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TABLE OF CONTENTS
PART IV Table of Contents

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, 2003

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.    o

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

        Aggregate market value of voting stock held by nonaffiliates as of December 31, 2002, was approximately $418.4 million. As of September 5, 2003, 18,129,932 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 2003 annual meeting and proxy statement. Any reference in this report to disclosures in our 2003 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, that involve a number of risks and uncertainties. Such forward looking statements are generally accompanied by words such as "intend," "may," "plan," "expect," "believe," "should," "would," "could," "anticipate," or other words that convey uncertainty of future events or outcomes. 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 those indicated by the forward-looking statements. Such risks and uncertainties include, without limitation, the following:

•

The current downturn in the semiconductor industry could lead to a decrease in the demand for our photomask products;



•

The semiconductor industry is highly cyclical and has been subject to significant economic downturns at various times;



•

Our financial results may vary significantly from quarter to quarter or we may fail to meet investors' expectations, which could negatively impact the price of our stock;



•

Lack of visibility and short turn around time of orders may impact our ability to respond to a changing business environment;



•

We may not obtain sufficient capital to fund our needs;



•

Our operating results could be adversely affected by under-utilized production capacity;



•

A significant portion of our revenue is derived from Asia and Europe, and therefore, our business, financial condition and results of operations are to a significant degree subject to economic, political and social events in these regions;



•

Macroeconomic conditions may have effects on the semiconductor industry;



•

We may be unable to enhance our existing products and develop and manufacture new products and upgrades with improved capabilities to satisfy anticipated demand for more technologically advanced photomasks;



•

Rapid technological change could render our products obsolete or our manufacturing processes ineffective;



•

We may not remain competitive and increased competition could seriously harm our business;



•

We may be unable to successfully develop or market our EDA software;



•

DuPont has influence on all stockholder votes;



•

Our success depends, in part, upon key managerial, engineering and technical personnel as well as our ability to continue to attract and retain additional personnel and integrate new personnel into key positions; and



•

Other risks indicated in our other filings with the Securities and Exchange Commission, including but not limited to those factors which are discussed under the caption "Risk Factors" in this annual report.

        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.

        The forward-looking statements are made as of the release date hereof, and we disclaim any intention or obligation to update or revise any forward-looking statements or to update the reasons why the actual results could differ materially from those projected in the forward-looking statements, whether as a result of new information, future events or otherwise.

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PART I

Item 1. Business

The Company

        We are a leading global provider of microimaging solutions. We develop and produce advanced photomasks, a key enabling technology used in the manufacture of semiconductor and other microelectronic devices. We also develop electronic design automation, or EDA, software. We were incorporated in Texas on June 25, 1985, and were reincorporated in Delaware on December 31, 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. Our website is located at http://www.photomask.com. We make available free of charge through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material, or furnish it to, the SEC. The information contained or incorporated in our website is not part of this document.

Photomasks

        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 photomasks based on customer-supplied design data, including photomasks that meet the highly demanding design specifications required by leading semiconductor manufacturers. We believe that our focus on developing photomasks for leading edge semiconductor designs using our advanced photomask manufacturing processes provides us with a competitive advantage.

        During fiscal 2003, we sold our products to over 400 customers and customer sites in more than 20 different countries. Based on revenue, our top 20 customers during fiscal 2003 were: Agere Systems, AMD, AMI, Atmel, Chartered Semiconductor, Cypress, Hewlett-Packard, Hynix, IBM, Infineon, LSI Logic, Maxim Integrated Products, Micron Technology, Motorola, National Semiconductor, Philips, Samsung, STMicroelectronics, Texas Instruments and UMC.

        A key element of our strategy is to continue to develop and expand our strategic relationships with leading semiconductor manufacturers. These strategic relationships take on many forms, including individual joint development programs with customers such as Cypress and Xilinx to joint venture relationships such as the Advanced Mask Technology Center GmbH & Co. KG, or AMTC, our photomask research and development joint venture with AMD and Infineon. These collaborative relationships enable us to share the cost of developing leading-edge photomask technology and expand our customer relationships through, in most cases, supply agreements. We believe that our strategic relationships will help us to solidify our market position and provide us the opportunity to remain a leading supplier of advanced photomasks.

        We have a global manufacturing network with manufacturing facilities in seven countries in North America, Europe and Asia. We believe that the strategic location of our facilities provides us with a competitive advantage by placing us close to major centers of semiconductor production.

Electronic Design Automation Software

        In March 2002, we acquired the assets of BindKey Technologies, Inc., or BindKey, an EDA, or electronic design automation, software company. Integrated circuit, or IC, design engineers use EDA software to design an IC, which can then be transferred onto our photomasks. We recently introduced, with selected beta site customers, software tools that enhance the manufacturability of leading edge ICs. We believe our EDA software, which is focused on design for manufacturability, or DFM, will significantly reduce the design cycle time of ICs. Furthermore, we plan to introduce new products that are designed to enhance manufacturing yields by creating IC designs that are intended to simplify the manufacturing process.

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        We believe that continued increases in the complexity and cost of IC designs will require advanced EDA tools such as those we are developing. We intend to increase our focus on the development of integrated microimaging solutions which will help solve next generation IC design problems by incorporating insight from leading-edge photomask development into EDA tools.

Industry Background

        Integrated circuit designs consist of a series of separate patterns, each of which must be transferred onto a different photomask. The resulting series of photomasks is then used to successively image the circuit patterns onto the semiconductor wafer. As a result, photomasks are a necessary component in the typical production of semiconductors. Furthermore, as the semiconductor industry continues to build smaller and more powerful integrated circuits, advanced photomask technologies such as phase shift masks and photomasks designed with optical proximity correction features, have become critical.

        Historically, photomasks were generally designed and manufactured internally by semiconductor manufacturers in captive production facilities. However, over time, the vast majority of semiconductor manufacturers have divested their captive photomask operations and chosen to rely on merchant photomask manufacturers for their photomask needs. This trend was accelerated by 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.

        As a result of the increasing use of advanced photomask technologies and the captive to merchant supply trend, the available market for merchant photomask manufacturers like us has grown substantially. 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 2002. We estimate the photomask market served by merchant manufacturers was approximately 70% of the worldwide market in 2002.

        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.

        We believe that, over the long-term, semiconductor manufacturers will continue to introduce smaller and more powerful integrated circuits. As a result, chip complexity is expected to continue increasing, which in turn will keep advanced photomasks in the role of a critical enabling technology. Additionally, we believe that increasing complexity will require greater integration of the IC design and fabrication steps. Over time, we expect the average selling prices of photomasks to increase, reflecting the increased technology embedded in photomasks required to build more advanced semiconductor devices. As such, we believe that this trend will be the primary driver of photomask industry growth in the future, which according to an industry source is expected to be approximately 12 percent per year on average through calendar year 2008.

        An expanding field of DFM software tools is emerging as a way to help streamline the steps required to produce a chip. DFM software tools are designed to enhance manufacturing yields by creating IC designs that are intended to simplify the manufacturing process. We believe the use of these tools will grow over time and become a more integral part of the entire value chain at advanced design rules.

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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:

•

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 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.



•

Expand Our Strategic Relationships with Customers. A key element of our strategy is to continue to develop and expand our strategic relationships with leading semiconductor manufacturers. These strategic relationships take on many forms, including individual joint development programs with customers such as Cypress and Xilinx and joint venture relationships such as the AMTC. These collaborative relationships enable us to share the cost of developing leading-edge photomask technology and expand our customer relationships through, in most cases, supply agreements. We believe that our strategic relationships will help us to solidify our market position and provide us the opportunity to remain a leading supplier of advanced photomasks.



•

Capitalize on Our Established Global Manufacturing and Customer Service Support Network. We operate a network of 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.



•

Leverage Strategic Relationships with Key Suppliers. We believe close collaboration with leading equipment and material suppliers, such as ETEC Systems (an Applied Materials company), JEOL, Toshiba, KLA-Tencor, Schott, Hoya and Micro Lithography, Inc. helps enhance our ability to provide our customers with early access to the most advanced photomasks. We benefit from these relationships through more complete understanding of future materials equipment and system requirements, and through beta testing of advanced production equipment and materials in research and development partnerships with strategic customers.



•

Pursue Microimaging Solutions. We believe 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. As chip design complexity continues to increase, we are developing a suite of software tools that enhances the manufacturability of deep subwavelength designs through our wholly owned subsidiary, BindKey. We plan to introduce new products that are designed to enable our customers to create IC designs that simplify the manufacturing process and in turn enhance manufacturing yields. By offering software tools that apply a DFM approach early in the IC design process, we intend to increase our focus on the development of integrated microimaging solutions which will help solve next generation IC design problems by incorporating insight from leading-edge photomask development into EDA tools. 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.

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Products and Technology

Photomasks

        Photomasks, also called masks or reticles, 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, 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 40 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, which are protective covers for photomasks, are then mounted onto the mask and the mask is 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:

•

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.



•

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.



•

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 five 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.

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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. During fiscal 2002, we stopped producing photoblanks internally. 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.

Electronic Design Automation Software

        In March 2002, we acquired the assets of and hired the employees of BindKey. We are developing a suite of software tools that ensures manufacturability of deep subwavelength designs during the design phase and we believe that these products will 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 Europe, we have a manufacturing facility located in Corbeil-Essonnes, France. We are in the process of closing our older manufacturing facilities in Hamburg, Germany and Rousset, France and consolidating production into our other facilities. We, along with our AMTC joint venture partners, currently have a new facility in the start-up phase of production located 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 Korea and China. For financial information about the results of our operating segments for each of the last three fiscal years, see Note 18 of Notes to the Consolidated Financial Statements included in "Item 8—Financial Statements and Supplementary Data."

        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 $7.4 million, $10.1 million and $7.3 million as of June 30, 2001, 2002 and 2003, respectively. We do not believe that backlog is a meaningful indicator of future sales, and there can be no assurance that the backlog at any point in time will translate into sales in subsequent periods.

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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:

        In fiscal 2001, Texas Instruments and IBM accounted for approximately 16 percent and 10 percent of our revenue, respectively. In fiscal 2002, Texas Instruments and UMC accounted for approximately 13 percent and 10 percent of our revenue, respectively. In fiscal 2003, Texas Instruments accounted for approximately 10 percent of our revenue. Our ten largest customers, in the aggregate, accounted for more than 50 percent of our revenue in fiscal 2003.

        We have supply agreements with some of our customers, including AMD, Cypress, IBM, Infineon, Micron Technology, Motorola, UMC and Xilinx. 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 from customers for future delivery of photomasks to be used in the production of leading-edge semiconductor devices. We also have entered into joint technology development agreements with AMD, Cypress, Infineon, 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. We have three primary competitors in each of North America and Europe, and five primary competitors in Asia.

        Some of our competitors may expand operations to meet the needs of customers and take advantage of new growth opportunities. Also, captive photomask operations sometimes are divested by their owners to merchant manufacturers.

        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.

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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.

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

•

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



•

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



•

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



•

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

        We participate in research and development joint ventures, strategic alliances and joint technology development agreements, including:

•

In the fourth quarter of fiscal 2002, we, along with Advanced Micro Devices and Infineon, established the AMTC, a joint venture research and development center that will develop and pilot-manufacture next generation photomask technologies. The AMTC facility is co-located with our new commercial photomask production facility in Dresden, Germany. Both facilities are scheduled to become operational by the end of calendar 2003. We anticipate that in the future, the AMTC will house the majority of our research and development efforts globally. We believe that the AMTC will enable us to create next generation technologies with increased functionality in ever-smaller geometries.



•

We, along with AMD, Micron Technology and Motorola, participate in the RTC, a joint venture initiated in 1997 for developing advanced photomask technology and the fabrication of leading-edge photomasks. The joint venture is currently focused on technology programs aimed at accelerating the development of advanced photomasks supporting memory, microprocessors and advanced logic designs. The joint venture agreement expires in June 2004.



•

Together with strategic customers such as Cypress and Xilinx, we are engaged in joint technology development programs that are focused on delivering advanced photomask technology in support of customer roadmaps. We believe that, to the extent we successfully develop and deliver advanced photomasks, these joint development agreements enable us to capture a greater percentage of a customers' photomask demand on an annual basis.

        During fiscal 2003, our research and development expense was $29.7 million, compared with $30.3 million for fiscal 2002 and $32.2 million for fiscal 2001.

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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 photomask technologies are protected by a number of patents and patent applications. 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, 2003, we employed approximately 1,660 people worldwide.

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.

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 annual 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. The semiconductor industry is highly cyclical and has been subject to significant economic downturns at various times. The semiconductor industry suffered a sharp decline in orders and revenue in calendars 2001 and 2002, and this weakness has continued in calendar 2003. The outlook for the semiconductor industry is uncertain, and it is very difficult to predict how long the current downturn will last. A continued downturn or further downturns in the semiconductor industry could lead to a further decrease in the demand for photomasks. Our investment in new facilities and equipment is based, in part, on the anticipated expansion plans and growth 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.

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        In addition, the demand for photomasks may decrease, even when there is growth in the demand for semiconductors, due to a number of factors, including the following:

•

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



•

A reduction in design complexity;



•

Other technological and manufacturing advances; or



•

A slowdown in the introduction of new semiconductor designs.

Our financial results are 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 quickly respond to a changing business environment. In addition, our operating results could be affected by the following factors:

•

Competitive and customer-driven pricing pressures;



•

Changes in the mix of products sold;



•

Volume of orders shipped;



•

Market acceptance of our products and our customers' products;



•

Our ability to meet demand and delivery schedules;



•

Fluctuations in manufacturing yields;



•

Fluctuations in currency exchange rates;



•

Cyclical semiconductor industry conditions;



•

Our access to advanced process technologies;



•

The gain or loss by us of a large customer;



•

The length of our sales cycle; and



•

The timing and extent of product and process development costs.

        Moreover, we are limited in our ability to reduce costs quickly in response to any revenue shortfalls due to our significant fixed costs. 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 periods.

We have recently incurred losses from operations and we may incur additional losses in future periods.

        We have recently incurred losses from our operations. We cannot assure you that we will achieve or sustain profitability or positive cash flows from operating activities in the future. Our failure to achieve or sustain profitability in the future could adversely affect the market price of our common stock.

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We may not obtain sufficient capital to fund our needs.

        We will need to continue to make significant capital expenditures to enhance our manufacturing capability in order to keep pace with rapidly changing technologies. Based on our current operating plans, we or our joint ventures may require external financing from time to time to fund capital expenditures. We cannot assure you that we or our joint ventures will be able to obtain the additional capital required on reasonable terms, or at all, or that any such lack of capital will not have a material adverse effect on our financial condition and results of operations.

        We have also entered into substantial additional commercial commitments, some of which extend over multiple years, in respect of our joint ventures and certain other parties. These guarantees and additional commercial commitments are not reflected on our consolidated balance sheets but are detailed in "Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations" of this annual report.

        In the event of a fundamental change in our company, each holder of our convertible subordinated notes due July 2004 and May 2008 will have the right to require us to redeem those notes, and 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 regard to the July 2004 notes). In that case, our failure to redeem tendered notes would constitute an event of default under the indentures for the notes, and may constitute a default under the terms of other indebtedness that we may enter into from time to time.

Our operating results may be adversely affected by under-utilized production capacity.

        Our operations require us to incur significant fixed costs. Accordingly, decreases in sales volume significantly affect our operating profits when our production capacity is not fully utilized. Our results of operations could be adversely affected to the extent that such capacity is not utilized.

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 process and equipment 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. This has resulted in an increase in the price of photomasks 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, any of which could result in a loss of customers or could otherwise have a material adverse effect on our financial condition and results of operations.

We may be unable to effectively manage our manufacturing operations.

        We regularly move existing production lines among different plants. If we do not adequately manage these changes and improvements, the productivity of our plants could suffer, which could cause us to lose sales or customers and we may also incur additional expenses.

10

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 feature 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 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 financial position or results of operations. Likewise, our inability to keep up with technical and manufacturing requirements for photomasks, which continue to require decreasing feature size, could have a material adverse effect on our financial condition or 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 financial position or results of operations. 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 financial condition or 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 revenue 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;



•

Taiwan Mask Corporation; 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. As the semiconductor industry has matured, many semiconductor manufacturers have divested or closed their captive photomask operations. 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 such as 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 have greater financial, technical, marketing or other resources, any of which could provide them with a competitive advantage over us.

11

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

•

Product quality;



•

Timeliness of delivery;



•

Pricing;



•

Technical capabilities;



•

Location and capacity of manufacturing facilities; and



•

Technical service.

Our international operations present special risks.

        Approximately 42%, 50% and 53% of our revenue in fiscal 2001, 2002 and 2003, respectively, was derived from sales in non-U.S. markets. We expect revenue derived 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;



•

Difficulties in managing a global enterprise;



•

Tariffs and other trade barriers;



•

Changes in tax laws;



•

Political and economic uncertainties, such as the recent outbreak of severe acute respiratory syndrome, or SARS;



•

Impacts related to longer payment cycles;



•

Limitations on our ability under local laws to protect our intellectual property; and



•

Unexpected changes in the regulatory environment.

        Changes in the relative values of currencies occur from time to time and may, in certain instances, have a material adverse 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. 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.

12

We face risks associated with software development and marketing.

        Our success in EDA software depends upon our ability to develop and commercialize our EDA software, to develop new software products and to 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 experience significant undetected errors or "bugs" in our products. We also cannot be certain that we will be able to develop, commercialize or market EDA software, or that we will be able to license these products to customers on commercially reasonable terms. Furthermore, we might not receive significant revenue from our research and development efforts.

        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 50% of our revenue in each of fiscal 2001, 2002 and 2003. In fiscal 2001, Texas Instruments and IBM accounted for approximately 16% and 10% of revenue, respectively. In fiscal 2002, Texas Instruments and UMC accounted for approximately 13% and 10% of our revenue, respectively. In fiscal 2003, Texas Instruments accounted for approximately 10% of our revenue. As of June 30, 2003, Infineon accounted for approximately 21% of accounts receivable, trade. No other customer represented more than 10% of accounts receivable, trade as of June 30, 2003. 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 or cancel their orders without significant penalty. In addition, recently there has been a trend toward outsourcing semiconductor manufacturing to foundries. To the extent we do not have strategic relationships with these foundries, this trend could have a material adverse effect on our financial condition or 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 as long as 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 financial condition or results of operations. In addition, the manufacturing equipment necessary to produce advanced photomasks could become prohibitively expensive or might not operate as effectively as intended.

We depend on a limited number of 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 material adverse effect on our financial condition or results of operations. 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 at prices comparable with those charged by our suppliers before the disruption.

13

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 qualified 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 financial condition 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.

We may not successfully integrate or realize the intended benefits of 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;



•

Research and development write-offs; and



•

Other acquisition-related expenses.

        The success of these transactions will depend, in part, on our ability to:

•

Integrate acquired production equipment with our operations;



•

Attract, train and retain additional qualified personnel;



•

Cooperate with our joint venture partners; and



•

Utilize any resulting additional production capacity.

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 financial condition or results of operations.

14

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 condition or results of operations. Any failure by us to adequately comply with such laws and regulations could subject us to significant future liabilities.

We have risks associated with operating global information systems.

        Our manufacturing operations are dependent on an enterprise-wide software system and related infrastructure. While these systems have been designed to achieve high availability, we cannot assure you that disruptions to our operations caused by system failures will not occur.

E.I. du Pont de Nemours and Company, or DuPont, has influence on all stockholder votes and other matters.

        DuPont owned approximately 20.1% percent of our outstanding common stock as of June 30, 2003. 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 acquirer 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 terminate our use of the DuPont tradename and logo, and its exercise of that right could adversely affect us.

Our certificate of incorporation and bylaws have anti-takeover provisions, and we have a stockholders' rights plan.

        Provisions of our certificate of incorporation and bylaws, Delaware law and our stockholders' 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.

Recent Developments

        In July 2003, we signed a multi-year pellicle supply agreement with Micro Lithography, Inc., or MLI. In connection with the supply agreement, we are closing our pellicle production facility in Danbury, Connecticut, ending production in September 2003. Our global workforce will be reduced by approximately 5 percent, or approximately 96 positions once this initiative is complete. To account for the projected cost of the Danbury site closure and global workforce reduction, we will record charges in the first and second quarters of fiscal 2004 totaling between $1.7 million and $2.2 million (which are net of proceeds of $1.7 million from the sale of certain pellicle assets and technology) related to employee severance, asset disposals and related costs. As a result of this action, we expect to realize a reduction in expenses of approximately $1.0 million per quarter beginning in the second half of fiscal 2004.

15

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 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. Facilities and property that are leased have terms that begin to expire in calendar years 2003 (Santa Clara, Sunnyvale and Hsinchu), 2004 (Shanghai), 2009 (Corbeil-Essones), 2012 (Dresden and Gresham) and 2059 (Singapore). We also maintain customer service data centers in leased facilities, including centers in Burlington, Vermont, Colorado Springs, Colorado, Dallas, Texas, Hillsboro, Oregon, Melbourne, Florida and Tokyo, Japan.

        We consider the productive capacity of the facilities operated by each of the 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 condition, results of operations, cash flows or liquidity.

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

        None.

16

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. As of our record date on September 5, 2003 we had 79 shareholders of record.

        The information required to be disclosed by Item 201(d) of Regulation S-K is disclosed in Item 12 of this annual report

Item 6. Selected Financial Data

        The following tables set forth our selected consolidated financial data. The consolidated balance sheet data as of June 30, 2002 and 2003 and the consolidated income statement data for each of the three years ended June 30, 2003 has been derived from the audited consolidated financial statements appearing elsewhere in this document. The consolidated financial data for the years ended June 30, 1999 and 2000 and as of June 30, 1999, 2000 and 2001 has been derived from audited consolidated financial statements not appearing in this document. The following consolidated financial 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.

17

(a)

Includes a pre-tax charge of $36.1 million related to cost reduction programs.

(b)

Includes pre-tax realized and unrealized gains of $10.7 million on warrants.

(c)

Includes a pre-tax charge of $7.4 million related to cost reduction programs and acquired in-process research and development.

(d)

Includes a pre-tax gain of $10.4 million related to the sale of all of our photoblank manufacturing assets.

(e)

Includes a pre-tax charge of $26.1 million related to cost reduction programs.

(f)

Includes a pre-tax charge of $43.2 million related to the impairment of long-lived assets.

18

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 consolidated 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 400 customers and customer sites in more than 20 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 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.

        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.

19

Results of Operations

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

Year Ended June 30, 2003 Compared to Year Ended June 30, 2002

        Revenue, net.    Revenue, net is comprised primarily of photomask sales to semiconductor manufacturers. Revenue, net decreased 5.5 percent from $341.9 million in 2002 to $323.1 million in 2003. From 2002 to 2003, revenue, net produced in North America decreased from $171.6 million to $152.0 million, in Europe increased from $62.0 million to $63.4 million and in Asia decreased from $108.3 million to $107.7 million. The decreases were attributable to a decline in average selling prices partially offset by an increase in unit demand. Revenue, net was also negatively impacted by work stoppages in Europe and by a customer that required us to re-certify one of our facilities in Asia.

        Cost of Goods Sold.    Cost of goods sold consists of materials, labor, depreciation and overhead. Cost of goods sold increased 7.8 percent from $272.0 million in 2002 to $293.3 million in 2003. Gross profit margin decreased from 20.5 percent in 2002 to 9.2 percent in 2003. The decrease in gross profit margin resulted primarily from a decline in revenue due to lower average selling prices, costs associated with the consolidation of trailing edge production in Europe, the ramp-up of our advanced production facility in Dresden, Germany and increased depreciation. These increases in cost of goods sold were partially offset by benefits realized from our cost reduction programs. We expect that gross profit margins will experience near term pressure primarily as a result of the start-up costs for our Dresden, Germany manufacturing facility and consolidation costs in Europe. Over the long term, we expect gross profit margins to improve as a result of lower costs resulting from our consolidation efforts in Europe and impairment of long-lived assets during 2003. See Notes 14 and 15 of Notes to the Consolidated Financial Statements included in "Item 8—Financial Statements and Supplementary Data."

20

        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 increased 6.6 percent from $41.2 million in 2002 to $43.9 million in 2003. Selling, general and administrative expense as a percentage of revenue increased from 12.0 percent in 2002 to 13.6 percent in 2003. The increase in selling, general and administrative expense was primarily a result of the completion and implementation of new information systems, the ramp-up of our Dresden, Germany facility and full year ownership of BindKey offset by lower costs associated with the divestiture of the photoblanks business and cost containment efforts. We expect selling, general and administrative expense will increase in the near term as a result of increasing costs for the ramp-up of our facility in Dresden, Germany and BindKey.

        Research and Development Expense.    Research and development expense consists primarily of employee costs, cost of consumed materials, depreciation, engineering related costs and our share of costs of the RTC and AMTC joint ventures. Research and development expense decreased 2.1 percent from $30.3 million in 2002 to $29.7 million in 2003. As a percentage of revenue, research and development expense increased slightly from 8.9 percent in 2002 to 9.2 percent in 2003. The decrease in cost was attributable to reduced costs associated with the modification and extension of our agreement with the RTC partners offset partially by an increase in BindKey's EDA software development expenses and start-up expenses for the AMTC. We expect research and development expense will increase as we incur our share of the costs from the ramp-up of the AMTC in the fiscal 2004.

        Special Charges.    In 2002, we recorded pre-tax special charges totaling $7.4 million related to cost reduction programs and acquired In Process Research & Development, or IPR&D. These initiatives were completed as of March 31, 2002 and the related liabilities were completely settled as of September 30, 2002. The special charges of $2.0 million related to employee severance were the result of eliminating 68 employment positions, primarily manufacturing, in North America and Europe. The special charges of $5.1 million related to asset disposals and related costs resulted primarily from decommissioning trailing-edge production equipment. In connection with the acquisition of the assets of BindKey in March 2002, approximately $0.3 million of the purchase price was allocated to 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. As a result of these actions, we realized a reduction in expenses of approximately $4.5 million during 2003.

        In 2003, we recorded special charges totaling $26.1 million related to employee severance, asset disposals and related costs, and lease termination costs. The special charges related to North America, Europe and Asia were $7.2 million, $18.6 million and $0.3 million, respectively. These special charges were the result of programs that were implemented to reduce costs. The integration and consolidation initiatives in North America were completed as of March 31, 2003 and the related liabilities were substantially settled as of June 30, 2003. We plan to vacate the owned manufacturing facility in Rousset, France and the leased manufacturing facility in Hamburg, Germany, complete the consolidation initiatives in Europe and settle the related liabilities, including severance, by December 31, 2003. The integration and consolidation initiatives in Asia were completed as of March 31, 2003 and the related liabilities were completely settled as of June 30, 2003. As a result of these actions, we expect to realize a reduction in expenses of approximately $10.0 million during fiscal 2004.

        A summary of the related accrued liabilities is shown below (in millions):

21

        Impairment of Long-Lived Assets.    During 2003, we recorded a charge of $43.2 million for reductions in the carrying value of certain long-lived assets held and used in operations. At fiscal year end and in accordance with SFAS No. 144, we performed a periodic review and evaluation of the carrying value of long-lived assets and determined that, based on revised market assumptions reflecting the sustained industry downturn and the continued under-utilization of production equipment, the carrying value of certain production facilities and equipment in North America and Asia exceeded the current fair value. Asset impairment tests were performed at the facility site location level which is the lowest level for which separately identifiable cash flows exist. The periodic review and evaluation of the carrying value of the long-lived assets was performed with the assistance of independent valuation specialists. The fair value of assets that were subject to impairment were determined using both the cost, market and income approaches. As a result of our impairment of long-lived assets, we also expect depreciation expense to be lower by approximately $2.0 million to $2.5 million per quarter subsequent to June 30, 2003.

        Income (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. We held no warrants during 2003.

        Gain on Sale of Assets.    Gain on sale of assets represents the gain recognized upon a sale of property and equipment. In March 2002, we sold all of our photoblank manufacturing assets located in Poughkeepsie, New York, to Schott Lithotec AG, or Schott. We 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 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 supply agreement also allows us to be paid additional amounts totaling $10.0 million during fiscal 2004 if specified purchase levels are achieved by March 31, 2004.

        Other Income (Expense), net.    Other income (expense), net includes interest expense, interest income and exchange gains and losses. Other income (expense), net was $1.2 million in 2002 and $(0.9) million in 2003. The decrease was primarily due to lower interest income reflective of lower interest rates and exchange losses from foreign currency movements.

        Provision for (Benefit from) Income Taxes.    The provision for (benefit from) income taxes differs from the amounts computed by applying the federal statutory rate of 35 percent to income (loss) before income taxes and minority interest as a result of our reduced tax rates in certain Asian jurisdictions, our inability to record deferred tax benefits for net operating losses generated in certain tax jurisdictions and our need to place valuation allowances on certain other deferred tax assets as discussed below.

        During 2003, we recorded valuation allowances against our net deferred tax assets in North America and the majority of those in Europe (primarily related to net operating loss carryforwards). The restructuring in Germany also resulted in a charge for a valuation allowance of $1.8 million during 2003. The valuation allowances were recorded under the provisions of SFAS No. 109, Accounting for Income Taxes, which requires an assessment of positive and negative evidence when determining the need for valuation allowances. Historical evidence, such as the operating results in North America and Europe during the most recent three-year period, is weighted more heavily in this assessment as compared to future expected results because of the uncertainty of actually achieving forecasted results. Our cumulative North America losses and Europe losses in the most recent three-year period represent sufficient negative evidence to require valuation allowances against our North America and Europe net deferred tax assets. We intend to maintain valuation allowances until sufficient positive evidence exists to support their reversal.

        During 2003, we received income tax refunds of $23.3 million by carrying North America net operating losses back to prior years. Also, our decision to carryback certain losses in France resulted in a tax benefit of $3.2 million.

        Minority Interest in Income of Joint Ventures.    Minority interest in income of joint ventures reflects our partners' share of the earnings of our consolidated joint venture operations, which currently include our Shanghai, China and Hsinchu, Taiwan operations. The minority interest share of our income of joint ventures was $6.9 million for 2002 and $1.8 million for 2003. The decrease was a result of lower revenue and increased production costs.

22

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, during 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 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.

        Cost of Goods Sold.    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 during 2001 to $69.9 million during 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.

        Selling, General and Administrative Expense.    Selling, general and administrative expense decreased 15.4 percent from $48.6 million during 2001 to $41.2 million during 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 revenue partially offset by the benefits realized from the cost reduction programs.

        Research and Development Expense.    Research and development expense decreased 6.0 percent from $32.2 million during 2001 to $30.3 million during 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 revenue.

        Special Charges.    In 2002, we recorded pre-tax special charges totaling $7.4 million related to cost reduction programs and acquired IPR&D. These initiatives were completed as of March 31, 2002 and the related liabilities were completely settled as of September 30, 2002. The special charges of $2.0 million related to employee severance were the result of eliminating 68 employment positions, primarily manufacturing, in North America and Europe. The special charges of $5.1 million related to asset disposals and related costs resulted primarily from decommissioning trailing-edge production equipment. In connection with the acquisition of the assets of BindKey in March 2002, approximately $0.3 million of the purchase price was allocated to 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.

        Income (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 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 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 a reduction of cost of goods sold over the term of the agreement.

        Other Income (Expense), net.    Other income (expense), 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.

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        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. 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 North America. 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 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.

        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. The increase was primarily the result of increased profitability in our China joint venture.

Liquidity and Capital Resources

        Our working capital was $133.3 million as of June 30, 2002 and $213.4 million as of June 30, 2003. The increase in working capital was due principally to an increase in cash from the issuance of $125.0 million of convertible subordinated notes on May 5, 2003, offset by capital expenditures. Cash and cash equivalents were $138.9 million as of June 30, 2002 and $250.4 million as of June 30, 2003. Cash provided by operating activities was $62.7 million in fiscal 2002 and $55.8 million in 2003. The decrease in cash provided by operating activities was primarily a result of reduced profits in fiscal 2003 as compared to fiscal 2002.

        Cash used in investing activities, consisting primarily of capital expenditures, was $75.1 million in fiscal 2002 and $67.4 million in fiscal 2003. The decrease in cash used in investing activities resulted from lower capital expenditures and payments for acquisitions. Management expects capital expenditures for fiscal 2004 to be approximately $65.0 million. Capital expenditures have been and will be used primarily to advance our technical capability. In addition, we may in the future pursue additional acquisitions of businesses, products and technologies, or enter into 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 $8.1 million in fiscal 2002 and $122.7 million in fiscal 2003. Proceeds from borrowings, net of issuance costs, increased $124.7 million in fiscal 2003 due to the issuance of $125.0 million convertible subordinated notes on May 5, 2003. Additionally, our employees purchased $2.8 million of common stock under our employee plans.

        In July 2000, we issued and sold $100.0 million aggregate principal amount of convertible subordinated notes. The notes were sold at par less an underwriting discount of 2 percent and we received 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 are not callable by us. We have reserved 941,088 shares of our common stock for conversion of the convertible subordinated notes. 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. Debt issue costs of $2.4 million related to these notes are included in non-current other assets on the accompanying consolidated balance sheets and are amortized using the straight-line method, which approximates the interest method, to interest expense over the scheduled maturity period.

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        On May 5, 2003, we issued and sold $125.0 million aggregate principal amount of convertible subordinated notes in a private placement. The notes were sold at par less an underwriting discount of 2.625 percent and we received net proceeds of $121.2 million. The notes are due May 15, 2008, will accrue interest at an annual rate of 1.25 percent and are convertible at any time into shares of our common stock at a conversion price of $25.595 per share. Interest on the notes is payable semi-annually on May 15 and November 15 of each year beginning November 15, 2003. We have reserved 4,883,762 shares of our common stock for conversion of the convertible subordinated notes. If a change of control occurs, 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 change of control is any transaction in which a person or group becomes the beneficial owner of 50% or more of our common stock or has the power to elect a majority of our board of directors, any consolidation, merger or similar transaction in which our shareholders immediately prior to the transaction hold less than a majority of the outstanding voting stock of the surviving corporation and the consideration in the merger or consolidation is not common stock listed on a national securities exchange or approved for quotation on the NASDAQ National Market, or the holders of our capital stock approve any plan or proposal for our liquidation or dissolution. A change of control will not be deemed to have occurred if the last sale price of our common stock for any five trading days during the ten trading days immediately preceding the change of control is at least equal to 105% of the conversion price of the notes. If a change of control 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. 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. Debt issue costs of $3.8 million related to these notes are included in non-current other assets on the accompanying consolidated balance sheet and are amortized using the straight-line method, which approximates the interest method, to interest expense over the scheduled maturity period. In connection with the issuance of the notes, we entered into a Registration Rights Agreement and filed a shelf registration statement covering resales of the notes and the common stock issuable upon conversion of the notes. If we fail to comply with certain of our obligations under the Registration Rights Agreement, additional interest will accrue on the affected notes at an annual rate of 0.5 percent. Also in connection with the issuance of the notes, we amended our Rights Agreement dated January 30, 2001, to provide that the issuance of the notes to the initial purchasers would not cause the initial purchasers to be Acquiring Persons (as defined in the Rights Agreement) under the Rights Agreement and therefore no Distribution Date (as defined in the Rights Agreement) under the Rights Agreement would occur as a result of the issuance of the notes to the initial purchasers.

        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, 2003 (in millions):

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        The following summarizes our other commercial commitments as of June 30, 2003 (in millions):

        Guarantees include our portion of certain equipment leases of the RTC with future minimum lease payments aggregating approximately $2.9 million as of June 30, 2003.

        We, along with AMD and Infineon, have established the Maskhouse Building Administration GmbH & Co., or BAC, which is the owner of a state-of-the-art photomask research manufacturing facility in Dresden, Germany. We have guaranteed one-third of the BAC's construction bridge loan. The 75.0 million Euro construction bridge loan was executed in June 2002 with an original maturity date of June 13, 2003 and was amended and extended in May 2003 as described below. The construction bridge loan had 65.0 million Euro ($74.2 million as of June 30, 2003) outstanding as of June 30, 2003. During December 2002, the BAC and AMTC executed a facility agreement that included a term loan of 75.0 million Euro ($85.7 million as of June 30, 2003) and a revolving credit facility of 120.0 million Euro ($137.0 million as of June 30, 2003). As of June 30, 2003, there were no outstanding balances under either the term loan or revolving credit facility. The term loan will be used to repay the construction bridge loan and the revolving credit facility will be used for equipment purchases. We have guaranteed one-third of the term loan, or up to 25.0 million Euro ($28.6 million as of June 30, 2003), until the BAC building is occupied and lease payments begin. We have also guaranteed up to 32.0 million Euro ($36.5 million as of June 30, 2003) of the revolving credit facility. Each of these guarantees includes certain other costs as defined in the loan agreements. We will be required to honor our guarantees upon the occurrence of an event of default as defined in the loan agreements.

        Both the term loan and the revolving credit facility include a condition precedent requiring European Union approval of certain terms prior to initial drawdown. In May 2003, the construction bridge loan and the revolving credit facility were amended to provide access to funds on an interim basis pending receipt of the European Union approval. The construction bridge loan was amended to extend the final maturity from June 13, 2003 to September 30, 2003, In combination with the maturity date extension, construction bridge loan commitments of 10.0 million Euro were voluntarily canceled by the BAC, leaving total commitments of 65.0 million Euro as of May 2003. Also during May 2003, the revolving credit facility was amended to allow up to 52.0 million Euro ($59.4 million as of June 30, 2003) to be accessed on an interim basis through September 2003. There were no amendments to our guarantees in association with the amendments to the construction bridge loan and revolving credit facility. There were no outstanding balances associated with the interim revolving credit facility commitments as of June 30, 2003. In July 2003, we received approval from the European Union. As a result, we expect the term loan and the revolving credit facility to be funded and the construction bridge loan to be repaid during the first quarter of fiscal 2004.

        In May 2002, we entered into an agreement to acquire photomask production equipment from Infineon's internal photomask manufacturing operations in Munich, Germany and become Infineon's strategic photomask supplier. In consideration for the acquisition of certain photomask production assets and the agreement to supply Infineon with photomasks over the 10-year term of the agreement, we agreed to pay Infineon $53.5 million over a seven-year period ending in March 2009. We made the first $10.0 million payment associated with the agreement in April 2003. In addition, we agreed to purchase from Infineon additional photomask production equipment for approximately $28.1 million payable over a five-year period ending in December 2006. We expect to fund all payments to Infineon from cash provided by operations; however, we may elect to satisfy up to approximately $30.2 million of these amounts by issuing shares of our common stock.

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        In addition to the commitments in the tables above, we are also committed to fund approximately 25 percent of the costs related to the maintenance and overhead of the leased equipment of the RTC through June 2004. Additionally, we are committed to fund a portion of the operating cash requirements of the AMTC. We expect our portion to be approximately 33 percent through September 2003 and to vary between approximately 22 percent to 26 percent thereafter. We will lease approximately 50 percent of the BAC's photomask research and manufacturing facility for a term of 10 years.

        We have also established a profit sharing plan with the BindKey employees. Over the next three years, BindKey employees may earn amounts annually based on the annual after-tax earnings of BindKey. In addition and upon the termination of the final year subject to the profit sharing plan, the employees may earn as much as an additional $120.0 million based on the after-tax earnings of BindKey in the final year. Any amounts earned in relation to the profit sharing plan will be expensed in the period earned.

        In addition, in March 2002 we sold all of our photoblank manufacturing assets located in Poughkeepsie, New York, to Schott Lithotec AG, or Schott. We also entered into a supply agreement with Schott for a significant portion of our future purchases of photoblanks.

        We also have various purchase commitments incidental to the normal course of business, including non-refundable deposits to purchase equipment. In the aggregate, such commitments are not at prices in excess of current market.

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 or FCA shipping point; however, our final terms depend upon the negotiations with our customers.

•

Estimates, specifically sales return allowances, the allowance for doubtful accounts receivable, allowance for excess and obsolete inventory and depreciation expense

        The preparation of consolidated financial statements requires us to make estimates and assumptions that affect the reported amount of assets and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue 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 or if our original estimates are otherwise incorrect, we may have to reduce our estimates of the recoverability of amounts due us by a material amount.

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•

We maintain inventory reserves for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and estimated market value based on assumptions of future demands and market conditions. If actual market conditions are materially less favorable than those projected by management, or if our estimates of market value are later determined to have been materially incorrect, additional inventory writedowns may be required.



•

Property and equipment are depreciated using the straight-line method over the estimated useful lives of the assets ranging from three to seven years for equipment and 10 to 20 years for buildings. Property and equipment held under capital leases and leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful lives of the assets or the estimated remaining term of the lease.

•

Valuation of identifiable intangibles and other long-lived assets

        We assess the impairment of identifiable intangibles subject to amortization and other long-lived assets 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 subject to amortization and other long-lived assets 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. See Note 15 of Notes to the Consolidated Financial Statements included in "Item 8—Financial Statements and Supplementary Data" in regard to the charge of $43.2 million recorded during fiscal 2003 for reductions in the carrying value of certain long-lived assets held and used in operations.

•

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 on our consolidated balance sheets. Further, the actual annual amount of taxable income in each tax jurisdiction may differ from the estimates we use 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 taxable income and establish valuation allowances if recovery is not more likely than not. Our income tax provision on the consolidated income statements are 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.

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•

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 exercise significant 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, AMTC, BAC and certain of our non-North America employees. Transactions with DuPont relate primarily to agreements entered into in 1996. Additionally, $1.4 million and $1.9 million of our revenue in China for fiscal 2001 and 2002, respectively, was transacted through a DuPont subsidiary in order to facilitate the collection of accounts receivable. We conduct a portion of our research and development projects by funding our proportionate share of the research efforts of the RTC and AMTC joint ventures. Additionally, we have receivables from certain of our non- North America employees related primarily to housing and automobile loans.

        In June 2002, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standard, or SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 provides guidance on the accounting for recognizing, measuring and reporting of costs associated with exit and disposal activities, including restructuring activities. SFAS No. 146 adjusts the timing of when a liability for termination benefits is to be recognized based on whether the employee is required to render future service. A liability for costs to terminate an operating lease or other contract before the end of its term is to be recognized when the entity terminates the contract or ceases using the rights conveyed by the contract. All other costs associated with an exit or disposal activity are to be expensed as incurred. SFAS No. 146 requires the liability to be measured at its fair value with subsequent changes in fair value to be recognized each reporting period utilizing an interest allocation approach. 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). The pronouncement is effective for exit or disposal activities initiated after December 31, 2002 and had no impact on our consolidated financial condition or results of operations.

        In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires certain guarantees to be measured at fair value upon issuance and recorded as a liability. In addition, FIN 45 expands current disclosure requirements regarding guarantees issued by an entity, including tabular presentation of the changes affecting an entity's aggregate product warranty liability. Certain provisions of FIN 45 are effective December 15, 2002: others are effective after December 31, 2002. The adoption of FIN 45 had no impact on our consolidated financial condition or results of operations.

        In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, an Amendment of FASB Statement No. 123. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends certain provisions of SFAS No. 123 to require that disclosure of the pro forma effect of applying the fair value method of accounting for stock-based compensation be prominently displayed in an entity's accounting policy in annual and interim financial statements. Certain of the disclosure modifications are required for fiscal years ending after December 15, 2002. The adoption of SFAS No. 148 had no impact on our consolidated financial condition or results of operations.

        In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest Entities ("VIE"). FIN No. 46 requires that if a company holds a controlling financial interest in a VIE, the assets, liabilities and results of the VIE's activities should be consolidated in the entity's financial statements. We do not expect that the adoption of FIN No. 46 will have a material impact on our consolidated financial condition or results of operations.

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        In January 2003, the Securities and Exchange Commission ("SEC") issued a final rule requiring enhanced disclosure of material off-balance sheet transactions, arrangements, and other relationships with unconsolidated entities that may have a material current or future effect on financial condition, changes in financial condition, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenue or expenses. The rule also requires a tabular disclosure of future payments due under contractual commitments. The disclosure requirements for off-balance sheet transactions, arrangements and other relationships are required for fiscal years ending on or after June 15, 2003. The adoption of this pronouncement had no impact on our consolidated results of operations or financial condition. The tabular disclosure requirements for future payments due under contractual commitments are required for fiscal years ending on or after December 15, 2003. We do not expect the tabular disclosure requirements to have a material impact on our consolidated financial condition or results of operations.

        In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, except to the extent the provisions of this statement relate to previously effective SFAS No.133 implementation issues and for hedging relationships designated after June 30, 2003. We do not expect that the adoption of SFAS No. 149 will have a material impact on our consolidated financial condition or results of operations.

        In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this pronouncement had no impact on our consolidated financial condition or results of operations.

        Foreign Currency Exposure.    Non-North America 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 consolidated 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 consolidated results of operations in the future.

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, 2003, we had $100.0 million in non-interest bearing convertible subordinated notes, $125.0 million in 1.25% convertible subordinated notes and $13.1 million in interest bearing borrowings of which $11.5 million were short-term borrowings. As a result, changes in the interest rate market would change the estimated fair value of our long-term convertible notes and other interest bearing borrowings. 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.

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        Foreign currency exposures are primarily due to non-North America 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 revenue and expenses. 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. As of June 30, 2003, the fair value of our forward foreign exchange contracts outstanding was $29.1 million with an unrealized loss recorded in the consolidated income statement of $0.4 million for 2003. These instruments may involve elements of credit and market risk in excess of the amounts recognized in the consolidated financial statements. We believe that a 10 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 revenue 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 general, 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 revenue and gross margins as measured in U.S. dollars. Our foreign currency-hedging program is not designed to hedge the margin risks associated with foreign exchange rate changes. Our hedging is comprised of foreign currency forward exchange contracts utilized to mitigate the risks associated with foreign currency fluctuations on certain balance sheet exposures. However, the hedging program will not eliminate all of our foreign exchange risks.

        The marketplace for our products dictates that we maintain inventories of raw materials. 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 our competitors or us of products embodying new technology. While we maintain valuation allowances for 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, 2003, we had outstanding foreign short-term borrowings, including capital lease obligations, totaling $11.4 million. As of June 30, 2003, 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.

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        As of June 30, 2003 we had $100.0 million of convertible subordinated notes outstanding due in July 2004. The notes have 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.

        In addition, we issued and sold $125.0 million aggregate principal amount of convertible subordinated notes in a private placement in May 2003. The notes are due May 15, 2008, will accrue interest at an annual rate of 1.25 percent and are convertible at any time into shares of our common stock at a conversion price of $25.595 per share. Interest on the notes is payable semi-annually on May 15 and November 15 of each year beginning November 15, 2003. If a change of control occurs, 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 change of control is any transaction in which a person or group becomes the beneficial owner of 50% or more of our common stock or has the power to elect a majority of our board of directors, any consolidation, merger or similar transaction in which our shareholders immediately prior to the transaction hold less than a majority of the outstanding voting stock of the surviving corporation and the consideration in the merger or consolidation is not common stock listed on a national securities exchange or approved for quotation on the NASDAQ National Market, or the holders of our capital stock approve any plan or proposal for our liquidation or dissolution. If a change of control 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. 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. In connection with the issuance of the notes, we entered into a Registration Rights Agreement and filed a shelf registration statement covering resales of the notes and the common stock issuable upon conversion of the notes. If we fail to comply with certain of our obligations under the Registration Rights Agreement, additional interest will accrue on the affected notes at an annual rate of 0.5 percent.

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.

Item 9A. Controls and Procedures

        Our chief executive officer and our chief financial officer, based on their evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d -15(e) under the Securities and Exchange Act of 1934) as of the end of the period covered by this report on Form 10-K of DuPont Photomasks, Inc., believe that our disclosure controls and procedures were effective. There were no significant changes in internal control over financial reporting or in other factors during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART III

        Information with respect to the following Items is incorporated by reference to our proxy statement to be filed in connection with our 2003 annual meeting of stockholders. However, information regarding executive officers is listed below pursuant to General Instruction G of this Form 10-K.

Item 10. Directors and Executive Officers

EXECUTIVE OFFICERS

        The following table sets forth as of June 30, 2003, the name, age and position with DuPont Photomasks of each person who is an executive officer of DuPont Photomasks.

        Marshall C. Turner is Chairman of our Board and became our Chief Executive Officer in June 2003. Mr. Turner is a director of the AllianceBernstein Technology Fund, Inc. He is also the Chairman of the Board of the Smithsonian's National Museum of Natural History, and a director of the George Lucas Educational Foundation. From 1981 through 1998, he was a founding general partner of Taylor & Turner Associates, Ltd., the general partner of several venture partnerships. He served on an interim basis from June 1999 to May 2000 as the Chairman of our Board of Directors and Chief Executive Officer. He holds a Bachelor's Degree in Mechanical Engineering and a Master's Degree in Product Design from Stanford University, and a Master's Degree in Business Administration from Harvard University. He has been one of our directors since April 1996.

        Craig W. Kokjohn is our Executive Vice President—Worldwide Operations. In 1973, Mr. Kokjohn began his career at DuPont in the electronics business unit, where he held a variety of technical sales and sales management, technical service management, and product management positions. In December 1988, Mr. Kokjohn joined us as the general manager of our Kokomo 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. He holds a Bachelor's Degree in Chemical Engineering from the University of Iowa.

        James W. Boeckman is our Executive Vice President, General Counsel and Secretary and joined us in July 2002. Prior to joining us, he was a partner in the Corporate and Securities Practice Group of Vinson & Elkins L.L.P. for five years and served as co-chair of the firm's Technology Transactions and Licensing practice group. Prior to joining Vinson & Elkins L.L.P., Mr. Boeckman served as Senior Regional Counsel for the Asia-Pacific region for Electronic Data Systems Corporation. Mr. Boeckman graduated summa cum laude with a B.A. from Westminster College and with high honors from The University of Texas School of Law.

        James R. Northup is our Executive Vice President—Worldwide Sales and joined us in January 2002. A 19-year industry veteran, Mr. 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. Mr. Northup holds a B.S. with honors in chemical engineering from the University of Rhode Island.

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        Satish Rishi is our Executive Vice President—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, Mr. 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. Mr. 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.

        In June 2003 our Board of Directors approved a code of ethics for our senior executives, including our principal executive officer, principal financial officer, and principal accounting officer or controller (as those terms are used in the applicable SEC rules). A copy of our code of ethics is filed as an exhibit to this annual report. The code of ethics supplements our existing business ethics policies and procedures that are applicable to all of our employees

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

Item 14. Principal Accountant Fees and Services

        The information required by this Item is incorporated by reference to the Proxy Statement under the section captioned "Ratification of Selection of Independent Accountants."

PART IV

Item 15. 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, 2002 and 2003 and for the years ended June 30, 2001, 2002 and 2003 are filed as part of this Form 10-K on the pages indicated:

34

        (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.

35

        A letter above indicates an exhibit previously filed with the Securities and Exchange Commission as an exhibit to the filing described below and is incorporated herein by reference.

(b)

Reports on Form 8-K:

        Our report on Form 8-K, dated April 15, 2003, reporting our announcements on April 11, 2003 and April 15, 2003, respectively, regarding (i) our preliminary financial results for the fiscal quarter ended March 31, 2003 and certain other information and (ii) our financial results for the fiscal quarter ended March 31, 2003 and certain other information.

        Our report on Form 8-K, dated April 30, 2003, reporting our announcement on April 29, 2003 regarding (i) our intention to offer $100.0 million aggregate principal amount of convertible subordinated notes due 2008 in a private placement (the "Offering") and (ii) our pricing of the previously announced Offering and that the size of the Offering had increased from $100.0 million to $105.0 million.

        Our report on Form 8-K, dated May 5, 2003, reporting our announcement on May 5, 2003, regarding our completion of the private placement of $125.0 million aggregate principal amount of our convertible subordinated notes due 2008.

36

        Our report on Form 8-K, dated June 26, 2003, reporting our announcement on June 25, 2003, that (i) Peter S. Kirlin, Ph.D., had resigned as chairman and chief executive officer and that the board of directors elected Marshall C. Turner as chairman of the board and chief executive officer and (ii) revenue for the fourth quarter of fiscal 2003, ending June 30, 2003, was currently tracking to the low end of the range of previous guidance, or $80.0 million, and our plans to report full fourth quarter results on Wednesday, July 23, 2003.

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.

        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:

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Report of Independent Auditors

        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 15(a)(1) on page 34 present fairly, in all material respects, the financial position of DuPont Photomasks, Inc. and its subsidiaries at June 30, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2003 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 15(a)(2) on page 35 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.

/s/ PricewaterhouseCoopers LLP

Austin, Texas
July 22, 2003

F-1

DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES

CONSOLIDATED INCOME STATEMENTS

(Dollars in thousands, except share data)

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

F-2

DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

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

F-3

DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)