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

                               ----------------

                                   FORM 10-K

                 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 OF
                      THE SECURITIES EXCHANGE ACT OF 1934
                        For the year ended June 30, 1999

                         Commission file number 0-20839

                               ----------------

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

              Delaware                                 74-2238819
   (State or Other Jurisdiction of        (I.R.S. Employer Identification No.)
   Incorporation or Organization)

                           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
           (Each class is registered on the NASDAQ National Market):

                              Title of Each Class
                         Common stock ($.01 par value)

       No securities are registered pursuant to Section 12(g) of the Act.

                               ----------------

  Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]  No [_]

  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. [X]

  Aggregate market value of voting stock held by nonaffiliates (excludes
outstanding shares beneficially owned by directors and executive officers and
shares held by E.I. du Pont de Nemours and Company) as of September 7, 1999,
was approximately $362 million. As of such date, 15,378,623 shares of the
common stock, $.01 par value, were outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE
 (Specific pages incorporated are indicated under the applicable Item herein):

<TABLE>
<CAPTION>
                                                            Incorporated by
                                                         Reference in Part No.
                                                         ---------------------
<S>                                                      <C>
Our proxy statement filed in connection with our 1999
 Annual Meeting of Stockholders.........................          III
</TABLE>

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                            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 wholly
owned 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 currency. Our year
ends June 30.

                               ----------------

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----

                                     Part I

 <C>      <S>                                                              <C>
 Item 1.  Business......................................................     3

 Item 2.  Properties....................................................    17

 Item 3.  Legal Proceedings.............................................    18

 Item 4.  Submission of Matters to a Vote of Security Holders...........    18

          Executive Officers............................................    19

                                    Part II

 Item 5.  Market for Our Common Equity and Related Stockholder Matters..    20

 Item 6.  Selected Financial Data.......................................    21

             Management's Discussion and Analysis of Financial Condition
 Item 7.  and Results of Operations.....................................    22

 Item 7A. Quantitative and Qualitative Disclosures About Market Risk....    27

 Item 8.  Financial Statements and Supplementary Data...................    27

             Changes in and Disagreements with Accountants on Accounting
 Item 9.  and Financial Disclosure......................................    27

                                    Part III

 Item 10. Directors and Executive Officers..............................    28

 Item 11. Executive Compensation........................................    28

                     Security Ownership of Certain Beneficial Owners and
 Item 12. Management....................................................    28

 Item 13. Certain Relationships and Related Transactions................    28

                                    Part IV

          Exhibits, Financial Statement Schedules and Reports on Form 8-
 Item 14. K ............................................................    28

          Signatures....................................................    29
</TABLE>

                       Note on Incorporation by Reference

  Throughout this report, various information and data are incorporated by
reference to portions of our 1999 Proxy Statement. Any reference in this report
to disclosures in our 1999 Proxy Statement shall constitute incorporation by
reference of that specific material into this Form 10-K.

                                       2
<PAGE>

               SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

  This document contains forward-looking statements that involve substantial
risks and uncertainties. You can identify these statements by forward-looking
words such as "anticipate," "intend," "plan," "estimate," "expect," "believe,"
"may," "should," "would," "will" and "could" or similar words. You should read
statements that contain these words carefully because they discuss our future
expectations, contain projections of our future results of operations or of our
financial position or state other forward-looking information. We believe that
it is important to communicate our future expectations. However, there may be
events in the future that we are unable to accurately predict or control. The
factors listed in the section captioned "Risk Factors," as well as any
cautionary language in this document, provide examples of risks, uncertainties
and events that may cause our actual results to differ materially from the
expectations we describe in our forward-looking statements.

                                     PART I

Item 1. Business

The Company

  Based on worldwide sales, we believe we are the largest photomask
manufacturer 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 tightest design specifications required by
semiconductor manufacturers today. We sell our products to over 200 customers
in 20 different countries. We believe that we are the principal merchant
photomask supplier for many of our customers, including Advanced Micro Devices,
Hewlett-Packard, Hyundai, LG Semicon, Lucent Technologies, Micron Technology,
National Semiconductor, Philips, Samsung and STMicroelectronics. We operate
globally from eleven manufacturing facilities in North America, Europe and
Asia, including two joint venture facilities. We also operate the DPI Reticle
Technology Center, LLC, a joint venture facility dedicated to advanced
photomask technology development and fabrication of leading-edge photomasks.
Our principal executive offices are located at 131 Old Settlers Boulevard,
Round Rock, Texas 78664 and our telephone number at this location is (512) 310-
6500.

Industry Background

  The demand for photomasks is driven largely by increases in the number of
semiconductor designs and the complexity of integrated circuits. Integrated
circuit designs consist of a series of separate patterns, each of which must be
imaged onto a different photomask. The resulting series of photomasks is then
used to successively layer the circuit patterns onto the semiconductor wafer.
As a result, photomasks are a necessary component in the production of
semiconductors, and advanced photomask technologies are critical to enabling
the manufacture of increasingly complex semiconductor devices. In addition,
advanced photomask technologies such as phase shift masks and optical proximity
correction masks can extend the optical resolution of existing photolithography
equipment, thereby delaying the otherwise significant investment required for
new semiconductor manufacturing equipment. Growth in the photomask market has
not always correlated with increases in semiconductor sales. According to
industry sources, the total worldwide market for photomasks has grown from
approximately $1.3 billion in 1995 to approximately $1.8 billion in 1998. We
estimate that the photomask market in North America, Europe and non-Japan Asia
represented approximately 50% of the worldwide market over the last five years.

  Historically, photomasks were generally designed and manufactured internally
by semiconductor manufacturers in captive production facilities. Since the mid-
1980s, however, the market for merchant photomask manufacturers like us has
grown substantially. We estimate that during 1998 merchant photomask

                                       3
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sales in North America, Europe and non-Japan Asia were approximately $700
million. As a result of a number of factors, including the increasing
complexity and pace of technological change in the photomask industry, the
emergence of reliable merchant photomask manufacturers and a trend by
semiconductor manufacturers to focus capital resources on their core business,
a number of semiconductor manufacturers have divested their captive photomask
operations and chosen to rely on merchant photomask manufacturers for their
photomask needs. Other semiconductor manufacturers who have retained captive
photomask operations have increasingly turned to merchant manufacturers to
produce more technically advanced photomasks rather than invest in new capital
equipment. Finally, the increasing capital requirements and competitive
pressures in the photomask market have contributed to a consolidation among
merchant photomask manufacturers.

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

  We believe the demand for photomasks and the photomask industry's importance
in the semiconductor manufacturing process are increasing due to the following
trends:

  .  Proliferation of Semiconductor Applications. Semiconductor devices of
     all types are continuing to proliferate into products, including
     cellular telephones, pagers, automobiles, medical products, household
     appliances and other consumer electronic products. In addition, the
     demand for semiconductor devices by traditional markets such as personal
     computers is growing significantly as semiconductor content in
     electronic systems increases and as personal computers expand further
     into homes and other new market segments. We believe that the
     proliferation of semiconductor applications will lead to an increase in
     semiconductor design activity and resulting demand for photomasks.

  .  Customization of Semiconductor Designs. Growing demand for customized
     semiconductors generates increased demand for photomasks as each new
     type of semiconductor device requires additional new and often more
     advanced photomasks. Examples of this customization include application
     specific integrated circuits, application specific standard products,
     system-on-a-chip and a growing variety of memory products.

  .  Increasing Device Complexity. Efforts to improve the performance and
     functionality of semiconductor devices have resulted in more complex
     devices. Complex devices require additional layers of patterns, and
     additional photomasks on which the patterns are imaged, to be
     manufactured. For example, the number of photomasks typically required
     for the manufacture of microprocessors in 1991 was 14 as compared to 25
     photomasks now required for the most advanced generation of
     microprocessors.

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

  We believe that all of these trends in the semiconductor industry are
increasing the demand for photomasks and driving the need for the continuing
development of advanced photomasks.

                                       4
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Strategy

  Our objective is to be the world's premier global supplier of photomasks, by
providing the finest service and most advanced technology to our customers, by
implementing the following strategies:

  .  Advance Our Technological Leadership. We intend to continue to invest in
     research and development and advanced equipment to enhance our
     technological leadership position. We believe this strategy is essential
     to continuing to develop and deliver leading-edge photomasks, which are
     required to meet the demands of the leading global semiconductor
     manufacturers. We also believe that by providing leading-edge photomasks
     we can position ourselves as the preferred provider of photomasks to our
     customers. For example, we are partners with Advanced Micro Devices,
     Micron Technology and Motorola in the DPI Reticle Technology Center, a
     unique facility dedicated solely to developing advanced photomask
     technology and fabrication processes for leading-edge photomasks.
     Generally, we can use the technological advancements developed by the
     DPI Reticle Technology Center and our advanced facility in Ichon, Korea
     to improve the capability and efficiency of our manufacturing
     facilities.

  .  Expand Our Strategic Relationships with Customers. A key component of
     our ongoing strategy is to continue to develop and expand our strategic
     relationships with the world's leading semiconductor manufacturers. We
     believe our joint development relationships, including our alliance with
     Hyundai to jointly develop leading-edge photomasks and our participation
     in the DPI Reticle Technology Center, will enable us to share the risks
     and benefits of developing the next generation of photomasks. In
     addition, we believe these relationships will help to solidify our
     position as, or provide us the opportunity to become, the primary
     supplier of advanced photomasks and key enabling technologies to our
     customers.

  .  Capitalize on Our Established Global Manufacturing and Customer Service
     Support Network. Since 1991, we have operated globally with integrated
     manufacturing facilities in North America, Europe and Asia. Our
     facilities are strategically located close to our customers, many of
     whom have multiple facilities located throughout the world and prefer
     global suppliers to serve their photomasks needs. In addition, a global
     data transmission network that integrates the manufacturing and delivery
     capabilities of these facilities, enabling efficient resource allocation
     and information sharing links our facilities. We believe the 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 utilize internal
     skills and capabilities to develop advanced photoblanks, a critical
     component of photomasks, and to identify suppliers of products and
     materials critical to improving photomask technology. For example, we
     have a strategic alliance with Hoya Corporation to develop and produce
     advanced photoblanks supporting the manufacture of semiconductor devices
     with design rules of 0.18 micron and smaller. We also believe that our
     strategic relationships with leading equipment suppliers help ensure our
     ability to provide our customers with early access to the most advanced
     photomasks. As an example, we have an exclusive lead-time agreement with
     Etec Systems to significantly upgrade the capability and capacity of our
     MEBES(R) electron-beam pattern generation tools, which is expected to
     significantly expand our leading-edge photomask capability. As a result
     of all of the foregoing measures, we believe we can rapidly deliver to
     our customers the latest advances in photomask technologies.

Products and Technology

 Photomasks

  Photomasks 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

                                       5
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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 separate photomasks of
typically 15 to 25 separate masks. 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 of the photoblank. Chemical developers dissolve the
exposed areas and the thin chrome layer of the photoblank is etched to
replicate the customer design pattern on the photomask. Subsequently, the
photomask is inspected for defects, its critical dimensions are confirmed and
any defects are repaired. Pellicles are then mounted onto the masks and the
masks are delivered to the customer.

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

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

  .  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
     wafer and therefore permit improved image fidelity, and also typically
     require extremely tight specifications.

  The demand for these products has grown during the past two 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.

 Photoblanks and Pellicles

  Photomasks are manufactured from photoblanks, which are highly polished
quartz or glass plates coated with ultra-thin layers of chrome and
photoresist. The photomask is protected from particle contamination by an
ultra-thin, frame-mounted transparent film called a pellicle. The pellicle,
when mounted on the photomask, creates a sealed, contamination-free
environment for the photomask pattern. We manufacture both photoblanks and
pellicles and we believe that our knowledge of materials used in the
production photoblanks and pellicles gives us a competitive advantage in
managing the supply, quality and cost of our principal component materials.

  The production of photoblanks requires ultra-pure chrome deposition on
highly polished and extremely flat quartz or glass substrates. The quality and
properties of photoblanks strongly affect the yield and quality of

                                       6
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photomasks. We purchase virgin quartz substrates from a limited number of
suppliers. In addition, we recycle quartz substrates that have been repolished
to reduce cost and dependence on external suppliers. We manufacture
approximately 70% of our requirement for photoblanks and purchase the
remainder from Hoya Corporation. We have a strategic alliance with Hoya
Corporation to develop and produce advanced photoblanks supporting the
manufacture of semiconductor devices with 0.18 micron design rules and
smaller. We believe that this alliance, coupled with our internally developed
knowledge of photoblank technology, enhances our ability to develop and
deliver advanced photomasks.

  Pellicles are produced from nitrocellulose or other polymer solutions that
we prepare or purchase. The ultra-thin film is typically precision-coated with
an anti-reflective layer to improve optical performance characteristics. We
have introduced proprietary pellicle films that are specifically designed to
withstand the powerful radiation found in the emerging generation of advanced
steppers. We hold several patents covering various aspects of pellicle
technology and from time to time may have various patents pending.
Historically, we purchase approximately 30% of the pellicles we use to
manufacture photomasks from third-party suppliers.

Global Manufacturing and Operations

  Since 1991, we have operated globally with established manufacturing
facilities in North America, Europe and Asia. Approximately 60%, 19% and 21%
of our sales in 1999 were in North America, Europe and Asia. In North America,
we operate photomask manufacturing facilities in Round Rock, Texas, Santa
Clara, California, and Kokomo, Indiana. Additionally, we began construction on
a new photomask manufacturing facility in Gresham, Oregon, which we
subsequently and indefinitely delayed. If additional capacity were to be
needed, we could complete the Gresham facility within approximately six
months. In Europe, our manufacturing facilities are located in Rousset,
France, Hamburg, Germany and Hamilton, Scotland. In Asia, we operate a
manufacturing facility in Ichon, Korea, operate joint venture facilities in
Shanghai, China and Hsinchu, Taiwan and are building a new photomask
production facility in Singapore. We serve semiconductor manufacturers in
Japan through our support office in Tokyo, Japan and our manufacturing
facilities in Ichon, Korea and Shanghai, China.

  We believe that our global presence is important for meeting the supply
needs of multi-national customers on a timely basis. Close proximity to
customers is important because of rapid delivery requirements and the need for
frequent personal interactions. As a result, each manufacturing facility
primarily supplies local semiconductor manufacturers. Moreover, each of our
manufacturing facilities is connected by a global data transmission network,
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 optimize resource
allocation, thereby lowering production costs while providing effective
customer service on a local level.

  Each of our manufacturing sites is 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.

Our Customers

  We are a principal photomask supplier to many of the leading global
semiconductor manufacturers. Essentially all of our sales are to customers in
the semiconductor manufacturing industry. Our largest customers include the
following:

<TABLE>
   <S>                         <C>                         <C>
   Advanced Micro Devices      Hyundai                     National Semiconductor
   AMI                         IBM                         Philips
   Atmel                       LG Semicon                  Samsung
   Delco                       LSI Logic                   Silicon Valley Group
   Fujitsu                     Lucent Technologies         STMicroelectronics
   Hewlett-Packard             Micron Technology           Texas Instruments
   Hexfet                      Motorola                    UMC Group
</TABLE>

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  In 1999, our two largest customers, Lucent Technologies and
STMicroelectronics, in the aggregate, accounted for approximately 21% of our
sales and each individually accounted for over 10% of our sales. Our ten
largest customers, in the aggregate, accounted for more than 60% of our sales.

  We have entered into multi-year, non-exclusive supply agreements with some of
our customers, including Hewlett-Packard, Hyundai, Lucent Technologies,
STMicroelectronics and UMC Group. Each agreement is separately negotiated and
therefore specific terms vary.

Worldwide Sales and Support

  Because each photomask is unique, we work closely with each customer to
define and communicate precisely the 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 several of our customers'
design centers and 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 the customers'
order receives 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.

Our 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 local geographic region in
which we operate. In North America, we compete primarily with Align-Rite and
Photronics and, to a lesser extent, with other smaller merchant photomask
suppliers. In Europe, we compete with Align-Rite, Compugraphics and Photronics.
In Asia, we compete with Dai Nippon Printing, Hoya Corporation, Photronics,
P.K. Limited, Taiwan Mask Corporation, Toppan Printing Company and, to a lesser
extent, with other smaller merchant photomask suppliers. Captive Japanese
suppliers and three significant local independent suppliers predominantly serve
the Japanese market. We expect that some of our competitors will expand
operations to better meet the needs of customers and take advantage of new
growth opportunities. In addition, captive photomask operations can, and
sometimes do, sell into the merchant market.

  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 formation of captive operations, which requires
significant capital investments and operating costs to develop the requisite
manufacturing expertise.

Our 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 leadership. To maintain our technological leadership, we expect
to be required to anticipate, respond to and utilize changing technologies.

  We, along with Advanced Micro Devices, Micron Technology and Motorola,
operate the DPI Reticle Technology Center, a joint venture for developing
advanced photomask technology and the fabrication of leading-edge photomasks.
The DPI Reticle Technology Center is located in a fully equipped, freestanding
facility adjacent to our photomask manufacturing facility in Round Rock, Texas.
We believe that the collaborative effort underway at the DPI Reticle Technology
Center leverages the combined strength and

                                       8
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insights of global leaders in memory, microprocessors and advanced logic design
and fabrication to accelerate the development of advanced photomasks. The joint
venture is scheduled to terminate in June 2000 but can be renewed at the
discretion of the members.

  We, independently and through our participation in the DPI Reticle Technology
Center, intend to continue to invest in research and development to ensure our
technological capabilities. We focus our research and development in three
areas:

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

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

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

  We are enhancing our existing products through worldwide-integrated
engineering, capital investment for improved capability and beta testing of
leading-edge equipment. Product enhancements in the past led to the development
of technology currently used to produce photomasks compatible with 0.25 micron
semiconductor lithography. This technology is providing the platform for the
development of manufacturing technologies consistent with 0.18 micron and 0.15
micron semiconductor lithography at high yields and rapid cycle times. We have
been a leader in the development of leading-edge photomasks products, such as
phase shift, optical proximity and advanced binary masks. Our research and
development of photomask component materials is also responding to the
technology demands of semiconductor manufacturers through the development of
improved materials needed to produce advanced photomasks. Recent examples of
such materials developments include low stress chrome blanks, pellicles with
contamination-control features, pellicles that can withstand deep ultraviolet
radiation and attenuated embedded chrome blanks for phase shift masks.

  We have established a research and development group that consists of trained
and experienced personnel. The capabilities of this group have been augmented
by its access to DuPont's corporate science and engineering resources. Elements
of DuPont's material science expertise and its analytical capabilities are
relevant to photomask research and development. We will continue to have access
to DuPont's corporate science and engineering through 2000 pursuant to a
research, development and consulting agreement with DuPont, which will provide
us with a supplement to our core research and development program.

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

Employees

  As of June 30, 1999, we employed approximately 1,600 people worldwide. There
are no employees who are represented by a union. Our German subsidiary,
however, is subject to German law, which binds it, as a member of a selected
industry group, to agreements reached by industry management and employee
representatives. We believe we have a good relationship with our employees.

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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 potential groundwater
contamination issue at our Danbury, Connecticut site under voluntary corrective
action. Any such contamination is believed to be historical and therefore any
environmental liabilities would be covered by the indemnification agreement
with DuPont.

                                       10
<PAGE>

                                  RISK FACTORS

  You should carefully consider the following risks. 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 risks. The trading price of our common stock could decline due to any
of these risks. You should also refer to the other information included or
incorporated by reference in this document, including our 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.
Downturns in the semiconductor industry could lead to a decrease in the demand
for photomasks. The semiconductor industry is highly cyclical and has been
subject to significant economic downturns at various times. Our investment in
new facilities and equipment is based, in part, on the announced expansion
plans of the semiconductor industry. From time to time, the semiconductor
industry has developed more slowly than originally anticipated. A lack of
development in the semiconductor industry in a location in which we operate or
establish new facilities could have a material adverse effect on our business.

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

  .  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 May Be Affected by Factors Outside of Our Control

  Our quarterly and annual operating results are affected by a wide variety of
factors that could adversely affect sales 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 sales in any quarter are
dependent upon orders received during that quarter, which limits our ability to
respond to a changing business environment. In addition, our operating results
could be affected by the following factors:

  .  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 increasing demand and delivery schedules;

  .  Fluctuations in manufacturing yields;

  .  Fluctuations in currency exchange rates;

  .  Cyclical semiconductor industry conditions;

  .  Our access to advanced process technologies; and

  .  The timing and extent of product and process development costs.

                                       11
<PAGE>

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

We May Not Obtain Sufficient Capital to Fund Our Needs

  We will need to continue to make significant capital expenditures to expand
our operations and to enhance our manufacturing capability. Based on our
current operating plans, we will require external financing from time to time
to fund our capital expenditures. We cannot assure you that we will be able to
obtain the additional capital required on reasonable terms, or at all, or that
any such expansion or lack of capital will not have a material adverse effect
on our business and results of operations, particularly during the start-up
phase of new operations.

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

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

Rapid Technological Change Could Render Our Products Obsolete

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

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

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:

  .  Align-Rite;

  .  Compugraphics;

  .  Dai Nippon Printing;

  .  Hoya Corporation;

  .  Photronics;

  .  P.K. Limited;

  .  Taiwan Mask Corporation; and

  .  Toppan Printing Company.

                                       12
<PAGE>

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

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

  .  Product quality;

  .  Delivery to schedule performance;

  .  Pricing;

  .  Technical capabilities;

  .  The location and capacity of manufacturing facilities; and

  .  Technical service.

Our International Operations Present Special Risks

  Approximately 40% of our sales in 1999 were derived from sales in non-U.S.
markets. We expect sales from non-U.S. markets to continue to represent a
significant portion of our total sales. 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 value of currencies;

  .  Restrictive governmental actions; and

  .  Difficulties in managing a global enterprise.

  Changes in the relative value of currencies occur from time to time and may,
in certain instances, have a material effect on our results of operations. Our
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 such exposure by hedging through forward
contracts. We cannot be certain 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. Further, we cannot assure you that
such risks will not have a material adverse impact on our liquidity and results
of operations in the future.

Our Operating Results Are Influenced by the Performance of Asian Economies

  In recent years, Asian economies have been highly volatile and recessionary,
resulting in significant fluctuations in local currencies and other
instabilities. These instabilities may continue or worsen, which could have a
material adverse impact on our financial position and results of operations as
approximately 21% of our sales in 1999 were derived from this region. These
conditions may continue or worsen especially since we continue to expand in
Asia.

                                       13
<PAGE>

We Face Risks Associated with Manufacturing Difficulties

  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 in the manufacturing process can lower
manufacturing yields and make products unmarketable. Moreover, manufacturing
leading-edge photomasks is relatively more complex and time-consuming than
manufacturing high-volume, less advanced photomasks, and may lead to general
delays in the manufacturing of all levels of photomasks. We have, on occasion,
experienced manufacturing difficulties and capacity limitations that have
delayed our ability to deliver products within the time frames contracted for
by our customers. We cannot assure you that we will not experience these or
other manufacturing difficulties, or be subject to increased costs or
production capacity constraints in the future, any of which could result in a
loss of customers or could otherwise have a material adverse effect on our
business and results of operations.

We Depend on a Few Significant Customers

  In 1999, our ten largest customers, in the aggregate, accounted for more than
60% of our sales. All of these customers are in the semiconductor industry. The
loss of, or a significant reduction of orders from, any of these customers
could have a material adverse effect on our results of operations. While we
believe we have strategic relationships with a number of our customers, our
customers place orders on an as-needed basis and generally can change their
suppliers without penalty. In addition, recently there has been a trend toward
outsourcing semiconductor manufacturing to foundries. To the extent we do not
have a strategic relationship with these foundries, this trend could have a
material adverse effect on our business and results of operations.

We Depend on a Limited Number of Equipment Manufacturers

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

We Depend on a Limited Number of Raw Materials Suppliers

  We have a limited number of long-term supply agreements with our raw
materials suppliers. In addition, we have historically relied primarily on a
limited number of suppliers for the quartz plates used in the manufacture of
photoblanks, which are a key component in the manufacture of photomasks. Any
disruption in our supply relationships or increases in prices, particularly
related to quartz plates, 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 business and operating results. In the event of such
disruption, we cannot assure you that we could develop alternative sources
within reasonable time frames, or if developed, that these sources would
provide supplies or equipment at prices comparable with those charged by our
suppliers before such disruption.

We Depend on a Limited Number of Management and Technical Personnel

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

                                       14
<PAGE>

DuPont Controls All Stockholder Votes

  DuPont currently owns approximately 55% of our outstanding common stock. As a
result, DuPont is able to:

  .  Control the vote of most matters submitted to our stockholders,
     including any merger, consolidation or sale of all or substantially all
     of our assets;

  .  Elect the members of our board of directors; and

  .  Prevent or cause a change in control of our company.

We Must Integrate and Manage Our Recent Acquisitions and Joint Ventures

  From time to time we have made various acquisitions and entered into joint
venture arrangements intended to complement or expand our business. For
example, we recently entered into transactions with Hyundai, UMC Group and
Hewlett-Packard. The success of these transactions will depend on our ability
to:

  .  Attract, train and retain additional personnel;

  .  Integrate acquired production equipment with our operations; and

  .  Utilize any resulting additional production capacity.

  The success of any joint venture will also depend on our ability to achieve
cooperation with our joint venture partner. We may encounter difficulties in
integrating acquired assets with our operations and managing any joint
ventures. Furthermore, we may not realize the benefits we anticipated when we
entered into these transactions. Any of the foregoing could have a material
adverse effect on our business and results of operations.

We Are Subject to Risks Associated with Future Acquisitions or 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;

  .  The incurrence of debt and contingent liabilities;

  .  Amortization of goodwill and other intangibles;

  .  Research and development write-offs; and

  .  Other acquisition-related expenses.

  Further, we cannot be certain that any acquired business, product or
technology will be successfully integrated with our operations or that we will
receive the intended benefits of any acquisition or joint ventures.

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;

  .  That competitors will not be able to independently develop similar
     technology;

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

  .  That foreign intellectual property laws will adequately protect our
     intellectual property rights.

                                       15
<PAGE>

  We may become the subject of infringement claims or legal proceedings by
third parties with respect to current or future 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 and
diversion of resources, product shipment delays or force us to enter into
royalty or license agreements rather than dispute the merits of these claims.
Any of the foregoing could have a material adverse effect on our business,
results of operations and financial position.

We May Be Unprepared for Changes in Environmental Laws and Regulations

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

Year 2000 Issues Expose Us to Liability

  We recognize the need to reduce the extent to which our operations will be
adversely impacted by Year 2000 software failures and have established a
project team to assess Year 2000 risks. The project team has coordinated the
identification of and is coordinating the implementation of changes to computer
hardware and software applications that will attempt to ensure the availability
and integrity of our information systems and the reliability of our operational
systems and manufacturing processes. We are also assessing the potential
overall impact of the impending century change on our business, results of
operations and financial position.

  The total cost of our Year 2000 compliance activities has not been, and is
not expected to be, material to our results of operations. Although we have
used our best estimates to project the time and expense associated with the
completion of our Year 2000 modification and testing processes, we cannot
assure you that we will identify and address all significant Year 2000 problems
in a prompt and cost-effective manner. Such Year 2000 problems, if not fixed,
could have a material adverse effect on our business, results of operations and
financial position.

  We also face risk to the extent that suppliers of products, services and
systems purchased by us and others with whom we transact business on a
worldwide basis do not comply with Year 2000 requirements. In the event any
such third party cannot promptly provide us with products, services or systems
that meet the Year 2000 requirements, or in the event Year 2000 issues prevent
such third parties from prompt delivery of products or services required by us,
our results of operations could be materially adversely affected. In addition,
Year 2000 issues could cause significant delays in, or cancellations of,
decisions to purchase our products or services, which would have a material
adverse effect on our business, results of operations and financial position.

We Face Uncertainty Implementing a New Global Information System

  We are in the process of implementing a new enterprise-wide software system
that replaces our existing financial, human resources and manufacturing
information systems. We cannot assure you that this conversion will be
successful or that it will yield benefits to us.

Our Market Price Is Volatile

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

  .  Quarterly variations in our results of operations;

  .  The announcement of new products or product enhancements by us or our
     competitors;

                                       16
<PAGE>

  .  Technological innovations by us or our competitors;

  .  Changes in earnings estimates or buy/sell recommendations by analysts;

  .  The operating and stock price performance of other comparable companies;
     and

  .  General market conditions or market conditions specific to particular
     industries.

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

Our Stock Price May Be Affected When Additional Shares Are Sold

  If our stockholders sell substantial amounts of our common stock in the
public market, the market price of our common stock could fall. Such sales
might make it more difficult for us to sell equity or equity-related securities
in the future at a time and place that we deem appropriate. DuPont beneficially
owns 8,400,000 shares of common stock. DuPont has advised us that it expects to
continue to reduce its ownership interest in our company over time, subject to
prevailing market conditions. We have granted DuPont certain rights with
respect to the registration of shares of our common stock held by DuPont,
including the right to require that we register under the Securities Act of
1933 the sale of all or part of the shares it holds, and to include such shares
in a registered offering of securities by us for DuPont.

Item 2. Properties

 We conduct manufacturing operations throughout the world. 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.

<TABLE>
<CAPTION>
                                    Floor Space      Type of
             Location              in Square Feet    Interest         Use
             --------              -------------- -------------- --------------
<S>                                <C>            <C>            <C>
North America
  Round Rock, Texas...............     54,000         Owned        Photomasks
  Kokomo, Indiana.................     42,000         Owned        Photomasks
  Santa Clara, California.........     38,000         Leased       Photomasks
  Gresham, Oregon (delayed
   completion)....................     70,000         Owned        Photomasks
  Poughkeepsie, New York..........     23,000         Owned       Photoblanks
  Danbury, Connecticut............     55,000         Owned        Pellicles
  Round Rock, Texas...............     17,000         Owned         Research
  Round Rock, Texas...............     27,000         Owned      Administration
Europe
  Rousset, France.................     24,000         Leased       Photomasks
  Hamburg, Germany................     22,000         Leased       Photomasks
  Hamilton, Scotland..............     15,000         Owned        Photomasks
Asia
  Ichon, Korea....................    102,000         Owned        Photomasks
  Shanghai, China.................     16,000     Jointly Leased   Photomasks
  Singapore (under construction)..     50,000         Owned        Photomasks
  Hsinchu, Taiwan.................      6,000     Jointly Leased   Photomasks
  Tokyo, Japan....................      1,000         Leased        Support
</TABLE>

                                       17
<PAGE>

  We own most of the manufacturing equipment in our facilities. The research
facility in Round Rock is leased to the DPI Reticle Technology Center and
contains primarily manufacturing equipment leased by the DPI Reticle Technology
Center from a third party. Facilities and property located in Santa Clara and
Hamburg are leased under leases that expire in 2001 and 2022. We also maintain
customer service data centers in leased facilities in Mesa, Arizona, Beaverton,
Oregon and Dallas, Texas.

  A number of our facilities are in seismically active areas. Although we have
obtained 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 not currently involved in any material legal proceedings.

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

  None.

                                       18
<PAGE>

                               EXECUTIVE OFFICERS

  The following table sets forth the name, age as of June 30, 1999 and position
with DuPont Photomasks of each person who is an executive officer or director
of DuPont Photomasks.

<TABLE>
<CAPTION>
          Name           Age                              Position(s)
          ----           ---                              ----------
<S>                      <C> <C>
Marshall C. Turner......  57 Chairman of our Board and Chief Executive Officer
Preston M. Adcox........  56 President and Chief Operating Officer
Paul S. Chipman.........  42 Executive Vice President--Technology and Chief Technology Officer
Gerard Cognie...........  55 Executive Vice President--European Operations
David S. Gino...........  41 Executive Vice President--Finance and Chief Financial Officer
John M. Lynn............  41 Executive Vice President, General Counsel and Secretary
Kenneth A. Rygler.......  55 Executive Vice President--Worldwide Marketing and Strategic Planning
Chulwoo Won.............  47 Executive Vice President--Asia Pacific Operations
</TABLE>

  Marshall C. Turner is our Chairman of our Board of Directors and Chief
Executive Officer, positions he assumed on an interim basis in June 1999 until
a permanent replacement is appointed. An independent consultant, he has been a
venture capital principal or operating executive in technology industries for
26 years. From its inception in 1981 through 1998, he was a general partner of
Taylor & Turner Associates, Ltd., the general partner of several venture
capital partnerships. Mr. Turner is Vice-Chairman of the Board of the Public
Broadcasting Service and of the Smithsonian Museum of Natural History. He
serves as a director of Alliance Technology Fund, Splitrock Services, Inc.,
three privately held companies and the George Lucas Educational Foundation. He
has been one of our directors since April 1996.

  Preston M. Adcox is our President and Chief Operating Officer. He joined
DuPont in 1967 and has held a number of manufacturing and technology management
positions. He became a Managing Director in DuPont's semiconductor materials
business in 1988 and had global responsibility for DuPont's photomask
operations until 1996. He was a member of the Board of Directors of Etec
Systems from 1990 to early 1995. Since 1988, he has served on the Board of
Directors of Semi-Sematech, an organization representing U.S. equipment and
material suppliers to the semiconductor manufacturing industry.

  Paul S. Chipman is our Executive Vice President--Technology and Chief
Technology Officer, a position he has held since March 1999. He joined us as a
result of our acquisition of Perkin Elmer's photomask operations in 1990 and
has held a number of manufacturing and technology management positions. He is
also general manager of the DPI Reticle Technology Center, LLC.

  Gerard Cognie is our Executive Vice President--European Operations and the
Chairman of the Board of DuPont Photomasks (France) S.A. He joined DuPont in
1968 and from 1988 to 1996 served as the Director of DuPont's European
photomask operations and from 1985 to 1996 served as the Director of
Electronics for DuPont France.

  David S. Gino is our Executive Vice President--Finance and Chief Financial
Officer. Before assuming his position with us, he was Chief Financial Officer
and Controller of Master Images, a photomask manufacturer, until DuPont
acquired it in 1987. He held a number of financial and business management
positions with DuPont's semiconductor materials, imaging systems and printing
and publishing businesses.

  John M. Lynn is our Executive Vice President and General Counsel. He also
serves as Corporate Secretary. He joined DuPont in 1980 as a chemical engineer
and then, after a departure for law school, rejoined DuPont as a lawyer in
1985. He held a number of legal advisory positions with DuPont before joining
us in 1997.

  Kenneth A. Rygler is our Executive Vice President--Worldwide Marketing and
Strategic Planning. He joined DuPont in 1964 and held numerous sales,
marketing, planning and business development management positions.

                                       19
<PAGE>

  Chulwoo Won is our Executive Vice President--Asia Pacific Operations. Mr. Won
joined DuPont in 1980 and became actively engaged with the photomask business
in 1989. He was named vice president of the Asia Pacific region in 1995 until
his appointment as one of our executive officers in 1997.

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

                                    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.

<TABLE>
<CAPTION>
                                                                  High     Low
                                                                 ------- -------
<S>                                                              <C>     <C>
Year Ended June 30, 1998:
  First Quarter................................................. $74 1/8 $46 3/4
  Second Quarter................................................  72 7/8  27 3/4
  Third Quarter.................................................  47 7/8  25 3/8
  Fourth Quarter................................................  58      28 7/8
Year Ending June 30, 1999:
  First Quarter................................................. $38 1/2 $19 3/4
  Second Quarter................................................  43 7/8  16 7/8
  Third Quarter.................................................  51 1/4  36 1/2
  Fourth Quarter................................................  50 3/4  36
Year Ended June 30, 2000:
  First Quarter (through September 7, 1999).....................  54 3/4  39
</TABLE>

  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.

                                       20
<PAGE>

Item 6. Selected Financial Data

  The following tables set forth our selected financial data. The data for the
three years ended June 30, 1999 has been derived from the audited financial
statements appearing elsewhere in this document. The data for the years ended
June 30, 1995 and 1996 and as of June 30, 1997 has been derived from audited
financial statements not appearing in this document. The following data should
be read in conjunction with our financial statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this document.

<TABLE>
<CAPTION>
                                           Year Ended June 30,
                               ------------------------------------------------
                                 1995      1996      1997      1998      1999
                               --------  --------  --------  --------  --------
                                  (in thousands, except per share data)
<S>                            <C>       <C>       <C>       <C>       <C>
Income Statement Data:
Sales........................  $161,514  $213,415  $261,185  $271,591  $264,015
Cost of goods sold...........   120,512   142,200   163,319   179,369   187,427
Selling, general and
 administrative expense......    21,803    25,167    31,611    29,509    33,944
Research and development
 expense.....................     8,777     9,162    12,372    12,714    16,835
                               --------  --------  --------  --------  --------
Operating profit.............    10,422    36,886    53,883    49,999    25,809
Other (income) expense.......     6,464     7,964    (1,284)       27       717
                               --------  --------  --------  --------  --------
Income before income taxes,
 minority interest and
 extraordinary item..........     3,958    28,922    55,167    49,972    25,092
Provision for income taxes...               2,678    19,308    17,127     7,763
                               --------  --------  --------  --------  --------
Income before minority
 interest and extraordinary
 item........................     3,958    26,244    35,859    32,845    17,329
Minority interest in joint
 ventures....................      (161)     (660)     (903)     (687)       59
                               --------  --------  --------  --------  --------
Income before extraordinary
 item........................     4,119    26,904    36,762    33,532    17,270
Extraordinary item...........                       (22,242)
                               --------  --------  --------  --------  --------
Net income...................  $  4,119  $ 26,904  $ 59,004  $ 33,532  $ 17,270
                               ========  ========  ========  ========  ========
Basic earnings per share
 before extraordinary item...  $    .39  $   2.51  $   2.44  $   2.21  $   1.13
Diluted earnings per share
 before extraordinary item...  $    .39  $   2.50  $   2.37  $   2.15  $   1.09
Basic weighted average shares
 outstanding.................    10,500    10,727    15,101    15,180    15,299
Diluted weighted average
 shares outstanding..........    10,500    10,743    15,520    15,612    15,780

<CAPTION>
                                                 June 30,
                               ------------------------------------------------
                                 1995      1996      1997      1998      1999
                               --------  --------  --------  --------  --------
                                              (in thousands)
<S>                            <C>       <C>       <C>       <C>       <C>
Balance Sheet Data:
Cash and cash equivalents....  $  8,412  $ 20,179  $ 51,351  $ 19,688  $ 61,311
Working capital..............    16,405    34,458    66,082    33,052    71,134
Property and equipment.......   113,124   123,048   162,310   244,650   312,240
Total assets.................   171,701   227,893   291,579   351,979   480,406
Long-term borrowings.........     4,265     9,324    10,473     7,519     4,659
Long-term borrowings, related
 parties.....................   125,570                         9,000   100,000
</TABLE>

                                       21
<PAGE>

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

  The following discussion and analysis of financial condition and results of
operations should be read in conjunction with our financial statements and
related notes included elsewhere in this document.

Overview

  Based on worldwide sales, we believe we are the largest photomask
manufacturer in the world. We sell our products to over 200 customers in 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 also manufacture
photoblanks and pellicles, the principal components of photomasks, primarily
for internal consumption. We operate globally with established manufacturing
facilities in North America, Europe and Asia.

  The demand for photomasks is driven primarily by semiconductor design
activity. A number of recent trends have fueled growth in photomasks,
including:

  .  The proliferation of semiconductor applications;

  .  Increasing customization of semiconductor designs;

  .  Growing complexity of semiconductor devices; and

  .  Decreasing feature size of semiconductor designs.

These trends have increased the importance of photomask technology in the
semiconductor manufacturing process. Primarily as a result of these trends, our
annual sales increased an average of 13.9% from 1995 to 1999.

  Due to a downturn in the semiconductor industry and corresponding photomask
industry over-capacity, our sales decreased 2.8% from $271.6 million in 1998 to
$264.0 million in 1999. Competitive pricing pressure was the primary
contributor to the overall decrease in sales during this period.

  Photomask manufacturing operations are capital intensive. Accordingly, at a
given threshold of manufacturing capacity, a high proportion of our operating
costs are fixed and remain relatively constant as sales volume increases or
decreases. To the extent that we have under-utilized production capacity,
operating profit increases or decreases significantly as sales volume increases
or decreases. In the early 1990's, we had excess capacity. As sales increased
through 1997, costs associated with manufacturing remained relatively unchanged
and our operating margin over the period increased. In 1998 and 1999, our
operating costs on an absolute basis increased more than our sales. As a
result, our operating margin declined. In 2000, we anticipate that our
operating costs will continue to increase as we add capacity to position
ourselves for future growth. If our sales growth does not keep pace with
increases in operating costs, our operating margin will decline further.

                                       22
<PAGE>

Results of Operations

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

<TABLE>
<CAPTION>
                                                           Year Ended June
                                                                 30,
                                                          -------------------
                                                          1997   1998   1999
                                                          -----  -----  -----
<S>                                                       <C>    <C>    <C>
Sales.................................................... 100.0% 100.0% 100.0%
Cost of goods sold.......................................  62.6   66.0   71.0
Selling, general and administrative expense..............  12.1   10.9   12.8
Research and development expense.........................   4.7    4.7    6.4
                                                          -----  -----  -----
Operating profit.........................................  20.6   18.4    9.8
Other (income) expense...................................  (0.5)          0.3
                                                          -----  -----  -----
Income before income taxes, minority interest and
 extraordinary item......................................  21.1   18.4    9.5
Provision for income taxes...............................   7.4    6.3    3.0
                                                          -----  -----  -----
Income before minority interest and extraordinary item...  13.7   12.1    6.5
Minority interest in joint ventures......................  (0.4)  (0.2)
                                                          -----  -----  -----
Income before extraordinary item.........................  14.1   12.3    6.5
Extraordinary item.......................................  (8.5)
                                                          -----  -----  -----
Net income...............................................  22.6%  12.3%   6.5%
                                                          =====  =====  =====
</TABLE>

 Year Ended June 30, 1999 Compared to Year ended June 30, 1998

  Sales. Sales are comprised primarily of photomask sales to semiconductor
manufacturers. Sales decreased 2.8% from $271.6 million in 1998 to $264.0
million in 1999. From 1998 to 1999, sales increased in North America from
$152.2 million to $157.4 million, sales decreased in Europe from $67.0 million
to $51.8 million and sales increased in Asia from $52.4 million to $54.8
million. Competitive pricing pressure was offset by increased unit volume
during this period. Europe's sales decrease was primarily due to significant
price erosion associated with competitive pricing pressure. We experienced
average selling price decreases of approximately 11% in 1999. Unit volume
increased approximately 6% in 1999. We continue to experience an increase in
demand for advanced photomasks, those with design technology of 0.25 micron and
below, which now represent approximately 22% of our sales. This shift in demand
reflects what we believe to be a continued trend toward higher utilization of
complex semiconductor devices with finer line widths.

  Cost of Goods Sold. Cost of goods sold consists of material, labor,
depreciation and overhead. Cost of goods sold increased from $179.4 million in
1998 to $187.4 million in 1999. The increase resulted primarily from higher
costs associated with increased manufacturing capacity offset in part by lower
costs associated with decreased sales and cost containment initiatives. As a
percentage of sales, cost of goods sold increased from 66.0% in 1998 to 71.0%
in 1999. The percentage of sales increase was primarily due to margin
compression as a result of competitive pricing pressures, costs related to new
facilities and costs related to continued capacity expansions at existing
facilities. As we add capacity to position ourselves for future growth, we will
incur additional costs related to new facilities and costs related to capacity
expansions at existing facilities.

  Selling, General and Administrative Expense. Selling, general and
administrative expense includes salaries of sales personnel, marketing expense,
general and administrative expense and product distribution expense. Since
January 1996, selling, general and administrative expense includes fees
incurred by us under transitional agreements with DuPont. Selling, general and
administrative expense as a percentage of sales increased from 10.9% in 1998 to
12.8% in 1999. In addition, selling, general and administrative expense
increased 15.0% from $29.5 million in 1998 to $33.9 million in 1999 as a result
of new facilities and initiatives and incentive compensation expense at
targeted levels. We anticipate that selling, general and administrative expense
will increase in the future.

                                       23
<PAGE>

  Research and Development Expense. Research and development expense consists
primarily of employee costs, cost of material consumed, depreciation,
engineering related costs and our share of costs of the DPI Reticle Technology
Center. Research and development expense increased from $12.7 million in 1998
to $16.8 million in 1999. The increase was due primarily to increased focus on
research and development at our facility in Ichon and our joint venture
participation with Advanced Micro Devices, Micron Technology and Motorola in
the DPI Reticle Technology Center, which was formed to develop advanced
photomask technology and fabricate leading-edge photomasks. We believe that,
through our participation in the DPI Reticle Technology Center, we will be able
to help meet the future technology needs of the semiconductor industry for
advanced photomasks. We anticipate that research and development expense will
continue to increase in absolute dollars in the future reflecting our strategy
of advancing our technological leadership. However, there can be no assurance
that such expenditures will enable us to develop new technologies or to
maintain our technological leadership.

  Other (Income) Expense. Other (income) expense was negligible in 1998 and
$0.7 million in 1999. The increase relates primarily to increased interest
expense as a result of borrowings drawn on our credit agreement as discussed
below.

  Provision for Income Taxes. Our tax expense has been determined in accordance
with FAS 109 and is based on the statutory rates in effect in the countries in
which we operate. Our effective tax rate was 34% for 1998 and was 31% for 1999.
Certain of our operations in Asia are subject to government granted tax
exemptions.

  Minority Interest in Joint Ventures. The minority interest impact of our
joint venture manufacturing facilities was ($0.7 million) in 1998 and was
negligible in 1999. Minority interest reflects the partners' share of the joint
ventures' operations.

 Year Ended June 30, 1998 Compared to Year Ended June 30, 1997

  Sales. Sales increased 4.0% from $261.2 million in 1997 to $271.6 million in
1998. From 1997 to 1998, sales increased in North America from $145.6 million
to $152.2 million, sales increased in Europe from $63.0 million to $67.0
million and sales decreased in Asia from $52.6 million to $52.4 million. A
continued increase in the demand for advanced photomasks, which have higher
average selling prices, was a primary contributor to the overall increase in
sales during these periods. This shift in demand reflects what we believe to be
a continued trend toward higher utilization of complex semiconductor devices
with finer line widths. Product mix-related average selling price increases
contributed approximately one-half of the revenue growth in 1998. The balance
of the revenue growth came from increased unit volume. The strength of the U.S.
Dollar against the Korean Won, and to a lesser extent, the German Mark and
French Franc, adversely impacted sales by approximately $15 million in 1998 and
thus adversely impacted sales growth in 1998 as compared to the previous year.

  Cost of Goods Sold. Cost of goods sold increased 9.8% from $163.3 million in
1997 to $179.4 million in 1998 resulting primarily from higher costs associated
with increased sales, costs related to new facilities and costs related to
continued capacity expansions at existing facilities. As a percentage of sales,
cost of goods sold increased from 62.6% in 1997 to 66.0% in 1998. The
percentage of sales increase was primarily due to margin compression as a
result of the strength of the U.S. Dollar, costs related to new facilities and
costs related to continued capacity expansions at existing facilities.

  Selling, General and Administrative Expense. Selling, general and
administrative expense as a percentage of sales decreased from 12.1% in 1997 to
10.9% in 1998. Selling, general and administrative expense decreased 6.6% from
$31.6 million in 1997 to $29.5 million in 1998 as a result of reductions in
discretionary spending including reduced incentive compensation expense.

  Research and Development Expense. Research and development expense increased
from $12.4 million in 1997 to $12.7 million in 1998. The increase was due
primarily to expenses arising from our joint venture participation in the DPI
Reticle Technology Center.


                                       24
<PAGE>

  Other (Income) Expense. Interest income was $2.1 million in 1997 and $0.1
million in 1998. Interest income results from short-term investment of our cash
balances. Exchange loss consists of net gains and losses resulting from the
remeasurement of our accounts denominated in non-U.S. currencies into U.S.
Dollars, which is our functional currency. Exchange loss was $0.8 million in
1997 compared to $0.2 million in 1998 primarily due to fluctuations of the U.S.
Dollar against the Korean Won, German Mark and French Franc. Exchange loss is
net of the impact of hedging activities designed to reduce exchange rate
exposure.

  Provision for Income Taxes. Our tax expense has been determined in accordance
with FAS 109 and is based on the statutory rates in effect in the countries in
which we operate. Our effective tax rate was 35% in 1997 and was 34% in 1998.

  Minority Interest in Joint Ventures. The minority interest impact of our
joint venture manufacturing facilities was ($0.9 million) in 1997 compared to
($0.7 million) in 1998, reflecting the partners' share of losses from the joint
ventures.

  Extraordinary Item. In January 1997, we sold our entire investment in Etec
Systems common stock. Aggregate net proceeds from the sale of $39.2 million
were used in operations. We realized a $34.2 million gain on the sale. The
related provision for income taxes was $12.0 million.

Liquidity and Capital Resources

  Our working capital was $33.1 million at June 30, 1998 and $71.1 million at
June 30, 1999. The increase in working capital is due principally to higher
cash resulting from borrowings on our credit agreement. Cash and cash
equivalents were $19.7 million at June 30, 1998 and $61.3 million at June 30,
1999. Cash provided by operating activities decreased from $87.9 million in
1998 to $65.0 million in 1999 primarily due to lower net income.

  Cash used in investing activities, including capital expenditures and
payments for acquisitions, was $128.5 million in 1998 and $128.1 million in
1999. Management expects capital expenditures for 2000 will be approximately
$125 million. Capital expenditures have been and will be used primarily to
expand our manufacturing capacity and advance our technical capability. We may
in the future pursue additional acquisitions of businesses, products and
technologies, or enter into other joint venture arrangements that could
complement or expand our business. Any material acquisition or joint venture
could result in a decrease to our working capital depending on the amount,
timing and nature of the consideration to be paid.

  Cash provided by financing activities was $9.9 million in 1998 and $106.2
million in 1999 and, for 1999, primarily reflects net borrowings on our credit
agreement. Pursuant to our credit agreement with DuPont, DuPont originally
agreed to provide a credit facility in an aggregate amount of $100.0 million.
This credit facility expires in 2001 and any loans thereunder will bear
interest at LIBOR plus 0.25% per annum. At our option, advances under this
credit facility are convertible into term loans with maturities up to seven
years. We had borrowed a maximum of approximately $69 million under this credit
facility and, at June 30, 1999, no borrowings were outstanding under this
credit facility. We have amended our credit agreement with DuPont to add a
second credit facility with an additional borrowing capacity of $100.0 million.
The new credit facility has a term of three years and outstanding amounts bear
interest at 0.25% per annum for the first two years and LIBOR plus 0.25% per
annum for the third year. We have borrowed a maximum of $100.0 million under
this credit facility and, at June 30, 1999, borrowings of $100.0 million were
outstanding under this credit facility. The amended credit agreement contains,
among other things, covenants restricting our ability to incur additional debt.

  Our ongoing cash requirements will be for capital expenditures, acquisitions,
research and development and working capital. We have established a joint
venture with UMC Group to produce photomasks in Taiwan. We also began
construction on a new photomask production facility in Gresham, Oregon that we
subsequently and indefinitely delayed. If additional capacity were to be
needed, we could complete the Gresham facility within approximately six months.
In addition, we began construction on a new photomask production facility in

                                       25
<PAGE>

Singapore. Further, we have entered into an agreement with Etec Systems to
upgrade our existing MEBES(R) electron-beam pattern generation tools. These
plans reflect a significant capital investment over the next five years.
Management believes that cash provided by operations and the credit agreement
will be sufficient to meet our cash requirements for at least the next 12
months. Based on our current operating plans, we will require external
financing from time to time to fund our capital expenditures. There can be no
assurance that we will be able to obtain the additional financing required to
fund these capital investments on reasonable terms, or at all.

  Furthermore, there can be no assurance that alternative sources of financing
will be available upon expiration of the DuPont credit facilities or that
alternative sources of funding will be available if our borrowing requirements
exceed the facilities. In addition, there can be no assurance that, even if
funding is available, the terms thereof will be attractive.

Other Matters

  Changing Accounting Standards. In June 1998, the Financial Accounting
Standards Board issued FAS 133 which is not expected to have a material impact
on our results.

  Foreign Currency Exposure. Non-U.S. operations are subject to certain risks
inherent in conducting business abroad, including price and currency exchange
controls, fluctuation in the relative value of currencies and restrictive
governmental actions. Changes in the relative value of currencies occur from
time to time and may, in certain instances, have a material effect on our
results of operations. Our 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 Korean Won, French Franc, German
Mark, Japanese Yen and Singapore Dollar forward contracts designed to reduce
such exposure. There can be no assurance that such forward contracts or any
other hedging activity will be available or adequate to eliminate, or even
mitigate, the impact of our exchange rate exposure. There can be no assurance
that such risks will not have a material adverse impact on our liquidity and
results of operations in the future.

  Year 2000 Issues. Many currently installed computer systems are not capable
of distinguishing 21st century dates from 20th century dates. As a result, in
less than one year, computer systems and/or software used by many companies in
a wide variety of applications will experience operating difficulties unless
they are modified or upgraded to adequately process information involving,
related to or dependent upon the century change. Significant uncertainty
exists concerning the scope and magnitude of problems associated with the
century change.

  We recognize the need to ensure our operations will not be adversely
impacted by Year 2000 software failures and have established a project team to
address Year 2000 risks. The project team has coordinated the identification
of, and is coordinating the implementation of, changes to computer hardware
and software applications that will attempt to ensure availability and
integrity of our information systems and the reliability of our operational
systems and manufacturing processes. We have also assessed the potential
overall impact of the impending century change on our business, results of
operations and financial position.

  We have reviewed our information and operational systems and manufacturing
processes to identify those products, services or systems that are not Year
2000 compliant. As a result of this review, we have determined that we will be
required to modify or replace certain information and operational systems so
they will be Year 2000 compliant. These modifications and replacements are
being, and will continue to be, made in conjunction with our overall systems
initiatives. As of June 30, 1999, we have spent approximately $1.1 million of
the currently estimated $2.0 million total cost of the Year 2000 compliance
program. Costs incurred and expected to be incurred consist of the costs of
programmers, including third-party consultants, utilized to write software
patches and to update applications and operating systems. Funds for the Year
2000 compliance program are

                                      26
<PAGE>

being provided from available working capital. Our Year 2000 project is on
schedule to be completed during 1999. Based on available information, we do not
believe any material exposure to significant business interruption exists as a
result of Year 2000 compliance issues. Accordingly, we have not adopted any
formal contingency plan in the event that our Year 2000 project is not promptly
completed. These costs and the timing in which our plans to complete our Year
2000 modification and testing processes are based on management's best
estimates. However, there can be no assurance that we will sufficiently
identify and remediate all significant Year 2000 problems, that remediation
efforts will not involve significant time and expense, or that such problems
will not have a material adverse effect on our business, results of operations
or financial position.

  We also face risk to the extent that suppliers of products, services and
systems purchased by us and others with whom we transact business on a
worldwide basis do not comply with Year 2000 requirements. We have initiated
formal communications with significant suppliers and customers to determine the
extent to which we are vulnerable to failures by these third parties to
remediate their own Year 2000 issues. Areas being addressed include major
third-party suppliers as well as full reviews of our manufacturing equipment,
telephone and voice mail systems, security systems and other office support
systems. Most of our equipment suppliers are providing patches that will be
tested and installed by the end of 1999. In the event these third parties
cannot promptly provide us with products, services or systems that meet the
Year 2000 requirements, or in the event Year 2000 issues prevent such third
parties from timely delivery of products or services required by us, our
results of operations could be materially adversely affected. To the extent
Year 2000 issues cause significant delays in, or cancellation of, decisions to
purchase our products or services, our business, results of operations and
financial position would be materially adversely affected.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

  Non-U.S. operations are subject to certain risks inherent in conducting
business abroad, including fluctuation in the relative value of currencies. We
monitor exchange rate exposure and attempt to reduce such exposure by hedging.
We have entered into Korean Won, French Franc, German Mark, Japanese Yen and
Singapore Dollar forward contracts designed to reduce our exchange rate
exposure. At June 30, 1999, we held forward contracts with a notional amount of
approximately $2.3 million, a carrying amount of approximately $2.5 million and
an unrealized loss of approximately $0.2 million. The strength of the U.S.
Dollar against the Korean Won, and to a lesser extent, the German Mark and
French Franc, adversely impacted sales by approximately $15 million in 1998 and
thus adversely impacted sales growth in 1998 as compared to the previous year.

Item 8. Financial Statements and Supplementary Data

  Index to Financial Statements:

<TABLE>
<CAPTION>
                                                                     Page(s)
                                                                   -----------
   <S>                                                             <C>
   Report of Independent Accountants..............................         F-1
   Income Statement for the Three Years Ended June 30, 1999.......         F-2
   Balance Sheet at June 30, 1998 and 1999........................         F-3
   Statement of Cash Flows for the Three Years Ended June 30,
    1999..........................................................         F-4
   Notes to Financial Statements.................................. F-5 to F-13
</TABLE>

  All Schedules are omitted because they are not applicable or the required
information is shown in the Financial Statements or Notes thereto.

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

  None.

                                       27
<PAGE>

                                    PART III

  Information with respect to the following Items is incorporated by reference
to the pages indicated in our Proxy Statement filed in connection with our 1999
Annual Meeting of Stockholders. However, information regarding executive
officers is contained in Part I of this report (page 19) pursuant to General
Instruction G(3) of this Form 10-K.

Item 10. Directors and Executive Officers

<TABLE>
<CAPTION>
                                                                        Page(s)
                                                                        --------
   <S>                                                                  <C>
   Election of Directors............................................... 10 to 12
   Compliance With Section 16(a) of the Exchange Act................... 23

Item 11. Executive Compensation

<CAPTION>
                                                                        Page(s)
                                                                        --------
   <S>                                                                  <C>
   Executive Compensation and Other Information........................ 27 to 29
   Director Compensation............................................... 29 to 30

Item 12. Security Ownership of Certain Beneficial Owners and Management

<CAPTION>
                                                                        Page(s)
                                                                        --------
   <S>                                                                  <C>
   Beneficial Ownership of Securities.................................. 19 to 20

Item 13. Certain Relationships and Related Transactions

<CAPTION>
                                                                        Page(s)
                                                                        --------
   <S>                                                                  <C>
   Transactions and Relationship Between Us and DuPont................. 20 to 23
</TABLE>

                                    PART IV

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

  (a) The following financial statements, financial statement schedules and
exhibits are filed as a part of this Report:

  1. Financial statements--see Index to Financial Statements on page

  2. Financial statement schedules--see Index to Financial Statements on page


  3. Exhibits--see Index to Exhibits on page

  (b) Reports on Form 8-K

    Our report on Form 8-K, dated June 9, 1999, announcing that J. Michael
  Hardinger stepped down as our Chief Executive Officer and Chairman of our
  Board.

                                       28
<PAGE>

                                   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.

  Date: September 20, 1999

                                          DuPont Photomasks, Inc.

                                                   /s/ David S. Gino
                                          By: _________________________________
                                                       David S. Gino
                                             Executive Vice President--Finance
                                                and Chief Financial Officer

                               POWER OF ATTORNEY

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

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

<TABLE>
<CAPTION>
                 Name                            Title                   Date
                 ----                            -----                   ----

<S>                                    <C>                        <C>
      /s/ Marshall C. Turner           Chairman of our Board and  September 20, 1999
______________________________________  Chief Executive Officer
          Marshall C. Turner            (Principal Executive
                                        Officer)

       /s/ Preston M. Adcox            President and Chief        September 20, 1999
______________________________________  Operating Officer
           Preston M. Adcox

        /s/ David S. Gino              Executive Vice President-- September 20, 1999
______________________________________  Finance and Chief
            David S. Gino               Financial Officer
                                        (Principal Financial and
                                        Accounting Officer)

        /s/ John L. Doyle              Director                   September 20, 1999
______________________________________
            John L. Doyle

        /s/ John W. Himes              Director                   September 20, 1999
______________________________________
            John W. Himes

       /s/ John C. Hodgson             Director                   September 20, 1999
______________________________________
           John C. Hodgson

      /s/ Gary W. Pankonien            Director                   September 20, 1999
______________________________________
          Gary W. Pankonien

     /s/ Susan Vladuchick Sam          Director                   September 20, 1999
______________________________________
         Susan Vladuchick Sam

       /s/ John C. Sargent             Director                   September 20, 1999
______________________________________
           John C. Sargent
</TABLE>

                                       29
<PAGE>

                               INDEX TO EXHIBITS

  A single asterisk below indicates an exhibit previously filed with the
Securities and Exchange Commission as an exhibit to our Registration Statement
on Form S-1, Registration No. 333-3386 (the "IPO Registration Statement"), such
exhibit being incorporated herein by reference. A double asterisk below
indicates an exhibit previously filed with the Securities and Exchange
Commission as an exhibit to the our Annual Report on Form 10-K for the year
ended June 30, 1997 (the "1997 Form 10-K"), such exhibit being incorporated
herein by reference. A triple asterisk below indicates an exhibit previously
filed with the Securities and Exchange Commission as an exhibit to the our
Annual Report on Form 10-K for the year ended June 30, 1998 (the "1998 Form 10-
K"), such exhibit being incorporated herein by reference. Unless otherwise
indicated, the number of the exhibit below is also the number of such exhibit
as filed with the IPO Registration Statement, the 1997 Form 10-K or the 1998
Form 10-K.

<TABLE>
<CAPTION>
 Exhibit
 Number
 -------
 <C>     <S>
  3.1    Certificate of Incorporation of the Company, as amended and restated
         on April 3, 1996*
  3.2    Bylaws, as amended on December 31, 1995*
  4.1    Specimen Certificate for Common Stock*
 10.1    Transitional Administrative Services Agreement between the Company and
         E.I. du Pont de Nemours and Company dated as of January 1, 1996*
 10.2    Environmental Indemnification Agreement between the Company and E.I.
         du Pont de Nemours dated April 30, 1996*
 10.3    Amended Bonus Plan, as adopted by the Company's Board of Directors on
         October 28, 1996**
 10.4    Second Amended and Restated Non-employee Directors Stock Option Plan
         as adopted by the Company's Board of Directors on July 27, 1998***
 10.5    Amended and Restated Stock Performance Plan as adopted by the
         Company's Board of Directors on June 9, 1997**
 10.6    Founders Stock Option Plan, as adopted by the Company's Board of
         Directors on March 26, 1996*
 10.7    Registration Rights Agreement between the Company and DuPont Chemical
         and Energy Operations, Inc. dated as of December 31, 1995*
 10.8    Tax Indemnification Agreement among the Company, DuPont Chemical and
         Energy Operations, Inc. and E.I. du Pont de Nemours and Company dated
         May 14, 1996*
 10.9    Amended Credit Agreement between the Company and DuPont Chemical and
         Energy Operations, Inc. dated as of March 9, 1999
 10.10   Letter Agreement between J. M. Hardinger and E.I. du Pont de Nemours
         and Company dated as of September 21, 1995*
 10.11   Research, Development and Consulting Agreement between the Company and
         E.I. du Pont de Nemours and Company dated as of January 1, 1996*
 10.12   Business Transfer Agreement between DuPont Korea, Ltd. and DuPont
         Photomasks Korea, Ltd. Dated December 22, 1995*
 10.13   Form of Indemnification Agreement between the Company and its
         Directors and Officers*
 10.14   Corporate Tradename and Trademark Agreement between the Company and
         E.I. du Pont de Nemours and Company dated May 7, 1998***
 10.15   Amended 1997 Stock Option and Restricted Stock Plan as adopted by the
         Company's Board of Directors on September 2, 1999
 10.16   1998 Employee Stock Purchase Plan as adopted by the Company's Board of
         Directors on July 27, 1998***
 11      Statement re Computation of Per Share Earnings
 21      List of principal subsidiaries of the Company
 23      Consent of PricewaterhouseCoopers LLP
 24      Power of Attorney (included on the signature page contained in Part IV
         hereof)
 27      Financial Data Schedule
</TABLE>

                                       30
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS

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

  In our opinion, the accompanying balance sheet and the related income
statement and statement of cash flows present fairly, in all material respects,
the financial position of DuPont Photomasks, Inc. and its subsidiaries at June
30, 1998 and 1999, and the results of their operations and their cash flows for
each of the three years in the period ended June 30, 1999, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards 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 the opinion expressed above.

PricewaterhouseCoopers LLP

Austin, Texas
July 27, 1999

                                      F-1
<PAGE>

                    DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES

                                INCOME STATEMENT
                (Dollars in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                 Year Ended June 30,
                                         -------------------------------------
                                            1997         1998         1999
                                         -----------  -----------  -----------
<S>                                      <C>          <C>          <C>
Sales................................... $   261,185  $   271,591  $   264,015
Cost of goods sold......................     163,319      179,369      187,427
Selling, general and administrative
 expense................................      31,611       29,509       33,944
Research and development expense........      12,372       12,714       16,835
                                         -----------  -----------  -----------
Operating profit........................      53,883       49,999       25,809
Other (income) expense..................      (1,284)          27          717
                                         -----------  -----------  -----------
Income before income taxes, minority
 interest and extraordinary item........      55,167       49,972       25,092
Provision for income taxes..............      19,308       17,127        7,763
                                         -----------  -----------  -----------
Income before minority interest and
 extraordinary item.....................      35,859       32,845       17,329
Minority interest in joint ventures.....        (903)        (687)          59
                                         -----------  -----------  -----------
Income before extraordinary item........      36,762       33,532       17,270
Extraordinary item......................     (22,242)
                                         -----------  -----------  -----------
Net income.............................. $    59,004  $    33,532  $    17,270
                                         ===========  ===========  ===========
Basic earnings per share before
 extraordinary item..................... $      2.44  $      2.21  $      1.13
Extraordinary item......................       (1.47)
                                         -----------  -----------  -----------
Basic earnings per share................ $      3.91  $      2.21  $      1.13
                                         ===========  ===========  ===========
Basic weighted average shares
 outstanding............................  15,100,521   15,179,596   15,299,339
                                         ===========  ===========  ===========
Diluted earnings per share before
 extraordinary item..................... $      2.37  $      2.15  $      1.09
Extraordinary item......................       (1.43)
                                         -----------  -----------  -----------
Diluted earnings per share.............. $      3.80  $      2.15  $      1.09
                                         ===========  ===========  ===========
Diluted weighted average shares
 outstanding............................  15,520,239   15,612,234   15,780,181
                                         ===========  ===========  ===========
</TABLE>


         The accompanying notes are an integral part of this statement.

                                      F-2
<PAGE>

                    DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES

                                 BALANCE SHEET
                (Dollars in thousands, except par value amounts)

<TABLE>
<CAPTION>
                                                                  June 30,
                                                              -----------------
                                                                1998     1999
                                                              -------- --------
<S>                                                           <C>      <C>
                           ASSETS
Current assets:
  Cash and cash equivalents.................................. $ 19,688 $ 61,311
  Accounts receivable, trade.................................   47,471   45,272
  Accounts receivable, related parties.......................    3,349    1,388
  Inventories................................................   18,236   12,707
  Deferred income taxes......................................    6,389    9,547
  Prepaid expenses and other current assets..................    6,574    9,421
                                                              -------- --------
    Total current assets.....................................  101,707  139,646
Property and equipment.......................................  244,650  312,240
Accounts receivable, related parties.........................    1,106    1,324
Deferred income taxes........................................    2,221    3,596
Other assets.................................................    2,295   23,600
                                                              -------- --------
    Total assets............................................. $351,979 $480,406
                                                              ======== ========
            LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable, trade.................................... $ 30,197 $ 34,563
  Accounts payable, related parties..........................   10,391    1,742
  Short-term borrowings......................................    2,143    2,702
  Income taxes payable.......................................    1,828    5,179
  Other accrued liabilities..................................   24,096   24,326
                                                              -------- --------
    Total current liabilities................................   68,655   68,512
Long-term borrowings.........................................    7,519    4,659
Long-term borrowings, related parties........................    9,000  100,000
Deferred income taxes........................................   12,048   13,644
Other liabilities............................................    1,800    2,837
Minority interest in net assets of joint ventures............            16,453
Commitments and contingencies
Stockholders' equity:
  Common stock, $.01 par value; 25,000,000 shares authorized;
   15,258,722 and 15,332,282 issued and outstanding..........      152      153
  Additional paid-in capital.................................  160,269  164,342
  Retained earnings..........................................   92,536  109,806
                                                              -------- --------
    Total liabilities and stockholders' equity............... $351,979 $480,406
                                                              ======== ========
</TABLE>

         The accompanying notes are an integral part of this statement.

                                      F-3
<PAGE>

                    DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES

                            STATEMENT OF CASH FLOWS
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                    Year Ended June 30,
                                                ------------------------------
                                                  1997      1998       1999
                                                --------  ---------  ---------
<S>                                             <C>       <C>        <C>
Cash flows from operating activities:
 Net income.................................... $ 59,004  $  33,532  $  17,270
 Adjustments to reconcile net income to net
  cash provided by operations:
  Depreciation and amortization................   26,593     31,869     41,784
  Other........................................     (494)     1,764       (926)
  Gain.........................................  (34,219)
  Cash provided (used) by changes in assets and
   liabilities
   Accounts receivable.........................   (6,945)   (10,309)     5,048
   Inventories.................................   (5,444)    (1,747)     6,370
   Prepaid expenses and other current assets...   (5,038)     2,641     (1,785)
   Accounts payable............................    2,470     27,336     (3,226)
   Other accrued liabilities...................    5,814      2,828        510
                                                --------  ---------  ---------
    Net cash provided by operating activities..   41,741     87,914     65,045
                                                --------  ---------  ---------
Cash flows from investing activities:
 Capital expenditures..........................  (51,057)  (100,200)   (87,772)
 Payments for acquisitions.....................             (28,344)   (40,355)
 Proceeds from sale of investment..............   39,219
                                                --------  ---------  ---------
    Net cash used in investing activities......  (11,838)  (128,544)  (128,127)
                                                --------  ---------  ---------
Cash flows from financing activities:
 Increase in borrowings........................    2,394      8,739     88,650
 Net proceeds from issuance of common stock....       61      1,174      1,202
 Increase in minority interest in net assets of
  joint ventures...............................                         16,394
                                                --------  ---------  ---------
    Net cash provided by financing activities..    2,455      9,913    106,246
                                                --------  ---------  ---------
Effect of exchange rate changes on cash........   (1,186)      (946)    (1,541)
                                                --------  ---------  ---------
Net increase (decrease) in cash and cash
 equivalents...................................   31,172    (31,663)    41,623
Cash and cash equivalents at beginning of
 year..........................................   20,179     51,351     19,688
                                                --------  ---------  ---------
Cash and cash equivalents at end of year....... $ 51,351  $  19,688  $  61,311
                                                ========  =========  =========
</TABLE>

         The accompanying notes are an integral part of this statement.

                                      F-4
<PAGE>

                    DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES

                         NOTES TO FINANCIAL STATEMENTS
                             (Dollars in thousands)

1. Organization and Summary of Significant Accounting Policies

  Basis of Presentation: Our financial statements include the accounts of
DuPont Photomasks, Inc. and its subsidiaries. All significant intercompany
balances and transactions have been eliminated. Our principal business is the
manufacture and sale of photomasks, high-purity quartz or glass plates
containing precision microscopic images of integrated circuits, to
semiconductor manufacturers.

  Revenue Recognition: Sales and related costs of goods sold are included in
income when goods are shipped to our customers. Provision is made for estimated
sales returns.

  Cash and Cash Equivalents: Cash and cash equivalents include highly liquid
investments with original maturities of three months or less.

  Inventories: Inventories, primarily raw materials, are valued at the lower of
average cost or market.

  Property and Equipment: Property and equipment are stated at cost and are
depreciated using the straight-line method over the estimated useful lives of
the assets. The gross value of property and equipment and related accumulated
depreciation are eliminated at the date of disposal and the resulting gain or
loss is included in income. Maintenance and repairs are charged to operations;
replacements and betterments are capitalized. The future economic benefit of
property and equipment is reviewed periodically through an undiscounted cash
flow analysis to determine if an impairment has occurred.

  Intangible Assets: Intangible assets are amortized using the straight-line
method over their estimated useful lives of five to seven years. Net intangible
assets were $1,750 and $22,409 at June 30, 1998 and 1999 and are included in
other assets. The future economic benefit of intangible assets is reviewed
periodically through an undiscounted cash flow analysis to determine if an
impairment has occurred.

  Research and Development: Research and development costs are expensed as
incurred. Further, we participate in the DPI Reticle Technology Center, a joint
venture for advanced photomask development and fabrication of leading-edge
photomasks.

  Non-U.S. Currencies: We have determined that the U.S. Dollar is the
functional currency of our worldwide operations. Accounts denominated in non-
U.S. currencies are remeasured into U.S. Dollars and the resulting exchange
gains and losses are included in income in the period they occur. Exchange
gains and losses are recorded net of the impact of hedging activities designed
to reduce exchange rate exposure. We have entered into Korean Won, French
Franc, German Mark, Japanese Yen and Singapore Dollar forward contracts
designed to reduce our exchange rate exposure. At June 30, 1999, we held
forward contracts with a notional amount of approximately $2,300, a carrying
amount of approximately $2,500 and an unrealized loss of approximately $200.

  Income Taxes: We account for income taxes using an asset and liability
approach that requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized in
our financial statements or tax returns. In estimating future tax consequences,
all expected future events are considered other than enactments of changes in
tax laws or rates. Valuation allowances are established as necessary to reduce
deferred tax assets to their expected realizable value. Certain of our
operations in Asia are subject to government granted tax exemptions.

  Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires us to make estimates and
assumptions, based upon all known facts and

                                      F-5
<PAGE>

                    DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

circumstances, that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.

  Reclassifications: Certain prior year balances have been reclassified to
conform to 1999 presentation.

2. Acquisitions

  In March 1998, we entered into a strategic alliance with Hyundai whereby we
purchased selected photomask manufacturing equipment located at Hyundai's
captive photomask manufacturing facility in Korea and entered into a five-year
supply agreement. We acquired, through our Korean subsidiary, approximately
$28,800 of equipment and approximately $1,000 in inventory. Consideration for
the assets was principally cash, and was partially financed by $24,000 in
borrowings under our credit facility with DuPont.

  In November 1998, we completed the acquisition of Hewlett-Packard's photomask
manufacturing organization. The acquisition included the purchase of equipment,
the purchase of inventory, the execution of a supply agreement, the execution
of a technology license agreement and the hiring of employees in the Hewlett-
Packard photomask manufacturing organization. Consideration for the acquisition
was approximately $39,000 in cash, one half of which was paid at closing and
one half of which was paid in February 1999. The cash payments were funded with
borrowings under our credit facility with DuPont. Approximately $23,600 has
been assigned to intangible assets.

3. Related Party Transactions

  Effective January 1996, we entered into several transitional agreements with
DuPont. Charges for services under these agreements were $3,944 for 1997,
$3,072 for 1998 and $2,375 for 1999. Amounts charged to us for functions and
services provided by DuPont are principally included in general and
administrative expense.

  We owned 1,025,640 shares of Etec Systems common stock until January 1997.
Etec Systems is our principal supplier of electron beam and laser beam systems.
In January 1997, we sold the entire investment. Aggregate net proceeds from the
sale of $39,219 were used in operations. We realized a $34,219 gain on the
sale. The related provision for income taxes was $11,977.

  Accounts receivable, related parties includes receivables from our employees
of $1,154 (Current $48, Non-Current $1,106) and $1,384 (Current $60, Non-
Current $1,324) at June 30, 1998 and 1999 which relate principally to housing
and automobile loans to our non-U.S. employees. The remainder represents
receivables for goods sold to various DuPont entities and other related parties
and amounts due us under our tax indemnification agreement with DuPont and the
transitional agreements with DuPont. Sales to related parties, including the
DPI Reticle Technology Center and various DuPont entities who serve as
resellers for us, were $8,764, $10,933 and $7,056 for the years ended June 30,
1997, 1998 and 1999.

  Accounts payable, related parties represents payables to DuPont for payroll
and benefits paid by DuPont on our behalf and billed on a one-month-lag basis
and amounts payable under the transitional agreements with DuPont. In August
1996, we paid $1,785 in settlement of certain amounts payable to DuPont at June
30, 1996 and DuPont contributed $3,745 of its remaining outstanding receivable
to us as an equity contribution.

4. Accounts Receivable, Trade

  Essentially all of our sales are to customers in the semiconductor
manufacturing industry. We assess the financial strength of our customers
before extending credit to reduce the risk of loss as we generally do not

                                      F-6
<PAGE>

                    DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

require collateral. One of our customers represented approximately twelve
percent of sales in 1997. Two of our customers each represented more than ten
percent of sales in 1998 and, in the aggregate, these two customers represented
approximately twenty-seven percent of sales in the year. Two of our customers
each represented more than ten percent of sales in 1999 and, in the aggregate,
these two customers represented approximately twenty-one percent of sales in
the year.

5. Property and Equipment

  Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                                                June 30,
                                                           --------------------
                                              Estimated
                                             Useful Lives    1998       1999
                                            -------------- ---------  ---------
   <S>                                      <C>            <C>        <C>
     Construction-in-progress..............                $  64,221  $  80,140
     Land..................................                    5,932      5,932
     Buildings............................. 10 to 20 years    76,775     85,735
     Equipment.............................   3 to 7 years   313,010    384,037
                                                           ---------  ---------
                                                             459,938    555,844
     Less: accumulated depreciation........                 (215,288)  (243,604)
                                                           ---------  ---------
     Property and equipment................                $ 244,650  $ 312,240
                                                           =========  =========
</TABLE>

6. Other Accrued Liabilities

  Other accrued liabilities consist of the following:

<TABLE>
<CAPTION>
                                                                   June 30,
                                                                ---------------
                                                                 1998    1999
                                                                ------- -------
   <S>                                                          <C>     <C>
     Accrued vacation pay...................................... $ 3,180 $ 3,409
     Accrued compensation and benefits.........................   7,483  11,122
     Other.....................................................  13,433   9,795
                                                                ------- -------
     Other accrued liabilities................................. $24,096 $24,326
                                                                ======= =======
</TABLE>

7. Borrowings

  Borrowings consist of the following:

<TABLE>
<CAPTION>
                                                                  June 30,
                                                               ----------------
                                                                1998     1999
                                                               -------  -------
   <S>                                                         <C>      <C>
     Capital lease obligations................................ $ 2,374  $ 2,162
     5.625% bank borrowings due 1999 through 2001.............   4,500    3,750
     Other bank borrowings due 1999 through 2000..............   2,788    1,449
                                                               -------  -------
                                                                 9,662    7,361
       Less: short-term borrowings............................  (2,143)  (2,702)
                                                               -------  -------
     Long-term borrowings..................................... $ 7,519  $ 4,659
                                                               =======  =======
</TABLE>

                                      F-7
<PAGE>

                    DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


8. Leases

  Minimum lease payments for years ending June 30 are as follows:

<TABLE>
<CAPTION>
                                                              Capital  Operating
                                                              Leases    Leases
                                                              -------  ---------
   <S>                                                        <C>      <C>
     2000.................................................... $   277   $1,111
     2001....................................................     277    1,125
     2002....................................................     277      465
     2003....................................................     243      281
     2004....................................................     224      281
     Thereafter..............................................   2,034    1,654
                                                              -------   ------
       Minimum lease payments................................   3,332   $4,917
                                                                        ======
         Less: interest......................................  (1,170)
                                                              -------
     Present value of minimum lease payments................. $ 2,162
                                                              =======
</TABLE>

9. Credit Agreement

  We have entered into a credit agreement with DuPont pursuant to which DuPont
originally agreed to provide a credit facility to us in an aggregate amount of
$100,000. This credit facility expires in 2001 and any loans thereunder will
bear interest at LIBOR plus 0.25% per annum. At our option, advances under this
credit facility are convertible into term loans with maturities up to seven
years. We had borrowed a maximum of $69,000 under this credit facility and, at
June 30, 1999, no borrowings were outstanding under this credit facility. We
have amended our credit agreement with DuPont to add a second credit facility
with an additional borrowing capacity of $100,000. The new credit facility has
a term of three years and outstanding amounts bear interest at 0.25% per annum
for the first two years and LIBOR plus 0.25% per annum for the third year. We
have borrowed a maximum of $100,000 under this credit facility and, at June 30,
1999, borrowings of $100,000 were outstanding under this credit facility. The
amounts loaned under the amended credit agreement are unsecured and the amended
credit agreement contains various representations, covenants and events of
default. For example, the amended credit agreement provides that, without
DuPont's prior written consent, we will not incur, create, assume or permit to
exist any indebtedness, including guarantees on indebtedness, in addition to
the indebtedness under the amended credit agreement.

                                      F-8
<PAGE>

                    DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


10. Stockholders' Equity

  Stockholders' equity at June 30 is as follows:

<TABLE>
<CAPTION>
                                                          Accumulated
                                              Additional     Other
                                       Common  Paid-In   Comprehensive Retained
                                       Stock   Capital      Income     Earnings
                                       ------ ---------- ------------- --------
   <S>                                 <C>    <C>        <C>           <C>
   Balance at 1996....................  $151   $152,880    $ 11,583
     Contribution of capital..........            3,745
     Issuance of common stock.........              117
     Unrealized holding gain..........                       10,659
     Sale of investment...............                      (22,242)
     Net income.......................                                 $ 59,004
                                        ----   --------    --------    --------
   Balance at 1997....................   151    156,742                  59,004
     Issuance of common stock.........     1      3,527
     Net income.......................                                   33,532
                                        ----   --------    --------    --------
   Balance at 1998....................   152    160,269                  92,536
     Contribution of capital..........            2,442
     Issuance of common stock.........     1      1,631
     Net income.......................                                   17,270
                                        ----   --------    --------    --------
   Balance at 1999....................  $153   $164,342    $           $109,806
                                        ====   ========    ========    ========
</TABLE>

11. Stock Plans

  We have several stock performance plans whereby options to purchase shares of
common stock or shares of restricted stock have been or can be granted to
directors, officers, employees and consultants. Generally, option exercise
prices are equal to the fair market value at the date of grant. Restricted
stock grants do not require the payment of any cash consideration by the
recipient. Matters such as vesting periods and expirations are determined on a
plan-by-plan or grant-by-grant basis. Additionally, we maintain a qualified
employee stock purchase plan that permits substantially all of our U.S.
employees to purchase shares of our common stock. A summary of stock option
activity is as follows:

<TABLE>
<CAPTION>
                                   1997                1998                1999
                             ------------------ ------------------- --------------------
                                       Weighted            Weighted             Weighted
                              Number   Average             Average              Average
                                of     Exercise Number of  Exercise Number of   Exercise
                              Shares    Price    Shares     Price     Shares     Price
                             --------  -------- ---------  -------- ----------  --------
   <S>                       <C>       <C>      <C>        <C>      <C>         <C>
   Balance at beginning of
    year...................   953,784   $17.00    990,544   $18.07   1,403,514   $30.27
   Options granted.........    86,976   $29.21    507,983   $52.10   1,722,485   $28.45
   Options forfeited.......   (46,640)  $17.00    (26,930)  $27.67  (1,053,047)  $39.69
   Options exercised.......    (3,576)  $17.00    (68,083)  $17.24     (68,816)  $17.47
                             --------           ---------           ----------
   Balance at end of year..  990,5444   $18.07  1,403,514   $30.27   2,004,136   $24.19
                             ========           =========           ==========
   Exercisable at end of
    year...................   223,210   $17.00    396,063   $17.64     578,504   $18.89
</TABLE>

                                      F-9
<PAGE>

                    DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


  Additional information related to stock options at June 30, 1999 is as
follows:

<TABLE>
<CAPTION>
                                    Options Outstanding          Options Exercisable
                            ----------------------------------- ----------------------
                            Number     Weighted      Weighted   Number     Weighted
                              of       Average     Average Life   of       Average
     Exercise Price Range   Shares  Exercise Price    (Years)   Shares  Exercise Price
     --------------------   ------- -------------- ------------ ------- --------------
   <S>                      <C>     <C>            <C>          <C>     <C>
   $17.00.................. 761,113     $17.00         7.0      543,841     $17.00
   $23.25 to $33.69........ 971,673     $23.77         9.2
   $35.37 to $49.37........ 179,700     $41.81         9.4       11,750     $39.05
   $52.75 to $71.56........  91,650     $53.47         8.1       22,913     $53.47
</TABLE>

  A summary of restricted stock grant activity is as follows:

<TABLE>
<CAPTION>
                                      1997                   1998                   1999
                             ---------------------- ---------------------- ----------------------
                              Number   Market Value  Number   Market Value  Number   Market Value
                             of Shares  Per Share   of Shares  Per Share   of Shares  Per Share
                             --------- ------------ --------- ------------ --------- ------------
   <S>                       <C>       <C>          <C>       <C>          <C>       <C>
   Balance at beginning of
    year...................   94,913      $17.00      89,060     $17.54      4,744      $27.16
   Restricted stock
    granted................    4,744      $27.16       1,755     $17.00      1,709      $35.12
   Restricted stock
    forfeited..............   (9,605)     $17.00
   Restricted stock
    issued.................     (992)     $17.00     (86,071)    $17.00     (4,744)     $27.16
                              ------                 -------                ------
   Balance at end of year..   89,060      $17.54       4,744     $27.16      1,709      $35.12
                              ======                 =======                ======
</TABLE>

  On September 21, 1998, our Board of Directors approved a resolution
authorizing the re-pricing of substantially all of our then outstanding
employee stock options, both vested and unvested, issued under our various
stock performance plans with an exercise price in excess of $23.25. As part of
the re-pricing, the ten year term of the options and the four year vesting
period were restarted as of September 21,1998 and the exercise price on the
options was revised to $23.25. This resolution resulted in the re-pricing of
968,993 options.

  At June 30, 1999, there were 3,699,177 shares reserved for future grant or
issuance under our stock plans. We apply APB 25 and its related interpretations
in accounting for our stock plans. The weighted average fair values of stock
options granted in 1997, 1998 and 1999 were $16.16, $31.65 and $21.16. The
weighted average fair values were determined using the Black-Scholes option-
pricing model with the following assumptions: a risk-free interest rate of 6.5%
for 1997, a risk-free interest rate of 5.5% for 1998 and a risk free rate of
interest of 5.0% for 1999; no dividend yield; expected term of five years and
volatility of 58% for 1997, volatility of 68% for 1998 and volatility of 67%
for 1999. Had compensation cost been determined based on the fair value of
stock option awards at the date of grant, net income (diluted earnings per
share) would have been $57,456, $29,577 and $10,739 ($3.76, $1.94 and $0.71) in
1997, 1998 and 1999.

12. Provision for Income Taxes

  The provision for income taxes consists of the following:

<TABLE>
<CAPTION>
                                                         Year Ended June 30,
                                                        -----------------------
                                                         1997     1998    1999
                                                        -------  ------- ------
   <S>                                                  <C>      <C>     <C>
   Current:
     Federal........................................... $25,819  $ 8,909 $5,809
     State.............................................     787    1,023  1,410
     Non-U.S...........................................   4,679    4,320    904
   Deferred:
     Federal...........................................  (1,039)   1,353   (443)
     State.............................................     (59)     155   (106)
     Non-U.S...........................................   1,098    1,367    189
                                                        -------  ------- ------
   Provision for income taxes.......................... $31,285  $17,127 $7,763
                                                        =======  ======= ======
</TABLE>

                                      F-10
<PAGE>

                    DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


  The provision for income taxes differs from the amount computed by applying
the federal statutory rate as a result of the following:

<TABLE>
<CAPTION>
                                                      Year Ended June 30,
                                                    -------------------------
                                                     1997     1998     1999
                                                    -------  -------  -------
   <S>                                              <C>      <C>      <C>
   Tax at 35% statutory federal tax rate........... $31,285  $17,490  $ 8,762
   Higher effective tax rate on non-U.S.
    operations.....................................   2,158    1,752    1,460
   Tax exemptions..................................  (4,809)  (5,870)  (4,987)
   Change in valuation allowance...................    (243)            1,997
   State taxes, net of federal.....................     633    1,258      675
   Other...........................................   2,261    2,497     (144)
                                                    -------  -------  -------
   Provision for income taxes...................... $31,285  $17,127  $ 7,763
                                                    =======  =======  =======
</TABLE>

  Deferred tax assets (liabilities) consist of the following:

<TABLE>
<CAPTION>
                                                                      June 30,
                                                                        1999
                                                                      --------
   <S>                                                                <C>
   Deferred tax assets:
     Inventories..................................................... $    980
     Depreciation....................................................    1,948
     Accrued liabilities.............................................    4,753
     Credit facility.................................................    2,442
     Other...........................................................    5,070
                                                                      --------
       Deferred tax assets...........................................   15,193
                                                                      --------
   Deferred tax liabilities:
     Depreciation....................................................   (8,015)
     Other...........................................................   (5,682)
                                                                      --------
       Deferred tax liabilities......................................  (13,697)
                                                                      --------
       Valuation allowance...........................................   (1,997)
                                                                      --------
       Deferred income taxes......................................... $   (501)
                                                                      ========
</TABLE>

  We have entered into a tax indemnification agreement with DuPont. The amount
due from DuPont under the tax indemnification agreement was $571 at June 30,
1998. We have a capital loss carryforward of $18,513. Benefit from this
carryforward, if and when realized, is payable to DuPont under the tax
indemnification agreement.

  We recorded the deferred tax benefit arising from our second credit facility
with DuPont as a contribution of capital. Undistributed earnings of certain
subsidiaries are considered indefinitely reinvested. We have not provided
deferred tax liabilities for additional income taxes that would result from
repatriation of these earnings.

                                      F-11
<PAGE>

                    DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


13. Segment Information

  In accordance with FAS 131, segment information as of or for the years ended
June 30 is as follows:

<TABLE>
<CAPTION>
                                             United
                                             States  Europe     Asia    Total
                                            -------- -------  -------- --------
   <S>                                      <C>      <C>      <C>      <C>
   1997
   Sales................................... $145,621 $62,988  $ 52,576 $261,185
   Transfers between geographic areas......   21,973   1,019       649
                                            -------- -------  -------- --------
                                             167,594  64,007    53,225  261,185
                                            ======== =======  ======== ========
   Net income..............................   38,836   9,037    11,131   59,004
   Identifiable assets.....................  151,293  50,877    89,409  291,579
   1998
   Sales................................... $152,213 $66,953  $ 52,425 $271,591
   Transfers between geographic areas......   22,654   2,002       603
                                            -------- -------  -------- --------
                                             174,867  68,955    53,028  271,591
                                            ======== =======  ======== ========
   Net income..............................   13,808   5,702    14,022   33,532
   Identifiable assets.....................  164,699  71,618   115,662  351,979
   1999
   Sales................................... $157,401 $51,783  $ 54,831 $264,015
   Transfers between geographic areas......   20,429   2,615     6,482
                                            -------- -------  -------- --------
                                             177,830  54,398    61,313  264,015
                                            ======== =======  ======== ========
   Net income (loss).......................    7,322  (1,861)   11,809   17,270
   Identifiable assets.....................  257,953  74,365   148,088  480,406
</TABLE>

  Sales outside the United States of products manufactured in and exported from
the United States are not significant. Products are transferred between
geographic areas on a basis intended to approximate the market value of such
products.

14. Commitments and Contingencies

  We are undertaking a significant global expansion to support the future
growth of our business. We have established a joint venture with UMC Group to
produce photomasks in Taiwan. We also began construction on a new photomask
production facility in Gresham, Oregon that we subsequently and indefinitely
delayed. If additional capacity were to be needed, we could complete the
Gresham facility within approximately six months. In addition, we began
construction of a photomask production facility in Singapore.

  We have entered into an agreement with Etec Systems to upgrade our existing
MEBES(R) electron-beam pattern generation tools. The hardware and software
upgrades will enhance the capability of the tools while simultaneously
increasing the speed at which they operate. As part of the agreement, Etec
Systems purchased the use of technology developed by us. The tools to be
upgraded currently reside throughout our integrated network of production
facilities.

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

                                      F-12
<PAGE>

                    DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


15. Unaudited Quarterly Financial Data

  Unaudited quarterly financial data for 1998 and 1999 is as follows:

<TABLE>
<CAPTION>
                                                      Quarter
                                    -------------------------------------------
                                      First      Second     Third      Fourth
                                    ---------- ---------- ---------- ----------
   <S>                              <C>        <C>        <C>        <C>
   1998
   Sales..........................  $   68,809 $   67,328 $   67,563 $   67,891
   Operating profit...............      13,488     11,691     11,961     12,859
   Net income.....................       9,203      8,261      7,785      8,283
   Basic earnings per share.......        0.61       0.54       0.51       0.54
   Diluted earnings per share.....        0.59       0.53       0.50       0.53
   Basic weighted average shares
    outstanding...................  15,129,611 15,165,132 15,167,645 15,255,996
   Diluted weighted average shares
    outstanding...................  15,684,990 15,605,359 15,554,304 15,604,281
   1999
   Sales..........................  $   60,995 $   61,877 $   67,159 $   73,984
   Operating profit...............       5,200      5,567      6,509      8,533
   Net income.....................       3,280      3,127      4,455      6,408
   Basic earnings per share.......        0.21       0.20       0.29       0.42
   Diluted earnings per share.....        0.21       0.20       0.28       0.40
   Basic weighted average shares
    outstanding...................  15,275,126 15,296,222 15,307,852 15,318,156
   Diluted weighted average shares
   outstanding....................  15,613,591 15,669,911 15,918,677 15,918,672
</TABLE>

                                      F-13