market, it may be particularly difficult for us to replace our customers if we lose their business.

A significant portion of our expected future subsystem business in the semiconductor capital equipment market is comprised of products for the fabrication of 300mm semiconductor wafers. Wafer fabrication equipment for 300mm wafers is in a very early stage of its adoption, and is expected to be driven by the need for the ability to manufacture more semiconductor chips at lower costs. The deployment of such equipment requires a significant capital investment by semiconductor manufacturers, and many semiconductor manufacturers have delayed plans to deploy such lines until market conditions improve. If the demand for capital equipment for 300mm wafers does not increase, or increases more slowly than expected, demand for our subsystem products will likewise be adversely affected, and our business and results of operations could be harmed significantly.

In addition, a significant portion of our expected future capital equipment sales to the integrated semiconductor device manufacturing market is comprised of systems for flip chip bonding and other advanced die bonding techniques. Demand for these systems is expected to be driven in significant part by increases in demand for new technologies in industries such as communications and consumer electronics that require the use of such manufacturing techniques. If the demand for electronic devices requiring flip chip bonding and/or other advanced die bonding techniques does not increase, or increases more slowly than expected, demand for our capital equipment will likewise be adversely affected, and our business and results of operations could be harmed significantly.

The severe downturn in the fiber optic communications market has harmed and may continue to harm our business.

A substantial portion of our current and expected future business in the fiber optic communications market is dependent upon sales to companies that manufacture components for fiber optic communications systems. These component manufacturers are largely dependent upon telecommunications system manufacturers, who in turn depend on sales of their products to telecommunications carriers. As such, our success in this market will ultimately depend on the long-term growth of the communications industry, and in particular the growth of Internet usage and bandwidth demand. Demand for high-bandwidth service has not grown as quickly as the communications industry had forecast, and many carriers currently have significant excess capacity in their fiber optic networks. As a result,

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NEWPORT CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operation (Continued)
Three and Nine Months Ended September 30, 2002 and 2001

demand for optical components has decreased substantially, leaving many component manufacturers with significant excess manufacturing capacity. Unless and until higher demand for bandwidth increases network utilization and bandwidth pricing, telecommunications carriers will be unlikely to make significant investments in new fiber optic networks, and sales of the manufacturing and test equipment we supply to the companies that build this network equipment will be unlikely to increase significantly. In addition, several major telecommunications carriers have recently declared bankruptcy or are in significant financial distress, and others have significant debt service obligations that may limit their ability to purchase new capital equipment, which may further delay the recovery of this market. If the communications industry and Internet usage and bandwidth demand do not grow as expected, our business and operating results would be harmed significantly.

Due to the decline in demand for optical components and our customers' significant excess manufacturing capacity, our sales to this market have declined substantially, and may decline further in the future. While we have significantly reduced the cost structure of our operations serving this market, our ability to reduce these costs further is limited by our plans to continue our investment in next-generation product technology and to support and service our products. In addition, due to the relatively long manufacturing lead times for some of the systems and subsystems we sell to these markets, we may incur expenditures or purchase raw materials or components for products we cannot sell. We have in the past and may in the future be required to write off excess or obsolete inventory due to declines in our forecasted sales to this market. Accordingly, the continuing downturn in this market has harmed our operating results significantly, and may continue to do so in the future.

Our component manufacturer customers have experienced severe business declines during this downturn. Several of these customers have recently ceased operations or announced their intent to exit this market. Others are currently operating at losses and are unable to make meaningful long-term predictions for their recovery, and hence their forecasted requirements for capital equipment. This continuing uncertainty severely limits our ability to predict the timing of any recovery in this market or our sales to this market in future periods.

The markets and industries that we serve are subject to rapid technological change, and if we do not introduce new and innovative products or improve our existing products, our business and results of operations will be negatively affected.

Our markets are characterized by rapid technological advances, evolving industry standards, shifting customer needs and new product introductions and enhancements.  Products in our markets often become outdated quickly and without warning.  We depend to a significant extent upon our ability to enhance our existing products, to address the demands of the marketplace for new and improved technology, either through internal development or by acquisitions, and to be price competitive.  If we or our competitors introduce new or enhanced products, it may cause our customers to defer or cancel orders for our existing products.  In addition, because certain of our markets experience severe cyclicality in capital spending, if we fail to introduce new products in a timely manner we may miss market upturns, and may fail to have our subsystem products designed into our customers’ products.  We may not be successful in acquiring, developing, manufacturing or marketing new products on a timely or cost-effective basis.  If we fail to adequately introduce new, competitive products on a timely basis, our business and results of operations would be harmed.

We offer products for multiple industries and must face the challenges of supporting the distinct needs of each of the markets we serve.

We market products for the fiber optic component, semiconductor capital equipment, industrial metrology, life and health science, aerospace and research markets.  Because we operate in multiple markets, we must work constantly to understand the needs, standards and technical requirements of several different industries and must devote significant resources to developing different products for these industries.  Product development is costly and time consuming.  Many of our products are used by our customers to develop, manufacture and test their own products.  As a result, we must anticipate trends in our customers’ industries and develop products before our customers’ products are commercialized.  If we do not accurately predict our customers’ needs and future activities, we may invest substantial resources in developing products that do not achieve broad market acceptance.  Our decision to continue to offer products to a given market or to penetrate new markets is based in part on our judgment of the size, growth rate and other factors that contribute to the attractiveness of a particular market.  If our product offerings in any particular market are not competitive or our analyses of a market are incorrect, our business and results of operations would be harmed.

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NEWPORT CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operation (Continued)
Three and Nine Months Ended September 30, 2002 and 2001

Because our sales cycle is long and difficult to predict, and our orders are subject to rescheduling or cancellation, we may experience fluctuations in our operating results.

Many of our capital equipment and subsystem products are complex, and customers for these products require substantial time to make purchase decisions.  These customers often perform, or require us to perform extensive configuration, testing and evaluation of our products before committing to purchasing them.  The sales cycle for our capital equipment and subsystem products from initial contact through shipment typically varies, is difficult to predict and can last as long as one year.  The orders comprising our backlog are often subject to cancellation and changes in delivery schedules by our customers without significant penalty.  We have from time to time experienced order rescheduling and cancellations that have caused our revenues in a given period to be materially less than would have been expected based on our backlog at the beginning of the period.  If we experience such rescheduling and/or cancellations in the future, our operating results will fluctuate from period to period.  These fluctuations could harm our results of operations and cause our stock price to drop.

We face significant risks from doing business in foreign countries.

Our business is subject to risks inherent in conducting business internationally.  In 2001, 2000 and 1999, our international revenues accounted for approximately 33.4%, 29.1% and 32.7%, respectively, of total net sales, with a substantial portion of sales originating in Europe.  We expect that international revenues will continue to account for a significant percentage of total net sales for the foreseeable future.  As a result of our international operations, we face various risks, which include:

Ÿ	adverse changes in the political or economic conditions in countries or regions where we manufacture or sell our products;
Ÿ	challenges of administering our business globally;
Ÿ	compliance with multiple and potentially conflicting regulatory requirements including export requirements, tariffs and other trade barriers;
Ÿ	longer accounts receivable collection periods;
Ÿ	overlapping, differing or more burdensome tax structures;
Ÿ	adverse currency fluctuations;

Ÿ	differing protection of intellectual property;
Ÿ	difficulties in staffing and managing each of our individual foreign operations; and
Ÿ	trade restrictions and licensing requirements.

As a result of our international operations, fluctuations in foreign exchange rates could affect the sales price in local currencies of our products in foreign markets, potentially making our products less competitive.  In addition, exchange rate fluctuations could increase the costs and expenses of our foreign operations or require us to modify our current business practices.  If we experience any of the risks associated with international business, our business and results of operations could be significantly harmed.

We face substantial competition, and if we fail to compete effectively, our operating results will suffer.

The markets for our products are intensely competitive, and we believe that competition from both new and existing competitors will increase in the future.  We compete in several specialized market segments, against a limited number of companies in each segment.  We also face competition in some of our markets from our existing and potential customers who have developed or may develop products that are competitive to ours.  Many of our existing and potential competitors are more established, enjoy greater name recognition and possess greater financial, technological and marketing resources than we do.  Other competitors are small and highly specialized firms that are

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NEWPORT CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operation (Continued)
Three and Nine Months Ended September 30, 2002 and 2001

able to focus on only one aspect of a market.  We compete on the basis of product features, quality, reliability and price and on our ability to manufacture and deliver our products on a timely basis.  We may not be able to compete successfully in the future against existing or new competitors.  In addition, competitive pressures may force us to reduce our prices, which could negatively affect our operating results.  If we do not respond adequately to competitive challenges, our business and results of operations would be harmed.

Acquisitions of additional businesses, products or technologies we may make could negatively affect our business.

We have historically achieved growth through a combination of internally developed new products and acquisitions.  In recent years we have acquired several companies and technologies, and we expect to continue to pursue acquisitions of other companies, technologies and complementary product lines in the future to expand our product offerings and technology base to further our strategic goals.  Each of our recent acquisitions involves, and any future acquisition would involve risks, including:

• a decline in demand by our customers for the products of the acquired business;

• our ability to integrate the acquired business’ operations, products and personnel;

• our ability to retain key personnel of the acquired businesses;

• our ability to manufacture and sell the products of the acquired businesses;

• our ability to expand our financial and management controls and reporting systems and procedures to integrate the acquired businesses;

• our ability to realize expected synergies resulting from the acquisition;

• diversion of management’s time and attention;

• customer dissatisfaction or performance problems with the products or services of an acquired firm;

• assumption of unknown liabilities, or other unanticipated events or circumstances; and

• the need to record significant charges or write down the carrying value of intangible assets, which could lower our earnings.

We cannot assure that any business that we may acquire will achieve anticipated revenues and operating results.  Any of these risks could materially harm our business, financial condition and results of operations.

If we are delayed in introducing our new products into the marketplace, or if our new products contain defects, our operating results will suffer.

Because our products are sophisticated and complex, we may experience delays in introducing new products or enhancements to our existing products.  If we do not introduce our new products or enhancements into the marketplace in a timely fashion, our customers may choose to use competitors’ products.  Our inability to introduce new or enhanced products in a timely manner could cause our business and results of operations to suffer.  Our products may also contain defects or undetected errors.  As a result, we could incur substantial expenses in fixing any defects or undetected errors, which could result in damage to our competitive position and harm our business and results of operations.

If we are unable to attract new employees and retain and motivate existing employees, our business and results of operations will suffer.

Our ability to maintain and grow our business is directly related to the service of our employees in each area of our operations.  Our future performance will be directly tied to our ability to hire, train, motivate and retain qualified

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NEWPORT CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operation (Continued)
Three and Nine Months Ended September 30, 2002 and 2001

personnel.  Competition for personnel in the technology marketplace is intense, and if we are unable to hire sufficient numbers of employees with the experience and skills we need or to retain our employees, our business and results of operations would be harmed.

We rely on several sole-source and limited source suppliers.

We obtain some of the materials used to build our systems and subsystems, such as the sheet steel used in some of our vibration isolation tables, from single or limited sources due to unique component designs as well as specialized quality and performance requirements needed to manufacture our products.  If our components or raw materials are unavailable in adequate amounts or are unavailable on satisfactory terms, we may be required to purchase them from alternative sources, if available, which could increase our costs and cause delays in the production and distribution of our products.  If we do not obtain comparable replacement components from other sources in a timely manner, our business and results of operations will be harmed.  Many of our suppliers require long lead-times to deliver the quantities of components that we need.  If we fail to accurately forecast our needs, or if we fail to obtain sufficient quantities of components that we use to manufacture our products, then delays or reductions in production and shipment could occur, which would harm our business and results of operations.

If we fail to protect our intellectual property and proprietary technology, we may lose our competitive advantage.

Our success and ability to compete depend in large part upon protecting our proprietary technology.  We rely on a combination of patent, trademark and trade secret protection and nondisclosure agreements to protect our proprietary rights.  The steps we have taken may not be sufficient to prevent the misappropriation of our intellectual property, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States.  The patent and trademark law and trade secret protection may not be adequate to deter third party infringement or misappropriation of our patents, trademarks and similar proprietary rights.  In addition, patents issued to us may be challenged, invalidated or circumvented.  Our rights granted under those patents may not provide competitive advantages to us, and the claims under our patent applications may not be allowed.  We may be subject to or may initiate interference proceedings in the United States Patent and Trademark Office, which can demand significant financial and management resources.  The process of seeking patent protection can be time consuming and expensive and patents may not be issued from currently pending or future applications.  Moreover, our existing patents or any new patents that may be issued may not be sufficient in scope or strength to provide meaningful protection or any commercial advantage to us.  We may in the future initiate claims or litigation against third parties for infringement of our proprietary rights in order to determine the scope and validity of our proprietary rights or the proprietary rights of our competitors, which claims could result in costly litigation and the diversion of our technical and management personnel.  For example, we have notified several manufacturers of semiconductor wafer handling robots that we believe that they are infringing upon one or more of our U.S. patents.  We will take such actions where we believe that they are of sufficient strategic or economic importance to us to justify the cost.

We have experienced, and may in the future experience, intellectual property infringement claims.

We have from time to time received communications from third parties alleging that we are infringing certain trademarks, patents or other intellectual property rights of others.  For example, Newport Electronics, Inc., a manufacturer of electronic devices, filed suit against us claiming that our use of the “Newport” trademark infringes its rights with respect to such mark.  Whenever claims arise, we evaluate their merits.  Any claims of infringement brought by third parties could result in protracted and costly litigation, and we could become subject to damages for infringement, or to an injunction preventing us from selling one or more of our products or using one or more of our trademarks.  Such claims could also result in the necessity of obtaining a license relating to one or more of our products or current or future technologies, which may not be available on commercially reasonable terms or at all.  Any intellectual property litigation and the failure to obtain necessary licenses or other rights could have a material adverse effect on our business, financial condition and results of operations.  In addition, the terms of our customer contracts typically require us to indemnify the customer in the event of any claim of infringement brought by a third party based on our products.  Any such claims of this kind may have a material adverse effect on our business, financial condition or results of operations.

Page 28

NEWPORT CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operation (Continued)
Three and Nine Months Ended September 30, 2002 and 2001

Terrorism and acts of war and the associated economic uncertainties may negatively impact our business.

Terrorist attacks and potential military activities have created economic and political uncertainties, contributing to the current global economic downturn.  Future acts of terrorism or increased military action may create additional uncertainties and worsen or delay recovery of the global economy, which could negatively impact our business, financial condition or results of operations.

Natural disasters or power outages could disrupt or shut down our operations.

Our operations are susceptible to damages from earthquakes, floods, fire, loss of power or water supplies, or other similar contingencies.  We have significant facilities in areas with above average seismic activity.  If any of our facilities were to experience a catastrophic loss, it could disrupt our operations, delay production, shipments and revenue, and result in large expenses to repair or replace the facility, any of which would harm our business.  In addition, a significant portion of our manufacturing operations are located in California, which has experienced power shortages and resulted in “rolling blackouts.”  If these blackouts were to recur, it could cause disruptions to our operations and the operations of certain of our suppliers, distributors and customers.  We are predominantly uninsured for losses and interruptions caused by earthquakes and power outages.

Page 29

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

The principal market risks (i.e., the risk of loss arising from adverse changes in market rates and prices) to which we are exposed are foreign exchange rates which may generate translation and transaction gains and losses and interest rate risk.

Foreign Currency Risk

Operating in international markets sometimes involves exposure to volatile movements in currency exchange rates.  The economic impact of currency exchange rate movements on our operating results is complex because such changes are often linked to variability in real growth, inflation, interest rates, governmental actions and other factors.  These changes, if material, may cause us to adjust our financing and operating strategies.  Consequently, isolating the effect of changes in currency does not incorporate these other important economic factors.

We use 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.  We do not engage in currency speculation.  The forward exchange contracts generally require us to exchange U.S. dollars for foreign currencies at maturity, at rates agreed to at 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, we could be at risk for any currency related fluctuations.  Transaction gains and losses are included in our current net loss.  Net foreign exchange gains and losses were not material to our reported results of operations for the last three years. 

The operating loss from international operations totaled $1.0 million and $0.2 million for the three and nine months ended September 30, 2002.  As currency exchange rates change, translation of the income statements of international operations into U.S. dollars affects year-over-year comparability of operating results.  We do not generally hedge translation risks because cash flows from international operations are generally reinvested locally.  We do not enter into hedges to minimize volatility of reported earnings because we do not believe it is justified by the exposure or the cost.

Changes in currency exchange rates that would have the largest impact on translating future international operating profit include the euro, British pound, Canadian dollar and Swiss franc.  We estimate that a 10% change in foreign exchange rates would not have had a material effect on reported net loss for the three- and nine-month period ended September 30, 2002.  We believe that this quantitative measure has inherent limitations because, as discussed in the first paragraph of this section, it does not take into account any governmental actions or changes in either customer purchasing patterns or financing and operating strategies.

Interest Rate Risk

The interest rates we pay on certain of our debt instruments are subject to interest rate risk.  Our unsecured line of credit bears interest at either the prevailing prime rate, or the prevailing London Interbank Offered Rate plus 1.5%, at our option.  Our long-term debt instruments carry fixed interest rates.  We estimate that a 10% increase in interest rates on our unsecured lines of credit would not have a material impact on our reported net loss.  Our investments in marketable securities, which totaled $270.8 million at September 30, 2002, are sensitive to changes in the general level of U.S. interest rates.  We estimate that a 10% decline in the interest earned on our investment portfolio would not have had a material effect on our net loss for the three- and nine-month period ended September 30, 2002.

The sensitivity analyses presented in the interest rate and foreign exchange discussions above disregard the possibility that rates can move in opposite directions and that gains from one category may or may not be offset by losses from another category and vice versa.

Page 30

Item 4.  Controls and Procedures.

(a)	Evaluation of Disclosure Controls and Procedures.
	Our chief executive officer and our chief financial officer, after evaluating our “disclosure controls and procedures” (as defined in Securities Exchange Act of 1934 (the “Exchange Act”) Rules 13a-14(c) and 15-d-14(c)) as of a date (the “Evaluation Date”) within 90 days before the filing date of this Quarterly Report on Form 10-Q have concluded that as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
(b)	Changes in Internal Controls.
	Subsequent to the Evaluation Date, there were no significant changes in our internal controls or in other factors that could significantly affect our disclosure controls and procedures, nor were there any significant deficiencies or material weaknesses in our internal controls.  As a result, no corrective actions were required or undertaken.

PART II – OTHER INFORMATION

Item 1.  Legal Proceedings.

In August 1999, Newport Electronics, Inc., a manufacturer of electronic devices, filed suit against us in the Federal District Court in Connecticut, claiming that our use of the “Newport” trademark infringes its rights with respect to such mark.  In January 2002, a trial was held with respect to this litigation, and the jury returned a verdict in our favor on all of Newport Electronics’ claims.  In February 2002, Newport Electronics filed a motion for a new trial in such litigation.  In April 2002, the Court denied this motion.  In May 2002, Newport Electronics filed a notice of appeal with the Second Circuit Court of Appeals.  Oral arguments are scheduled for November 26, 2002.

Item 6.  Exhibits and Reports on Form 8-K.

(a)	Exhibits.
	10.1	Second Omnibus Amendment to Credit Agreements and Waiver, dated as of July 26, 2002, between the registrant and ABN AMRO Bank, N.V. (incorporated by reference to Exhibit 10.1 of the registrant’s Form 10-Q for the quarter ended June 30, 2002).
	10.2	Fifth Modification of Note Agreement dated July 30, 2002, between the registrant and The Prudential Insurance Company of America (incorporated by reference to Exhibit 10.2 of the registrant’s Form 10-Q for the quarter ended June 30, 2002).
	10.3	Business Loan Agreement dated September 25, 2002, by and between the registrant and Bank of America, N.A.
	10.4	Promissory Note dated September 25, 2002, payable by the registrant to Bank of America, N.A.
	10.5	Commercial Pledge Agreement, dated September 25, 2002, by and between the registrant and Bank of America, N.A.
	99.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.
	99.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.

Page 31

(b)	Reports on Form 8-K.
	On August 21, 2002, we filed a Current Report on Form 8-K, Item 9, disclosing a cost reduction program and the reorganization of our business units.

SIGNATURES

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

Dated: November 12, 2002	NEWPORT CORPORATION
	By:	/s/ CHARLES F. CARGILE
		Charles F. Cargile, Vice President and Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer)

Page 32

CERTIFICATIONS

I, Robert G. Deuster, Chairman, President and Chief Executive Officer of Newport Corporation, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Newport Corporation;
2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 of the Exchange Act) for the registrant and we have:
	a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
	b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
	c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
	a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6.	The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:  November 12, 2002
	/s/ ROBERT G. DEUSTER
	Robert G. Deuster Chairman, President, and Chief Executive Officer (Principal Executive Officer)

Page 33

I, Charles F. Cargile, Vice President and Chief Financial Officer of Newport Corporation, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Newport Corporation;
2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 of the Exchange Act) for the registrant and we have:
	a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
	b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
	c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
	a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6.	The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:  November 12, 2002
	/s/ CHARLES F. CARGILE
	Charles F. Cargile Vice President and Chief Financial Officer (Principal Financial Officer)

Page 34

EXHIBIT INDEX

Exhibit No.	Description
10.1	Second Omnibus Amendment to Credit Agreements and Waiver, dated as of July 26, 2002, between the registrant and ABN AMRO Bank, N.V. (incorporated by reference to Exhibit 10.1 of the registrant’s Form 10-Q for the quarter ended June 30, 2002).
10.2	Fifth Modification of Note Agreement dated July 30, 2002, between the registrant and The Prudential Insurance Company of America (incorporated by reference to Exhibit 10.2 of the registrant’s Form 10-Q for the quarter ended June 30, 2002).
10.3	Business Loan Agreement, dated September 25, 2002, by and between the registrant and Bank of America, N.A.
10.4	Promissory Note, dated September 25, 2002, payable by the registrant to Bank of America, NA
10.5	Commercial Pledge Agreement, dated September 25, 2002, by and between the registrant and Bank of America, NA
99.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.
99.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.

Page 35

EX-10.3

                                                                    Exhibit 10.3
Bank of America [LOGO]

                            BUSINESS LOAN AGREEMENT

================================================================================
Borrower: Newport Corporation       Lender: Bank of America, N.A.
          1791 Deere Avenue                 CLSC-Commercial Banking (LA)
          Irvine, CA 92606                  CA9-703-11-11
                                            333 South Beaudry Avenue, 11th Floor
                                            Los Angeles, CA 90017-1486
================================================================================

THIS BUSINESS LOAN AGREEMENT dated September 25, 2002, is made and executed
between Newport Corporation ("Borrower") and Bank of America, N.A. ("Lender") on
the following terms and conditions. Borrower has received prior commercial loans
from Lender or has applied to Lender for a commercial loan or loans or other
financial accommodations, including those which may be described on any exhibit
or schedule attached to this Agreement ("Loan"). Borrower understands and agrees
that: (A) in granting, renewing, or extending any Loan, Lender is relying upon
Borrower's representations, warranties, and agreements as set forth in this
Agreement; (B) the granting, renewing, or extending of any Loan by Lender at all
times shall be subject to Lender's sole judgment and discretion; and (C) all
such Loans shall be and remain subject to the terms and conditions of this
Agreement.

TERM. This Agreement shall be effective as of September 25, 2002, and shall
continue in full force and effect until such time as all of Borrower's Loans in
favor of Lender have been paid in full, including principal, interest, costs,
expenses, attorneys' fees, and other fees and charges, or until such time as the
parties may agree in writing to terminate this Agreement.

CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the initial
Advance and each subsequent Advance under this Agreement shall be subject to the
fulfillment to Lender's satisfaction of all of the conditions set forth in this
Agreement and in the Related Documents.

     Loan Documents. Borrower shall provide to Lender the following documents
     for the Loan: (1) the Note; (2) Security Agreements granting to Lender
     security interests in the Collateral; (3) financing statements and all
     other documents perfecting Lender's Security Interests; (4) evidence of
     insurance as required below; (5) together with all such Related Documents
     as Lender may require for the Loan; all in form and substance satisfactory
     to Lender and Lender's counsel.

     Borrower's Authorization. Borrower shall have provided in form and
     substance satisfactory to Lender properly certified resolutions, duly
     authorizing the execution and delivery of this Agreement, the Note and the
     Related Documents. In addition, Borrower shall have provided such other
     resolutions, authorizations, documents and instruments as Lender or its
     counsel, may require.

     Payment of Fees and Expenses. Borrower shall have paid to Lender all fees,
     charges, and other expenses which are then due and payable as specified in
     this Agreement or any Related Document.

     Representations and Warranties. The representations and warranties set
     forth in this Agreement, in the Related Documents, and in any document or
     certificate delivered to Lender under this Agreement are true and correct.

     No Event of Default. There shall not exist at the time of any Advance a
     condition which would constitute an Event of Default under this Agreement
     or under any Related Document.

REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each disbursement of loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any Indebtedness exists:

     Organization. Borrower is a corporation for profit which is, and at all
     times shall be, duly organized, validly existing, and in good standing
     under and by virtue of the laws of the State of Nevada. Borrower is duly
     authorized to transact business in all other states in which Borrower is
     doing business, having obtained all necessary filings, governmental
     licenses and approvals for each state in which Borrower is doing business.
     Specifically, Borrower is, and at all times shall be, duly qualified as a
     foreign corporation in all states in which the failure to so qualify would
     have a material adverse effect on its business or financial condition.
     Borrower has the full power and authority to own its properties and to
     transact the business in which it is presently engaged or presently
     proposed to engage. Borrower maintains an office at 1791 Deere Avenue,
     Irvine, CA 92606. Unless Borrower has designated otherwise in writing, the
     principal office is the office at which Borrower keeps its books and
     records including its records concerning the Collateral. Borrower will
     notify Lender prior to any change in the location of Borrower's state of
     organization or any change in Borrower's name. Borrower shall do all things
     necessary to preserve and to keep in full force and effect its existence,
     rights and privileges, and shall comply with all regulations, rules,
     ordinances, statutes, orders and decrees of any governmental or
     quasi-governmental authority or court applicable to Borrower and Borrower's
     business activities.

     Assumed Business Names. Borrower has filed or recorded all documents or
     filings required by law relating to all assumed business names used by
     Borrower. Excluding the name of Borrower, the following is a complete list
     of all assumed business names under which Borrower does business: None.

     Authorization. Borrower's execution, delivery, and performance of this
     Agreement and all the Related Documents have been duly authorized by all
     necessary action by Borrower and do not conflict with, result in a
     violation of, or constitute a default under (1) any provision of Borrower's
     articles of incorporation or organization, or bylaws, or any agreement or
     other instrument binding upon Borrower or (2) any law, governmental
     regulation, court decree, or order applicable to Borrower or to Borrower's
     properties.

     Financial Information. Each of Borrower's financial statements supplied to
     Lender truly and completely disclosed Borrower's financial condition as of
     the date of the statement, and there has been no material adverse change in
     Borrower's financial condition subsequent to the date of the most recent
     financial statement supplied to Lender. Borrower has no material contingent
     obligations except as disclosed in such financial statements.

     Legal Effect. This Agreement constitutes, and any instrument or agreement
     Borrower is required to give under this Agreement when delivered will
     constitute legal, valid, and binding obligations of Borrower enforceable
     against Borrower in accordance with their respective terms.

     Properties. Except as contemplated by this Agreement or as previously
     disclosed in Borrower's financial statements or in writing to Lender and as
     accepted by Lender, and except for property tax liens for taxes not
     presently due and payable, Borrower owns and has good title to all of
     Borrower's properties free and clear of all Security Interests, and has not
     executed any security documents or financing statements relating to such
     properties. All of Borrower's properties are titled in Borrower's legal
     name, and Borrower has not used or filed a financing statement
     under any other name for at least the last five (5) years.

     Hazardous Substances. Except as disclosed to and acknowledged by Lender in
     writing, Borrower represents and warrants that: (1) During the period of
     Borrower's ownership of Borrower's Collateral, there has been no use,
     generation, manufacture, storage, treatment, disposal, release or
     threatened release of any Hazardous Substance by any person on, under,
     about or from any of the Collateral. (2) Borrower has no knowledge of,



                            BUSINESS LOAN AGREEMENT
                                  (Continued)                             Page 2
================================================================================

     or reason to believe that there has been (a) any breach or violation of any
     Environmental Laws; (b) any use, generation, manufacture, storage,
     treatment, disposal, release or threatened release of any Hazardous
     Substance on, under, about or from the Collateral by any prior owners or
     occupants of any of the Collateral; or (c) any actual or threatened
     litigation or claims of any kind by any person relating to such matters.
     (3) Neither Borrower nor any tenant, contractor, agent or other authorized
     user of any of the Collateral shall use, generate, manufacture, store,
     treat, dispose of or release any Hazardous Substance on, under, about or
     from any of the Collateral; and any such activity should be conducted in
     compliance with all applicable federal, state, and local laws, regulations,
     and ordinances, including without limitation all Environmental Laws.
     Borrower authorizes Lender and its agents to enter upon the Collateral to
     make such inspections and tests as Lender may deem appropriate to determine
     compliance of the Collateral with this section of the Agreement. Any
     inspections or tests made by Lender shall be at Borrower's expense and for
     Lender's purposes only and shall not be construed to create any
     responsibility or liability on the part of Lender to Borrower or to any
     other person. The representations and warranties contained herein are based
     on Borrower's due diligence in investigating the Collateral for hazardous
     waste and Hazardous Substances. Borrower hereby (1) releases and waives any
     future claims against Lender for indemnity or contribution in the event
     Borrower becomes liable for cleanup or other costs under any such laws, and
     (2) agrees to indemnify and hold harmless Lender against any and all
     claims, losses, liabilities, damages, penalties, and expenses which Lender
     may directly or indirectly sustain or suffer resulting from a breach of
     this section of the Agreement or a consequence of any use, generation,
     manufacture, storage, disposal, release or threatened release of a
     hazardous waste or substance on the Collateral. The provisions of this
     section of the Agreement, including the obligation to indemnify, shall
     survive the payment of the Indebtedness and the termination, expiration or
     satisfaction of this Agreement and shall not be affected by Lender's
     acquisition of any interest in any of the Collateral, whether by
     foreclosure or otherwise.

     Litigation and Claims. No litigation, claim, investigation, administrative
     proceeding or similar action (including those for unpaid taxes) against
     Borrower is pending or threatened, and no other event has occurred which
     may materially adversely affect Borrower's financial condition or
     properties, other than litigation, claims, or other events, if any, that
     have been disclosed to and acknowledged by Lender in writing.

     Taxes. To the best of Borrower's knowledge, all of Borrower's tax returns
     and reports that are or were required to be filed, have been filed, and
     all taxes, assessments and other governmental charges have been paid in
     full, except those presently being or to be contested by Borrower in good
     faith in the ordinary course of business and for which adequate reserves
     have been provided.

     Lien Priority. Unless otherwise previously disclosed to Lender in writing,
     Borrower has not entered into or granted any Security Agreements, or
     permitted the filing or attachment of any Security Interests on or
     affecting any of the Collateral directly or indirectly securing repayment
     of Borrower's Loan and Note, that would be prior or that may in any way be
     superior to Lender's Security Interests and rights in and to such
     Collateral.

     Binding Effect. This Agreement, the Note, all Security Agreements (if
     any), and all Related Documents are binding upon the signers thereof, as
     well as upon their successors, representatives and assigns, and are legally
     enforceable in accordance with their respective terms.

AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, so long
as this Agreement remains in effect, Borrower will:

     Notices of Claims and Litigation. Promptly inform Lender in writing of (1)
     all material adverse changes in Borrower's financial condition, and (2) all
     existing and all threatened litigation, claims, investigations,
     administrative proceedings or similar actions affecting Borrower or any
     Guarantor which could materially affect the financial condition of Borrower
     or the financial condition of any Guarantor.

     Financial Records. Maintain its books and records in accordance with GAAP,
     applied on a consistent basis, and permit Lender to examine and audit
     Borrower's books and records at all reasonable times.

     Financial Statements. Furnish Lender with the following:

          Annual Statements. As soon as available, but in no event later than
          one-hundred-twenty (120) days after the end of each fiscal year,
          Borrower's balance sheet and income statement for the year ended,
          audited by a certified public accountant satisfactory to Lender.

          Interim Statements. As soon as available, but in no event later than
          45 days after the end of each fiscal quarter, Borrower's balance sheet
          and profit and loss statement for the period ended, prepared by
          Borrower.

          Additional Requirements.

          Compliance Certificates-Revised Schedule. In lieu of the provisions
          of the Affirmative Covenant paragraph entitled "Compliance
          Certificates", the following provision in substituted to replace it in
          its entirety:

          Compliance certificates are not required.

     All financial reports required to be provided under this Agreement shall be
     prepared in accordance with GAAP, applied on a consistent basis, and
     certified by Borrower as being true and correct.

     Additional Information. Furnish such additional information and statements,
     as Lender may request from time to time.

     Insurance. Maintain fire and other risk insurance, public liability
     insurance, and such other insurance as Lender may require with respect to
     Borrower's properties and operations, in form, amounts, coverages and with
     insurance companies acceptable to Lender. Borrower, upon request of Lender,
     will deliver to Lender from time to time the policies or certificates of
     insurance in form satisfactory to Lender, including stipulations that
     coverages will not be cancelled or diminished without at least thirty (30)
     days prior written notice to Lender. Each insurance policy also shall
     include an endorsement providing that coverage in favor of Lender will not
     be impaired in any way by any act, omission or default of Borrower or any
     other person. In connection with all policies covering assets in which
     Lender holds or is offered a security interest for the Loans, Borrower
     will provide Lender with such lender's loss payable or other endorsements
     as Lender may require.

     Insurance Reports. Furnish to Lender, upon request of Lender, reports on
     each existing insurance policy showing such information as Lender may
     reasonably request, including without limitation the following: (1) the
     name of the insurer; (2) the risks insured; (3) the amount of the policy;
     (4) the properties insured; (5) the then current property values on the
     basis of which insurance has been obtained; and the manner of determining
     those values; and (6) the expiration date of the policy. In addition, upon
     request of Lender (however not more often than annually), Borrower will
     have an independent appraiser satisfactory to Lender determine, as
     applicable, the actual cash value or replacement cost of any Collateral.
     The cost of such appraisal shall be paid by Borrower.

     Other Agreements. Comply with all terms and conditions of all other
     agreements, whether now or hereafter existing, between Borrower and any
     other party and notify Lender immediately in writing of any default in
     connection with any other such agreements.

     Loan Proceeds. Use all Loan proceeds solely for Borrower's business
     operations, unless specifically consented to the contrary by Lender in
     writing.

     Taxes, Charges and Liens. Pay and discharge when due all of its
     indebtedness and obligations, including without limitation all assessments,
     taxes, governmental charges, levies and liens, of every kind and nature,
     imposed upon Borrower or its properties, income, or profits, prior to the
     date on which penalties would attach, and all lawful claims that, if
     unpaid, might become a lien or charge upon any of Borrower's properties,
     income, or profits.



                            BUSINESS LOAN AGREEMENT
                                  (Continued)                             Page 3
================================================================================

     Performance. Perform and comply, in a timely manner, with all terms,
     conditions, and provisions set forth in this Agreement, in the Related
     Documents, and in all other instruments and agreements between Borrower and
     Lender. Borrower shall notify Lender immediately in writing of any default
     in connection with any agreement.

     Operations. Maintain executive and management personnel with substantially
     the same qualifications and experience as the present executive and
     management personnel; provide written notice to Lender of any change in
     executive and management personnel; conduct its business affairs in a
     reasonable and prudent manner.

     Environmental Studies. Promptly conduct and complete, at Borrower's
     expense, all such investigations, studies, samplings and testings as may be
     requested by Lender or any governmental authority relative to any
     substance, or any waste or by-product of any substance defined as toxic or
     a hazardous substance under applicable federal, state, or local law, rule,
     regulation, order or directive, at or affecting any property or any
     facility owned, leased or used by Borrower.

     Compliance with Governmental Requirements. Comply with all laws,
     ordinances, and regulations, now or hereafter in effect, of all
     governmental authorities applicable to the conduct of Borrower's
     properties, businesses and operations, and to the use or occupancy of the
     Collateral, including without limitation, the Americans With Disabilities
     Act. Borrower may contest in good faith any such law, ordinance, or
     regulation and withhold compliance during any proceeding, including
     appropriate appeals, so long as Borrower has notified Lender in writing
     prior to doing so and so long as, in Lender's sole opinion, Lender's
     interests in the Collateral are not jeopardized. Lender may require
     Borrower to post adequate security or a surety bond, reasonably
     satisfactory to Lender, to protect Lender's interest.

     Inspection. Permit employees or agents of Lender at any reasonable time to
     inspect any and all Collateral for the Loan or Loans and Borrower's other
     properties and to examine or audit Borrower's books, accounts, and records
     and to make copies and memoranda of Borrower's books, accounts, and
     records. If Borrower now or at any time hereafter maintains any records
     (including without limitation computer generated records and computer
     software programs for the generation of such records) in the possession of
     a third party, Borrower, upon request of Lender, shall notify such party to
     permit Lender free access to such records at all reasonable times and to
     provide Lender with copies of any records it may request, all at Borrower's
     expense.

     Compliance Certificates. Unless waived in writing by Lender, provide Lender
     at least annually, with a certificate executed by Borrower's chief
     financial officer, or other officer or person acceptable to Lender,
     certifying that the representations and warranties set forth in this
     Agreement are true and correct as of the date of the Certificate and
     further certifying that, as of the date of the certificate, no Event of
     Default exists under this Agreement.

     Environmental Compliance and Reports. Borrower shall comply in all respects
     with any and all Environmental Laws; not cause or permit to exist, as a
     result of an intentional or unintentional action or omission on Borrower's
     part or on the part of any third party, on property owned and/or occupied
     by Borrower, any environmental activity where damage may result to the
     environment, unless such environmental activity is pursuant to and in
     compliance with the conditions of a permit issued by the appropriate
     federal, state or local governmental authorities; shall furnish to Lender
     promptly and in any event within thirty (30) days after receipt thereof a
     copy of any notice, summons, lien, citation, directive, letter or other
     communication from any governmental agency or instrumentality concerning
     any intentional or unintentional action or omission on Borrower's part in
     connection with any environmental activity whether or not there is damage
     to the environment and/or other natural resources.

     Additional Assurances. Make, execute and deliver to Lender such promissory
     notes, mortgages, deeds of trust, security agreements, assignments,
     financing statements, instruments, documents and other agreements as Lender
     or its attorneys may reasonably request to evidence and secure the Loans
     and to perfect all Security Interests.

RECOVERY OF ADDITIONAL COSTS. If the imposition of or any change in any law,
rule, regulation or guideline, or the interpretation or application of any
thereof by any court or administrative or governmental authority (including any
request or policy not having the force of law) shall impose, modify or make
applicable any taxes (except federal, state or local income or franchise taxes
imposed on Lender), reserve requirements, capital adequacy requirements or other
obligations which would (A) increase the cost to Lender for extending or
maintaining the credit facilities to which this Agreement relates, (B) reduce
the amounts payable to Lender under this Agreement or the Related Documents, or
(C) reduce the rate of return on Lender's capital as a consequence of Lender's
obligations with respect to the credit facilities to which this Agreement
relates, then Borrower agrees to pay Lender such additional amounts as will
compensate Lender therefor, within five (5) days after Lender's written demand
for such payment, which demand shall be accompanied by an explanation of such
imposition or charge and a calculation in reasonable detail of the additional
amounts payable by Borrower, which explanation and calculations shall be
conclusive in the absence of manifest error.

LENDER'S EXPENDITURES. If any action or proceeding is commenced that would
materially affect Lender's interest in the Collateral or if Borrower fails to
comply with any provision of this Agreement or any Related Documents, including
but not limited to Borrower's failure to discharge or pay when due any amounts
Borrower is required to discharge or pay under this Agreement or any Related
Documents, Lender on Borrower's behalf may (but shall not be obligated to) take
any action that Lender deems appropriate, including but not limited to
discharging or paying all taxes, liens, security interests, encumbrances and
other claims, at any time levied or placed on any Collateral and paying all
costs for insuring, maintaining and preserving any Collateral. All such
expenditures incurred or paid by Lender for such purposes will then bear
interest at the rate charged under the Note from the date incurred or paid by
Lender to the date of repayment by Borrower. All such expenses will become a
part of the Indebtedness and, at Lender's option, will (A) be payable in demand;
(B) be added to the balance of the Note and be apportioned among and be payable
with any installment payments to become due during either (1) the term of any
applicable insurance policy; or (2) the remaining term of the Note; or (C) be
treated as a balloon payment which will be due and payable at the Note's
maturity.

NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent of
Lender:

     Indebtedness and Liens. (1) Except for trade debt incurred in the normal
     course of business and indebtedness to Lender contemplated by this
     Agreement, create, incur or assume indebtedness for borrowed money,
     including capital leases, (2) sell, transfer, mortgage, assign, pledge,
     lease, grant a security interest in, or encumber any of Borrower's assets
     (except as allowed as Permitted Liens), or (3) sell with recourse any of
     Borrower's accounts, except to Lender.

     Continuity of Operations. (1) Engage in any business activities
     substantially different than those in which Borrower is presently engaged,
     (2) cease operations, liquidate, merge, transfer, acquire or consolidate
     with any other entity, change its name, dissolve or transfer or sell
     Collateral out of the ordinary course of business, or (3) pay any dividends
     on Borrower's stock (other than dividends payable in its stock), provided,
     however that notwithstanding the foregoing, but only so long as no Event of
     Default has occurred and is continuing or would result from the payment of
     dividends, if Borrower is a "Subchapter S Corporation" (as defined in the
     Internal Revenue Code of 1986, as amended), Borrower may pay cash dividends
     on its stock to its shareholders from time to time in amounts necessary to
     enable the shareholders to pay income taxes and make estimated income tax
     payments to satisfy their liabilities under federal and state law which
     arise solely from their status as Shareholders of a Subchapter S
     Corporation because of their ownership of shares of Borrower's stock, or
     purchase or retire any of Borrower's outstanding shares or alter or amend
     Borrower's capital structure.

     Loans, Acquisitions and Guaranties. (1) Loan, invest in or advance money or
     assets, (2) purchase, create or acquire any interest in any other
     enterprise or entity, or (3) incur any obligation as surety or guarantor
     other than in the ordinary course of business.



                            BUSINESS LOAN AGREEMENT
                                   (Continued)                          Page 4
================================================================================

    CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
    Borrower, whether under this Agreement or under any other agreement, Lender
    shall have no obligation to make Loan Advances or to disburse Loan proceeds
    if: (A) Borrower or any Guarantor is in default under the terms of this
    Agreement or any of the Related Documents or any other agreement that
    Borrower or any Guarantor has with Lender; (B) Borrower or any Guarantor
    dies, becomes incompetent or becomes insolvent, files a petition in
    bankruptcy or similar proceedings, or is adjudged a bankrupt; (C) there
    occurs a material adverse change in Borrower's financial condition, in the
    financial condition of any Guarantor, or in the value of any Collateral
    securing any Loan; or (D) any Guarantor seeks, claims or otherwise attempts
    to limit, modify or revoke such Guarantor's guaranty of the Loan or any
    other loan with Lender.

    RIGHT OF SETOFF. To the extent permitted by applicable law, Lender reserves
    a right of setoff in all Borrower's accounts with Lender (whether checking,
    savings, or some other account). This includes all accounts Borrower holds
    jointly with someone else and all accounts Borrower may open in the future.
    However, this does not include an IRA or Keogh accounts, or any trust
    accounts for which setoff would be prohibited by law. Borrower authorizes
    Lender, to the extent permitted by applicable law, to charge or setoff all
    sums owing on the Indebtedness against any all such accounts.

    DEFAULT. Each of the following shall constitute an Event of Default under
    this Agreement:

         Payment Default. Borrower fails to make any payment when due under the
         Loan.

         Other Defaults. Borrower fails to comply with or to perform any other
         term, obligation, covenant or condition contained in this Agreement or
         in any of the Related Documents or to comply with or to perform any
         term, obligation, covenant or condition contained in any other
         agreement between Lender and Borrower.

         Default in Favor of Third Parties. Borrower or any Grantor defaults
         under any loan, extension of credit, security agreement, purchase or
         sales agreement, or any other agreement, in favor of any other creditor
         or person that may materially affect any of Borrower's or any
         Grantor's property or Borrower's or any Grantor's ability to repay the
         Loans or perform their respective obligations under this Agreement or
         any of the Related Documents.

         False Statements. Any warranty, representation or statement made or
         furnished to Lender by Borrower or on Borrower's behalf under this
         Agreement or the Related Documents is false or misleading in any
         material respect, either now or at the time made or furnished or
         becomes false or misleading at any time thereafter.

         Insolvency. The dissolution or termination of Borrower's existence as a
         going business, the insolvency of Borrower, the appointment of a
         receiver for any part of Borrower's property, any assignment for the
         benefit of creditors, any type of creditor workout, or the commencement
         of any proceeding under any bankruptcy or insolvency laws by or against
         Borrower.

         Defective Collateralization. This Agreement or any of the Related
         Documents ceases to be in full force and effect (including failure of
         any collateral document to create a valid and perfected security
         interest or lien) at any time for any reason.

         Creditor or Forfeiture Proceedings. Commencement of foreclosure or
         forfeiture proceedings, whether by judicial proceeding, self-help,
         repossession or any other method, by any creditor of Borrower or by any
         governmental agency against any collateral securing the Loan. This
         includes a garnishment of any of Borrower's accounts, including deposit
         accounts, with Lender. However, this Event of Default shall not apply
         if there is a good faith dispute by Borrower as to the validity or
         reasonableness of the claim which is the basis of the creditor or
         forfeiture proceeding and if Borrower gives Lender written notice of
         the creditor or forfeiture proceeding and deposits with Lender monies
         or a surety bond for the creditor or forfeiture proceeding, in an
         amount determined by Lender, in its sole discretion, as being an
         adequate reserve or bond for the dispute.

         Events Affecting Guarantor. Any of the preceding events occurs with
         respect to any Guarantor of any of the Indebtedness or any Guarantor
         dies or becomes incompetent, or revokes or disputes the validity of, or
         liability under, any Guaranty of the Indebtedness.

         Change in Ownership. Any change in ownership of twenty-five percent
         (25%) or more of the common stock of Borrower.

         Adverse Change. A material adverse change occurs in Borrower's
         financial condition, or Lender believes the prospect of payment or
         performance of the Loan is impaired.

    EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except
    where otherwise provided in this Agreement or the Related Documents, all
    commitments and obligations of Lender under this Agreement or the Related
    Documents or any other agreement immediately will terminate (including any
    obligation to make further Loan Advances or disbursements), and, at Lender's
    option, all Indebtedness immediately will become due and payable, all
    without notice of any kind to Borrower, except that in the case of an Event
    of Default of the type described in the "Insolvency" subsection above, such
    acceleration shall be automatic and not optional. In addition, Lender shall
    have all the rights and remedies provided in the Related Documents or
    available at law, in equity, or otherwise. Except as may be prohibited by
    applicable law, all of Lender's rights and remedies shall be cumulative and
    may be exercised singularly or concurrently. Election by Lender to pursue
    any remedy shall not exclude pursuit of any other remedy, and an election to
    make expenditures or to take action to perform an obligation of Borrower or
    of any Grantor shall not affect Lender's right to declare a default and to
    exercise its rights and remedies.

    ARBITRATION. (a) This paragraph concerns the resolution of any controversies
    or claims between the parties, whether arising in contract, tort or by
    statute, including but not limited to controversies or claims that arise out
    of or relate to: (i) this agreement (including any renewals, extensions or
    modifications); or (ii) any document related to this agreement;
    (collectively a "Claim").

    (b) At the request of any party to this agreement, any Claim shall be
    resolved by binding arbitration in accordance with the Federal Arbitration
    Act (Title 9, U.S. Code) (the "Act"). The Act will apply even though this
    agreement provides that it is governed by the law of a specified state.

    (c) Arbitration proceedings will be determined in accordance with the Act,
    the applicable rules and procedures for the arbitration of disputes of JAMS
    or any successor thereof ("JAMS"), and the terms of this paragraph. In the
    event of any inconsistency, the terms of this paragraph shall control.

    (d) The arbitration shall be administered by JAMS and conducted, unless
    otherwise required by law, in any U. S. state where real or tangible
    personal property collateral for this credit is located or if there is no
    such collateral, in the state specified in the governing law section of this
    agreement. All Claims shall be determined by one arbitrator; however, if
    Claims exceed $5,000,000, upon the request of any party, the Claims shall be
    decided by three arbitrators. All arbitration hearings shall commence within
    90 days of the demand for arbitration and close within 90 days of
    commencement and the award of the arbitrator(s) shall be issued within 30
    days of the close of the hearing. However, the arbitrator(s), upon a showing
    of good cause, may extend the commencement of the hearing for up to an
    addition 60 days. The arbitrator(s) shall provide a concise written
    statement of reasons for the award. The arbitration award may be submitted
    to any court having jurisdiction to be confirmed and enforced.

    (e) The arbitrator(s) will have the authority to decide whether any Claim is
    barred by the statute of limitations and, if so, to dismiss the arbitration
    on that basis. For purposes of the application of the statute of
    limitations, the service on JAMS under applicable JAMS rules of a notice of
    Claim is the equivalent of the filing of a lawsuit. Any dispute concerning
    this arbitration provision or whether a Claim is arbitratable shall be
    determined by the arbitrator(s). The arbitrator(s) shall have the power to
    award legal fees pursuant to the terms of this agreement.

    (f) This paragraph does not limit the right of any party to: (i) exercise
    self-help remedies, such as but not limited to, setoff; (ii) initiate
    judicial or



                            BUSINESS LOAN AGREEMENT
                                  (Continued)                             Page 5
================================================================================

     nonjudicial foreclosure against any real or personal property collateral;
     (iii) exercise any judicial or power of sale rights, or (iv) act in a court
     of law to obtain an interim remedy, such as but not limited to, injunctive
     relief, writ of possession or appointment of a receiver, or additional or
     supplementary remedies.

     (g) The filing of a court action is not intended to constitute a waiver of
     the right of any party, including the suing party, thereafter to require
     submittal of the Claim to arbitration.

     (h) all obligations, debts and liabilities, including any swap, option or
     forward obligations, plus interest thereon, of Borrower to Lender, or any
     one or more of them, as well as all claims by Lender against Borrower or
     any other party to this Agreement or any one or more of them, whether now
     existing or hereafter arising, whether related or unrelated to the purpose
     of the Note, whether voluntary or otherwise, whether due or not due, direct
     or indirect, absolute or contingent, liquidated or unliquidated and whether
     Borrower or any other party to this Agreement may be liable individually or
     jointly with others, whether obligated as guarantor, surety, accommodation
     party or otherwise, and whether recovery upon such amounts may be or
     hereafter may become barred by any statute of limitations, and whether the
     obligation to repay such amounts may be or hereafter may become otherwise
     unenforceable. Unless the Borrower and any other party to this Agreement
     shall have otherwise agreed in writing or received written notice thereof,
     this Agreement shall not secure any obligation owing to Lender which
     constitutes "consumer credit" subject to the disclosure requirements of the
     Federal Truth in Lending Act and any regulations promulgated thereunder.

     ADDITIONAL DEFAULTS. Each of the following shall constitute an event of
     default ("Event of Default") under this Agreement:

     Event of Default Under Related Documents. A default or event of default
     occurs under the terms of any Related Document executed by Borrower or any
     guarantor, pledgor, accommodation party or other obligor.

     Revocation of Termination of Trust. If any Borrower, grantor, guarantor,
     pledgor, accommodation party or other obligor on the indebtedness secured
     hereunder or any of the related documents is a trust or the trustee(s) of a
     trust, such trust is revoked or otherwise terminated or all or a
     substantial part of such trust's assets are distributed or otherwise
     disposed of, or in the case of a revocable trust, the grantor of such trust
     dies.

     Default by Affiliates. Any affiliate of Borrower default under any loan,
     extension or credit, security agreement, purchase or sales agreement, or
     any other agreement, in favor of Lender or any other creditor.

     COUNTERPART SIGNATURES. This Agreement may be executed in any number of
     counterparts, each of which when so executed shall be deemed to be an
     original and all of which taken together shall constitute one and the same
     agreement.

     ADDRESS FOR NOTICES. Notwithstanding anything to the contrary herein, all
     notices and communications to the Lender shall be directed to the following
     address:

                Bank of America, N.A.
                Los Angeles CLSC, Attn: Notice Desk
                333 South Beaudry Avenue, 11th Floor
                Los Angeles, CA 90017-1486.

     EXHIBIT TO BUSINESS LOAN AGREEMENT. An exhibit, titled "EXHIBIT TO BUSINESS
     LOAN AGREEMENT," is attached to this Agreement and by this reference is
     made a part of this Agreement just as if all the provisions, terms and
     conditions of the Exhibit had been fully set forth in this Agreement.

     MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part
     of this Agreement:

          Amendments. This Agreement, together with any Related Documents,
          constitutes the entire understanding and agreement of the parties as
          to the matters set forth in this Agreement. No alteration of or
          amendment to this Agreement shall be effective unless given in writing
          and signed by the party or parties sought to be charged or bound by
          the alteration or amendment.

          Attorneys' Fees; Expenses. Borrower agrees to pay upon demand all of
          Lender's costs and expenses, including Lender's attorneys' fees and
          Lender's legal expenses, incurred in connection with the enforcement
          of this Agreement. Lender may hire or pay someone else to help enforce
          this Agreement, and Borrower shall pay the costs and expenses of such
          enforcement. Costs and expenses include Lender's attorneys' fees and
          legal expenses whether or not there is a lawsuit, including attorney's
          fees and legal expenses for bankruptcy proceedings (including efforts
          to modify or vacate any automatic stay or injunction), appeals, and
          any anticipated post-judgement collection services. Borrower also
          shall pay all court costs and such additional fees as may be directed
          by the court.

          Caption Headings. Caption headings in this Agreement are for
          convenience purposes only and are not to be used to interpret or
          define the provisions of this Agreement.

          Consent to Loan Participation. Borrower agrees and consents to
          Lender's sale or transfer, whether now or later, of one or more
          participation interests in the Loan to one or more purchasers, whether
          related or unrelated to Lender. Lender may provide, without any
          limitation whatsoever, to any one or more purchasers, or potential
          purchasers any information or knowledge Lender may have about Borrower
          or about any other matter relating to the Loan, and Borrower hereby
          waives any rights to privacy Borrower may have with respect to such
          matters. Borrower additionally waives any and all notices of sale of
          participation interests, as well as all notice of any repurchase of
          such participation interests. Borrower also agrees that the purchasers
          of any such participation interests will be considered as the absolute
          owners of such interests in the Loan and will have all the rights
          granted under the participation agreement or agreements governing the
          sale of such participation interests. Borrower further waives all
          rights of offset or counterclaim that it may have now or later
          against Lender or against any purchaser of such a participation
          interest and unconditionally agrees that either Lender or such
          purchaser may enforce Borrower's obligation under the Loan
          irrespective of the failure or insolvency of any holder of any
          interest in the Loan. Borrower further agrees that the purchaser of
          any such participation interests may enforce its interests
          irrespective of any personal claims or defenses that Borrower may have
          against Lender.

          Governing Law. This Agreement will be governed by, construed and
          enforced in accordance with federal law and the laws of the State of
          California. This Agreement has been accepted by Lender in the State of
          California.

          Choice of Venue. If there is a lawsuit, Borrower agrees upon Lender's
          request to submit to the jurisdiction of the courts of any County,
          State of California.

          No Waiver by Lender. Lender shall not be deemed to have waived any
          rights under this Agreement unless such waiver is given in writing and
          signed by Lender. No delay or omission on the part of Lender in
          exercising any right shall operate as a waiver of such right or any
          other right. A waiver by Lender of a provision of this Agreement shall
          not prejudice or constitute a waiver of Lender's right otherwise to
          demand strict compliance with that provision or any other provision of
          this Agreement. No prior waiver by Lender, nor any course of dealing
          between Lender and Borrower, or between Lender and any Grantor, shall
          constitute a waiver of any of Lender's rights or of any of Borrower's
          or any Grantor's obligations as to any future transactions. Whenever
          the consent of Lender is required under this Agreement, the granting
          of such consent by Lender in any instance shall not constitute
          continuing consent to subsequent instances where such consent is
          required and in all cases such consent may be granted or withheld in
          the sole discretion of Lender.

          Notices. Any notice required to be given under this Agreement shall be
          given in writing, and shall be effective when actually delivered, when
          actually received by telefacsimile (unless otherwise required by law),
          when deposited with a nationally recognized overnight courier, or, if
          mailed,



                            BUSINESS LOAN AGREEMENT
                                  (Continued)                             Page 6
================================================================================

     when deposited in the United States mail, as first class, certified or
     registered mail postage prepaid, directed to the addresses shown near the
     beginning of this Agreement. Any party may change its address for notices
     under this Agreement by giving formal written notice to the other parties,
     specifying that the purposes of the notice is to change the party's
     address. For notice purposes, Borrower agrees to keep Lender informed at
     all times of Borrower's current address. Unless otherwise provided or
     required by law, if there is more than one Borrower, any notice given by
     Lender to any Borrower is deemed to be notice given to all Borrowers.

     Severability. If a court of competent jurisdiction finds any provision of
     this Agreement to be illegal, invalid, or unenforceable as to any
     circumstance, that finding shall not make the offending provision illegal,
     invalid, or unenforceable as to any other circumstance. If feasible, the
     offending provision shall be considered modified so that it becomes legal,
     valid and enforceable. If the offending provision cannot be so modified, it
     shall be considered deleted from this Agreement. Unless otherwise required
     by law, the illegality, invalidity, or unenforceability of any provision of
     this Agreement shall not affect the legality, validity or enforceability of
     any other provision of this Agreement.

     Subsidiaries and Affiliates of Borrower. To the extent the context of any
     provisions of this Agreement makes it appropriate, including without
     limitation any representation, warranty or covenant, the word "Borrower" as
     used in this Agreement shall include all of Borrower's subsidiaries and
     affiliates. Notwithstanding the foregoing however, under no circumstances
     shall this Agreement be construed to require Lender to make any Loan or
     other financial accommodation to any of Borrower's subsidiaries or
     affiliates.

     Successors and Assigns. All covenants and agreements contained by or on
     behalf of Borrower shall bind Borrower's successors and assigns and shall
     inure to the benefit of Lender and its successors and assigns. Borrower
     shall not, however, have the right to assign Borrower's rights under this
     Agreement or any interest therein, without the prior written consent of
     Lender.

     Survival of Representations and Warranties. Borrower understands and agrees
     that in extending Loan Advances, Lender is relying on all representations,
     warranties, and covenants made by Borrower in this Agreement or in any
     certificate or other instrument delivered by Borrower to Lender under this
     Agreement or the Related Documents. Borrower further agrees that regardless
     of any investigation made by Lender, all such representations, warranties
     and covenants will survive the extension of Loan Advances and delivery to
     Lender of the Related Documents, shall be continuing in nature, shall be
     deemed made and redated by Borrower at the time each Loan Advance is made,
     and shall remain in full force and effect until such time as Borrower's
     Indebtedness shall be paid in full, or until this Agreement shall be
     terminated in the manner provided above, whichever is the last to occur.

     Time is of the Essence. Time is of the essence in the performance of this
     Agreement.

     Waive Jury. All parties to this Agreement hereby waive the right to any
     jury trial in any action, proceeding, or counterclaim brought by any party
     against any other party.

DEFINITIONS. The following capitalized words and terms shall have the following
meanings when used in this Agreement. Unless specificially stated to the
contrary, all references to dollar amounts shall mean amounts in lawful money of
the United States of America. Words and terms used in the singular shall include
the plural, and the plural shall include the singular, as the context may
require. Words and terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. Accounting
words and terms not otherwise defined in this Agreement shall have the meanings
assigned to them in accordance with generally accepted accounting principles as
in effect on the date of this Agreement:

     Advance. The word "Advance" means a disbursement of Loan funds made, or to
     be made, to Borrower or on Borrower's behalf on a line of credit or
     multiple advance basis under the terms and conditions of this Agreement.

     Agreement. The word "Agreement" means the Business Loan Agreement, as this
     Business Loan Agreement may be amended or modified from time to time,
     together with all exhibits and schedules attached to this Business Loan
     Agreement from time to time.

     Borrower. The word "Borrower" means Newport Corporation, and all other
     persons and entities signing the Note in whatever capacity.

     Collateral. The word "Collateral" means all property and assets granted as
     collateral security for a Loan, whether real or personal property, whether
     granted directly or indirectly, whether granted now or in the future, and
     whether granted in the form of a security interest, mortgage, collateral
     mortgage, deed or trust, assignment, pledge, crop pledge, chattel mortgage,
     collateral chattel mortgage, chattel trust, factor's lien, equipment trust,
     conditional sale, trust receipt, lien, charge, lien or title retention
     contract, lease or consignment intended as a security device, or any other
     security or lien interest whatsoever, whether created by law, contract, or
     otherwise.

     Environmental Laws. The words "Environmental Laws" mean any and all state,
     federal and local statutes, regulations and ordinances relating to the
     protection of human health or the environment, including without limitation
     the Comprehensive Environmental Response, Compensation, and Liability Act
     of 1980, as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), the
     Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499
     ("SARA"), the Hazardous Materials Transportation Act, 49 U.S.C. Section
     1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C.
     Section 6901, et seq., Chapters 6.5 through 7.7 of Division 20 of the
     California Health and Safety Code, Section 25100, et seq., or other
     applicable state or federal laws, rules, or regulations adopted pursuant
     thereto.

     Event of Default. The words "Event of Default" mean any of the events of
     default set forth in this Agreement in the default section of this
     Agreement.

     GAAP. The word "GAAP" means generally accepted accounting principles.

     Grantor. The word "Grantor" means each and all of the persons or entities
     granting a Security Interest in any Collateral for the Loan, including
     without limitation all Borrowers granting such a Security Interest.

     Guarantor. The word "Guarantor" means any guarantor, surety, or
     accomodation party of any or all of the Loan.

     Guaranty. The word "Guaranty" means the guaranty from Guarantor to Lender,
     including without limitation a guaranty of all or part of the Note.

     Hazardous Substances. The words "Hazardous Substances" mean materials that,
     because of their quantity, concentration or physical, chemical or
     infectious characteristics, may cause or pose a present or potential
     hazard to human health or the environment when improperly used, treated,
     stored, disposed of, generated, manufactured, transported or otherwise
     handled. The words "Hazardous Substances" are used in their very
     broadest sense and include without limitation any and all hazardous or
     toxic substances, materials or waste as defined by or listed under the
     Environmental Laws. The term "Hazardous Substances" also includes, without
     limitation, petroleum and petroleum by-products or any fraction thereof and
     asbestos.

     Indebtedness. The word "Indebtedness" means the indebtedness evidenced by
     the Note or Related Documents, including all principal and interest
     together with all other indebtedness an costs and expenses for which
     Borrower or Grantor or any other borrower, guarantor, pledgor, obligor or
     accommodation party is responsible under this Agreement or under any of the
     Related Documents, including any swap, option or forward obligations.

     Lender. The word "Lender" means Bank of America, N.A., its successors and
     assigns.

     Loan. The word "Loan" means any and all loans and financial accommodations
     from Lender to Borrower whether now or hereafter existing and



                             BUSINESS LOAN AGREEMENT
                                  (Continued)                             Page 7
================================================================================

     however evidenced, including without limitation those loans and financial
     accommodations described herein or described on any exhibit or schedule
     attached to this Agreement from time to time.

     Note. The word "Note" means (i) the Note executed by Borrower in the
     principal amount of $5,000,000 dated September 25, 2002, (ii) any other
     promissory note, credit agreement or letter of credit agreement now or
     hereafter executed by Borrower in favor of Lender with respect to the
     Indebtedness, including without limitation those promissory notes, credit
     agreements and letter of credit agreements described on any schedule or
     exhibit attached to this Agreement from time to time, and (iii) any
     renewals of, extensions of, modifications of, refinancings of,
     consolidations of, and substitutions for any of the foregoing.

     Permitted Liens. The words "Permitted Liens" mean (1) liens and security
     interests securing Indebtedness owed by Borrower to Lender; (2) liens for
     taxes, assessments, or similar charges either not yet due or being
     contested in good faith; (3) liens of materialmen, mechanics, warehousemen,
     or carriers, or other like liens arising in the ordinary course of business
     and securing obligations which are not yet delinquent; (4) purchase money
     liens or purchase money security interests upon or in any property acquired
     or held by Borrower in the ordinary course of business to secure
     indebtedness outstanding on the date of this Agreement or permitted to be
     incurred under the paragraph of this Agreement titled "Indebtedness and
     Liens"; (5) liens and security interests which, as of the date of this
     Agreement, have been disclosed to and approved by the Lender in writing;
     and (6) those liens and security interests which in the aggregate
     constitute an immaterial and insignificant monetary amount with respect to
     the net value of Borrower's assets.

     Related Documents. The words "Related Documents" mean all promissory notes,
     credit agreements, loan agreements, environmental agreements, guaranties,
     security agreements, mortgages, deeds of trust, security deeds, collateral
     mortgages, and all other instruments, agreements and documents, whether now
     or hereafter existing, executed in connection with the Loan.

     Security Agreement. The words "Security Agreement" mean and include without
     limitation any agreements, promises, covenants, arrangements,
     understandings or other agreements, whether created by law, contract, or
     otherwise, evidencing, governing, representing, or creating a Security
     Interest.

     Security Interest. The words "Security Interest" mean, without limitation,
     any and all types of collateral security, present and future, whether in
     the form of a lien, charge, encumbrance, mortgage, deed of trust, security
     deed, assignment, pledge, crop pledge, chattel mortgage, collateral chattel
     mortgage, chattel trust, factor's lien, equipment trust, conditional sale,
     trust receipt, lien or title retention contract, lease or consignment
     intended as a security device, or any other security or lien interest
     whatsoever whether created by law, contract, or otherwise.

BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN
AGREEMENT AND BORROWER AGREES TO ITS TERMS. THIS BUSINESS LOAN AGREEMENT IS
DATED SEPTEMBER 25, 2002.

BORROWER:

NEWPORT CORPORATION

By: /s/ William R. Abbott                  By: /s/ Jeffrey B. Coyne
   ---------------------------------      -----------------------------------
   William R. Abbott, VP of Finance       Jeffrey B. Coyne, VP & General Counsel
   & Treasurer of Newport Corporation     of Newport Corporation

LENDER:

BANK OF AMERICA, N.A.

By: /s/ C K Goodfellow
   ---------------------------------
   Authorized Signer



                       EXHIBIT TO BUSINESS LOAN AGREEMENT

================================================================================

   Borrower: Newport Corporation    Lender: Bank of America, N.A.
             1791 Deere Avenue              CLSC-Commercial Banking (LA)
             Irvine, CA 92606               CA9-703-11-11
                                            333 South Beaudry Avenue, 11th Floor
                                            Los Angeles, CA 90017-1486

================================================================================

  This EXHIBIT TO BUSINESS LOAN AGREEMENT is attached to and by this reference
  is made a part of the Business Loan Agreement, dated September 25, 2002, and
  executed in connection with a loan or other financial accommodations between
  BANK OF AMERICA, N.A. and Newport Corporation.

  This schedule summarizes the loans and other financial accommodations that are
  subject to this Loan Agreement. Reference is made to the applicable Note(s)
  and Related Documents for a full description of the terms and conditions of
  each Loan. Except with respect to the credit facilities specifically listed
  below, this Loan Agreement does not supersede the requirements of any other
  loan agreement or credit agreement between Lender and Borrower.

  1.1   Revolving Line of Credit Facility.

  (a)   Note Description.

  (i)   Date: September 25, 2002.

  (ii)  Original Principal Amount: Five Million Dollars ($5,000,000).

  (b)   Revolving Line of Credit Amount. During the availability period
  described below, Lender will provide a line of credit as described in the
  Note. The amount of the line of credit (the "Commitment") is Five Million
  Dollars ($5,000,000).

  This is a revolving line of credit providing for cash advances and letters of
  credit. During the availability period, Borrower may repay principal amounts
  and reborrow them.

  Borrower agrees not to permit the outstanding principal balance of cash
  advances under the line of credit plus the outstanding amounts of any letters
  of credit, including amounts drawn on letters of credit and not yet
  reimbursed, to exceed the Commitment.

  (c)   Availability Period. The line of credit is available between September
  25, 2002 and September 1, 2003, or such earlier or later date as the
  availability may terminate as provided in the Loan Agreement, the Note or any
  Related Documents (the "Expiration Date").

  (d)   Letters of Credit. This line of credit may be used for financing:

  (i)   commercial letters of credit with a maximum maturity of 90 days but not
  to extend more than 90 days beyond the Expiration Date. Each commercial letter
  of credit will require drafts payable at sight.

  (ii)  standby letters of credit with a maximum maturity of 365 days but not to
  extend more than 180 days beyond the Expiration Date.

  (iii) The amount of the letters of credit outstanding at any one time
  (including amounts drawn on the letters of credit and not yet reimbursed) may
  not exceed Five Million Dollars ($5,000,000). If any letter of credit is
  issued in a foreign currency, for purposes of calculating outstandings the
  amount thereof shall be converted into an equivalent amount in U.S. Dollars,
  as provided in the related application and agreement for letter of credit
  referenced in subparagraph (D) below.

  (iv)  Borrower agrees:

  (A)   any sum drawn under a letter of credit may, at the option of Lender, be
  added to the principal amount outstanding under the Loan Agreement. The amount
  will bear interest and be due as described elsewhere in the Loan Agreement.

  (B)   if there is a default under the Loan Agreement or any Related Document,
  to immediately prepay and make Lender whole for any outstanding letters of
  credit.

  (C)   the issuance of any letter of credit and any amendment to a letter of
  credit is subject to Lender's written approval and must be in form and content
  satisfactory to Lender and in favor of a beneficiary acceptable to Lender.

  (D)   to sign Lender's form Application and Agreement for Commercial Letter of
  Credit or Application and Agreement for Standby Letter of Credit, as
  applicable.

  (E)   to pay any issuance and/or other fees that Lender notifies Borrower will
  be charged for issuing and processing letters of credit for Borrower.

  (F)   to allow Lender to automatically charge its checking account for
  applicable fees, discounts, and other charges.

  (G)   to pay Lender a non-refundable fee equal to 1.50% per annum of the
  outstanding undrawn amount of each standby letter of credit, payable annually
  in advance, calculated on the basis of the face amount outstanding on the day
  the fee is calculated.

  1.2   Exceptions to Negative Covenants.

        (a) The paragraph entitled "Indebtedness and Liens" under NEGATIVE
  COVENANTS, is intentionally deleted.

        (b) The paragraph entitled "Continuity of Operations" under NEGATIVE
  COVENANTS, is replaced in its entirety by the following:

        "Continuity of Operations. (i) Engage in any business activities
  substantially different than those in which Borrower is presently engaged; or
  (ii) Cease operations or suspend its business for more than 7 days in any 30
  day period, liquidate, merge, transfer, acquire or consolidate with any other
  entity, change its name, dissolve or transfer or sell Collateral out of the
  ordinary course of business."

        (c) The paragraph entitled "Loans, Acquisitions and Guaranties" under
  NEGATIVE COVENANTS, is intentionally deleted.

  1.3   Exceptions to Conditions Precedent to Each Advance.

            (a) The paragraph entitled "Representations and Warranties" under
  CONDITIONS PRECEDENT TO EACH ADVANCE, is amended to read as follows:

                "Representations and Warranties. The representations and
  warranties set forth in this Agreement, in the Related Documents, and in any
  document or certificate delivered to Lender under this Agreement are true and
  correct, except for matters that would not have a material adverse effect on
  Borrower's business or financial condition."

  1.4   Exceptions to Representations and Warranties.

        (a) The paragraph entitled "Financial Information" under REPRESENTATIONS
  AND WARRANTIES, is amended to read as follows:

            "Financial Information. Each of Borrower's financial statements
  supplied to Lender truly and completely disclosed Borrower's financial



                       EXHIBIT TO BUSINESS LOAN AGREEMENT
                                  (Continued)                             Page 2
================================================================================

     condition as of the date of the statement, and there has been no material
     adverse change in Borrower's financial condition subsequent to the date of
     the most recent financial statement supplied to Lender. Borrower has no
     material contingent obligations that would be required to be disclosed on
     Borrower's financial statements in accordance with GAAP, except as
     disclosed in such financial statements."

          (b)  The paragraph entitled "Hazardous Substances" under
     REPRESENTATIONS AND WARRANTIES, is intentionally deleted.

     1.5  Litigation Exceptions.

          (a)  The paragraph entitled "Litigation and Claims" under
     REPRESENTATIONS AND WARRANTIES, is amended in its entirety to read as
     follows:

          "Litigation and Claims. No litigation, claim, investigation,
     administrative proceeding or similar action (including those for unpaid
     taxes) against Borrower is pending or threatened, and no other event has
     occurred which may materially adversely affect Borrower's financial
     condition or properties, other than (i) litigation, claims, or other
     events, if any, that have been disclosed to and acknowledged by Lender in
     writing, and (ii) litigation, claims, and other events that involve claims
     that, if lost, would not exceed One Million Dollars ($1,000,000) in the
     aggregate."

          (b)  The paragraph entitled "Notices of Claims and Litigation" under
     AFFIRMATIVE COVENANTS, is amended in its entirety to read as follows:

          "Notice of Claims and Litigation. Promptly advise Lender in writing of
     (i) any condition, event or act which comes to its attention that would or
     might materially adversely affect Borrower's financial condition or
     operations or Lender's rights under the Loan Documents, (ii) any existing
     or threatened litigation, arbitration, claims, investigations,
     administrative proceedings or similar actions filed by or against Borrower
     or any Guarantor or any Collateral affecting Borrower or any Guarantor or
     any Collateral that involve claims that, if lost, would be in excess of
     One Million Dollars ($1,000,000) in the aggregate."

     1.6  Exceptions to Affirmative Covenants.

          (a)  The paragraph entitled "Financial Records" under AFFIRMATIVE
     COVENANTS, is amended in its entirety to read as follows:

          "Financial Records. Maintain its books and records in accordance with
     GAAP, applied on a consistent basis."

          (b)  The paragraph entitled "Insurance" under AFFIRMATIVE COVENANTS,
     is amended in its entirety to read as follows:

          "Insurance. Maintain fire and other risk insurance, public liability
     insurance, and such other insurance with respect to Borrower's properties
     and operations, in form, amounts, coverages and with insurance companies
     acceptable to Lender. Borrower, upon request of Lender, will deliver to
     Lender from time to time the policies or certificates of insurance in form
     satisfactory to Lender, including stipulations that coverages will not be
     cancelled or diminished without a least thirty (30) days prior written
     notice to Lender. Each insurance policy also shall include an endorsement
     providing that coverage in favor of Lender will not be impaired in any way
     by act, omission or default of Borrower or any other person. In connection
     with all policies covering assets in which Lender holds or is offered a
     security interest for the Loans, Borrower will provide Lender with such
     lender's loss payable or other endorsements as Lender may require."

          (c)  The paragraph entitled "Insurance Reports" under AFFIRMATIVE
     COVENANTS, is amended to read as follows:

          "Insurance Reports. Furnish to Lender, upon request of Lender, reports
     on each existing insurance policy showing such information as Lender may
     reasonably request, including without limitation the following: (1) the
     name of the insurer; (2) the risks insured; (3) the amount of the policy;
     (4) the properties insured; (5) the then current property values on the
     basis of which insurance has been obtained, and the manner of determining
     those values; and (6) the expiration date of the policy."

          (d)  The paragraph entitled "Operations" under AFFIRMATIVE COVENANTS,
     is amended to read as follows:

          "Operations. Maintain executive personnel with substantially the
     same qualifications and experience as the present executive personnel;
     provide written notice to Lender of any changes in executive personnel;
     conduct its business affairs in a reasonable and prudent manner."

          (e)  The paragraph entitled "Environmental Studies" under AFFIRMATIVE
     COVENANTS, is intentionally deleted.

          (f)  The paragraph entitled "Inspection" under AFFIRMATIVE COVENANTS,
     is intentionally deleted.

          (g)  The paragraph entitled "Environmental Compliance and Reports"
     under AFFIRMATIVE COVENANTS, is intentionally deleted.

     1.7 Exceptions to Default.

          (a)  The paragraph entitled "Payment Default" under DEFAULT, is
     amended to read as follows:

          "Payment Default. Borrower fails to make any payment due under the
     Loan within five (5) business days of the date due."

          (b)  The paragraph entitled "Other Defaults" under DEFAULT, is
     amended to read as follows:

          "Other Defaults. Borrower fails to comply with or to perform any
     other term, obligation, covenant or condition contained in this Agreement
     or in any of the Related Documents or to comply with or to perform any
     term, obligation, covenant or condition contained in any other agreement
     between Lender and Borrower, and does not cure such failure with thirty
     (30) days following notice from Lender of such failure."

          (c)  The paragraph entitled "Default in Favor of Third Parties" under
     DEFAULT, is amended to read as follows:

          "Default in Favor of Third Parties. Borrower of any Grantor defaults
     under any loan extension of credit, security agreement, purchase or sales
     agreement, or any other agreement, in favor of any other creditor or person
     that may materially affect any of Borrower's or any Grantor's property or
     Borrower's or any Grantor's ability to repay the Loans or perform their
     respective obligations under this Agreement or any of the Related
     Documents, and does not cure such failure within thirty (30) days following
     receipt of notice of such default."

          (d)  The paragraph entitled "Credit or Forfeiture Proceedings" under
     DEFAULT, is amended to read as follows:

          "Creditor or Forfeiture Proceedings. Commencement of foreclosure or
     forfeiture proceedings in connection with claims in excess of One Million
     Dollars ($1,000,000) in each case whether by judicial proceeding,
     self-help, repossession or any other method, by any creditor of Borrower or
     by any governmental agency against any collateral securing the Loan. This
     includes a garnishment of any of Borrower's accounts, including deposit
     accounts, with lender. However, this Event of Default shall not apply if
     there is a good faith dispute by Borrower as to validity or reasonableness
     of the claim which is the basis of the creditor or forfeiture proceeding
     and if Borrower gives Lender written notice of the creditor or forfeiture
     proceeding and deposits with Lender monies or a surety bond for the
     creditor or forfeiture proceeding, in an amount determined by Lender, in
     its sole discretion, as being adequate reserve or bond for the dispute."

          (e)  The paragraph entitled "Change in Ownership" under DEFAULT, is
     intentionally deleted.

     1.8 Exceptions to Arbitration.

          (a)  Subparagraph (d) of the paragraph entitled "Arbitration", is
     amended to read as follows:

               (d)  The arbitration shall be administered by JAMS and conducted,
     unless otherwise required by law, in Orange County, California. All Claims



                       EXHIBIT TO BUSINESS LOAN AGREEMENT
                                   (Continued)                            Page 3

================================================================================

shall be determined by one arbitrator; however, if Claims exceed $5,000,000,
upon the request of any party, the Claims shall be decided by three arbitrators.
All arbitration hearings shall commence within 90 days of the demand for
arbitration and close within 90 days of commencement and the award of the
arbitrator(s) shall be issued within 30 days of the close of the hearing.
However, the arbitrator(s), upon a showing of good cause, may extend the
commencement of the hearing for up to an additional 60 days. The arbitrator(s)
shall provide a concise written statement of reasons for the award. The
arbitration award may be submitted to any court having jurisdiction to be
confirmed and enforced."

1.9  Exceptions to Exhibit to Business Loan Agreement.

     (a) The paragraph entitled "EXHIBIT TO BUSINESS LOAN AGREEMENT", is amended
to read as follows:

     "EXHIBIT TO BUSINESS LOAN AGREEMENT. An exhibit, titled 'EXHIBIT TO
BUSINESS LOAN AGREEMENT', is attached to this Agreement and by this reference is
made part of this Agreement just as if all the provisions, terms and conditions
of the Exhibit had been fully set forth in this Agreement. In the event of any
conflict between this Agreement and such exhibit, the terms of such exhibit
shall control."

1.10 Exceptions to Miscellaneous Provisions.

     (a) The paragraph entitled "Choice of Venue" under MISCELLANEOUS
PROVISIONS, is amended to read as follows:

     "Choice of Venue. If there is a lawsuit, Borrower agrees upon Lender's
request to submit to the jurisdiction of the courts of Orange County, State of
California."

     (b) The paragraph entitled "Subsidiaries and Affiliates of Borrower" under
MISCELLANEOUS PROVISIONS, is intentionally deleted.

THIS EXHIBIT TO BUSINESS LOAN AGREEMENT IS EXECUTED ON SEPTEMBER 25, 2002.

BORROWER:


NEWPORT CORPORATION

By:  /s/ William R. Abbott
    ----------------------------------------------------
     William R. Abbott, VP of Finance & Treasurer of
     Newport Corporation

By:  /s/ Jeffrey B. Coyne
     ---------------------------------------------------
     Jeffrey B. Coyne VP & General Counsel of Newport
     Corporation

LENDER:


BANK OF AMERICA, N.A.


By:  /s/ C K Goodfellow
     ---------------------------------------------------
     Authorized Signer

================================================================================

EX-10.4

                                                                    Exhibit 10.4

Bank of America [LOGO]


                                PROMISSORY NOTE

================================================================================

Borrower: Newport Corporation           Lender:  Bank of America, N.A.
          1791 Deere Avenue                      CLSC-Commercial Banking (LA)
          Irvine, CA 92606                       CA9-703-11-11
                                                 333 South Beaudry Avenue, 11th
                                                 Floor
                                                 Los Angeles, CA 90017-1486

================================================================================

Principal Amount: $5,000,000.00                 Date of Note: September 25, 2002

PROMISE TO PAY. Newport Corporation ("Borrower") promises to pay to Bank of
America, N.A. ("Lender"), or order, in lawful money of the United States of
America, the principal amount of Five Million & 00/100 Dollars ($5,000,000.00)
or so much as may be outstanding, together with interest on the unpaid
outstanding principal balance of each advance. Interest shall be calculated from
the date of each advance until repayment of each advance.

PAYMENT. Borrower will pay this loan in one payment of all outstanding principal
plus all accrued unpaid interest on September 1, 2003. In addition, Borrower
will pay regular monthly payments of all accrued unpaid interest due as of each
payment date, beginning October 1, 2002, with all subsequent interest payments
to be due on the same day of each month after that. Unless otherwise agreed or
required by applicable law, payments will be applied first to any unpaid
collection costs and any late charges, then to any unpaid interest, and any
remaining amount to principal. The annual interest rate for this Note is
computed on a 365/360 basis; that is, by applying the ratio of the annual
interest rate over a year of 360 days, multiplied by the outstanding principal
balance, multiplied by the actual number of days the principal balance is
outstanding. Borrower will pay Lender's address shown above or at such other
place as Lender may designate in writing.

VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from
time to time based on changes in an index which is the rate of interest
publicly announced from time to time by the Lender as its Prime Rate. The Prime
Rate is set by the Lender based on various factors, including the Lender's costs
and desired return, general economic conditions and other factors, and is used
as a reference point for pricing some loans. The Lender may price loans to its
customers at above, or below the Prime Rate. Any change in the Prime Rate shall
take effect at the opening of business on the day specified in the public
announcement of a change in the Lender's Prime Rate (the "Index"). The Index is
not necessarily the lowest rate charged by Lender on its loans and is set by
Lender in its sole discretion. If the Index becomes unavailable during the term
of this loan, Lender may designate a substitute index after notifying Borrower.
Lender will tell Borrower the current Index rate upon Borrowers request. The
interest rate change will not occur more often than each date of such change in
the index. Borrower understands that Lender may make loans based on other rates
as well. The interest rate to be applied to the unpaid principal balance of this
Note will be at a rate equal to the Index. NOTICE: Under no circumstances will
the interest rate on this Note be more than the maximum rate allowed by
applicable law.

PREPAYMENT FEE. Upon prepayment of this Note, Lender is entitled to the
following prepayment fee: Prepayments may be made in whole or in part at any
time on any loan or advance outstanding under this Note for which the Rate is
based on the Prime Rate or any other fluctuating Rate or Index which may change
daily. No prepayment of any loan or advance outstanding hereunder bearing
Interest at any other Rate shall be permitted without the prior written consent
of Lender. Notwithstanding such prohibition, if there is a prepayment of any
such loan or advance hereunder, whether by consent of Lender, or because of
acceleration or otherwise, Borrower shall, within 15 days of any request by
Lender, pay to Lender any loss or expense, including any loss of anticipated
profits, which Lender may incur or sustain as a result of such prepayment. For
the purposes of calculating the amounts owed only, it shall be assumed that
Lender actually funded or committed to fund the loan or advance through the
purchase of an underlying deposit in an amount and for a term comparable to the
loan or advance. Any such determination by Lender shall be conclusive, absent a
manifest error in computation. All prepayments of principal shall be applied in
the inverse order of maturity, or in such other order as Lender shall determine
in its sole discretion. Except for the foregoing, Borrower may pay all or a
portion of the amount owed earlier than it is due. Early payments will not,
unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation
to continue to make payments of accrued unpaid interest. Rather, early payments
will reduce the principal balance due. Borrower agrees not to send Lender
payments marked "paid in full", "without recourse", or similar language. If
Borrower sends such a payment, Lender may accept it without losing any of
Lender's rights under this Note, and Borrower will remain obligated to pay any
further amount owed to Lender. All written communications concerning disputed
amounts, including any check or other payment instrument that indicates that the
payment constitutes "payment in full" of the amount owed or that is tendered
with other conditions or limitations or as full satisfaction of a disputed
amount must be mailed or delivered to: Bank of America, N.A., CA9-703-11-11,333
South Beaudry Avenue, 11th Floor Los Angeles, CA 90017-1486.

LATE CHARGE: If a payment is 15 days or more late, Borrower will be charged
4.000% of the unpaid portion of the regularly scheduled payment.

INTEREST AFTER DEFAULT. Upon Borrower's failure to pay all amounts declared due
pursuant to this section, including failure to pay upon final maturity, Lender,
as its option may, if permitted under applicable law, increase the variable
interest rate on this Note to 6.000 percentage points over the Index.

DEFAULT. Each of the following shall constitute an event of default ("Event of
Default") under this Note:

   Payment Default. Borrower fails to make any payment when due under this Note:

   Other Defaults. Borrower fails to comply with or to perform any other term,
   obligation, covenant or condition contained in this Note or in any of the
   related documents or to comply with or to perform any term, obligation,
   covenant or condition contained in any other agreement between Lender and
   Borrower.

   Default in Favor of Third Parties. Borrower or any Grantor defaults under any
   loan, extension of credit, security agreement, purchase or sales agreement,
   or any other agreement, in favor of any other creditor or person that may
   materially affect any of Borrower's property or Borrower's ability to repay
   this Note or perform Borrower's obligations under this Note or any of the
   related documents.

   False Statements. Any warranty, representation or statement made or furnished
   to Lender by Borrower or on Borrower's behalf under this Note or the related
   documents is false or misleading in any material respect, either now or at
   the time made or furnished or becomes false or misleading at any time
   thereafter.

   Insolvency. The dissolution or termination of Borrower's existence as a going
   business, the insolvency of Borrower, the appointment of a receiver for any
   part of Borrower's property, any assignment for the benefit of creditors, any
   type of creditor workout, or the commencement of any proceeding under any
   bankruptcy or insolvency laws by or against Borrower.

   Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture
   proceedings, whether by judicial proceeding, self-help, repossession or any
   other method, by any creditor or Borrower or by any governmental agency
   against any collateral securing the loan. This includes a garnishment of any
   of Borrower's accounts, including deposit accounts, with Lender. However,
   this Event of Default shall not apply if there is a good faith dispute by
   Borrower as to the validity or reasonableness of the claim which is the basis
   of the creditor or forfeiture proceeding



                                PROMISSORY NOTE
                                  (Continued)                             Page 2
================================================================================

     and if Borrower gives Lender written notice of the creditor or forfeiture
     proceeding and deposits with Lender monies or a surety bond for the
     creditor or forfeiture proceeding, in an amount determined by Lender, in
     its sole discretion, as being an adequate reserve or bond for the dispute.

     Events Affecting Guarantor. Any of the preceding events occurs with respect
     to any guarantor, endorser, surety, or accommodation party of any of the
     indebtedness or any guarantor, endorser, surety, or accommodation party
     dies or becomes incompetent, or revokes or disputes the validity of, or
     liability under, any guaranty of the indebtedness evidenced by this Note.

     Change In Ownership. Any change in ownership of twenty-five percent (25%)
     or more of the common stock of Borrower.

     Adverse Change. A material adverse change occurs in Borrower's financial
     condition, or Lender believes the prospect of payment or performance of
     this Note is impaired.

LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, and then
Borrower will pay that amount.

ATTORNEY'S FEES; EXPENSES. Lender may hire or pay someone else to help collect
this Note if Borrower does not pay. Borrower will pay Lender that amount. This
includes, subject to any limits under applicable law, Lender's attorneys' fees
and Lender's legal expenses, whether or not there is a lawsuit, including
attorneys' fees, expenses for bankruptcy proceedings (including efforts to
modify or vacate any automatic stay or injunction), and appeals. Borrower also
will pay any court costs, in addition to all other sums provided by law.

JURY WAIVER. Lender and Borrower hereby waive the right to any jury trial in any
action, proceeding, or counterclaim brought by either Lender or Borrower against
the other.

GOVERNING LAW. This Note will be governed by, construed and enforced in
accordance with federal law and the laws of the State of California. This Note
has been accepted by Lender in the State of California.

CHOICE OF VENUE. If there is a lawsuit, Borrower agrees upon Lender's request to
submit to the jurisdiction of the courts of any County, State of California.

RIGHT OF SETOFF. To the extent permitted by applicable law, Lender reserves a
right of setoff in all Borrower's accounts with Lender (whether checking,
savings, or some other account). This includes all accounts Borrower holds
jointly with someone else and all accounts Borrower may open in the future.
However, this does not include any IRA or Keogh accounts, or any trust accounts
for which setoff would be prohibited by law. Borrower authorizes Lender, to the
extent permitted by applicable law, to charge or setoff all sums owing on the
indebtedness against any and all such accounts.

LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under
this Note, as well as directions for payment from Borrower's accounts, may be
requested orally or in writing by Borrower or by an authorized person. Lender
may, but need not, require that all oral requests be confirmed in writing.
Borrower agrees to be liable for all either: (A) advanced in accordance with the
instructions of an authorized person or (B) credited to any of Borrower's
accounts with Lender. The unpaid principal balance owing on this Note at any
time may be evidenced by endorsements on this note or by Lender's internal
records, including daily computer print-outs. Lender will have no obligation to
advance funds under this Note if: (A) Borrower or any guarantor is in default
under the terms of this Note or any agreement that Borrower or any guarantor has
with Lender, including any agreement made in connection with the signing of this
Note; (B) Borrower or any guarantor ceases doing business or is insolvent; (C)
any guarantor seeks, claims or otherwise attempts to limit, modify or revoke
such guarantor's guarantee of this Note or any other loan with Lender; or (D)
Borrower has applied funds provided pursuant to this Note for purposes other
than those authorized by Lender.

ARBITRATION. (a) This paragraph concerns the resolution of any controversies or
claims between the parties, whether arising in contract, tort or by statute,
including but not limited to controversies or claims that arise out of or relate
to: (i) this agreement (including any renewals, extensions or modifications); or
(ii) any document related to this agreement; (collectively a "Claim").

(b) At the request of any party to this agreement, any Claim shall be resolved
by binding arbitration in accordance with the Federal Arbitration Act (Title 9,
U.S. Code) (the "Act"). The Act will apply even though this agreement provides
that it is governed by the law of a specified state.

(c) Arbitration proceedings will be determined in accordance with the Act, the
applicable rules and procedures for the arbitration of disputes of JAMS or any
successor thereof ("JAMS"), and the terms of this paragraph. In the event of any
inconsistency, the terms of this paragraph shall control.

(d) The arbitration shall be administered by JAMS and conducted, unless
otherwise required by law, in any U.S. state where real or tangible personal
property collateral for this credit is located or if there is no such
collateral, in the state specified in the governing law section of this
agreement. All Claims shall be determined by one arbitrator; however, if Claims
exceed $5,000,000, upon the request of any party, the Claims shall be decided by
three arbitrators. All arbitration hearings shall commence within 90 days of the
demand for arbitration and close within 90 days of commencement and the award of
the arbitrator(s) shall be issued within 30 days of the close of the hearing.
However, the arbitrator(s), upon a showing of good cause, may extend the
commencement of the hearing for up to an additional 60 days. The arbitrator(s)
shall provide a concise written statement of reasons for the award. The
arbitration award may be submitted to any court having jurisdiction to be
confirmed and enforced.

(e) The arbitrator(s) will have the authority to decide whether any Claim is
barred by the statute of limitations and, if so, to dismiss the arbitration on
that basis. For purposes of the application of the statute of limitations, the
service on JAMS under applicable JAMS rules of a notice of Claim is the
equivalent of the filing of a lawsuit. Any dispute concerning this arbitration
provision or whether a Claim is arbitratable shall be determined by the
arbitrator(s). The arbitrator(s) shall have the power to award legal fees
pursuant to the terms of this agreement.

(f) This paragraph does not limit the right of any party to: (i) exercise
self-help remedies, such as but not limited to, setoff; (ii) initiate judicial
or nonjudicial foreclosure against any real or personal property collateral;
(iii) exercise any judicial or power of sale rights, or (iv) act in a court of
law to obtain an interim remedy, such as but not limited to, injunctive relief,
writ of possession or appointment of a receiver, or additional or supplementary
remedies.

(g) The filing of a court action is not intended to constitute a waiver of the
right of any party, including the suing party, thereafter to require submittal
of the Claim to arbitration.

(h) all obligations, debts and liabilities, including any swap, option or
forward obligations, plus interest thereon, of Borrower to Lender, or any one or
more of them, as well as all claims by Lender against Borrower or any other
party to this Agreement or any one or more of them, whether now existing or
hereafter arising, whether related to the purpose of the Note, whether voluntary
or otherwise, whether due or not due, direct or indirect, absolute or
contingent, liquidated or unliquidated and whether Borrower or any other party
to this Agreement may be liable individually or jointly with others, whether
obligated as guarantor, surety, accommodation party or otherwise, and whether
recovery upon such amounts may be or hereafter may become barred by any statute
of limitations, and whether the obligation to repay such amounts may be or
hereafter may become otherwise unenforceable. Unless the Borrower and any other
party to this Agreement shall have otherwise agreed in writing or received
written notice thereof, this Agreement shall not secure any obligation owing to
Lender which constitutes "consumer credit" subject to the disclosure
requirements of the Federal Truth in Lending Act and any regulations promulgated
thereunder.

ADDITIONAL DEFAULTS.



                                PROMISSORY NOTE
                                  (Continued)                             Page 3
================================================================================

Each of the following shall constitute an event of default ("Event of Default")
under this Note:

Event of Default Under Related Documents. A default or event of default occurs
under the terms of any promissory note, guaranty, pledge agreement, security
agreement or other agreement or instrument executed by Borrower or any
guarantor, pledgor, accommodation party or other obligor in connection with or
relating to this Note.

Judgment. The entry of a judgment against any Borrower or guarantor, pledgor,
accommodation party or other obligor which Lender deems to be of a material
nature, in Lender's sole discretion.

Default by Affiliates. Any affiliate of Borrower defaults under any loan,
extension of credit, security agreement, purchase or sales agreement, or any
other agreement, in favor of Lender or any other creditor.

Adverse Government Action. Any governmental authority (including, without
limitation, any nation, state or other political subdivision thereof, any
central bank, and any entity exercising executive, legislative, judicial,
regulatory or administrative functions, and any corporation or other entity
owned or controlled by any of the foregoing) takes or institutes action, which,
in the opinion of Lender, will adversely affect Borrower's financial condition
or ability to pay or perform Borrower's obligations under this Note or any
instrument or agreement required under, or executed in connection with, this
Note.

SALE OF NOTE. Assignment. Lender may sell or offer to sell this Note, together
with any and all documents guaranteeing, securing or executed in connection with
this Note, to one or more assignees without notice to or consent of Borrower.
Lender is hereby authorized to share any information it has pertaining to the
loan evidenced by this Note, including without limitation credit information on
the undersigned, any of its principals, or any guarantors of this Note, to any
such assignee or prospective assignee.

COUNTERPART SIGNATURES. This Note may be executed in any number of counterparts,
each of which when so executed shall be deemed to be an original and all of
which taken together shall constitute one and the same agreement.

TERMINATION OF AUTOMATIC PAYMENTS. In the event that Borrower terminates the
Automatic Payment arrangement with Lender, Borrower agrees that the interest
rate under the Note will increase, at the discretion of the Lender, by one-half
percentage point (0.50%) per annum over the rate of interest stated in the Note,
and the amount of each interest installment will be increased accordingly. The
effective rate of interest under the Note shall not in any event exceed the
maximum rate permitted by law.

ADDITIONAL INTEREST AFTER DEFAULT. Upon any event of Default under this Note,
Lender, at its option, may, if permitted under applicable law, increase the
interest rate on this Note to the interest rate specified in the paragraph above
entitled "Interest After Default".

UNUSED COMMITMENT FEE. Borrower agrees to pay a fee on any difference between
the maximum principal amount available under this Note and the amount of credit
it actually uses, determined by the weighted average credit outstanding during
the specified period. The fee will be calculated at .25% per year. The
calculation of credit outstanding shall include the undrawn amount of letters of
credit. This fee is due on December 31, 2002 and on the last day of each
following quarter until the expiration of the availability of advances under
this Note.

AUTOMATIC PAYMENTS. Borrower hereby authorizes Lender automatically to deduct
from Borrower's account numbered 14592-06005 the amount of any loan payment. If
the funds in the account are insufficient to cover any payment, Lender shall not
be obligated to advance funds to cover the payment. At any time and for any
reason, Borrower or Lender may voluntarily terminate Automatic Payments.

PRE BILLING. If the Borrower and Lender elect to use pre-billing calculation,
for each payment date (the "Due Date") the amount of each payment debit will be
determined as follows: On the "Billing Date" Lender will prepare and mail to
Borrower an invoice of the amounts that will be due on that Due Date ("Billed
Amount"). (The "Billing Date" will be a date that is a specified number of
calendar days prior to the Due Date, which number of days will be mutually
agreed from time to time by Lender and Borrower.) The calculation of the Billed
Amount will be made on the assumption that no new extensions of credit or
payments will be made between the Billing Date and the Due Date, and that there
will be no changes in the applicable interest rate. On the Due Date Lender will
debit the Designated Account for the Billed Amount, regardless of the actual
amount due on that date ("Accrued Amount"). If the Due Date does not fall on a
Business Day, Lender shall debit the Designated Account on the first Business
Day following the Due Date. For purposes of this Agreement, "Business Day" means
a day other than Saturday, Sunday or other day on which commercial banks are
authorized to close or are in fact closed in the state where the Lender's
lending office is located. If the Billed Amount debited to the Designated
Account differs from the Accrued Amount, the difference will be treated as
follows: If the Billed Amount is less than the Accrued Amount, the Billed Amount
for the following Due Date will be increased by the amount of the underpayment.
Borrower will not be in default by reason of any such underpayment. If the
Billed Amount is more than the Accrued Amount, the Billed Amount for the
following Due Date will be decreased by the amount of the overpayment.
Regardless of any such difference, interest will continue to accrue based on the
actual amount of principal outstanding without compounding. Lender will not pay
interest on any overpayment.

AUTOMATIC PAYMENT. Borrower has elected to authorize Lender to effect payment of
sums due under this Note by means of debiting Borrower's account number
14592-06005. This authorization shall not affect the obligation of Borrower to
pay such sums when due, without notice, if there are insufficient funds in such
account to make such payment in full on the due date thereof, or if Lender fails
to debit the account.

CLOSING FEE. Borrower agrees to pay to Lender a loan fee in the amount of
$7,500. This fee is due at closing.

EXHIBIT TO NOTE. An exhibit, titled "EXHIBIT TO NOTE," is attached to this Note
and by this reference is made a part of this Note just as if all the provisions,
terms and conditions of the Exhibit had been fully set forth in this Note.

SUCCESSOR INTERESTS. The terms of this Note shall be binding upon Borrower, and
upon Borrower's heirs, personal representatives, successors and assigns, and
shall inure to the benefit of Lender and its successors and assigns.

GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or
remedies under this Note without losing them. Borrower and any other person who
signs, guarantees or endorses this Note, to the extent allowed by law, waive any
applicable statute of limitations, presentment, demand for payment, and notice
of dishonor. Upon any change in the terms of this Note, and unless otherwise
expressly stated in writing, no party who signs this Note, whether as maker,
guarantor, accommodation maker or endorser, shall be released from liability.
All such parties agree that Lender may renew or extend (repeatedly and for any
length of time) this loan or release any party or guarantor or collateral; or
impair, fail to realize upon or perfect Lender's security interest in the
collateral; and take any other action deemed necessary by Lender without the
consent of or notice to anyone. All such parties also agree that Lender may
modify this loan without the consent of or notice to anyone other than the party
with whom the modification is made. The obligations under this Note are joint
and several.



                                PROMISSORY NOTE
                                  (Continued)                             Page 4
================================================================================

   PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS
   OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER
   AGREES TO THE TERMS OF THE NOTE.

   BORROWER ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS PROMISSORY NOTE.

   BORROWER:



   NEWPORT CORPORATION

   By:  /s/ William R. Abbott                By:  /s/ Jeffrey B. Coyne
      -----------------------------------       --------------------------------
      William R. Abbott, VP of Finance          Jeffrey B. Coyne, VP & General
      & Treasurer of Newport Corporation        Counsel of Newport Corporation


================================================================================



                                 EXHIBIT TO NOTE

================================================================================

  Borrower: Newport Corporation     Lender: Bank of America, N.A.
            1791 Deere Avenue               CLSC-Commercial Banking (LA)
            Irvine, CA 92606                CA9-703-11-11
                                            333 South Beaudry Avenue, 11th Floor
                                            Los Angeles, CA 90017-1486

================================================================================

     This EXHIBIT TO NOTE is attached to and by this reference is made a part of
     the Promissory Note, dated September 25, 2002, and executed in connection
     with a loan or other financial accommodations between BANK OF AMERICA, N.A.
     and Newport Corporation.

     1. OPTIONAL INTEREST RATES

          1.1 Optional Rates. In addition to the interest rate specified in the
     Note, on the terms and subject to the conditions set forth below, Borrower
     will be able to select, from one of the following optional rates, an
     interest rate which will be applicable to a particular dollar increment of
     amounts outstanding, or to be disbursed, under the Note, during interest
     periods agreed to by Lender and Borrower. Any principal amount bearing
     interest at an optional rate is referred to as a "Portion":

          (a) the LIBOR Rate plus 1.50 percentage points.

          1.2 Rate Terms. Each optional interest rate is a rate per year.
     Interest will be paid on the last day of each interest period, and on the
     first day of each month during the interest period. No Portion will be
     converted to a different interest rate during the applicable interest
     period. If any principal amount bearing interest at an optional interest
     rate is repaid during an interest period (other than a scheduled principal
     payment), such repayment will be considered a prepayment subject to any
     prepayment fee as described in the Note. Upon the occurrence of an event of
     default under the Note or any other loan document, Lender may terminate the
     availability of optional interest rates for interest periods commencing
     after the default occurs. No interest period may extend beyond the maturity
     date of the Note. At the end of any interest period, the interest rate will
     revert to the rate specified in the Note, unless Borrower has designated
     another optional interest rate for the Portion.

          1.3 LIBOR Rate. The election of LIBOR Rates shall be subject to the
     following terms and requirements:

          (a) The interest period during which the LIBOR Rate will be in effect
     will be one, two or three months. The first day of the interest period must
     be a day other than a Saturday, or a Sunday on which Lender is open for
     business in New York and London and dealing in offshore dollars (a "LIBOR
     Banking Day"). The last day of the interest period and the actual number of
     days during the interest period will be determined by Lender using the
     practices of the London inter-bank market.

          (b) Each LIBOR Rate Portion will be for an amount not less than One
     Hundred Thousand Dollars ($100,000).

          (c) The "LIBOR Rate" means the interest rate determined by the
     following formula, rounded upward to the nearest 1/100 of one percent. (All
     amounts in the calculation will be determined by Lender as of the first day
     of the interest period.)

                   LIBOR Rate =   London Inter-Bank Offered Rate
                                (1.00 - Reserve Percentage)

          Where,

          (i)  "London Inter-Bank Offered Rate" means the average per annum
     interest rate at which U.S. dollar deposits would be offered for the
     applicable interest period by major banks in the London inter-bank market,
     as shown on the Telerate Page 3750 (or any successor page) at approximately
     11:00 a.m. London time two (2) London Banking Days before the commencement
     of the interest period. If such rate does not appear on the Telerate Page
     3750 (or any successor page), the rate for that interest period will be
     determined by such alternate method as reasonably selected by Lender. A
     "London Banking Day" is a day on which Lender's London Banking Center is
     open for business and dealing in offshore dollars.

          (ii) "Reserve Percentage" means the total of the maximum reserve
     percentages for determining the reserves to be maintained by member banks
     of the Federal Reserve System for Eurocurrency Liabilities, as defined in
     Federal Reserve Board Regulation D, rounded upward to the nearest 1/100 of
     one percent. The percentage will be expressed as a decimal, and will
     include, but not be limited to, marginal, emergency, supplemental, special,
     and other reserve percentages.

          (d) Borrower shall irrevocably request a LIBOR Rate Portion no later
     than 12:00 noon time in the LIBOR Banking Day preceding the day on which
     the London Inter-Bank Offered Rate will be set, as specified above. For
     example, if there are no intervening holidays or weekend days in any of the
     relevant locations, the request must be made at least three days before the
     LIBOR Rate takes effect.

          (e) Lender will have no obligation to accept an election for a LIBOR
     Rate Portion if any of the following described events has occurred and is
     continuing:

          (i)  Dollar deposits in the principal amount, and for periods equal to
     the interest period, of a LIBOR Rate Portion are not available in the
     London inter-bank market; or

          (ii) the LIBOR Rate does not accurately reflect the cost of a LIBOR
     Rate Portion.

     1.4  Notices; Authority to Act. Lender may accept requests by Borrower for
     optional interest rates made by telephone. Borrower acknowledges and agrees
     that the agreement of Lender herein to receive certain notices by telephone
     is solely for the convenience of Borrower. Lender shall be entitled to rely
     on the authority of the person purporting to be a person authorized by
     Borrower to give such notice, and Lender shall have no liability to
     Borrower on account of any action taken by Lender in reliance upon such
     telephonic notice. The obligation of Borrower to repay all sums owing under
     the Note shall not be affected in any way or to any extent by any failure
     by Lender to receive written confirmation of any telephonic notice or the
     receipt by Lender of a confirmation which is at variance with the terms
     understood by Lender to be contained in the telephonic notice.

     1.5  Exceptions to Default.

          (a) The paragraph entitled "Payment Default", under DEFAULT, is
     amended to read as follows;

          "Payment Default. Borrower fails to make any payment when due under
     this Note within five (5) business days of the date due."

          (b) The paragraph entitled "Other Defaults", under DEFAULT, is amended
     to read as follows:

          "Other Defaults. Borrower fails to comply with or to perform any other
     term, obligation, covenant or condition contained in this Note or in any of
     the related documents or to comply with or to perform any term, obligation,
     covenant or condition contained in any other agreement between Lender and
     Borrower, and does not cure such failure within thirty (30) days following
     notice from Lender of such failure."

          (c) The paragraph entitled "Default in Favor of Third Parties", under
     DEFAULT, is amended to read as follows:

          "Default in Favor of Third Parties. Borrower or any Grantor defaults
     under any loan, extension of credit, security agreement, purchase or sales
     agreement, or any other agreement, in favor of any other creditor or person
     that may materially affect Borrower's ability to repay this Note or perform



                                EXHIBIT TO NOTE
                                  (Continued)                             Page 2
================================================================================

     Borrower's obligations under this Note or any of the related documents, and
     does not cure such failure within thirty (30) days following receipt of
     notice of such default."

          (d) The paragraph entitled "Change in Ownership", under DEFAULT, is
     intentionally deleted.

     1.6  Exceptions to Choice of Venue.

          (a) The paragraph entitled "Choice of Venue" is amended to read as
     follows:

          "CHOICE OF VENUE. If there is a lawsuit, Borrower agrees upon Lender's
     request to submit to the jurisdiction of the courts of Orange County, State
     of California."

     1.7  Exceptions to Arbitration.

          (a) Subparagraph (d) of the paragraph entitled "Arbitration" is
     amended to read as follows:

          "(d) The arbitration shall be administered by JAMS and conducted,
     unless otherwise required by law, in Orange County, California. All claims
     shall be determined by one arbitrator; however, if Claims exceed
     $5,000,000, upon the request of any party, the Claims shall be decided by
     three arbitrators. All arbitration hearings shall commence within 90 days
     of the demand for arbitration and close within 90 days of commencement and
     the award of the arbitrator(s) shall be issued within 30 days of the close
     of the hearing. However, the arbitrator(s), upon a showing of good cause,
     may extend the commencement of the hearing for up to an additional 60 days.
     The arbitrator(s) shall provide a concise written statement of reasons for
     the award. The arbitration award may be submitted to any court having
     jurisdiction to be confirmed and enforced".

     THIS EXHIBIT TO NOTE IS EXECUTED ON SEPTEMBER 25, 2002.

     BORROWER:



     NEWPORT CORPORATION

     By: /s/ William R. Abbott
        --------------------------------------------------
        William R. Abbott, VP of Finance & Treasurer of
        Newport Corporation

     By: /s/ Jeffrey B. Coyne
        --------------------------------------------------
        Jeffrey B. Coyne, VP & General Counsel of Newport
        Corporation


================================================================================

EX-10.5

                                                                    Exhibit 10.5

  Bank of America [LOGO]

                          COMMERCIAL PLEDGE AGREEMENT

================================================================================

  Grantor: Newport Corporation     Lender: Bank of America, N.A.
           1791 Deere Avenue               CLSC-Commercial Banking (LA)
           Irvine, CA 92606                CA9-703-11-11
                                           333 South Beaudry Avenue, 11th Floor
                                           Los Angeles, CA 90017-1486

================================================================================

  THIS COMMERCIAL PLEDGE AGREEMENT dated September 25, 2002, is made and
  executed between Newport Corporation ("Grantor") and Bank of America, N.A.
  ("Lender").

  GRANT OF SECURITY INTEREST. For valuable consideration, Grantor grants to
  Lender a security interest in the Collateral to secure the Indebtedness and
  agrees that Lender shall have the rights stated in this Agreement with respect
  to the Collateral, in addition to all other rights which Lender may have by
  law.

  COLLATERAL DESCRIPTION. The word "Collateral" as used in this Agreement means
  Grantor's present and future rights, title and interest in and to, together
  with any and all present and future additions thereto, substitutions
  therefore, and replacements thereof, and further together with all Income and
  Proceeds as described herein:

     (a) Account number ending in 0465393 held by Bank of America, N.A. as agent
     or custodian for Grantor (or any one or more Grantor) under an agreement
     for custody, safekeeping, investment management, investment advisory or
     similar services between Grantor and Bank of America, N.A., and all
     successor and replacement accounts, regardless of the numbers of such
     accounts or the offices at which such accounts are maintained (the
     "Accounts") and all rights of Grantor in connection with the Accounts. (b)
     All investment property, security entitlements, financial assets,
     certificated securities, uncertified securities, money, deposit accounts,
     instruments, certificates of deposit, general intangibles, and all other
     investments or property of any sort now or hereafter held, maintained or
     administered in the Accounts; but excluding collective investment funds
     managed by Lender including without limitation any interest in variable
     amount notes, commonly known as "master notes"; and excluding anything
     construed as real property under applicable state law. (c) All Income and
     Proceeds from the Collateral as defined herein.

  RIGHT OF SETOFF. To the extent permitted by applicable law, Lender reserves a
  right of setoff in all Grantor's accounts with Lender (whether checking,
  savings, or some other account). This includes all accounts Grantor holds
  jointly with someone else and all accounts Grantor may open in the future.
  However, this does not include any IRA or Keogh accounts, or any trust
  accounts for which setoff would be prohibited by law. Grantor authorizes
  Lender, to the extent permitted by applicable law, to charge or setoff all
  sums owing on the Indebtedness against any and all such accounts.

  REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE COLLATERAL. Grantor
  represents and warrants to Lender that:

     Ownership. Grantor is the lawful owner of the Collateral free and clear of
     all security interests, liens, encumbrances and claims of others except as
     disclosed to and accepted by Lender in writing prior to execution of this
     Agreement.

     Right to Pledge. Grantor has the full right, power and authority to enter
     into this Agreement and to pledge the Collateral.

     Authority; Binding Effect. Grantor has the full right, power and authority
     to enter into this Agreement and to grant a security interest in the
     Collateral to Lender. This Agreement is binding upon Grantor as well as
     Grantor's successor and assigns, and is legally enforceable in accordance
     with its terms. The foregoing representations and warranties, and all other
     representations and warranties contained in this Agreement are and shall be
     continuing in nature and shall remain in full force and effect until such
     time as this Agreement is terminated or cancelled as provided herein.

     No Further Assignment. Grantor has not, and shall not, sell, assign,
     transfer, encumber or otherwise dispose of any of Grantor's rights in the
     Collateral except as provided in this Agreement.

     No Defaults. There are no defaults existing under the Collateral, and there
     are no offsets or counterclaims to the same. Grantor will strictly and
     promptly perform each of the terms, conditions, covenants and agreements,
     if any, contained in the Collateral which are to be performed by Grantor.

     No Violation, The execution and delivery of this Agreement will not violate
     any law or agreement governing Grantor or to which Grantor is a party, and
     its certificate or articles of incorporation and bylaws do not prohibit any
     term or condition of this Agreement.

     Financing Statements. Grantor authorizes Lender to file a UCC-1 financing
     statement, or alternatively, a copy of this Agreement to perfect Lender's
     security interest. At Lender's request, Grantor additionally agrees to sign
     all other documents that are necessary to perfect, protect, and continue
     Lender's security interest in the Property. Grantor will pay all filing
     fees, title transfer fees, and other fees and costs involved unless
     prohibited by law or unless Lender is required by law to pay such fees and
     costs. Grantor irrevocably appoints Lender to execute financing statements
     and documents of title in Grantor's name and to execute all documents
     necessary to transfer title if there is a default. Lender may file a copy
     of this Agreement as a financing statement. If Grantor changes Grantor's
     name or address, or the name or address of any person granting a security
     interest under this Agreement changes, Grantor will promptly notify the
     Lender of such change.

  LENDER'S RIGHTS AND OBLIGATIONS WITH RESPECT TO THE COLLATERAL. Lender may
  hold the Collateral until all Indebtedness has been paid and satisfied.
  Thereafter Lender may deliver the Collateral to Grantor or to any other owner
  of the Collateral. Lender shall have the following rights in addition to all
  other rights Lender may have by law:

     Maintenance and Protection of Collateral. Lender may, but shall not be
     obligated to, take such steps as it deems necessary or desirable to
     protect, maintain, insure, store, or care for the Collateral, including
     paying of any liens or claims against the Collateral. This may include such
     things as hiring other people, such as attorneys, appraiser or other
     experts. Lender may charge Grantor for any cost incurred in so doing. When
     applicable law provides more than one method of perfection of Lender's
     security interest, Lender may choose the method(s) to be used.

     Income and Proceeds from the Collateral. Lender may receive all Income and
     Proceeds and add it to the Collateral. Grantor agrees to deliver to Lender
     immediately upon receipt, in the exact form received and without
     commingling with other property, all Income and Proceeds from the
     Collateral which may be received by, paid, or delivered to Grantor or for
     Grantor's account, whether as an addition to, in discharge of, in
     substitution of, or in exchange for any of the Collateral.

     Application of Cash. At Lender's option, Lender may apply any cash, whether
     included in the Collateral or received as Income and Proceeds or through
     liquidation, sale, or retirement, of the Collateral, to the satisfaction of
     the Indebtedness or such portion thereof as Lender shall choose,



                          COMMERCIAL PLEDGE AGREEMENT
                                  (Continued)                             Page 2
================================================================================

     whether or not matured.

     Transactions with Others. Lender may (1) extend time for payment or other
     performance, (2) grant a renewal or change in terms or conditions, or (3)
     compromise, compound or release any obligation, with any one or more
     Obligors, endorsers, or Guarantors of the Indebtedness as Lender deems
     advisable, without obtaining the prior written consent of Grantor, and no
     such act or failure to act shall affect Lender's rights against Grantor or
     the Collateral.

     All Collateral Secures Indebtedness. All Collateral shall be security for
     the security for the Indebtedness, whether the Collateral is located at one
     or more offices or branches of Lender. This will be the case whether or not
     the office or branch where Grantor obtained Grantor's loan knows about the
     Collateral or relies upon the Collateral as security.

     Collection of Collateral. Lender at Lender's option may, but need not,
     collect the Income and Proceeds directly from the Obligors. Grantor
     authorizes and directs the Obligors, if Lender decides to collect the
     Income and Proceeds, to pay and deliver to Lender all Income and Proceeds
     from the Collateral and to accept Lender's receipt for the payments.

     Power of Attorney. Grantor irrevocably appoints Lender as Grantor's
     attorney-in-fact, with full power of substitution, (a) to demand, collect,
     receive, receipt for, sue and recover all Income and Proceeds and other
     sums of money and other property which may now or hereafter become due,
     owing or payable from the Obligors in accordance with the terms of the
     Collateral; (b) to execute, sign and endorse any and all instruments,
     receipts, checks, drafts and warrants issued in payment for the Collateral;
     (c) to settle or compromise any and all claims arising under the
     Collateral, and in the place and stead of Grantor, execute and deliver
     Grantor's release and acquittance for Grantor; (d) to file any claim or
     claims or to take any action or institute or take part in any proceedings,
     either in Lender's own name or in the name of Grantor, or otherwise, which
     in the discretion of Lender may seem to be necessary or advisable; and (e)
     to execute in Grantor's name and to deliver to the Obligors on Grantor's
     behalf, at the time and in the manner specified by the Collateral, any
     necessary instruments or documents.

     Perfection of Security Interest. Upon Lender's request, Grantor will
     deliver to Lender any and all of the documents evidencing or constituting
     the Collateral. When applicable law provides more than one method of
     perfection of Lender's security interest, Lender may choose the method(s)
     to be used. Upon Lender's request, Grantor will sign and deliver any
     writings necessary to perfect Lender's security interest. Grantor hereby
     appoints Lender as Grantor's irrevocable attorney-in-fact for the purpose
     of executing any documents necessary to perfect, amend, or to continue the
     security interest granted in this Agreement or to demand termination of
     filings of other secured parties. This is a continuing Security Agreement
     and will continue in effect even though all or part of the Indebtedness is
     paid in full and even though for a period of time Grantor may not be
     indebted to Lender.

LENDER'S EXPENDITURES. If any action or proceeding is commenced that would
materially affect Lender's interest in the Collateral or if Grantor fails to
comply with any provision of this Agreement or any Related Documents, including
but not limited to Grantor's failure to discharge or pay when due any amounts
Grantor is required to discharge or pay under this Agreement or any Related
Documents, Lender on Grantor's behalf may (but shall not be obligated to) take
any action that Lender deems appropriate, including but not limited to
discharging or paying all taxes, liens, security interests, encumbrances and
other claims, at any time levied or placed on the Collateral and paying all
costs for insuring, maintaining and preserving the Collateral. All such
expenditures incurred or paid by Lender for such purposes will then bear
interest at the rate charged under the Note from the date incurred or paid by
Lender to the date of repayment by Grantor. All such expenses will become a part
of the Indebtedness and, at Lender's option, will (A) be payable on demand; (B)
be added to the balance of the Note and be apportioned among and be payable with
any installment payments to become due during either (1) the term of any
applicable insurance policy; or (2) the remaining term of the Note; or (C) be
treated as a balloon payment which will be due and payable at the Note's
maturity. The Agreement also will secure payment of these amounts. Such right
shall be in addition to all other rights and remedies to which Lender may be
entitled upon Default.

LIMITATIONS ON OBLIGATIONS OF LENDER. Lender shall use ordinary reasonable care
in the physical preservation and custody of the Collateral in Lender's
possession, but shall have no other obligation to protect the Collateral or its
value. In particular, but without limitation, Lender shall have no
responsibility for (A) any depreciation in value of the Collateral or for the
collection or protection of any Income and Proceeds from the Collateral, (B)
preservation of rights against parties to the Collateral or against third
persons, (C) ascertaining any maturities, calls, conversions, exchange, offers,
tenders, or similar matters relating to any of the Collateral, or (D) informing
Grantor about any of the above, whether or not Lender has or is deemed to have
knowledge of such matters. Except as provided above, Lender shall have no
liability for depreciation or deterioration of the Collateral.

DEFAULT. Each of the following shall constitute an Event of Default under this
Agreement:

     Payment Default. Grantor fails to make any payment due under the
     Indebtedness.

     Other Defaults. Grantor fails to comply with or to perform any other term,
     obligation, covenant or condition contained in this Agreement or in any of
     the Related Documents or to comply with or to perform any term, obligation,
     covenant or condition contained in any other agreement between Lender and
     Grantor.

     Default in Favor of Third Parties. Should Grantor or any Grantor default
     under any loan, extension of credit, security agreement, purchase or sales
     agreement, or any other agreement, in favor of any other creditor or person
     that may materially affect any of Grantor's property or Grantor's or any
     Grantor's ablility to repay the Indebtedness or perform their respective
     obligations under this Agreement or any of the Related Documents.

     False Statements. Any warranty, representation or statement made or
     furnished to Lender by Grantor or on Grantor's behalf under this Agreement
     or the Related Documents is false or misleading in any material respect,
     either now or at the time made or furnished or becomes false or misleading
     at any time thereafter.

     Defective Collateralization. This Agreement or any of the Related Documents
     ceases to be in full force and effect (including failure of any collateral
     document to create a valid and perfected security interest or lien) at any
     time and for any reason.

     Insolvency. The dissolution or termination of Grantor's existence as a
     going business, the insolvency of Grantor, the appointment of a receiver
     for any part of Grantor's property, any assignment for the benefit of
     creditors, any type of creditor workout, or the commencement of any
     proceeding under any bankruptcy or insolvency laws by or against Grantor.

     Creditor or Forfeiture Proceedings. Commencement of foreclosure or
     forfeiture proceedings, whether by judicial proceeding, self-help,
     repossession or any other method, by any creditor of Grantor or by any
     governmental agency against any collateral securing the Indebtedness. This
     includes a garnishment of any of Grantor's accounts, including deposit
     accounts, with Lender. However, this Event of Default shall not apply if
     there is a good faith dispute by Grantor as to the validity or
     reasonableness of the claim which is the basis of the creditor or
     forfeiture proceeding and if Grantor gives Lender written notice of the
     creditor or forfeiture proceeding and deposits with Lender monies or a
     surety bond for the creditor or forfeiture proceeding, in an amount
     determined by Lender, in its sole discretion, as being an adequate reserve
     or bond for the dispute.

     Events Affecting Guarantor. Any of the preceding events occurs with respect
     to guarantor, endorser, surety, or accommodation party of any of the
     Indebtedness or guarantor, endorser, surety, or accommodation party dies or
     becomes incompetent or revokes or disputes the validity of, or



                          COMMERCIAL PLEDGE AGREEMENT
                                  (Continued)                             Page 3
================================================================================
          liability under, any Guaranty of the Indebtedness.

          Adverse Change. A material adverse change occurs in Grantor's
          financial condition, or Lender believes the prospect of payment or
          performance of the Indebtedness is impaired.

     RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this
     Agreement, at any time thereafter, Lender may exercise any one or more of
     the following rights and remedies:

          Accelerate Indebtedness. Declare all Indebtedness, including any
          prepayment penalty which Grantor would be required to pay, immediately
          due and payable, without notice of any kind to Grantor.

          Collect the Collateral. Collect any of the Collateral and, at Lender's
          option and to the extent permitted by applicable law, retain
          possession of the Collateral while suing on the indebtedness.

          Sell the Collateral. Sell the Collateral, at Lender's discretion, as a
          unit or in parcels, at one or more public or private sales. Unless the
          Collateral is perishable or threatens to decline speedily in value or
          is of a type customarily sold on a recognized market, Lender shall
          give or mail to Grantor, and other persons as required by law, notice
          at least ten(10) days in advance of the time and place of any public
          sale, or of the time after which any private sale may be made.
          However, no notice need be provided to any person who, after an Event
          of Default occurs, enters into and authenticates an agreement waiving
          that person's right to notification of sale. Grantor agrees that any
          requirement of reasonable notice as to Grantor is satisfied if Lender
          mails notice by ordinary mail addressed to Grantor at the last address
          Grantor has given Lender in writing. If a public sale is held, there
          shall be sufficient compliance with all requirements of notice to the
          public by a single publication in any newspaper of general circulation
          in the county where the Collateral is located, setting forth the time
          and place of sale and a brief description of the property to be sold.
          Lender may be a purchaser at any public sale.

          Sell Securities. Sell any securities included in the Collateral in a
          manner consistent with applicable federal and state securities laws.
          If, because of restrictions under such laws, Lender is unable, or
          believes Lender is unable, to sell the securities in an open market
          transaction, Grantor agrees that Lender will have no obligation to
          delay sale until the securities can be registered. Then Lender may
          make a private sale to one or more persons or to a restricted group of
          persons, even though such sale may result in a price that is less
          favorable than might be obtained in an open market transaction. Such a
          sale will be considered commercially reasonable. If any securities
          held as Collateral are "restricted securities" as defined in the Rules
          of the Securities and Exchange Commission (such as Regulation D or
          Rule 144) or the rules of state securities departments under state
          "Blue Sky" laws, or if Grantor or any other owner of the Collateral is
          an affiliate of the issuer of the securities, Grantor agrees that
          neither Grantor, nor any member of Grantor's family, nor any other
          person signing this Agreement will sell or dispose of any securities
          of such issuer without obtaining Lender's prior written consent.

          Foreclosure. Maintain a judicial suit for foreclosure and sale of the
          Collateral.

          Transfer Title. Effect transfer of title upon sale of all or part of
          the Collateral. For this purpose, Grantor irrevocably appoints Lender
          as Grantor's attorney-in-fact to execute endorsements, assignments and
          instruments in the name of Grantor and each of them (if more than one)
          as shall be necessary or reasonable.

          Other Rights and Remedies. Have and exercise any or all of the rights
          and remedies of a secured creditor under the provisions of the Uniform
          Commercial Code, at law, in equity, or otherwise.

          Application of Proceeds. Apply any cash which is part of the
          Collateral, or which is received from the collection or sale of the
          Collateral, to reimbursement of any expenses, including any costs for
          registration of securities, commissions incurred in connection with a
          sale, attorney's fees and court costs, whether or not there is a
          lawsuit and including any fees on appeal, incurred by Lender in
          connection with the collection and sale of such Collateral and to the
          payment of the Indebtedness of Grantor to Lender, with any excess
          funds to be paid to Grantor as the interests of Grantor may appear.
          Grantor agrees, to the extent permitted by law, to pay any deficiency
          after application of the proceeds of the Collateral to the
          Indebtedness.

          Election of Remedies. Except as may be prohibited by applicable law,
          all of Lender's rights and remedies, whether evidenced by this
          Agreement, the Related Documents, or by any other writing, shall be
          cumulative and may be exercised singularly or concurrently. Election
          by Lender to pursue any remedy shall not exclude pursuit of any other
          remedy, and an election to make expenditures or to take action to
          perform an obligation of Grantor under this Agreement, after Grantor's
          failure to perform, shall not affect Lender's right to declare a
          default and exercise its remedies.

     ARBITRATION. (a) This paragraph concerns the resolution of any
     controversies or claims between the parties, whether arising in contract,
     tort or by statute, including but not limited to controversies or claims
     that arise out of or relate to: (1) this agreement (including any renewals,
     extensions or modifications); or (ii) any document related to this
     agreement; (collectively a "Claim").

     (b) At the request of any party to this agreement, any Claim shall be
     resolved by binding arbitration in accordance with the Federal Arbitration
     Act (Title 9, U. S. Code) (the "Act"). The Act will apply even though this
     agreement provides that it is governed by the law of a specified state.

     (c) Arbitration proceedings will be determined in accordance with the Act,
     the applicable rules and procedures for the arbitration of disputes of JAMS
     or any successor thereof ("JAMS"), and the terms of this paragraph. In the
     event of any inconsistency, the terms of this paragraph shall control.

     (d) The arbitration shall be administered by JAMS and conducted, unless
     otherwise required by law, in any U. S. state where real or tangible
     personal property collateral for this credit is located or if there is no
     such collateral, in the state specified in the governing law section of
     this agreement. All Claims shall be determined by one arbitrator; however,
     if Claims exceed $5,000,000, upon the request of any party, the Claims
     shall be decided by three arbitrators. All arbitration hearings shall
     commence within 90 days of the demand for arbitration and close within 90
     days of commencement and the award of the arbitrator(s) shall be issued
     within 30 days of the close of the hearing. However, the arbitrator(s),
     upon a showing of good cause, may extend the commencement of the hearing
     for up to an additional 60 days. The arbitrator(s) shall provide a concise
     written statement of reasons for the award. The arbitration award may be
     submitted to any court having jurisdiction to be confirmed and enforced.

     (e) The arbitrator(s) will have the authority to decide whether any Claim
     is barred by the statute of limitations and, if so, to dismiss the
     arbitration on that basis. For purposes of the application of the statute
     of limitations, the service on JAMS under applicable JAMS rules of a notice
     of Claim is the equivalent of the filing of a lawsuit. Any dispute
     concerning this arbitration provision or whether a Claim is arbitratable
     shall be determined by the arbitrator(s). The arbitrator(s) shall have the
     power to award legal fees pursuant to the terms of this agreement.

     (f) This paragraph does not limit the right of any part to: (i) exercise
     self-help remedies, such as but not limited to, setoff; (ii) initiate
     judicial or nonjudicial foreclosure against any real or personal property
     collateral; (iii) exercise any judicial or power of sale rights, or (iv)
     act in a court of law to obtain an interim remedy, such as but not limited
     to, injunctive relief, writ of possession or appointment of a receiver, or
     additional or supplementary



                          COMMERCIAL PLEDGE AGREEMENT
                                   (Continued)                            Page 4
================================================================================

     remedies.

     (g) The filing of a court action is not intended to constitute a waiver of
     the right of any party, including the suing party, thereafter to require
     submittal of the Claim to arbitration.

     (h) all obligations, debts and liabilities, including any swap, option or
     forward obligations, plus interest thereon, of Borrower to Lender, or any
     one or more of them, as well as all claims by Lender against Borrower or
     any other party to this Agreement or any one or more of them, whether now
     existing or hereafter arising, whether related or unrelated to the purpose
     of the Note, whether voluntary or otherwise, whether due or not due,
     direct or indirect, absolute or contingent, liquidated or unliquidated and
     whether Borrower or any other party to this Agreement may be liable
     individually or jointly with others, whether obligated as guarantor,
     surety, accommodation party or otherwise, and whether recovery upon such
     amounts may be or hereafter may become barred by any stature of
     limitations, and whether the obligation to repay such amounts may be or
     hereafter may become otherwise unenforceable. Unless the Borrower and any
     other party to this Agreement shall have otherwise agreed in writing or
     received written notice thereof, this Agreement shall not secure any
     obligation owing to Lender which constitutes "consumer credit" subject to
     the disclosure requirements of the Federal Truth in Lending Act and any
     regulations promulgated thereunder.

     ADDITIONAL DEFAULTS. Each of the following shall constitute an event of
     default ("Event of Default)" under this Agreement:

     Event of Default Under Related Documents. A default or event of default
     occurs under the terms of any Related Document executed by Borrower or any
     guarantor, pledgor, accommodation party or other obligor.

     Revocation or Termination of Trust. If any Borrower, grantor, guarantor,
     pledgor, accommodation party or other obligor on the indebtedness secured
     hereunder or any of the related documents is a trust or the trustee(s) of a
     trust, such trust is revoked or otherwise terminated or all or a
     substantial part of such trust's assets are distributed or otherwise
     disposed of, or in the case of a revocable trust, the grantor of such trust
     dies.

     Default by Affiliates. Any affiliate of Borrower defaults under any loan,
     extension of credit, security agreement, purchase or sales agreement, or
     any other agreement, in favor of Lender or any other creditor.

     COUNTERPART SIGNATURES. This Agreement may be executed in any number of
     counterparts, each of which when so executed shall be deemed to be origal
     and all of which taken together shall constitute one and the same
     agreement.

     COLLATERAL MAINTENANCE AND NOTICE RIDER. A rider, titled "Collateral
     Maintenance and Notice Rider," is attached to this Agreement and by this
     reference is made a part of this Agreement just as if all the provisions,
     terms and conditions of the rider have been fully set forth in this
     Agreement.

     ADDRESS FOR NOTICES. Notwithstanding anything to the contrary herein, all
     notices and communications to the Lender shall be directed to the following
     address:

               Bank of America, N.A.
               Los Angeles CLSC, Attn: Notice Desk
               333 South Beaudry Avenue, 11th Floor
               Los Angeles, CA 90017-1486.

     MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part
     of this Agreement:

          Amendments. This Agreement, together with any Related Documents,
          constitutes the entire understanding and agreement of the parties as
          to the matters set forth in this Agreement. No alteration of or
          amendment to this Agreement shall be effective unless given in writing
          and signed by the party or parties sought to be charged or bound by
          the alteration or amendment.

          Attorneys' Fees; Expenses. Grantor agrees to pay upon demand all of
          Lender's costs and expenses, including Lender's attorneys' fees and
          Lender's legal expenses, incurred in connection with the enforcement
          of this Agreement. Lender may hire or pay someone else to help enforce
          this Agreement, and Grantor shall pay the costs and expenses of such
          enforcement. Costs and expenses include Lender's attorneys' fees and
          legal expenses whether or not there is a lawsuit, including attorneys'
          fees and legal expenses for bankruptcy proceedings (including efforts
          to modify or vacate any automatic stay or injunction), appeals, and
          any anticipated post-judgement collection services. Grantor also shall
          pay all court costs and such additional fees as may be directed by the
          court.

          Caption Headings. Caption headings in this Agreement are for
          convenience purposes only and are not to be used to interpret or
          define the provisions of this Agreement.

          Governing Law. This Agreement will be governed by, construed and
          enforced in accordance with federal law and the laws of the State of
          California. This Agreement has been accepted by Lender in the State of
          California.

          Choice of Venue. If there is a lawsuit, Grantor agrees upon Lender's
          request to submit to the jurisdiction of the courts of any County,
          State of California.

          No Waiver by Lender. Lender shall not be deemed to have waived any
          rights under this Agreement unless such waiver is given in writing and
          signed by Lender. No delay or omission on the part of Lender in
          exercising any right shall operate as a waiver of such right or any
          other right. A waiver by Lender of a provision of this Agreement shall
          not prejudice or constitute a waiver of Lender's right otherwise to
          demand strict compliance with that provision or any other provision of
          this Agreement. No prior waiver by Lender, nor any course of dealing
          between Lender and Grantor, shall constitute a waiver of any of
          Lender's rights or of any of Grantor's obligations as to any future
          transactions. Whenever the consent of Lender is required under this
          Agreement, the granting of such consent by Lender in any instance
          shall not constitute continuing consent of subsequent instances where
          such consent is required and in all cases such consent may be granted
          or withheld in the sole discretion of Lender.

          Preference Payments. Any monies Lender pays because of an asserted
          preference claim in Grantor's bankruptcy will become a part of the
          Indebtedness and, at Lender's option, shall be payable by Grantor as
          provided in this Agreement.

          Notices. Any notice required to be given under this Agreement shall be
          given in writing, and shall be effective when actually delivered, when
          actually received by telefacsimile (unless otherwise required by law),
          when deposited with a nationally recognized overnight courier, or, if
          mailed, when deposited in the United States mail, as first class,
          certified or registered mail postage prepaid, directed to the
          addresses shown near the beginning of this Agreement. Any party may
          change its address for notices under this Agreement by giving formal
          written notice to the other parties, specifying that the purpose of
          the notice is to change the party's address. For notice purposes,
          Grantor agrees to keep Lender informed at all times of Grantor's
          current address. Unless otherwise provided or required by law, if
          there is more than one Grantor, any notice given by Lender to any
          Grantor is deemed to be notice given to all Grantors

          Waiver of Co-Obligor's Rights. If more than one person is obligated
          for the Indebtedness, Grantor irrevocably waives, disclaims and
          relinquishes all claims against such other person which Grantor has or
          would otherwise have by virtue of payment of the Indebtedness or any
          part

          See Exhibit Attached



                          COMMERCIAL PLEDGE AGREEMENT
                                  (Continued)                             Page 5
================================================================================

         thereof, specifically including but not limited to all rights of
         indemnity, contribution or exoneration.

         Severability. If a court of competent jurisdiction finds any provision
         of this Agreement to be illegal, invalid, or unenforceable as to any
         circumstance, that finding shall not make the offending provision
         illegal, invalid, or unenforceable as to any other circumstance. If
         feasible, the offending provision shall be considered modified so that
         it becomes legal, valid and enforceable. If the offending provision
         cannot be so modified, it shall be considered deleted from this
         Agreement. Unless otherwise required by law, the illegality,
         invalidity, or unenforceability of any provision of this Agreement
         shall not affect the legality, validity or enforceability of any other
         provision of this Agreement.

         Successors and Assigns. Subject to any limitations stated in this
         Agreement on transfer of Grantor's interest, this Agreement shall be
         binding upon and inure to the benefit of the parties, their successors
         and assigns. If ownership of the Collateral becomes vested in a person
         other than Grantor, Lender, without notice to Grantor, may deal with
         Grantor's successors with reference to this Agreement and the
         Indebtedness by way of forbearance or extension without releasing
         Grantor from the obligations of this Agreement or liability under the
         Indebtedness.

         Time is of the Essence. Time is of the essence in the performance of
         this Agreement.

         Waive Jury. All parties to this Agreement hereby waive the right to any
         jury trial in any action, proceeding, or counterclaim brought by any
         party against any other party.

DEFINITIONS. The following capitalized words and terms shall have the following
meanings when used in this Agreement. Unless specifically stated to the
contrary, all references to dollar amounts shall mean amounts in lawful money of
the United States of America. Words and terms used in the singular shall include
the plural, and the plural shall include the singular, as the context may
require. Words and terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code:

         Agreement. The word "Agreement" means this Commercial Pledge Agreement,
         as this Commercial Pledge Agreement may be amended or modified from
         time to time, together with all exhibits and schedules attached to this
         Commercial Pledge Agreement from time to time.

         Borrower. The word "Borrower" means Newport Corporation, and all other
         persons and entities signing the Note in whatever capacity.

         Collateral. The word "Collateral" means all of Grantor's right, title
         and interest in and to all the Collateral as described in the
         Collateral Description section of this Agreement.

         Default. The word "Default" means the Default set forth in this
         Agreement in the section titled "Default".

         Event of Default. The words "Event of Default" mean any of the events
         of default set forth in this Agreement in the default section of this
         Agreement.

         Grantor. The word "Grantor" means Newport Corporation.

         Guaranty. The word "Guaranty" means the guaranty from guarantor,
         endorser, surety, or accommodation party to Lender, including without
         limitation a guaranty of all or part of the Note.

         Income and Proceeds. The words "Income and Proceeds" mean all present
         and future income, proceeds, earnings, increases, and substitutions
         from or for the Collateral of every kind and nature, including without
         limitation all payments, interest, profits, distributions, benefits,
         rights, options, warrants, dividends, stock dividends, stock splits,
         stock rights, regulatory dividends, subscriptions, monies, claims for
         money due and to become due, proceeds of any insurance on the
         Collateral, shares of stock of different par value or no par value
         issued in substitution or exchange for shares included in the
         Collateral, and all other property Grantor is entitled to receive on
         account of such Collateral, including accounts, documents, instruments,
         chattel paper, and general intangibles.

         Indebtedness. The word "Indebtedness" means the indebtedness evidenced
         by the Note or Related Documents, including all principal and interest
         together with all other indebtedness and costs and expenses for which
         Borrower or Grantor or any other borrower, guarantor, pledgor, obligor
         or accommodation party is responsible under this Agreement or under any
         of the Related Documents, including any swap, option or forward
         obligations.

         Lender. The word "Lender" means Bank of America, N.A., its successors
         and assigns.

         Note. The word "Note" means (i) the Note executed by Borrower in the
         principal amount of $5,000,000 dated September 25, 2002, (ii) any other
         promissory note, credit agreement or letter of credit agreement now or
         hereafter executed by Borrower in favor of Lender with respect to the
         indebtedness, including without limitation those promissory notes,
         credit agreements and letter of credit agreements described on any
         schedule or exhibit attached to this Agreement from time to time, and
         (iii) any renewals of, extensions of, modifications of, refinancings
         of, consolidations of, and substitutions for any of the foregoing.

         Obligor. The word "Obligor" means without limitation any and all
         persons obligated to pay money or to perform some other act under the
         Collateral.

         Property. The word "Property" means all of Grantor's right, title and
         interest in and to all the Property as described in the "Collateral
         Description" section of this Agreement.

         Related Documents. The words "Related Documents" mean all promissory
         notes, credit agreements, loan agreements, environmental agreements,
         guaranties, security agreements, mortgages, deeds of trust, security
         deeds, collateral mortgages, and all other instruments, agreements and
         documents, whether now or hereafter existing, executed in connection
         with the Indebtedness.

GRANTOR HAS READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS COMMERCIAL PLEDGE
AGREEMENT AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED SEPTEMBER 25, 2002.

GRANTOR:



NEWPORT CORPORATION

By: /s/ William R. Abbott                 By: /s/ Jeffrey B. Coyne
   ------------------------------------      --------------------------------
    William R. Abbott, VP of Finance          Jeffrey B. Coyne, VP & General
    & Treasurer of Newport Corporation        Counsel of Newport Corporation



                           COMMERCIAL PLEDGE AGREEMENT
                                  (Continued)                             Page 6
================================================================================

================================================================================



                     EXHIBIT TO COMMERCIAL PLEDGE AGREEMENT

This EXHIBIT TO COMMERCIAL PLEDGE AGREEMENT is attached to an by this reference
is made a part of the Commercial Pledge Agreement, dated September 25, 2002, and
executed in connection with a loan or other financial accommodations between
BANK OF AMERICA, N.A. and Newport Corporation.

1.1  Exceptions to Default.

     (a) The paragraph entitled "Payment Default", under DEFAULT, is amended to
         read as follows:

         "Payment Default. Grantor fails to make any payment when due under the
         Indebtedness within five (5) business days of the date due."

     (b) The paragraph entitled "Other Defaults", under DEFAULT, is amended to
         read as follows:

         "Other Default. Grantor fails to comply with or to perform any other
         term, obligation, covenant or condition contained in this Agreement or
         in any of the Related Documents or to comply with or to perform any
         term, obligation, covenant or condition contained in any other
         agreement between Lender and Grantor, and does not cure such failure
         within thirty (30) days following notice from Lender of such failure."

     (c) The paragraph entitled "Default in Favor of Third Parties", under
         DEFAULT, is amended to read as follows:

         "Default in Favor Third Parties. Should Grantor or any Grantor default
         under any loan, extension of credit, security agreement, purchase or
         sales agreement, or any other agreement, in favor of any other creditor
         or person that may materially affect any of Grantor's property or
         Grantor's ability to repay the Indebtedness or perform their respective
         obligations under this Agreement or any of the Related Documents, and
         does not cure such failure within thirty (30) days following receipt of
         notice of such default."

1.2  Exception to Arbitration.

     (a) Subparagraph (d) of the paragraph entitled "Arbitration" is amended to
         read as follows:

         "(d) the arbitration shall be administered by JAMS and conducted,
         unless otherwise required by law, in Orange County, California. All
         Claims shall be determined by one arbitrator; however, if Claims exceed
         $5,000,000, upon the request of any party, the Claims shall be decided
         by three arbitrators. All arbitration hearings shall commence within 90
         days of the demand for arbitration and close within 90 days of
         commencement and the award of the arbitrator(s) shall be issued within
         30 days of the close of the hearing. However, the arbitrator(s), upon a
         showing of good cause, may extend the commencement of the hearing for
         up to an additional 60 days. The arbitrator(s) shall provide a concise
         written statement of reasons for the award. The arbitration award may
         be submitted to any court having jurisdiction to be confirmed and
         enforced."

1.3  Exceptions to Miscellaneous Provisions.

     (a) The paragraph entitled "Choice of Venue", under MISCELLANEOUS
         PROVISIONS, is amended to read as follows:

         "Choice of Venue. If there is a lawsuit, Grantor agrees upon Lender's
         request to submit to the jurisdiction of the courts of Orange County,
         State of California."



THIS EXHIBIT A TO COMMERCIAL PLEDGE AGREEMENT IS EXECUTED ON SEPTEMBER 25, 2002.

GRANTOR:

NEWPORT CORPORATION

By: /s/ William R. Abbott
   ------------------------
        William R. Abbott, VP of Finance &
        Treasurer of Newport Corporation

By: /s/ Jeffrey B. Coyne
   ------------------------
        Jeffrey B. Coyne, VP & General Counsel
        of Newport Corporation


LENDER:

BANK OF AMERICA, N.A.

By: /s/ C K Goodfellow
   ------------------------
        Authorized Signer

EX-99.1

Exhibit 99.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

          I, Robert G. Deuster, Chairman, President and Chief Executive Officer of Newport Corporation (the “Company”), certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that (i) the Quarterly Report on Form 10-Q of the Company for the quarterly period ended September 30, 2002 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of the Company. 

/s/ ROBERT G. DEUSTER

Robert G. Deuster
Chairman, President and Chief Executive Officer

EX-99.2

Exhibit 99.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

          I, Charles F. Cargile, Vice President and Chief Financial Officer of Newport Corporation (the “Company”), certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that (i) the Quarterly Report on Form 10-Q of the Company for the quarterly period ended September 30, 2002 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (ii) the information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of the Company. 

/s/ CHARLES F. CARGILE

Charles F. Cargile
Vice President and Chief Financial Officer