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

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED JUNE 30, 2002

Commission file number 0-20839

DUPONT PHOTOMASKS, INC.
(Exact name as specified in our charter)

131 Old Settlers Boulevard
Round Rock, Texas 78664
(Address of our principal executive offices)

Our telephone number, including area code: (512) 310-6500

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

Securities registered pursuant to Section 12(g) of the Act:
Common stock ($.01 par value)
Preferred share purchase rights

        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 ý    No o

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

        Aggregate market value of voting stock held by nonaffiliates (excludes outstanding shares beneficially owned by directors and executive officers and shares held by E. I. du Pont de Nemours and Company) as of September 6, 2002, was approximately $350.6 million. As of such date, 17,992,942 shares of the common stock, $.01 par value, were outstanding.

Documents Incorporated by Reference
(Specific pages incorporated are indicated under the applicable Item herein):

DUPONT PHOTOMASKS, INC.

        Unless otherwise indicated, "we," "us" and "our" mean DuPont Photomasks, Inc. and "DuPont" means E. I. du Pont de Nemours and Company or one of its subsidiaries. We have licensed from DuPont use of the tradename "DuPont" and the DuPont in Oval logo. All other trademarks or tradenames referred to in this document are the property of their respective owners. References in this document to "$" or "dollars" are to United States of America, or U.S., currency. Our fiscal year ends June 30.

TABLE OF CONTENTS

Note on Incorporation by Reference

        Throughout this report, various information and data are incorporated by reference to portions of our 2002 annual meeting and proxy statement. Any reference in this report to disclosures in our 2002 annual meeting and proxy statement shall constitute incorporation by reference of that specific material into this Form 10-K.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

        This annual report on Form 10-K contains 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. All statements other than historical or current facts, including, without limitation, statements about our business strategy, plans and objectives of management and our future prospects, are forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from these expectations. Such risks and uncertainties include, without limitation, the following:

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Substantially all of our sales are derived from semiconductor manufacturers; downturns in the semiconductor industry could lead to a decrease in the demand for our products;



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Our sales are characterized by short-term orders and shipment schedules without a significant backlog for products. As a result, substantially all of our sales in any quarter are dependent upon orders received during that quarter, which causes significant variability of our operating results and limits our ability to respond to a changing business environment;



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We may be unable to obtain the additional capital required to fund our existing debt obligations, our planned expansion or changes of operations and manufacturing capacity;



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Our business requires that we incur significant fixed costs; consequently, our operating results may be adversely affected if our production capacity is not fully utilized;



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Rapid technological change and new product introductions and enhancements characterize the photomask and semiconductor industries; we may be unable to anticipate, respond to or utilize rapidly changing technologies;



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Our market is highly competitive and subject to pricing pressures;



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We may experience manufacturing difficulties, or be subject to increased costs or production capacity constraints in the future; and



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Other risks indicated below under the caption "Risk Factors."

        These risks and uncertainties are beyond our control and, in many cases, we cannot predict the risks and uncertainties that could cause our actual results to differ materially from those indicated by the forward-looking statements. When used in this report, the words "believes," "plans," "expects," "anticipates," "intends," "continue," "may," "will," "could," "should," "future," "potential," "estimate," or the negative of such terms and similar expressions as they relate to us or our management, are intended to identify forward-looking statements.

PART I

Item 1. Business

The Company

        We are a leading global provider of microimaging solutions, developing and producing advanced photomasks, a key enabling technology used in the manufacture of semiconductor and other microelectronic devices; pellicles, the protective covers for photomasks; and electronic design automation, or EDA, software. Based on revenues in calendar 2002, we are one of the largest photomask manufacturers in the world. Photomasks are high-purity quartz or glass plates containing precision images of integrated circuits and are used as masters by semiconductor manufacturers to optically transfer these images onto semiconductor wafers. Photomasks are a necessary component in the production of semiconductors, and advanced photomask technologies are critical to enabling the manufacture of increasingly complex semiconductor devices. We manufacture a broad range of

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photomasks based on customer-supplied design data, including photomasks that meet the tightest design specifications required by semiconductor manufacturers today. We sell our products to over 300 customers and customer sites in over 17 different countries. We believe that we are a primary merchant photomask supplier for many of our customers, including Affymetrix, Agere Systems, American Microsystems, Atmel, Agilent Technologies, Cypress, Fujitsu, Hewlett-Packard, Hynix Semiconductor, IBM, Linear Tech, LSI Logic, Infineon, Maxim Integrated Products, Micron Technology, Motorola, National Semiconductor, Philips, Samsung, STMicroelectronics, Texas Instruments and UMC Group. We operate globally from 11 manufacturing facilities in North America, Europe and Asia, including two joint venture facilities, and have under construction a twelfth site in Germany. We also operate the DPI Reticle Technology Center, LLC, or RTC, a joint venture facility dedicated to advanced photomask technology development and fabrication of leading-edge photomasks. Information regarding our operating segments is presented in our consolidated financial statements. We were incorporated in Texas on June 25, 1985, and were reincorporated in Delaware on November 9, 1995. Our principal executive offices are located at 131 Old Settlers Boulevard, Round Rock, Texas 78664, and our telephone number at this location is (512) 310-6500.

Industry Background

        The demand for photomasks is driven largely by increases in the number of semiconductor designs and the complexity of integrated circuits. Integrated circuit designs consist of a series of separate patterns, each of which must be imaged onto a different photomask. The resulting series of photomasks is then used to successively layer the circuit patterns onto the semiconductor wafer. As a result, photomasks are a necessary component in the typical production of semiconductors, and advanced photomask technologies are critical to enabling the manufacture of increasingly complex semiconductor devices. In addition, advanced photomask technologies such as phase shift masks and optical proximity correction masks can extend the optical resolution of existing photolithography equipment, thereby delaying the otherwise significant investment required for new semiconductor manufacturing equipment. Growth in the photomask market has not always correlated with increases in semiconductor sales. According to an industry source, the total worldwide market for photomasks has grown from approximately $1.4 billion in calendar 1995 to approximately $2.5 billion in calendar 2001. We estimate that the photomask markets in North America, Europe and non-Japan Asia collectively represented approximately 65 percent of the worldwide market in calendar 2001.

        Historically, photomasks were generally designed and manufactured internally by semiconductor manufacturers in captive production facilities. Since the mid-1980s, however, the market for merchant photomask manufacturers like us has grown substantially. We estimate that during calendar 2001, merchant photomask sales in North America, Europe and non-Japan Asia were approximately $1.0 billion. As a result of a number of factors, including the increasing complexity and pace of technological change in the photomask industry, the emergence of reliable merchant photomask manufacturers and a trend by semiconductor manufacturers to focus capital resources on their core business, a number of semiconductor manufacturers have divested their captive photomask operations and chosen to rely on merchant photomask manufacturers for their photomask needs. Finally, the increasing capital requirements and competitive pressures in the photomask market have contributed to a consolidation among merchant photomask manufacturers.

        As the share of the photomask market served by merchant manufacturers has increased, semiconductor manufacturers have become increasingly reliant on global manufacturers that can reliably deliver advanced photomasks. Consequently, many semiconductor manufacturers have developed strategic relationships with leading merchant photomask manufacturers to maintain a consistent source of high quality photomasks.

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        We believe that, over the long-term, the market for photomasks in the semiconductor manufacturing process will increase due to the following trends:

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Proliferation of Semiconductor Applications. Semiconductor devices of all types are continuing to proliferate into products, including cellular telephones, pagers, automobiles, medical products, household appliances, Internet and communications infrastructure, personal digital assistants, digital cameras, MP3 music players and other consumer electronic products. We believe that the proliferation of semiconductor applications will lead to an increase in semiconductor design activity and resulting demand for photomasks.



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Customization of Semiconductor Designs. Growing demand for customized semiconductors generates increased demand for photomasks as each new type of semiconductor device requires additional new and often more advanced photomasks. Examples of this customization include application specific integrated circuits, or ASIC, application-specific standard products, or ASSP, system-on-a-chip and a growing variety of memory products. ASICs and ASSPs remain the preferred integrated circuit solutions for the production of a wide variety of electronic systems.



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Increasing Semiconductor Device Complexity. Efforts to improve the performance and functionality of semiconductor devices have resulted in more complex devices. Complex devices require additional layers of patterns, and additional photomasks on which the patterns are imaged, to be manufactured. For example, the number of photomasks typically required for the manufacture of complex logic devices in 1991 was 14 as compared to 30 or more photomasks required for today's complex logic devices.



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Decreasing Size of Semiconductor Designs. The ability to produce smaller and more powerful semiconductor chips at lower costs drives the semiconductor industry's growth. As semiconductor line widths become as small as and smaller than the wavelength of the illumination sources in optical lithography, the semiconductor manufacturing process becomes increasingly dependent upon high precision photomasks to deliver process results to more demanding specifications and tolerances. Development of increasingly smaller design features is likely to generate increased demand for advanced photomasks that can accurately and reliably replicate intricate design features.



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Shorter Product Lifecycles. Product lifecycles have been decreasing for many types of electronic products, including cellular telephones, Internet-capable devices and other consumer electronic products. Each new product generation tends to require design changes to semiconductor content. We believe that this trend will continue to increase semiconductor design activity and the resulting demand for photomasks.

Strategy

        Our objective is to be the world's premier global provider of microimaging solutions, by providing the finest service and most advanced technology to our customers through the following strategies:

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Advance Our Technological Position. We intend to continue to invest in research and development and advanced equipment to enhance our technological position. We believe this strategy is essential to continuing to develop and deliver leading-edge photomasks, which are required to meet the demands of the leading global semiconductor manufacturers. We also believe that by providing leading-edge photomasks, such as advanced binary masks, phase shift masks and optical proximity correction masks, we can position ourselves as the preferred provider of photomasks to our customers.



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Expand Our Strategic Relationships with Customers. A key component of our ongoing strategy is to continue to develop and expand our strategic relationships with the world's leading semiconductor manufacturers, including AMD, Agere Systems, Agilent Technologies, Cypress,

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Hewlett-Packard, Hynix Semiconductor, Infineon, IBM, Micron Technology, Motorola, Texas Instruments, UMC Group and Xilinx. We believe these relationships will help to solidify our position as, or provide us the opportunity to become, the primary supplier of advanced photomasks and key enabling technologies to our customers. In addition, we believe that our participation in the RTC has allowed us to leverage the combined strength and insights of the participating companies to accelerate the development of advanced photomasks. The addition of the Advanced Mask Technology Center, GmbH & Co., KG, or AMTC, our German partnership with AMD and Infineon, will allow us to expand that leverage and further enables us to provide many of the benefits of those developments to our customers.

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Capitalize on Our Established Global Manufacturing and Customer Service Support Network. Since 1991, we have operated globally with integrated manufacturing facilities in North America, Europe and Asia. Our global software, computing and network systems integrate the manufacturing and delivery capabilities of these facilities, enabling efficient resource allocation and information sharing. We believe our ability to consistently deliver high quality products and superior customer service, on a timely basis, to each customer's various facilities around the world provides us with a competitive advantage.



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Leverage Strategic Relationships with Key Suppliers. We benefit from beta-testing advanced production equipment and materials in research and development partnerships with strategic customers. We also believe that our strategic relationships with leading equipment suppliers, such as ETEC Systems (an Applied Materials company), Micronic, JEOL and KLA-Tencor, help enhance our ability to provide our customers with early access to the most advanced photomasks. As a result of all of the foregoing measures, we believe we can rapidly deliver to our customers the latest advances in photomask technologies. In addition, we have a strategic alliance with Schott Lithotec AG, or Schott, to develop and produce advanced photoblanks. Photoblanks are highly polished quartz or glass plates coated with ultra-thin layers of chrome and photoresist and are a key material used in the production of photomasks.



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Pursue New Business Opportunities. We believe that the dynamics of the semiconductor and microelectronics industries, and the growing importance of precision imaging in emerging technologies, are providing us with new business opportunities. These opportunities include marketing our photomask products and services into emerging markets such as biochips, optical components and microelectromechanical systems, or MEMS. In addition, as design complexity continues to increase, we are developing a suite of software tools that enhances the manufacturability of deep subwavelength designs. We will continue to evaluate our core competencies and apply resources accordingly, including acquisitions, divestitures or joint venture partnerships with other companies, in markets that we believe can benefit our customers and develop into profitable growth initiatives.

Products and Technology

Photomasks

        Photomasks, also called masks, are high-purity quartz or glass plates containing precise, microscopic images of integrated circuits that are used as masters—similar to negatives in a photographic process—to optically transfer the image of circuit patterns onto semiconductor wafers during the fabrication process. In producing a semiconductor, a photomask is usually placed in a photolithography tool, called a stepper, to make numerous reproductions of the pattern image on semiconductor wafers. This reproduction is typically accomplished by passing light through the photomask onto a photoresist that has been spin-coated onto the surface of the semiconductor wafer. The areas of the photoresist that have been exposed to light are then dissolved by chemical developers and subjected to further processing, such as etching, ion implantation and metal deposition. Successive steps of lithography, deposition and processing gradually create the multiple layers of conducting,

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semiconducting and insulating patterns that make up the millions of transistors found in a modern semiconductor device.

        We manufacture photomasks in accordance with semiconductor design and specification data provided on a confidential basis by our customers. The final design of each integrated circuit results in a set of precise individual circuit patterns to be imaged onto a series of typically 15 to 30 separate photomasks. The complete set of patterned photomasks is required to manufacture the customer's integrated circuit design. Upon receipt of a customer's circuit design, we convert the design to pattern data, which controls an electron beam or laser beam that exposes the circuit pattern onto a thin layer of photosensitive polymer, called a photoresist, covering the opaque chrome layer (or other material such as molysilicide) of the photoblank. Chemical developers dissolve the exposed areas and the thin chrome layer of the photoblank is etched to replicate the customer design pattern on the photomask. Subsequently, the photomask is inspected for defects, its critical dimensions are confirmed and any defects are repaired. Pellicles are then mounted onto the masks and the masks are delivered to the customer.

        We manufacture a broad range of photomasks for varying customer applications, including applications requiring the use of leading-edge photomasks. We manufacture these products using multiple production techniques, including electron beam and laser beam exposure as well as lower cost optical exposure techniques.

        We have developed advanced photomask products for customers using leading-edge lithography technologies in three categories:

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Advanced binary masks. Advanced binary photomasks are high quality photomasks manufactured with tight tolerances that permit our customers to use a variety of lithography technologies.



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Phase shift masks. Phase shift masks alter the phase of the light passing through the photomask, permitting improved depth of focus and resolution on the wafer, and have additional unique characteristics.



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Optical proximity correction masks. Optical proximity correction masks contain submicron features that help minimize optical distortions on the semiconductor wafer and, therefore, permit improved image fidelity. These masks also typically require extremely tight specifications.

        The demand for these products has grown during the past three years as customers search for more cost-effective, less capital-intensive methods for improving current semiconductor fabrication yields and shrinking feature sizes. All three of these product categories provide opportunities for semiconductor manufacturers to produce more advanced products with existing lithography equipment. Therefore, we expect these advanced photomasks to enable semiconductor manufacturers to delay significant capital investment in new generation steppers.

Materials

        Photomasks are manufactured from photoblanks. The photomask is protected from particle contamination by an ultra-thin, frame-mounted transparent film called a pellicle. The pellicle, when mounted on the photomask, creates a sealed, contamination-free environment for the photomask pattern. We manufacture pellicles and, until recently, photoblanks. We believe that our knowledge of materials used in the production of photoblanks and pellicles gives us a competitive advantage in managing the supply, quality and cost of our principal component materials. We also sell a limited number of pellicles to third parties.

Electronic Design Automation Software

        In March 2002, we acquired the assets of and hired the employees of BindKey Technologies, Inc., or BindKey, a provider of EDA software. We are developing a suite of software tools that ensures

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manufacturability of deep subwavelength designs during the design phase and we believe that these productswill significantly reduce the design cycle time of integrated circuits. In the future we plan to launch new products that enhance yields by creating chip designs that are easier to manufacture.

Global Manufacturing and Operations

        Since 1991, we have operated globally with established manufacturing facilities in North America, Europe and Asia. In fiscal 2002, approximately 50 percent of our total sales were produced in North America, approximately 18 percent in Europe and approximately 32 percent in Asia. In North America, we operate photomask manufacturing facilities in Round Rock, Texas, Santa Clara, California and Kokomo, Indiana, and a pellicle manufacturing facility in Danbury, Connecticut. In Europe, our manufacturing facilities are located in Corbeil-Essonnes, France, Rousset, France and Hamburg, Germany. We, with our AMTC joint venture partners, currently have a new facility under construction in Dresden, Germany. In Asia, we operate manufacturing facilities in Ichon, Korea and Singapore, and we operate joint venture manufacturing facilities in Shanghai, China and Hsinchu, Taiwan. We serve semiconductor manufacturers in Japan through our support office in Tokyo, Japan and primarily through our manufacturing facilities in Ichon, Korea and Shanghai, China.

        We believe that our global presence is important for meeting the supply needs of multi-national customers on a timely basis. Moreover, each of our manufacturing facilities is connected by our global software, computing and network system, which allows these facilities to transfer confidential customer design data and manufacturing instructions rapidly and coordinate manufacturing responsibility with our other facilities. By being able to transfer information throughout the world with this network, we can better optimize resources, thereby lowering production costs while providing effective customer service on a local level.

        Virtually all of our manufacturing sites are ISO 9002 or QS9000TE and ISO 14001 qualified. We manufacture photomasks in clean rooms designed to provide a contamination-free, temperature and humidity controlled environment. These clean rooms are similar to those used in the manufacture of semiconductors. Our historical emphasis on product research and development has carried over to process technology and has resulted in the development of production facilities equipped with state-of-the-art manufacturing equipment.

Backlog

        Our backlog was $7.3 million, $7.4 million and $10.1 million as of June 30, 2000, 2001 and 2002, respectively. We do not believe that backlog is a meaningful indicator of sales that can be expected for any period, and there can be no assurance that the backlog at any point in time will translate into sales in any subsequent period.

Customers

        We are a primary photomask supplier to many of the leading global semiconductor manufacturers. While the vast majority of our sales are to customers in the semiconductor industry, we also supply photomasks for producing disk drive heads, MEMS, displays, and biochips. Our largest semiconductor customers include the following:

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        In fiscal 2000, Texas Instruments accounted for approximately 12 percent of our revenues. In fiscal 2001, Texas Instruments and IBM accounted for approximately 14 percent and 10 percent of our revenues, respectively. In fiscal 2002, Texas Instruments and UMC Group accounted for approximately 13 percent and 10 percent of our revenues, respectively. Our ten largest customers, in the aggregate, accounted for more than 60 percent of our revenues in each of fiscal years 2000, 2001 and 2002.

        We have multi-year supply agreements with some of our customers, including Agilent Technologies, Agere Systems, Cypress, Hewlett-Packard, Hynix Semiconductor, IBM, Infineon, Xilinx and UMC Group. During their term, most of these agreements generally provide us with a minimum volume or percentage of purchases, subject to various conditions such as quality of our service and timeliness of delivery.

        In addition, we have received advance payments for future delivery of photomasks to be used in the production of leading-edge semiconductor devices from several customers. We also have entered into joint technology development agreements with Infineon Technologies, Advanced Micro Devices, Cypress and Xilinx.

Worldwide Sales and Support

        Each photomask is unique and we work closely with each customer to define and communicate the precise specifications required by the customer. We sell and service our products principally through our employees based at our manufacturing sites throughout the world.

        We have established customer service centers inside some of our customers' design centers and semiconductor wafer fabrication facilities. Employees located at these centers routinely interact with customer engineers to improve the accuracy of the customers' design data and documentation and ensure that customers' orders receive the appropriate priority at the manufacturing facility and that routine problems are resolved promptly. We believe that these centers located in customers' facilities reduce errors and returns and improve on-time delivery, each of which improves customer satisfaction.

Competition

        The photomask industry is highly competitive, and most of our customers utilize more than one photomask supplier. Because of our global presence, we compete with various merchant manufacturers in each geographic region in which we operate:

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In North America, we compete primarily with Photronics, Dai Nippon Printing and Toppan Printing Company and, to a lesser extent, with other smaller merchant photomask suppliers.



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In Europe, we compete principally with Compugraphics, Photronics and Dai Nippon Printing.



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In Asia, we compete primarily with Dai Nippon Printing, Hoya Corporation, Photronics, P.K. Limited, Taiwan Mask Corporation, Precision Semiconductor Mask Corporation, Toppan Printing Company, TCE and, to a lesser extent, with other smaller merchant photomask suppliers.



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Dai Nippon Printing, Hoya Corporation and Toppan Printing Company are the predominant suppliers to the Japanese market.



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Captive photomask operations sometimes sell into the merchant market in some or all of these regions.

        We expect that some of our competitors will expand operations to meet the needs of customers and take advantage of new growth opportunities. In addition, recent widespread consolidation in the photomask industry, particularly in Japan, has enhanced the remaining companies' strength as competitors. Also, captive photomask operations sometimes are divested by their owners to merchant manufacturers.

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        We believe that with the increasing importance of leading-edge photomask technology in the semiconductor manufacturing process, the ability to manufacture these advanced photomasks will be an important competitive factor. On-time delivery of defect-free photomasks at competitive prices historically has also been an important competitive factor in our industry. We also believe that our ability to develop the most advanced photomasks provides a more cost-effective alternative to the development of captive manufacturing operations, which require significant capital investments and operating costs to develop the requisite manufacturing expertise.

Research and Development Initiatives

        The photomask industry has been, and is expected to continue to be, characterized by rapid technological change. We have historically made significant investments in research and development to improve our technological position. To maintain our technological position, we expect to be required to anticipate, respond to and utilize changing technologies.

        We, along with Advanced Micro Devices, Micron Technology and Motorola, operate the RTC, a joint venture begun in 1997 for developing advanced photomask technology and the fabrication of leading-edge photomasks. The RTC is located in a fully-equipped, freestanding facility adjacent to our photomask manufacturing facility in Round Rock, Texas. We believe that the collaborative effort underway at the RTC leverages the combined strength and insights of global leaders in memory, microprocessors and advanced logic design and fabrication to accelerate the development of advanced photomasks. The joint venture agreement expires in December 2002 but can be renewed at the discretion of the members.

        The AMTC, established in the fourth quarter of 2002, will develop and pilot-manufacture next generation technologies. The AMTC facility will be co-located with a new commercial photomask production facility that we will establish in Dresden, Germany. We believe that the AMTC will ensure a continued edge in the worldwide race to create the next generation technologies with increased functionality in ever-smaller geometries.

        In 2002, we formed a strategic alliance with Schott to develop advanced photoblanks.

        We, independently and through our participation in the RTC and other joint technology development agreements with customers and suppliers, and in the future the AMTC and with Schott, intend to continue to invest in research and development to enhance our technological capabilities. We focus our research and development in four areas:

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The development of leading-edge photomask products such as phase shift masks, masks with optical proximity correction and advanced binary masks;



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The enhancement of existing products by improving manufacturing techniques and technologies,



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The development of advanced materials needed for the manufacture of leading-edge photomasks; and



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The development of EDA software to support the design and manufacture of semiconductors.

        We are enhancing our existing products through worldwide-integrated engineering, capital investment for improved capability and beta testing of leading-edge equipment. We have been a leader in the development of leading-edge photomasks products, such as phase shift, optical proximity and advanced binary masks. Our research and development of photomask component materials is also responding to the technology demands of semiconductor manufacturers through the development of improved materials needed to produce advanced photomasks. Recent examples of such materials development include low stress chrome blanks, pellicles with contamination-control features, pellicles that can withstand deep ultraviolet radiation and attenuated embedded chrome blanks for phase shift masks.

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Intellectual Property

        We believe that the success of our business depends more on our proprietary technology, information, processes and know-how than on patents or trademarks. Much of our proprietary information and technology relating to our manufacturing processes is not patented and may not be patentable. However, aspects of our photomasks, photoblanks and pellicles technologies are protected by a number of patents and patent applications. They include product patents for some types of attenuated, embedded phase shift blanks and deep ultra violet pellicles. While we consider our patents to be valuable assets, we do not believe that our competitive position is dependent on patent protection or that our operations are dependent on any individual patent. Instead, we believe that the success of our business depends primarily on our ability to maintain a lead over our competitors in developing our proprietary technology, information, processes and know-how. Nevertheless, we attempt to protect our intellectual property rights with respect to our products and manufacturing processes through patents and trade secrets when appropriate as part of our ongoing research, development and manufacturing activities. We also rely on non-disclosure agreements with employees and vendors to protect our proprietary processes.

Employees

        As of June 30, 2002, we employed approximately 1,800 people worldwide. There are no employees who are represented by a union. However, our German subsidiaries are subject to German law that binds them, as members of a selected industry group, to agreements reached by industry management and employee representatives. We believe we have a good relationship with our employees.

Environmental Matters

        Our operations and our ownership of real property are subject to various environmental laws and regulations that govern, among other things, the discharge of pollutants into the air and water and the handling, use, storage, disposal and clean-up of solid and hazardous wastes. Compliance with such laws and regulations requires that we incur capital expenditures and operating costs in connection with our ongoing operations. In addition, such laws and regulations may impose liabilities on owners and operators of businesses and real property without regard to fault and such liabilities may be joint and several with other parties. More stringent environmental laws and regulations may be enacted in the future, which may require us to expend additional amounts on environmental compliance or may require modifications in our operations. Although we are unable to predict the extent of our future liability with respect to any environmental matters, we believe, based upon current information, that environmental liabilities will not be material to our financial position or results of operations. DuPont has agreed to indemnify us for any environmental contamination present on our manufacturing sites at June 13, 1996, the date of our initial public offering, or present at any such site due to the generation, use, treatment, storage, release, emission, discharge or disposal of hazardous waste or hazardous materials before such date. The Environmental Protection Agency is reviewing a groundwater contamination issue at our Danbury, Connecticut site under voluntary corrective action. Any such contamination is believed to be offsite or historical, and, if that is the case, any environmental liabilities would be covered by the indemnification agreement with DuPont.

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Risk Factors

        You should carefully consider the following risks when considering forward-looking statements. The risks described below are not the only ones that we face. Our business, operating results or financial condition could be materially adversely affected by any of the following factors. You should also refer to the other information included or incorporated by reference in this report, including our consolidated financial statements and related notes.

Our Operations Are Dependent on the Activities of Semiconductor Manufacturers

        Substantially all of our sales are derived from semiconductor manufacturers. Further downturns in the semiconductor industry could lead to a decrease in the demand for photomasks. The semiconductor industry is highly cyclical and has been subject to significant economic downturns at various times. Our investment in new facilities and equipment is based, in part, on the announced expansion plans of the semiconductor industry. From time to time, semiconductor industry demand and technology have developed more slowly than originally anticipated. A lack of development in the semiconductor industry in a location in which we operate or establish new facilities could have a material adverse effect on our business.

        The demand for photomasks may decrease, even when there is growth in the demand for semiconductors, due to the following factors:

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Changes in semiconductor designs or applications, such as a reduction in customization or an increase in standardization;



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A reduction in design complexity;



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Other technological and manufacturing advances; or



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A slowdown in the introduction of new semiconductor designs.

Our Financial Results May Be Affected by Factors Outside of Our Control

        Our quarterly and annual operating results are affected by a wide variety of factors that could adversely affect revenue or profitability or lead to significant variability of our operating results. Since our business is characterized by short-term orders and shipment schedules without a significant backlog for products, substantially all of our revenue in any quarter is dependent upon orders received during that quarter, which limits our ability to respond to a changing business environment. In addition, our operating results could be affected by the following factors:

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Competitive and customer-driven pricing pressures;



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Changes in the mix of products sold;



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Volume of orders shipped;



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Market acceptance of our products and our customers' products;



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Our ability to meet increasing demand and delivery schedules;



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Fluctuations in manufacturing yields;



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Fluctuations in currency exchange rates;



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Cyclical semiconductor industry conditions;



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Our access to advanced process technologies; and



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The timing and extent of product and process development costs.

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        Moreover, we are limited in our ability to reduce costs quickly in response to any revenue shortfalls due to the need to make ongoing and significant capital investments. As a result of the foregoing factors, we may experience material adverse fluctuations in our future operating results on a quarterly or annual basis. Results of operations in any period, therefore, should not be considered indicative of the results to be expected for any future period.

We May Not Obtain Sufficient Capital to Fund Our Needs

        We will need to continue to make significant capital expenditures to expand our operations and to enhance our manufacturing capability in order to keep pace with rapidly changing technologies. Based on our current operating plans, we will require external financing from time to time to fund our capital expenditures. We may require external financing to fund the requirements of our $100.0 million subordinated convertible notes due in July 2004. We may require external financing to comply with our $30.7 million long-term supply contract with Infineon which requires payments through March 2009; equipment purchase commitments to Infineon of approximately $51.9 million payable through December 2006; and a capital contribution to a joint venture of 2.0 million Euros payable in October 2002. We may, at our discretion, satisfy up to approximately $30.2 million of those commitments with the issuance of our common stock. We also guarantee certain lease obligations for the RTC joint venture with future minimum lease payments aggregating approximately $12.1 million as of June 30, 2002. The RTC joint venture is scheduled to terminate in December 2002, but can be renewed at the discretion of the members. Additionally, we have guaranteed 33 percent of the 20.0 million Euros short-term debt of Maskhouse Building Administration GmbH & Co. KG, or BAC. We, along with AMD and Infineon, formed the BAC to construct the facilities to house the AMTC and our advanced photomask manufacturing facility in Dresden, Germany. We cannot assure you that we will be able to obtain the additional capital required on reasonable terms, or at all, or that any such expansion or lack of capital will not have a material adverse effect on our business and results of operations, particularly during the start-up phase of new or changed operations.

Our Operating Results May Be Adversely Affected by Under-Utilized Production Capacity

        Our operations require us to incur significant fixed costs. Accordingly, increases and decreases in sales volume significantly affect our operating profits when our production capacity is not fully utilized. We anticipate that our operating costs will increase as we add capacity to position ourselves for future growth. Our results of operations could be adversely affected to the extent that such capacity is not utilized.

We May Be Unable to Effectively Manage Our Manufacturing Operations

        We regularly move existing production lines within a given plant or among different plants. If we do not adequately manage these changes and improvements, the productivity of our plants will suffer, which could cause us to lose sales or customers.

Rapid Technological Change Could Render Our Products Obsolete Or Our Manufacturing Processes Ineffective

        Rapid technological change and new product introductions and enhancements characterize the photomask and semiconductor industries. In particular, as semiconductor pattern sizes continue to decrease, the demand for more technologically advanced photomasks is likely to increase. We believe we must continue to enhance our existing products and to develop and manufacture new products and upgrades with improved capabilities to satisfy this anticipated demand. Our inability to anticipate, respond to or utilize changing technologies could have a material adverse effect on our business and results of operations. Likewise our inability to keep up with technical and manufacturing requirements

13

for current types of photomasks which continue to require decreasing feature size could have a material adverse effect on our business and results of operations.

        Technological advances achieved by a competitor or a customer could lead to the commercial availability of alternate methods of transferring circuit designs onto semiconductor wafers without the use of photomasks. These alternatives, including direct-write lithography, could have a material adverse effect on our results of operations or financial position. Direct-write lithography writes the circuit pattern directly onto the semiconductor wafer without the use of a photomask. Although this direct-write method is currently too slow for high-volume, commercial device manufacturing, a significant advance in this technology or other technologies which transfer circuit designs without the use of photomasks would have a material adverse effect on our business and results of operations.

        In addition, changes in semiconductor designs, such as field-programmable gate arrays, application-specific standard products and other semiconductor designs that displace application-specific integrated circuits, could reduce photomask unit volumes in the future. Such a reduction in volumes could decrease our revenues from photomask sales.

Our Market Is Highly Competitive and Subject to Pricing Pressures

        The photomask industry is highly competitive, and most of our customers use more than one photomask supplier. Our significant competitors include other merchant manufacturers of photomasks, including:

•

Dai Nippon Printing;



•

Hoya Corporation;



•

Photronics, which has a majority interest in PSMC and PKL;



•

Taiwan Mask Corporation;



•

TCE; and



•

Toppan Printing Company.

        Our competitors can be expected to continue to develop and introduce new and enhanced products, any of which could cause a decline in market acceptance of our products or a reduction in our prices as a result of intensified price competition. We also compete with captive photomask operations. Beginning in the mid-1980's, a trend developed toward the divestiture or closing of captive photomask operations by semiconductor manufacturers. We cannot assure you that this trend will continue or that it will not reverse, thereby reducing the demand for photomasks produced by merchant photomask suppliers like us and increasing competition to the extent excess captive capacity is used to supply non-captive needs. We cannot be certain that semiconductor manufacturers will not form new captive operations to ensure that their photomask needs are met, particularly for advanced and leading-edge photomasks. Certain of our competitors may have greater financial, technical, marketing and other resources, each of which could provide them with a competitive advantage over us.

        Our ability to compete in the photomask market is primarily based on:

•

Product quality;



•

Delivery to schedule performance;



•

Pricing;



•

Technical capabilities;



•

Location and capacity of manufacturing facilities; and

14

•

Technical service.

Our International Operations Present Special Risks

        Approximately 41 percent, 42 percent and 50 percent of our revenue in fiscal 2000, 2001 and 2002, respectively, were derived from sales in non-U.S. markets. We expect revenue from non-U.S. markets to continue to represent a significant portion of our total revenue in the future. Our non-U.S. operations are subject to certain risks inherent in conducting business abroad, including:

•

Price and currency exchange controls;



•

Fluctuations in the relative values of currencies;



•

Restrictive governmental actions and regulations; and



•

Difficulties in managing a global enterprise.

        Changes in the relative values of currencies occur from time to time and may, in certain instances, have a material effect on our results of operations. Our financial statements reflect remeasurement of items denominated in non-U.S. currencies to U.S. dollars, our functional currency. We monitor our exchange rate exposure and attempt to reduce this exposure by hedging through forward contracts. We cannot be certain that these forward contracts or any other hedging activity will be available or adequate to eliminate, or even mitigate, the impact of our exchange rate exposure. Further, we cannot assure you that these risks will not have a material adverse impact on our liquidity and results of operations in the future.

Our Operating Results Are Influenced by the Performance of Asian Economies

        In recent years, Asian economies have been highly volatile and recessionary, resulting in significant fluctuations in local currencies and other instabilities. These instabilities may continue or worsen, which could have a material adverse impact on our financial position and results of operations, as approximately 23 percent, 22 percent and 32 percent of our revenue in fiscal 2000, 2001 and 2002, respectively, were derived from this region. Our exposure to the business risks presented by Asian economies will increase to the extent that we continue to expand our operations in that region.

We Face Risks Associated with Manufacturing Difficulties and Costs

        Our complex manufacturing processes require the use of expensive and technologically sophisticated equipment and materials and are continuously modified in an effort to improve manufacturing yields and product quality. Minute impurities or other difficulties and capability issues in the manufacturing process can lower manufacturing yields and make products unmarketable. Moreover, manufacturing leading-edge photomasks is relatively more complex and time-consuming than manufacturing high-volume, less advanced photomasks, and may lead to general delays in the manufacturing of all levels of photomasks. We have, on occasion, experienced manufacturing difficulties and capacity limitations that have delayed our ability to deliver products within the time frames contracted for by our customers. We have also experienced an increase in production costs due to production complexities that has led to an increase in the price of masks that may result in reduced demand. We cannot assure you that we will not experience these or other manufacturing difficulties, or be subject to increased costs or production capacity constraints in the future, any of which could result in a loss of customers or could otherwise have a material adverse effect on our business and results of operations.

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We Face Risks Associated with Software Development and Marketing

        Our success in EDA software depends upon our ability to develop new products and enhance our current versions of software. We must effectively compete within the highly competitive software industry. Changes in accounting regulations and related interpretations and policies, particularly regarding revenue recognition, may require us to defer recognizing revenue or require us to change our business practices. We might not be successful in expanding our technology into new production areas. We might experience significant undetected errors or "bugs" in our products. We might not receive significant revenues from our current research and development efforts for several years.

Our Production Facilities Could Be Damaged or Disrupted by a Natural Disaster, Labor Strike, War, Terrorism or Political Unrest

        A number of our facilities are in seismically active areas. Although we have obtained property damage and business interruption insurance, a major catastrophe such as an earthquake or other natural disaster at any of our sites, or political unrest, war, terrorism, labor strikes or work stoppages in any of the areas where we conduct operations, could result in a prolonged interruption of our business. Any disruption resulting from these events could cause significant delays in shipments of our products and the loss of sales and customers, and we do not know whether our insurance would adequately compensate us for any of these events.

We Depend on a Few Significant Customers

        Our ten largest customers, in the aggregate, accounted for more than 60 percent of our sales in fiscal 2000, 2001 and 2002. One of our customers represented approximately 12 percent of revenues in 2000, primarily in North America. Two of our customers each represented more than 10 percent of revenues in 2001; one customer represented 14 percent of revenues and the other represented 10 percent of revenues. These revenues were reported primarily in our North America and Europe segments. Two of our customers represented approximately 13 percent and 10 percent of revenues in 2002. These revenues were reported in North America, Europe and Asia. One customer represented approximately 15 percent of accounts receivable, trade at June 30, 2001. No customer represented more than 10 percent of accounts receivable, trade at June 30, 2002. The loss of, or a significant reduction of orders from, any of these customers could have a material adverse effect on our results of operations. While we believe we have strategic relationships with a number of our customers, our customers place orders on an as-needed basis and generally can change their suppliers without penalty. In addition, recently there has been a trend toward outsourcing semiconductor manufacturing to foundries. To the extent we do not have a strategic relationship with these foundries, this trend could have a material adverse effect on our business and results of operations.

We Depend on a Limited Number of Equipment Manufacturers

        We rely on a limited number of photomask equipment manufacturers to develop and supply the equipment we use. These equipment manufacturers currently require lead times of approximately 10 to 14 months between the order and the delivery of certain photomask imaging and inspection equipment. The failure of such manufacturers to develop or deliver such equipment on a timely basis could have a material adverse effect on our business and results of operations. In addition, the manufacturing equipment necessary to produce advanced photomasks could become prohibitively expensive.

We Depend on a Limited Number of Raw Materials Suppliers

        We have a limited number of long-term supply agreements with our raw materials suppliers. Any disruption in our supply relationships or increases in prices, particularly related to photoblanks, could result in delays or reductions in product shipments by us or increases in product costs that could have a

16

material adverse effect on our business and operating results. In the event of such a disruption, we cannot assure you that we could develop alternative sources within reasonable time frames, or if developed, that these sources would provide supplies or equipment at prices comparable with those charged by our suppliers before the disruption.

We Depend on a Limited Number of Management and Technical Personnel

        Our continued success depends, in part, upon key managerial, engineering and technical personnel as well as our ability to continue to attract and retain additional personnel. In the past, some key personnel have left us to pursue other opportunities. The loss of any key personnel could have a material adverse effect on our business or results of operations. There can be no assurance that we can retain our key managerial, engineering and technical employees. Our growth may be dependent on our ability to attract new highly skilled and qualified personnel and to integrate them into our operations. There can be no assurance that our recruiting efforts to attract and retain these personnel will be successful.

E. I. du Pont de Nemours and Company Has Influence on All Stockholder Votes and Other Matters

        DuPont owned approximately 20.2 percent of our outstanding common stock as of September 6, 2002. As a result, DuPont will continue to have influence on most matters submitted to our stockholders, including proposals regarding:

•

Any merger, consolidation or sale of all or substantially all of our assets;



•

Electing the members of our board of directors; and



•

Preventing or causing a change in control of our company.

        This concentration of ownership may discourage a potential acquiror from making an offer to buy our company that other stockholders might find favorable which, in turn, could adversely affect the market price of our common stock. Additionally, DuPont has the right, under certain circumstances, to affect our use of the DuPont tradename and logo, which could increase our costs.

We May Not Successfully Integrate or Realize the Intended Benefits of Recent or Future Acquisitions and Joint Ventures

        We may in the future pursue acquisitions of businesses, products and technologies, or enter into joint venture arrangements, that could complement or expand our business. The negotiation of potential acquisitions or joint ventures as well as the integration of an acquired business, product or technology could require us to incur significant costs and cause diversion of management's time and resources. Future acquisitions by us could result in the following consequences:

•

Dilutive issuances of equity securities;



•

Incurrence of debt and contingent liabilities;



•

Amortization of other intangibles;



•

Research and development write-offs; and



•

Other acquisition-related expenses.

        For example, over the past several years, we entered into a joint venture with UMC Group to manufacture photomasks in Taiwan, acquired the photomask manufacturing assets of Altis Semiconductor, a European joint venture between IBM and Infineon, extended the RTC agreement

17

through December 2002 and entered into the AMTC with AMD and Infineon. The success of these transactions will depend on our ability to:

•

Integrate acquired production equipment with our operations;



•

Attract, train and retain additional personnel;



•

Utilize any resulting additional production capacity; and



•

Cooperate with our joint venture partners.

        Our operating results can vary significantly based upon the impact of changes in global economic conditions on our customers. More specifically, the macro-economic environment entering fiscal year 2003 is more uncertain than in recent periods and has the potential to continue to materially and adversely affect us. The revenue growth and profitability of our business depends on increasing complexity and continued innovation of semiconductors. Because our sales are primarily to major corporate customers whose businesses fluctuate with general economic and business conditions, a softening of demand for semiconductors caused by a weakening economy may result in decreased revenues and lower growth rates. Customers may defer or reconsider purchasing products if they experience a downturn in their business or if there is a continued downturn in the general economy.

We May Be Unable to Enforce or Defend Our Ownership and Use of Proprietary Technology

        We believe that the success of our business depends more on our proprietary technology, information and processes and know-how than on patents or trademarks. Much of our proprietary information and technology relating to manufacturing processes is not patented and may not be patentable. We cannot assure you that:

•

We will be able to adequately protect our technology;



•

Competitors will not independently develop similar technology;



•

The claims allowed on any patents we hold will be sufficiently broad to protect our technology; or



•

Foreign intellectual property laws will adequately protect our intellectual property rights.

        We may become involved in infringement claims or legal proceedings by or against third parties with respect to current or future patents, copyrights, trademarks, products or processes. Any such claims or litigation, with or without merit, to enforce or protect our intellectual property rights or to defend our company against claimed infringement of the rights of others could result in substantial costs, diversion of resources and product shipment delays or could force us to enter into royalty or license agreements rather than dispute the merits of these claims. Any of the foregoing could have a material adverse effect on our business, results of operations and financial position.

We May Be Unprepared for Changes in Environmental Laws and Regulations

        We are subject to numerous environmental laws and regulations which impose various environmental controls on, among other things, the discharge of pollutants into the air and water and the handling, use, storage, disposal and clean-up of solid and hazardous wastes. Changes in these laws and regulations may have a material adverse effect on our financial position and results of operations. Any failure by us to adequately comply with such laws and regulations could subject us to significant future liabilities.

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We Face Uncertainty Implementing a New Global Information System

        We are in the process of implementing a new enterprise-wide software system that replaces our existing manufacturing information system. We cannot assure you that this conversion will be successful or that it will yield benefits to us. In addition, the implementation of this system could cause a short-term disruption of our business processes.

Our Market Price Is Volatile

        The market price of our common stock has been and can be expected to be significantly affected by factors such as:

•

Quarterly variations in our results of operations;



•

Announcements of new products or product enhancements by us, our competitors or our customers;



•

Technological innovations by us or our competitors;



•

Changes in earnings estimates or buy/sell recommendations by financial analysts for us;



•

Changes in earnings estimates or buy/sell recommendations by financial analysts for our competitors;



•

The operating and stock price performance of comparable companies; and



•

General market conditions or market conditions specific to particular industries.

        In particular, the stock prices for many companies in the technology sector have experienced wide fluctuations that have often been unrelated to the operating performance of such companies. Such fluctuations may adversely affect the market price of our common stock.

Our Stock Price May Be Affected when Additional Shares Are Sold

        If our stockholders sell substantial amounts of our common stock in the public market, the market price of our common stock could fall. Such sales might make it more difficult for us to sell equity or equity-related securities in the future at a time and place that we deem appropriate. As of September 6, 2002, DuPont beneficially owned approximately 3.6 million shares of our common stock. DuPont has advised us that it expects to continue to reduce its ownership interest in our company over time, subject to prevailing market conditions. We have granted DuPont certain rights with respect to the registration of shares of our common stock held by DuPont, including the right to require that we register under the Securities Act of 1933 the sale of all or part of the shares it holds, and to include such shares in a registered offering of securities by us.

Our Certificate of Incorporation and Bylaws Have Anti-Takeover Provisions and We Have a Shareholders' Rights Plan

        Provisions of our certificate of incorporation and bylaws, a Delaware law and our shareholders' rights plan could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. The combination of these provisions may inhibit a non-negotiated merger or other business combination.

Item 2. Properties

        We conduct manufacturing operations throughout the world. Virtually all of our operations are ISO 9002 or QS9000TE and ISO 14001 qualified. We believe that our facilities are adequate and

19

suitable for their respective uses. The table below presents certain information relating to our manufacturing and support facilities.

        We own most of the manufacturing equipment in our facilities. The research facility in Round Rock is leased to the RTC and primarily contains manufacturing equipment leased by the RTC from a third party. Facilities and property located in Santa Clara, Corbeil-Essonnes, Hamburg and Singapore are leased under leases that expire in calendar years 2003, 2009, 2013 and 2059, respectively. We also maintain customer service data centers in leased facilities, including centers in Mesa, Arizona, Burlington, Vermont, Orange, California, Colorado Springs, Colorado, Melbourne, Florida, Hillsboro, Oregon, Allentown, Pennsylvania, Dallas, Texas and Tokyo, Japan.

        We consider the productive capacity of the facilities operated by each of the country segments adequate and suitable for the requirements of each group. The extent of utilization of such facilities varies from location to location and from time to time during the year.

        A number of our facilities are in seismically active areas. Although we have obtained property damage and business interruption insurance, a major catastrophe such as an earthquake or other natural disaster at any of our sites could result in a prolonged interruption of our business.

Item 3. Legal Proceedings

        We are subject to litigation in the normal course of business. We believe the effect, if any, of an unfavorable settlement of such litigation would not have a material adverse effect on our financial position, results of operations, cash flows or liquidity.

Item 4. Submission of Matters to a Vote of Security Holders

        None.

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PART II

Item 5. Market for Our Common Equity and Related Stockholder Matters

        Our common stock is quoted on the NASDAQ National Market under the symbol "DPMI." The following table sets forth, for the periods indicated, the high and low sale prices per share of our common stock as reported on the NASDAQ National Market.

        We have not paid any dividends on our capital stock and do not intend to pay any cash dividends on our common stock in the foreseeable future. We currently intend to retain our earnings to finance future growth of our business. Future dividends, if any, will be determined by our board of directors. However, one of our consolidated joint ventures has declared and paid stock dividends and may declare additional stock dividends in the future. As of our date of record on August 30, 2002 we had 75 shareholders of record.

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Item 6. Selected Financial Data

        The following tables set forth our consolidated selected financial data. The consolidated balance sheet data as of June 30, 2001 and 2002 and the consolidated income statement data for each of the three years ended June 30, 2002 has been derived from the audited consolidated financial statements appearing elsewhere in this document. The consolidated data for the years ended June 30, 1998 and 1999 and as of June 30, 1998, 1999 and 2000 has been derived from audited consolidated financial statements not appearing in this document. The following consolidated data should be read in conjunction with our consolidated financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this document.

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

        The following discussion and analysis of financial condition and results of operations should be read in conjunction with our financial statements and related notes included elsewhere in this document. All references to years are to our fiscal years, which end on June 30.

Overview

        Based on worldwide revenue, we are one of the largest photomask manufacturers in the world. We sell our products to over 300 customers and customer sites in over 17 different countries. Essentially all of our sales are to customers in the semiconductor manufacturing industry. We manufacture a broad range of photomasks based on customer-supplied design data. We also manufacture pellicles, one of the principal components of photomasks, which protect the photomask from particle contamination, primarily for internal consumption. We operate globally with established manufacturing facilities in North America, Europe and Asia.

        We believe that over the long-term the market for photomasks in the semiconductor manufacturing process will increase due to the following trends:

•

Proliferation of semiconductor applications;



•

Customization of semiconductor designs;



•

Increasing semiconductor device complexity;



•

Decreasing size of semiconductor designs; and



•

Shorter product lifecycles.

        These trends have increased the importance of photomask technology in the semiconductor manufacturing process. In part as a result of these trends, our annual revenue increased an average annual compounded rate of 6 percent from 1998 to 2002.

        In 2002, our revenue decreased 16.2 percent, from $407.9 million in 2001 to $341.9 million. In 2002, our revenues continued to be negatively impacted by the downturn in the global semiconductor market, which began in the second half of fiscal 2001. This downturn was principally driven by decreased demand in many of the major end-user markets of the electronics industry. Although our customers' design activities continued, in reaction to declining demand they scaled back tape-outs (i.e., photomask orders) for some new chip designs until business conditions improve. The downturn became even more pronounced during the first half of fiscal 2002 as our customers, in reaction to continued soft demand and growing inventory levels began taking more dramatic steps to contain costs.

        During 2002, we derived cost savings and improved productivity from the reorganization of our manufacturing and technical organizations which commenced during the fourth quarter of 2001. In response to a sustained decline of demand in trailing-edge photomasks, we decommissioned and

23

abandoned a number of trailing-edge manufacturing lines throughout the world, and reduced our global workforce by 8 percent, over the course of 2001 and 2002.

        Photomask manufacturing operations are capital intensive. Accordingly, at a given threshold of manufacturing capacity, a high proportion of our operating costs are fixed and remain relatively constant as sales volume increases or decreases. To the extent that we have under-utilized production capacity, operating profit increases or decreases significantly as sales volume increases or decreases. In 2000 and 2001, our operating costs increased as we added capacity to position ourselves for future growth, but the utilization improved and our gross margin as a percentage of revenue rose 2.3 percentage points and 0.9 percentage points, respectively. In 2002, our gross margin as a percentage of revenue decreased 11.7 percentage points as our revenue fell 16.2 percent and our costs remained relatively stable. The current environment in the semiconductor industry is like no other in the past. Our customers' high level of uncertainty, combined with our short two-week backlog, creates too great a challenge to provide reliable guidance beyond a single quarter. In light of the volatility within our customer base, we head into fiscal 2003 with a broad range of revenue scenarios. We continue to explore operating and administrative efficiencies to improve operating margins in 2003.

Results of Operations

        The following table sets forth selected financial information expressed as a percentage of revenue, net for the periods indicated.

Year Ended June 30, 2002 Compared to Year Ended June 30, 2001

        Revenue, net.    Revenue, net decreased 16.2 percent from $407.9 million in 2001 to $341.9 million in 2002. Demand for advanced photomasks, those with design technology of 0.18 micron and below, grew from 27 percent to 40 percent of our revenue, for 2001 and 2002, respectively. Total unit volume demand declined 4 percent primarily as a result of our customers' response to the significant downturn in the semiconductor industry during the year. Average selling prices decreased 13 percent as a result of traditional product lifecycle declines in selling prices of certain technologies and customer-initiated

24

pressures and competitive pressures. Additionally our customers that maintain internal photomask operations reduced outsourcing during the year, reducing demand for higher-priced leading edge products. From 2001 to 2002, revenue, net produced in North America decreased from $235.3 million to $171.6 million because of the decrease in average selling price and unit volumes. Revenue, net produced in Europe decreased from $83.2 million to $62.0 million because of the decrease in average selling price and unit volumes. Revenue, net produced in Asia increased from $89.5 million to $108.3 million due primarily to an increase in average selling price and unit volumes. Increased unit volume in Asia was a result of improved local demand combined with production transferred from North America and Europe.

        Costs of Goods Sold.    Cost of goods sold consists of materials, labor, depreciation and overhead. Cost of goods sold decreased 1.7 percent from $276.7 million in 2001 to $272.0 million in 2002. The decrease resulted primarily from decreased production volumes, benefits realized from our cost reduction programs and the overall efficiencies gained through the global reorganization of our manufacturing organization implemented in the quarter ended June 30, 2001. These reductions were partially offset by increased depreciation expense resulting from new investments in advanced production capabilities. Gross profit decreased from $131.3 million for 2001 to $69.9 million for 2002. As a percentage of revenue, cost of goods sold increased from 67.8 percent in 2001 to 79.5 percent in 2002 primarily as a result of lower revenue. Unless revenue increases in the short term, gross margin rates will continue to be under pressure due to the effect of our fixed costs, however, this should be partially offset by the effect of ongoing cost reduction programs.

        Selling, General and Administrative Expense.    Selling, general and administrative expense includes salaries of sales and administrative personnel, marketing expense, general and administrative expense and product distribution expense. Selling, general and administrative expense decreased 15.4 percent from $48.6 million for 2001 to $41.2 million for 2002. This was primarily a result of the cost reduction programs implemented in the quarter ended June 30, 2001. Selling, general and administrative expense as a percentage of revenue, net increased from 11.9 percent for 2001 to 12.0 percent for 2002 as a result of lower revenues partially offset by the benefits realized from the cost reduction programs.

        Research and Development Expense.    Research and development expense consists primarily of employee costs, cost of material consumed, depreciation, engineering related costs and our share of costs of the RTC. Research and development expense decreased 6.0 percent from $32.2 million for 2001 to $30.3 million for 2002. The decrease was primarily as a result of synergies realized due to the reorganization of our technical group. Research and development expense as a percentage of revenue, net increased from 7.9 percent for 2001 to 8.9 percent for 2002. The increase was due primarily to lower revenues. We continue to focus on research and development in all of our advanced production facilities, in the RTC and in our EDA company. This focus will expand in the future to the AMTC and our alliance with Schott. The current RTC agreement expires in December 2002, but can be renewed at the discretion of the members. We believe that, because of our continued focus on research and development, we will be able to help meet the future technology needs of the semiconductor industry for advanced photomasks.

        Gain (Loss) on Warrants, net.    During 2002, we realized losses of $0.2 million upon the exercise of all remaining warrants of a strategic partner and sale of the underlying securities.

        Gain on Sale of Assets.    In March 2002, we sold all of our photoblank manufacturing assets located in Poughkeepsie, New York, to Schott. We have also entered into a supply agreement with Schott for a significant portion of our future purchases of photoblanks. The total proceeds of $31.6 million were allocated $26.5 million to the assets sold and $5.1 million to the supply agreement. The amount allocated to the supply agreement was determined based on the projected cash flows that will be generated by the supply agreement, discounted to present value. This transaction resulted in a pre-tax gain of approximately $10.4 million. The value of the supply agreement will be amortized ratably as

25

a reduction of cost of goods sold over the term of the agreement. The supply agreement also allows us to be paid additional amounts totaling $12.0 million if specified purchase levels are achieved by March 31, 2004. These additional amounts will be amortized as a reduction of cost of goods sold over the term of the supply agreement.

        Special Charges.    In the quarter ended March 31, 2002, we recorded pre-tax special charges totaling $7.4 million related to cost reduction programs and acquired in-process research and development, or IPR&D. The cost reduction programs and related special charges consisted of the following:

•

Asset abandonments relating primarily to trailing-edge production equipment that was removed from service.



•

Employee severance expenses relating to workforce reductions in the United States and Europe. Of the 68 employees severed, 64 employees left our company by March 31, 2002. The employee severances were primarily manufacturing positions and some administrative personnel.



•

In connection with the acquisition of the assets of BindKey in March 2002, approximately $0.3 million of the purchase price was allocated to purchased IPR&D. The amount attributed to IPR&D was expensed at the date of acquisition as the projects had not reached technological feasibility nor had any alternative future use.

        A summary of the special charges is shown below (in millions):

        We expect the remaining $0.2 million accrued liability to be utilized in fiscal 2003. No additional expenditures relating to these cost reduction programs are expected. We expect to realize benefits of approximately $4.7 million over the next year as a result of the asset impairments and employee reductions.

        Our management continues to monitor the business climate in general and our industry in particular to determine the usefulness of our assets and will, if necessary, incur additional charges in 2003 to enhance the economic viability of our company.

        Other (Expense) Income, net.    Other (expense) income, net includes interest income and expense, foreign currency transaction and remeasurement gains and losses. Other (expense) income, net was $2.0 million in 2001 and $1.2 million in 2002. The change was caused by a decrease in interest income of $1.6 million, due to substantially lower interest rates, partially offset by favorable decreases in net foreign exchange losses of $0.7 million.

        Provision for (Benefit from) Income Taxes.    Our tax expense is based on the statutory rates in effect in the countries in which we operate. Certain of our operations in Asia are subject to various tax holidays which expire in whole or in part during fiscal years 2003 through 2010. Certain tax holidays may be extended if specific conditions are met. Our effective tax rate for 2002 was a tax benefit of 189 percent versus a tax expense of 25 percent for 2001. Our effective tax rate varied from the prior year because of shifts in the geographic distribution of earnings and losses between high and low tax rate countries partially due to the special charges recorded in the United States. Additionally, the tax rate was impacted by an adjustment to release the previously provided valuation allowance against certain capital losses, which became realizable upon recognition of the capital gain on the sale of our

26

photoblank manufacturing assets. Our effective tax rate varied from the federal statutory rate because a substantial portion of our Asian manufacturing operations in Korea, China, Taiwan and Singapore operate at a reduced tax rate or free of tax under various tax holidays which expire in whole or in part during fiscal years 2003 through 2010.

        During 2002, we recorded deferred income tax benefits associated with our operating loss for the year. Recent changes in U.S. income tax laws allow substantially all of the deferred income tax benefits from these losses to be realized through tax refunds under special carryback rules available during fiscal 2002.

        Minority Interest in Income of Joint Ventures.    The minority interest impact of our joint venture manufacturing facilities was $6.2 million in 2001 compared to $6.9 million in 2002, reflecting the partners' share of income from our joint ventures, which currently include our Shanghai, China and Hsinchu, Taiwan operations. The increase was primarily the result of increased profitability in our Shanghai, China joint venture.

Year Ended June 30, 2001 Compared to Year Ended June 30, 2000

        Revenue, net.    Revenue, net increased 24.3 percent from $328.1 million in 2000 to $407.9 million in 2001. The overall annual increase primarily occurred because average selling price increased approximately 19 percent and unit volume increased approximately 8 percent from year 2000 to 2001. From 2000 to 2001, revenue, net produced in North America increased from $194.5 million to $235.3 million because of the increase in average selling price and unit volumes. Revenue, net produced in Europe increased from $58.4 million to $83.2 million because our Altis acquisition was online for the entire year and the increased average selling price and unit volumes. Revenue, net produced in Asia increased from $75.2 million to $89.5 million because our facility in Singapore was online for a majority of the year and our increased production in our joint ventures in Taiwan and Shanghai. During 2001, we experienced two radically different business climates in which we operated. For the first two quarters of 2001, we experienced 40 percent revenue growth versus the previous year. In the third quarter of 2001, one of the steepest drops on record in the global semiconductor market, principally driven by a drop in demand of many of the major end-use markets of the electronics industry, began to affect us as customers scaled back purchases. The downturn became even more pronounced in the fourth quarter of 2001 and started to affect orders for advanced photomasks.

        Cost of Goods Sold.    Cost of goods sold increased 22.7 percent from $225.4 million in 2000 to $276.7 million in 2001. The increase resulted primarily from higher costs associated with increased manufacturing capacity offset in part by cost containment initiatives initiated in the quarter ended June 30, 2001. As a percentage of sales, cost of goods sold decreased from 68.7 percent in 2000 to 67.8 percent in 2001. The percentage of sales decrease was primarily due to increased production volumes as a result of increased sales.

        Selling, General and Administrative Expense.    Selling, general and administrative expense as a percentage of sales decreased from 12.0 percent in 2000 to 11.9 percent in 2001. In addition, selling, general and administrative expense increased 23.2 percent from $39.5 million in 2000 to $48.6 million in 2001 as a result of new facilities coming completely on-line, initiatives and incentive compensation expense and the completion and implementation of new information systems.

        Research and Development Expense.    Research and development expense increased 35.4 percent from $23.8 million in 2000 to $32.2 million in 2001. The increase was due primarily to an increased investment in research and development throughout the company, particularly through our participation in the RTC. The current RTC agreement expires in December 2002, but can be renewed at the discretion of the members. In 2001, we entered into technology advancement projects with Infineon Technologies and Xilinx.

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        Special Charges.    In 2001, we recorded pre-tax special charges totaling $36.1 million related to cost reduction programs. The pre-tax special charge recorded in the quarter ended March 31, 2001 was $11.9 million and the special charge recorded in the quarter ended June 30, 2001 was $24.2 million. Accrued severance of $1.7 million was the only liability remaining at June 30, 2001 and it was completely paid out by August 2001. The cost reduction programs and related special charges consisted of the following:

•

Building costs and asset write-downs of $11.9 million related to the closing of our Gresham, Oregon facility. We determined that our estimated recoverable value was $5.3 million and we have reclassified this amount to assets held for sale. In 2002, we disposed of approximately $0.4 million of the assets at its estimated recoverable value. We continue to hold the building and remaining assets for sale and evaluate all proposals.



•

Asset write-downs of $21.4 million related primarily to trailing-edge production equipment and leasehold improvements that were removed from service and disposed of or are being held for sale. The assets had an estimated salvage value of approximately $0.7 million which was reclassified to assets held for sale. We expect to complete the disposal of the remaining equipment held for sale during fiscal 2003.



•

Employee severance expenses of $2.8 million related to the closure and sale of our Hamilton, Scotland facility and workforce reductions in the United States related to the decommissioning of trailing-edge production lines. Approximately 90 percent of the 139 terminated employees left our company by June 30, 2001. The accrued severance was completely paid out during July and August 2001. The employee terminations were primarily manufacturing positions.

        Gain (Loss) on Warrants, net.    During 2001, we recognized realized and unrealized gains of $10.7 million on warrants. As of June 30, 2001, we held 147,230 vested warrants with a market value of $1.7 million.

        Other (Expense) Income, net.    Other (expense) income, net includes interest income and expense, foreign currency transaction and remeasurement gains and losses. Other (expense) income, net was $(0.4) million in 2000 and $2.0 million in 2001. The change was caused by increased interest income due to increased cash balances, partially offset by smaller interest expense as a result of the refinancing of long-term debt completed in the quarter ended September 30, 2000.

        Provision for (Benefit from) Income Taxes.    Our tax expense is based on the statutory rates in effect in the countries in which we operate. Our effective tax rate decreased 3 percent from 28 percent for 2000 to 25 percent for 2001 primarily due to the tax benefit recognized on the sale of our Hamilton, Scotland facility. Our effective tax rate is lower than the maximum U.S. statutory rate primarily because certain of our operations in Asia are subject to government granted tax exemptions.

        Minority Interest in Income of Joint Ventures.    The minority interest impact of our joint venture manufacturing facilities was $2.7 million in 2000 compared to $6.2 million in 2001, reflecting the partners' share of income from our joint ventures, which currently include our Shanghai, China and Hsinchu, Taiwan operations. The $3.5 million change was the result of increased profitability of these operations.

Liquidity and Capital Resources

        Our working capital was $137.5 million as of June 30, 2001 and $115.3 million at June 30, 2002. The decrease in working capital was due principally to a decrease in revenue resulting in lower accounts receivable reflecting the continued downturn of the semiconductor industry, a reduction of inventories primarily as a result of the sale of our photoblank manufacturing assets and a reduction of deferred income taxes. Cash and cash equivalents were $138.6 million as of June 30, 2001 and $138.9 million as of June 30, 2002. Our principal source of cash is from our operating activities, which

28

generated $132.8 million in 2001 and $62.7 million in 2002. The decrease in cash provided by operating activities was primarily a result of lower net income as adjusted for non-cash income and expenses and lower customer prepayments in 2001 compared to 2002.

        We have agreed to purchase a significant portion of our photoblank requirements from Schott over the term of the supply agreement. Additionally, we have committed to pay Infineon $27.5 million for their 10-year photomask supply agreement.

        Cash used in investing activities, consisting of capital expenditures, proceeds from the sale of stock and investments and payments for acquisitions and investments, was $102.2 million in 2001 and $75.1 million in 2002. Management expects capital expenditures for 2003 to be approximately $50 million. We will fund a capital contribution to the BAC, of 2.0 million Euro during the second quarter of 2003. We have equipment purchase commitments of approximately $28.1 million, approximately $22.0 million of which is payable in 2003 and 2004 and up to $6.1 million of which is expected to be payable in 2006. Capital expenditures have been and will be used primarily to advance our technical capability. We also guarantee certain lease obligations of the RTC with future minimum lease payments of approximately $12.1 million as of June 30, 2002. Additionally, we have guaranteed 33 percent of the 20.0 million Euro short-term debt of the BAC. In addition, we may in the future pursue additional acquisitions of businesses, products and technologies, or enter into other joint venture arrangements, that could complement or expand our business. Any material acquisition or joint venture could result in a decrease to our working capital depending on the amount, timing and nature of the consideration to be paid.

        Cash provided from financing activities was $67.4 million in 2001 and $8.1 million in 2002. Net short-term borrowings increased $4.2 million in 2002. Additionally, our employees purchased $3.6 million of common stock under our employee plans.

        At June 30, 2000, we had a credit agreement with DuPont, which was comprised of two separate facilities for $100.0 million each. The first facility, which bore an interest rate of LIBOR plus 1.875 percent per annum expired in September 2001. The second facility was repaid and terminated in July 2000.

        In July 2000, we publicly sold equity and debt securities with aggregate net proceeds to us of $201.4 million. A portion of the proceeds was used to repay all of the outstanding borrowings from DuPont, as discussed above, and we are using the remaining proceeds for general corporate purposes, including potential acquisitions, working capital and capital expenditures. The first transaction was the sale of 3.2 million shares of our common stock of which 1.4 million shares represented original issuance and 1.8 million shares represented the sale of outstanding shares owned by DuPont. The stock was offered to the public at $77 per share with gross proceeds of $246.4 million, offering costs of $12.8 million, and net proceeds of $233.6 million. Our portion of the offering proceeds was $103.8 million for the original issuance. We also sold $100.0 million principal amount of subordinated convertible notes with net proceeds of $97.6 million. The notes are due in July 2004, with no stated interest, are convertible at any time into shares of our common stock at a conversion price of $106.26 per share, are unconditionally guaranteed by DuPont and have no optional redemption by us. In the event of a fundamental change in our company, each holder of notes will have the right to require us to redeem, in cash, any or all of such holder's notes at a price equal to 100 percent of the principal amount to be redeemed. A fundamental change generally is any transaction in which all or substantially all of our common stock is exchanged for, converted into, acquired for or constitutes the right to receive, consideration which is not all or substantially all common stock listed on a national securities exchange or approved for quotation on the NASDAQ National Market. If a fundamental change were to occur, we cannot assure you that we will have sufficient funds to pay the redemption price for all the notes tendered by the holders, although DuPont would be required to pay the redemption price under its guarantee. In that case, our failure to redeem tendered notes would constitute an event of default

29

under the indenture for the notes, and may constitute a default under the terms of other indebtedness that we may enter into from time to time.

        Our ongoing cash requirements will be for capital expenditures, acquisitions, research and development and working capital. Management believes that cash on hand and any cash provided by operations will be sufficient to meet our cash requirements for at least the next 12 months. Thereafter, based on our current operating plans, we may require external financing from time to time to fund our capital expenditure requirements. There can be no assurance that alternative sources of financing will be available if our capital requirements exceed cash flow from operations. There can be no assurance that we will be able to obtain any additional financing required to fund our capital needs on reasonable terms, or at all.

The following summarizes our contractual cash obligations as of June 30, 2002 (in millions):

The following summarizes our other commercial commitments as of June 30, 2002 (in millions):

        We are also committed to fund 25 percent of the operating cash requirements of the RTC through December 2002. Additionally, we are committed to fund 33 percent of the operating cash requirements of the AMTC and the BAC through June 2007.

Critical Accounting Policies

        Our critical accounting policies are as follows:

•

Revenue recognition

        Product revenue is recognized when both title and risk of loss transfers to the customer, provided that no significant obligations remain. Discounts and rebates are recorded as a reduction of revenue during the period they are earned by the customer. Provision is made for an estimate of product returns based on historical experience and is recorded as a reduction in revenue. Customarily, our shipping terms are FOB shipping point; however, our final terms depend upon the negotiations with our customers.

•

Estimating allowances, specifically sales returns, the allowance for doubtful accounts and allowance for excess and obsolete inventory

        The preparation of financial statements requires us to make estimates and assumptions that affect the reported amount of assets and disclosure of contingent assets and liabilities at

30

the date of the financial statements and the reported amounts of revenues and expenses during the reported period.

•

We must make estimates of potential future product returns related to current period product revenue. We analyze historical returns, current economic trends, and changes in customer demand and acceptance of our products when evaluating the adequacy of the sales returns and other allowances. Significant management judgments and estimates must be made and used in connection with establishing the sales returns and other allowances in any accounting period. Material differences may result in the amount and timing of our revenue for any period if management made different judgments or utilized different estimates.



•

Similarly, we must make estimates of the uncollectability of our accounts receivable. We consider trends of historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. If circumstances change, our estimates of the recoverability of amounts due us could be reduced by a material amount.



•

We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and estimated market value based on assumptions on future demands and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory writedowns may be required.




•

Valuation of intangible and other long-lived assets

        We assess the impairment of identifiable intangibles, other long-lived assets and related goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered important which could trigger an impairment review include the following:

•

Significant underperformance relative to expected historical or projected future operating results;



•

Significant changes in the manner of our use of the acquired assets or the strategy for our overall business;



•

Significant negative industry or economic trends; and



•

Our market capitalization relative to net book value.

        When it is determined that the carrying value of intangibles, long-lived assets and related goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, the measurement of any impairment is determined and the carrying value is reduced as appropriate.

•

Accounting for income taxes

        We are required to consider our income taxes in each of the tax jurisdictions in which we operate in computing our effective income tax rate. This process involves estimating our current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. Further, the actual annual amount of taxable income in each tax jurisdiction may differ from the estimates we used to compute the effective tax rate during our first, second and third quarters. Additionally, we evaluate the recoverability of the deferred tax assets from future

31

taxable income and establish valuation allowances if recovery is not more likely than not. Our income tax provision in the consolidated income statement is impacted by changes in the valuation allowance. This process is complex and involves significant management judgment in determining our provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets

•

Consolidation

        The consolidated financial statements presented herein include the accounts of DuPont Photomasks, Inc. and our controlled and wholly-owned subsidiaries. All significant intercompany transactions and accounts are eliminated in consolidation. Entities that are not controlled but on which we can significantly influence, are recorded under the equity method of accounting.

Other Matters

        In the ordinary course of business, we engage in transactions with related parties including DuPont, the RTC and certain of our non-United States employees. Transactions with DuPont relate primarily to agreements entered into in 1996 for transitional services. Additionally, approximately $1.0 million, $1.4 million and $1.9 million of our revenue in China for the years ended June 30, 2000, 2001 and 2002, respectively, was transacted through a DuPont subsidiary in order to facilitate the collection of receivables. We conduct a portion of our research and development projects by funding our proportionate share of the research efforts of the RTC joint venture. In the management of this joint venture, we enter into certain transactions in order to obtain cost benefits for the joint venture. Additionally, we have receivables from certain of our non-United States employees related primarily to housing and automobile loans.

        In July 2001, the Financial Accounting Standards Board, or FASB, issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142, discontinues amortization of acquired goodwill and instead requires annual impairment testing. Separable intangible assets will be amortized over their useful economic lives and tested for impairment in accordance with SFAS No. 121. Intangible assets with an indefinite useful economic life will not be amortized until the life of the asset is determined to be finite. For goodwill and indefinite-lived intangible assets acquired prior to July 1, 2001, goodwill will continue to be amortized until adoption of SFAS No. 142 at which time amortization will cease and a transitional goodwill impairment test will be performed. Any impairment charges resulting from the initial application of the new rules will be classified as a cumulative effect of change in accounting principle. We have adopted SFAS 142 as of July 1, 2002. It had no impact on our results of operations or financial position, and, we believe it will have no impact on our future results of operations and financial position.

        In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 supersedes previous guidance for financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The statement applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset. We have adopted SFAS 143 as of July 1, 2002 and do not expect it to have a material adverse impact on our future results of operations and financial position.

        In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 develops one accounting model, based on the model in SFAS No. 121, for the impairment or disposal of long-lived assets and for segments of a business to be disposed of. We have adopted SFAS 144 as of July 1, 2002 and do not expect it to have a material adverse impact on our future results of operations and financial position.

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        In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 rescinds certain guidance for reporting extinguishments of debt and provides guidance to determine if the transactions are part of recurring operations or if they meet the criteria for classification as an extraordinary item. Additionally, SFAS No. 145 requires that certain lease modifications be accounted for in the same manner as sale-leaseback transactions. We have adopted SFAS 145 as of July 1, 2002 and do not expect it to have a material adverse impact on our future results of operations and financial position.

        In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." Under SFAS No. 146, a liability for a cost that is associated with an exit or disposal activity must be recognized at fair value in the period the liability is incurred. SFAS No. 146 nullifies the guidance of the Emerging Issues Task Force, or 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). We are currently evaluating the impact of SFAS No. 146, but do not expect that its adoption will have a material adverse impact on our future results of operations and financial position. We will adopt SFAS No. 146 by December 31, 2002.

        Foreign Currency Exposure.    Non-U.S. operations are subject to certain risks inherent in conducting business abroad, including price and currency exchange controls, fluctuation in the relative value of currencies and restrictive governmental actions. Changes in the relative value of currencies occur from time to time and may, in certain instances, have a material effect on our results of operations. Our consolidated financial statements reflect remeasurement of items denominated in non-U.S. currencies to U.S. dollars, our functional currency. Exchange gains or losses are included in income in the period in which they occur. We monitor our exchange rate exposure and attempt to reduce such exposure by hedging. We have entered into forward contracts in currencies of the countries in which we conduct business in order to reduce such exposure. There can be no assurance that such forward contracts or any other hedging activity will be available or adequate to eliminate, or even mitigate, the impact of our exchange rate exposure. There can be no assurance that such risks will not have a material adverse impact on our liquidity and results of operations in the future.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk

        Market risks relating to our operations result primarily from changes in interest rates and changes in foreign currency exchange rates. As of June 30, 2002, we had $100.0 million in non-interest bearing convertible notes and approximately $14.7 million in interest bearing debt of which approximately $11.8 million was short-term debt. As a result, changes in the interest rate market would change the estimated fair value of our long-term debt. We believe that a 10 percent change in interest rates would not have a material effect on our business, financial condition, results of operations or cash flows.

        Foreign currency exposures are primarily due to non-U.S. operations which are subject to certain risks inherent in conducting business abroad, including price and currency exchange controls, fluctuation in the relative value of currencies and restrictive governmental actions. Changes in the relative value of currencies occur from time to time and may, in certain instances, have a material effect on our results of operations. Any exchange rate fluctuations can affect our margins since we may have imbalances between some foreign currency denominated revenues and expenses. Our financial statements reflect remeasurement of items denominated in non-U.S. currencies to U.S. dollars, our functional currency. Exchange gains or losses are included in income in the period in which they occur. We monitor our exchange rate exposure and attempt to reduce such exposure by hedging. We have entered into forward contracts in currencies of the countries in which we conduct business in order to reduce such exposure. At June 30, 2002, the fair value of our forward foreign exchange contracts outstanding was $14.0 million with an unrealized loss recorded in the consolidated income statement of $0.1 million for 2002. These instruments may involve elements of credit and market risk in excess of the amounts recognized in the financial statements. We believe that a ten percent change in exchange rates would not have a material effect on our business, financial condition, results of operations or cash flows. We monitor our positions and the credit quality of counter-parties, consisting primarily of major financial institutions, and do not anticipate nonperformance by any counter-party, although nonperformance could occur. There can be no assurance that such forward contracts or any other hedging activity will be available or adequate to eliminate, or even mitigate, the impact of our exchange rate exposure. There can be no assurance that such risks will not have a material adverse impact on our liquidity and results of operations in the future.

Financial Risk Management

        Our international revenues are subject to inherent risks, including fluctuations in local economies; difficulties in staffing and managing foreign operations; greater difficulty in accounts receivable collection; costs and risks of localizing products for foreign countries; unexpected changes in regulatory requirements, tariffs and other trade barriers; difficulties in the repatriation of earnings; and burdens of complying with a wide variety of foreign laws. Some of our sales outside of North America are denominated in local currencies, and accordingly, we are subject to the risks associated with fluctuations in currency rates. In particular, increases in the value of the dollar against foreign currencies decrease the U.S. dollar value of foreign sales requiring us either to increase our price in the local currency, which could render our product prices noncompetitive, or to suffer reduced revenues and gross margins as measured in U.S. dollars. Our foreign currency hedging program is comprised of foreign currency forward contracts to reduce the effect of exchange rate fluctuations. However, the hedging program will not eliminate all of our foreign exchange risks.

        The marketplace for our products dictates that we maintain inventories. Therefore, inventory obsolescence is a risk for us due to frequent engineering changes, shifting customer demand, the emergence of new industry standards and rapid technological advances including the introduction by us or our competitors of products embodying new technology. While we maintain valuation allowances for

34

excess and obsolete inventory and management continues to monitor the adequacy of such valuation allowances, there can be no assurance that such valuation allowances will be sufficient.

        As of June 30, 2002, we had outstanding foreign short-term debt totaling approximately $11.8 million. At June 30, 2002, we did not have any relationships with any unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Accordingly, we are not exposed to any financing, liquidity, market or credit risk that could arise if we were engaged in such relationships.

        At June 30, 2002 we had $100.0 million of subordinated convertible debt outstanding. The notes are due in July 2004, with no stated interest, are convertible at any time into shares of our common stock at a conversion price of $106.26 per share, are unconditionally guaranteed by DuPont and are not callable by us. In the event of a fundamental change in our company, each holder of notes will have the right to require us to redeem, in cash, any or all of such holder's notes at a price equal to 100 percent of the principal amount to be redeemed. A fundamental change generally is any transaction in which all or substantially all of our common stock is exchanged for, converted into, acquired for or constitutes the right to receive, consideration which is not all or substantially all common stock listed on a national securities exchange or approved for quotation on the NASDAQ National Market. If a fundamental change were to occur, we cannot assure you that we will have sufficient funds to pay the redemption price for all the notes tendered by the holders, although DuPont would be required to pay the redemption price under its guarantee. In that case, our failure to redeem tendered notes would constitute an event of default under the indenture for the notes, and may constitute a default under the terms of other indebtedness that we may enter into from time to time.

Item 8. Financial Statements and Supplementary Data

        The information required by this Item is included in Part IV, Item 14 (a) (1) and (2).

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

        None.

PART III

        Information with respect to the following Items is incorporated by reference to our proxy statement to be filed in connection with our 2002 annual meeting of stockholders. However, information regarding executive officers is listed below pursuant to General Instruction G of this Form 10-K.

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Item 10. Directors and Executive Officers

EXECUTIVE OFFICERS

        The following table sets forth as of June 30, 2002, the name, age and position with DuPont Photomasks of each person who is an executive officer of DuPont Photomasks.

        Peter S. Kirlin is our Chairman and CEO. From 1988 until joining the Company in May of 2000, he held various positions with ATMI, Inc., a supplier of materials, equipment and services used in the manufacture of semiconductors, most recently as Group Vice President, Technologies and Services. From 1986 to 1988, he worked at American Cyanamid Corporation as a project leader and conducted post-graduate research projects at the University of Munich's Institute of Physical Chemistry. He has 15 years of experience in the semiconductor capital equipment industry, with extensive concentration in mergers and acquisitions and a strong track record of successfully positioning businesses achieving high growth rates. Kirlin holds a Ph.D. in chemical engineering from the University of Delaware and a B.S. in chemical engineering from Penn State University. Kirlin has been issued 30 U.S. Patents and has authored more than 30 published technical papers.

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        Craig W. Kokjohn is our Executive Vice President, Worldwide Operations. In 1973, Kokjohn began his career at E.I. du Pont de Nemours & Company in the electronics business unit, where he held a variety of technical sales and sales management, technical service management, and product management positions. In 1988, Kokjohn joined us as the general manager of our Kokomo, Indiana facility. In addition, he subsequently held executive-level sales positions as Vice President U.S. Sales, Vice President U.S. Operations and Executive Vice President Global Sales.

        John M. Lynn was our Executive Vice President and General Counsel on June 30, 2002. He joined us in 1997. In July 2002, he changed his position and responsibilities and became Group President—Software Business Unit. He joined E.I. du Pont de Nemours & Company in 1980 as a chemical engineer and then, after a departure for law school, rejoined DuPont as a lawyer in 1985. He has a B.S. degree in chemical engineering from Vanderbilt University and a J.D. degree from West Virginia University.

        James R. Northup is our Executive Vice President of Worldwide Sales and joined us in January 2002. A 19-year industry veteran, Northup most recently served as President and Chief Executive Officer of Gray Scale Technologies, a privately held company that develops and markets gray-scale processing and photoblank technology for phase shift masks. Previous to that, he spent 10 years at Photronics, Inc., a supplier of photomasks, where his last position was President. He began his career in semiconductor fab operations at AT&T Technologies and Spectrum Technologies. Northup holds a B.S. with honors in chemical engineering from the University of Rhode Island.

        Satish Rishi is our Executive Vice President of Finance and Chief Financial Officer and joined us in November 2001. Most recently, he served as Vice President and Assistant Treasurer at Dell Computer Corporation. Previous to Dell, Rishi spent 13 years at Intel Corporation, where he held financial management positions of increasing responsibility, both in the United States and overseas. His last position at Intel was Assistant Treasurer. Rishi holds an M.B.A. from the University of California at Berkeley and a B.S. with honors in mechanical engineering from Delhi University in Delhi, India.

        Our executive officers are appointed annually by our Board of Directors in accordance with our Bylaws.

        Further information required by this Item is incorporated by reference to the Proxy Statement under the section captioned "Election of Directors" and "Compliance With Section 16(a) of the Exchange Act."

Item 11. Executive Compensation

        The information required by this Item is incorporated by reference to the Proxy Statement under the sections captioned "Executive Compensation and Other Information", "Director Compensation" and "Employment Contracts."

Item 12. Security Ownership of Certain Beneficial Owners and Management

        The information required by this Item is incorporated by reference to the Proxy Statement under the sections captioned "Beneficial Ownership of Securities."

Item 13. Certain Relationships and Related Transactions

        The information required by this Item is incorporated by reference to the Proxy Statement under the sections captioned "Transactions and Relationship Between Us and DuPont."

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PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)

The following documents are filed as a part of this Form 10-K:



(1)

Consolidated Financial Statements.    The following consolidated financial statements of DuPont Photomasks, Inc., as of June 30, 2001 and 2002 and for the years ended June 30, 2000, 2001 and 2002 are filed as part of this Form 10-K on the pages indicated:

(2)

Consolidated Financial Statement Schedules.    Schedules other than Schedule II are omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes.



(3)

Exhibits.    The exhibits to this Form 10-K have been included only with the copy of this Form 10-K filed with the Securities and Exchange Commission.

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        An asterisk above indicates an exhibit previously filed with the Securities and Exchange Commission as an exhibit to the filing described and is incorporated herein by reference. Unless otherwise indicated, the number of the exhibit below is also the number of such exhibit as filed with

39

the below described IPO Registration Statement, 1997 Form 10-K, 1998 Form 10-K, 1999 Form 10-K, 2000 Form 8-A, 2000 Form 10-K or 2001 Form 10-K.

(b)

Reports on Form 8-K:

Our report on Form 8-K, dated April 22, 2002, announcing that as of March 31, 2002 Schott Lithotec AG, or Schott, has acquired our photoblank business unit and that Schott and DuPont Photomasks, Inc. have entered into a long-term supply agreement to provide DuPont Photomasks, Inc. continued reliable access to commercial photoblanks.

Our report on Form 8-K, dated May 15, 2002, as amended, announcing that we have entered into an equipment purchase and a long-term supply agreement with Infineon Technologies AG, or Infineon. In a separate, but related, agreement, we, along with Infineon and Advanced Micro Devices, Inc. agreed to establish a joint venture for purposes of engaging in photomask research and development activities in Dresden, Germany. The activities of the joint venture will be co-located with our new facility in Dresden, Germany.

Our report on Form 8-K, dated May 17, 2002, announcing that several employees, officers, directors and individuals, including Satish Rishi and Marshall Turner, have adopted Written Stock and Option Trading Plans pursuant to SEC Rule 10b 5-1. The individual plans permit the trading in our stock and options according to their individual formulas, which include quantities, pricing points, dates and other variables in accordance with the SEC rules. All individual plans will be in compliance with the SEC rules and applicable securities regulations.

40

SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, we have duly caused this report to be signed on our behalf by the undersigned, thereunto duly authorized.

POWER OF ATTORNEY

        KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby severally constitutes and appoints, James W. Boeckman, Satish Rishi and Mark Stephen Syrnick, and each or any of them, his or her true and lawful attorney-in-fact and agent, each with the power of substitution and resubstitution, for him or her in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

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

41

CERTIFICATION OF
CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
DUPONT PHOTOMASKS, INC.

        I, Peter S. Kirlin, Chief Executive Officer of DuPont Photomasks, Inc., pursuant to Rules 13a-14 of the Securities Exchange Act of 1934, do hereby certify that:

1.

I have reviewed the Annual Report on Form 10-K of DuPont Photomasks, Inc. being filed;

2.

Based on my knowledge, the Annual 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 the Annual Report; and

3.

Based on my knowledge, the financial statements, and other financial information included in the Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in the Annual Report.

Date: September 9, 2002

        I, Satish Rishi, Chief Financial Officer of DuPont Photomasks, Inc., pursuant to Rules 13a-14 of the Securities Exchange Act of 1934, do hereby certify that:

1.

I have reviewed the Annual Report on Form 10-K of DuPont Photomasks, Inc. being filed;

2.

Based on my knowledge, the Annual 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 the Annual Report; and

3.

Based on my knowledge, the financial statements, and other financial information included in the Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in the Annual Report.

Date: September 9, 2002

42

INDEX TO EXHIBITS

43

        An asterisk above indicates an exhibit previously filed with the Securities and Exchange Commission as an exhibit to the filing described and is incorporated herein by reference. Unless otherwise indicated, the number of the exhibit below is also the number of such exhibit as filed with the below described IPO Registration Statement, 1997 Form 10-K, 1998 Form 10-K, 1999 Form 10-K, 2000 Form 8-A , 2000 Form 10-K or 2001 Form 10-K.

44

Report of Independent Accountants

To the Board of Directors and Stockholders of DuPont Photomasks, Inc.:

        In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) on page 38 present fairly, in all material respects, the financial position of DuPont Photomasks, Inc. and its subsidiaries at June 30, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2002 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 14(a)(2) on page 38 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        As discussed in Note 1 to the consolidated financial statements, in fiscal year 2001 the Company changed its revenue recognition for certain product shipments.

PricewaterhouseCoopers LLP

Austin, Texas
September 9, 2002

F-1

DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES

CONSOLIDATED INCOME STATEMENT

(Dollars in thousands, except share data)

The accompanying notes are an integral part of this statement.

F-2

DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

(Dollars in thousands, except share data)

The accompanying notes are an integral part of this statement.

F-3

DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(Dollars in thousands)