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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended July 3, 2004

OR

For the transition period from            to            

COMMISSION FILE NUMBER 001-16611

Mykrolis Corporation

(Exact Name of Registrant as Specified in its Charter)

Delaware

(State or Other Jurisdiction of Incorporation or Organization)

04-3536767

(I.R.S. Employer Identification No.)

129 Concord Road

Billerica, Massachusetts 01821

(Address of principal executive offices)

(978) 436-6500

Registrant’s Telephone Number, Including Area Code

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 and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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

The registrant had 41,687,995 shares of common stock outstanding as of July 15, 2004.

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Mykrolis Corporation

INDEX TO FORM 10-Q

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PART I - FINANCIAL INFORMATION

Item 1. Condensed Financial Statements

Mykrolis Corporation

Consolidated Statements of Operations

(In thousands except per share data)

(Unaudited)

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

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Mykrolis Corporation

Consolidated Balance Sheets

(In thousands except share data)

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

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Mykrolis Corporation

Consolidated Statements of Shareholders’ Equity

and Comprehensive Income (Loss)

(In thousands)

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

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Mykrolis Corporation

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

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

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Mykrolis Corporation

Notes to Consolidated Financial Statements

(In thousands except share and per share data)

1. Background and Basis of Presentation

Background

Prior to March 31, 2001, Mykrolis Corporation’s (the “Company”) business was operated as a fully integrated business unit of Millipore Corporation (“Millipore”); the Company became independent through a spin-off by Millipore that was effected in three steps. On March 31, 2001, Millipore transferred to the Company substantially all of the assets and liabilities associated with its microelectronics business (the “Separation”). The Company completed its initial public offering of 7.0 million shares of common stock on August 9, 2001. On February 27, 2002 (the “Distribution Date”), Millipore completed the spin-off of the Company through the distribution to its shareholders of all of the 32.5 million shares of the Company’s common stock owned by Millipore on that date. Effective February 28, 2002 the Company became a fully independent company.

Interim Financial Statements

The accompanying consolidated financial statements have been prepared in accordance with the rules of the Securities and Exchange Commission for interim financial statements and do not include all disclosures required by generally accepted accounting principles in the United States of America. The financial information included herein, other than the consolidated balance sheet at December 31, 2003, has been prepared without audit. The consolidated balance sheet at December 31, 2003 has been derived from, but does not include all the disclosures contained in the audited consolidated financial statements for the year ended December 31, 2003. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Form 10–K Annual Report for the year ended December 31, 2003. The financial information as of July 3, 2004 and for the three and six months ended July 3, 2004 and June 28, 2003 is unaudited, but includes all adjustments that management considers necessary for a fair presentation of the Company’s consolidated results of operations, financial position and cash flows. All of these adjustments are of a normal recurring nature. Results for the six-month period ended July 3, 2004 are not necessarily indicative of results to be expected for the full fiscal year 2004 or for any other future periods.

Fiscal Year

The Company’s fiscal year is the 365-366 day period that commences on January 1 and ends on December 31. Each fiscal quarter generally contains 13 weeks and consists of 88 to 94 days ending on the Saturday nearest the calendar month end. Fiscal year 2004 comprises the 366 day period from January 1 to December 31, 2004 with quarters ending March 3, July 3, October 2 and December 31. Fiscal year 2003 comprises the 365 day period that began on January 1 and ended on December 31, 2003 with quarters ending March 29, June 28, September 27 and December 31.

Reclassifications

Certain items in the prior year’s consolidated financial statements have been reclassified to conform to the current presentation of the financial statements.

2. Stock Plans

Options for the purchase of the Company’s common stock have been granted to officers, directors and key employees under various nonqualified stock option plans and agreements. The Company accounts for these grants under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation cost is recorded as a charge to operations for options granted under those plans and agreements where the exercise price equals or exceeds the market value of the underlying common stock on the date of grant.

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If the recognition provisions of FASB Statement No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure - an Amendment of FASB Statement No. 123, had been adopted, the effect on net income (loss) and basic and diluted net income (loss) per share would have been as follows:

The fair value of options granted under the Company’s stock-based plan was estimated at grant date using a Black-Scholes option pricing model with the following weighted-average assumptions:

The Company accounts for stock option grants to non-employees in accordance with EITF Issue No. 96-18, Accounting for Equity Instruments that are Issued to Other than Employees, for Acquiring, or in Conjunction with Selling, Goods or Services (“EITF 96-18”). EITF 96-18 requires variable plan accounting with respect to such non-employee stock options, whereby stock-based compensation associated with such options is measured on the date such options vest, and incorporates the then-current fair market value of the Company’s common stock into the option valuation model. During the three and six months ended July 3, 2004, the Company recorded $35 and $47, respectively, of stock-based compensation expense, which is included in selling, general and administrative expense related to options to purchase 25,000 shares of Mykrolis common stock issued to a non-employee in February 2004.

3. Earnings Per Share

For the three months and six months ended July 3, 2004 and June 28, 2003, basic and diluted income (loss) per common share was calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the respective period. The weighted average diluted shares outstanding calculation excludes those stock options for which the impact would have been antidilutive. For the three and six months ended July 3, 2004, there were 1,248,950 antidilutive options. The number of stock options that were antidilutive at June 28, 2003 were 7,458,586 due to the Company’s net loss position.

As of July 3, 2004, Mykrolis had outstanding options to purchase an aggregate of 7,384,246 shares of its common stock at a weighted average price of $ 11.11. Of these options, options to purchase an aggregate of 3,529,062 shares at a weighted average price of $ 10.35 were fully vested and exercisable.

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4. Other Intangible Assets

Components of the Company’s identifiable other intangible assets are as follows:

The Company recorded amortization expense for its other intangible assets of $442 and $432 for the three months ended July 3, 2004 and June 28, 2003, respectively and $884 and $804 for the six months ended July 3, 2004 and June 28, 2003, respectively. Estimated amortization expense for the fiscal years 2004 to 2008 is $1,869, $1,851, $1,830, $1,092 and $374, respectively.

5. Product Warranty Costs

At the time revenue is recognized, the Company provides for estimated cost of product warranties as provided for under contractual arrangements. Warranty obligations are affected by product failure rates and service delivery costs incurred in correcting a product failure. Should such failure rates or costs differ from these estimates, accrued warranty costs would be adjusted in the period that such events or costs become known.

Changes in the accrued warranty costs during the first six months of 2004 and 2003 were as follows:

6. Restricted Cash

The Company has provided cash collateral totaling $1,608 on standby letters of credit in connection with the lease for its corporate headquarters, research and development and manufacturing facility in Billerica and other security deposits. At July 3, 2004, this cash collateral was invested in certificates of deposit and money market funds.

7. Other Income, Net

Other income (expense) is summarized below:

8. Inventories

Inventories are summarized as follows:

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9. Employee Retirement Plans

The employees of the Company’s subsidiary in Japan (“Nihon Mykrolis”) are covered by a defined benefit pension plan. Additionally, substantially all of the Company’s U.S. employees are covered under several unfunded defined benefit post-retirement benefit plans. The plans provide medical and life insurance benefits and are, depending on the plan, either contributory or non-contributory.

The table below set forth the estimated net periodic cost of the Nihon Mykrolis pension plan and the U.S. post-retirement Benefit Plans.

10. Income Taxes

For the three months ended July 3, 2004, the Company recorded income tax expense of $3,055 on consolidated pre-tax income of $10,776, yielding an effective tax rate of 28.3% during the quarter. The Company has calculated an annual effective tax rate of 24% which is primarily related to the Company’s foreign operations and results from its overall geographic mix of income, including tax benefits relating to U.S. net operating losses for which no tax benefit had been previously taken. For the three months ended June 28, 2003 the Company recorded income tax expense of $2,698 with respect to certain foreign operations on a consolidated pre-tax loss of $2,837, yielding an effective tax rate of negative 95.1%.

For the six months ended July 3, 2004, the Company recorded income tax expense of $4,645 on consolidated pre-tax income of $19,353, yielding an annual effective tax rate of 24.0%. Income tax expense is primarily related to the Company’s foreign operations and results from its overall geographic mix of income, including tax benefits relating to U.S. net operating losses for which no tax benefit had been previously taken. For the six months ended June 28, 2003 the Company recorded income tax expense of $4,411 with respect to certain foreign operations on a consolidated pre-tax loss of $6,481, yielding an effective tax rate of negative 68.1%.

During the first quarter of 2004, Millipore notified the Company that certain of the Company’s U.S. tax attributes were utilized in connection with Millipore’s consolidated tax return filings for periods between the Separation and the Distribution Date. Under the terms of the tax sharing agreement with Millipore in connection with the Separation, the Company is entitled to be paid for tax attributes utilized by Millipore. On March 5, 2004, the Company received a payment with respect to these tax attributes of $1,255 from Millipore. As a result, this payment was recorded as an increase in additional paid-in capital included in stockholders’ equity.

11. Business Segment Information

The Company operates in one reportable segment that develops, manufactures and sells consumables and capital equipment to semiconductor fabrication companies and other companies using similar manufacturing processes, as well as OEM suppliers to those companies. The Company also provides capital equipment repair services to customers in this segment. The Company’s products include membrane and metal based filters, housings, precision liquid dispense filtration pumps, resin based gas purifiers and mass flow and pressure controllers. The products are used by customers in manufacturing operations to remove contaminants in liquid and gas processes, to purify liquids and gases, to measure and control flow rates and to control and monitor pressure and vacuum levels during the manufacturing process. The Company’s products are sold worldwide through a direct sales force and through distributors in selected regions.

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The Company attributes net sales to different geographic areas as presented in the table below.

12. Significant Customers and Concentration of Risk

During the three months ended July 3, 2004 and June 28, 2003 and the six months ended July 3, 2004 and June 28, 2003, one customer represented 12.6%, 9.3%, 13.5% and 9.9% of revenues, respectively. Accounts receivable for this customer was $7,010 and $5,713 at July 3, 2004 and December 31, 2003, respectively. There were no other customers that accounted for more than 10% of revenues or accounts receivable during these periods.

13. Commitments and Contingencies

On March 3, 2003 the Company filed a lawsuit against Pall Corporation in the United States District Court for the District of Massachusetts alleging infringement of two of the Company’s U.S. Patents by a fluid separation device known as the Pall Photo Kleen EZD-2 filter assembly manufactured and sold by the defendant. The Company’s lawsuit also sought a preliminary injunction preventing the defendant from the manufacture, use, sale, offer for sale or importation into the U.S. of the infringing product. A hearing on Mykrolis’s request for a preliminary injunction held in August 2003. On April 30, 2004, the United States District Court for the District of Massachusetts issued a preliminary injunction against Pall Corporation and ordered Pall to immediately stop making, using, selling, or offering to sell within the US, or importing into the U.S., its PhotoKleen EZD-2 Filter Assembly products or “any colorable imitation” of those products. On June 21, 2004, the Company filed a motion with the Court to hold Pall Corporation in contempt of court for failing to comply with the terms of the preliminary injunction; a hearing on this motion was held on July 14, 2004.

The Company is subject to other claims and legal proceedings, which, in the opinion of the Company’s management, are incidental to the Company’s normal business operations. In the opinion of management, although final settlement of these suits and claims may impact the Company’s financial statements in a particular period, they will not, in the aggregate, have a material adverse effect on the Company’s financial position, results of operations or cash flows.

The Company enters into a variety of indemnification commitments in the ordinary course of its business including the following:

The Company has never incurred costs to defend lawsuits or settle claims related to these types of indemnification commitments. As a result, the Company believes the estimated fair value of these commitments is minimal. Accordingly, the Company has no liabilities recorded for these commitments as of July 3, 2004.

During the quarter ended July 3, 2004, in conjunction with the employment and relocation of the Vice President of Business Development, the Company entered into a commitment with a third-party employee relocation administrator with respect to the sale of property located in Austin Texas. As a part of this commitment, the Company

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agreed to indemnify the third-party relocation administrator against any deterioration in the market value of the property between the sale to the third party relocation administrator and resale to a third party at estimated fair market value. In connection with this indemnification commitment, the Company has not recorded a liability as of July 3, 2004.

14. Accrued Restructuring Costs

The Company took several restructuring actions in 2003, 2002 and 2001 to better align its cost structure with prevailing market conditions due to the prolonged industry downturn and to establish separate operations from its former parent. These actions primarily focused on reducing the workforce and consolidating global facilities.

During the three months ended July 3, 2004, changes to prior estimates occurred resulting in the reversal of $88 in employee severance costs. This change in estimate was primarily due to lower than expected severance benefits paid. In addition, during the six months ended July 3, 2004, the Company paid $199 for severance costs and $972 for leasehold/other costs consisting of lease payments, utility expenses, property taxes and general maintenance costs associated with the vacant Bedford, MA facility. $84 of accretion was recorded during the six months ended July 3, 2004 as a non-cash increase in the restructuring reserve as result of recording the liability at present value.

As of July 3, 2004, the Company’s total accrued restructuring costs amount to $2,358 of which $172 relates to severance costs for terminated employees that will be paid by the first quarter of 2005, and $2,186 to facility costs, primarily for the leased facility in Bedford, MA, which will be substantially paid by the fourth quarter of 2005.

The activity related to the Company’s restructuring accruals is shown below: