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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, 2000

                         Commission file number 0-20839

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

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

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

                           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(g) 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 15, 2000,
was approximately $420.7 million. As of such date, 17,254,690 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 2000 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 fiscal year ends June 30.

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

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
<S>                                                                        <C>
Part I
  Item 1. Business........................................................   3
  Item 2. Properties......................................................  20
  Item 3. Legal Proceedings...............................................  20
  Item 4. Submission of Matters to a Vote of Security Holders.............  21

Part II
  Item 5. Market for Our Common Equity and Related Stockholder Matters....  21
  Item 6. Selected Financial Data.........................................  22
  Item 7. Management's Discussion and Analysis of Financial Condition and
          Results of Operations...........................................  23
  Item 7A. Quantitative and Qualitative Disclosures About Market Risk.....  28
  Item 8. Financial Statements and Supplementary Data.....................  28
  Item 9. Changes in and Disagreements with Accountants on Accounting and
          Financial Disclosure............................................  28

Part III
  Item 10. Directors and Executive Officers...............................  29
  Item 11. Executive Compensation.........................................  30
  Item 12. Security Ownership of Certain Beneficial Owners and
           Management.....................................................  30
  Item 13. Certain Relationships and Related Transactions.................  30

Part IV
  Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-
           K..............................................................  31
      Signatures..........................................................  33
</TABLE>

                       Note on Incorporation by Reference

   Throughout this report, various information and data are incorporated by
reference to portions of our 2000 Proxy Statement. Any reference in this report
to disclosures in our 2000 Proxy Statement shall constitute incorporation by
reference of that specific material into this Form 10-K.

                                       2
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               SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

   This document contains forward-looking statements that involve substantial
risks and uncertainties such as statements concerning:

  .  Industry trends;

  .  Customer demand for photomasks;

  .  Growth and future operating results;

  .  Developments in our markets and strategic focus;

  .  Expansion of and enhancements to our manufacturing facilities and
     product offerings;

  .  Customer benefits attributable to our products;

  .  Potential acquisitions and joint ventures and the integration of
     acquired businesses;

  .  Technologies and operations;

  .  Strategic relationships with third parties; and

  . Future economic, business and regulatory conditions.

   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 in Part I, Item I captioned "Risk Factors," as
well as any other 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.
You should be aware that the occurrence of the events described in these risk
factors and elsewhere in this document could have a material adverse effect on
our business, results of operations and financial position.

                                     PART I

Item 1. Business

The Company

   We are one of the largest photomask manufacturers in the world. Photomasks
are high-purity quartz or glass plates containing precision images of
integrated circuits and are used as masters by semiconductor manufacturers to
optically transfer these images onto semiconductor wafers. Photomasks are a
necessary component in the production of semiconductors, and advanced photomask
technologies are critical to enabling the manufacture of increasingly complex
semiconductor devices. We manufacture a broad range of photomasks based on
customer-supplied design data, including photomasks that meet the tightest
design specifications required by semiconductor manufacturers today. We sell
our products to over 300 customers in 20 different countries. We believe that
we are the principal merchant photomask supplier for many of our customers,
including Advanced Micro Devices, Agilent Technologies, Hewlett-Packard,
Hyundai, IBM, Lucent Technologies, Micron Technology, National Semiconductor,
Philips, Samsung, STMicroelectronics, Texas Instruments and UMC Group. We
operate globally from 13 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.
Information regarding our operating segments is presented in our financial
statements. We were incorporated in Texas on June 25, 1985, and were
reincorporated in Delaware on November 9, 1995. Our principal executive offices
are located at 131 Old Settlers Boulevard, Round Rock, Texas 78664, and our
telephone number at this location is (512) 310-6500.

                                       3
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Industry Background

   The demand for photomasks is driven largely by increases in the number of
semiconductor designs and the complexity of integrated circuits. Integrated
circuit designs consist of a series of separate patterns, each of which must be
imaged onto a different photomask. The resulting series of photomasks is then
used to successively layer the circuit patterns onto the semiconductor wafer.
As a result, photomasks are a necessary component in the typical production of
semiconductors, and advanced photomask technologies are critical to enabling
the manufacture of increasingly complex semiconductor devices. In addition,
advanced photomask technologies such as phase shift masks and optical proximity
correction masks can extend the optical resolution of existing photolithography
equipment, thereby delaying the otherwise significant investment required for
new semiconductor manufacturing equipment. Growth in the photomask market has
not always correlated with increases in semiconductor sales. According to an
industry source, the total worldwide market for photomasks has grown from
approximately $1.3 billion in 1995 to approximately $2.1 billion in 1999. We
estimate that the photomask market in North America, Europe and non-Japan Asia
represented approximately 60 percent of the worldwide market in 1999.

   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 1999 merchant photomask sales in
North America, Europe and non-Japan Asia were over $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. Some other
semiconductor manufacturers who have retained captive photomask operations have
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 in the semiconductor manufacturing
process is 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, Internet and communications infrastructure, personal digital
     assistants 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 Semiconductor Device Complexity. Efforts to improve the
     performance and functionality of semiconductor devices have resulted in
     more complex devices. Complex devices require additional

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     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 as and smaller than the wavelength of the illumination sources in
     optical lithography, the semiconductor manufacturing process becomes
     increasingly dependent upon high precision photomasks to deliver process
     results to more demanding specifications and tolerances. Future
     generations of semiconductor 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 smaller design features is likely to
     generate increased demand for advanced photomasks that can accurately
     and reliably replicate intricate design features.

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

Strategy

   Our objective is to be the world's premier global supplier of photomasks, by
providing the finest service and most advanced technology to our customers and
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, such as advanced binary masks, phase shift masks and optical
     proximity correction masks, we can position ourselves as the preferred
     provider of photomasks to our customers. For example, we are partners
     with Advanced Micro Devices, Micron Technology and Motorola in the DPI
     Reticle Technology Center, a unique facility dedicated 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,
     including AMD, Agilent Technologies, Hewlett-Packard, Hyundai, IBM,
     Micron Technology, Motorola, Texas Instruments, and UMC Group. We
     believe these relationships will help to solidify our position as, or
     provide us the opportunity to become, the primary supplier of advanced
     photomasks and key enabling technologies to our customers. In addition,
     we believe that our participation in the DPI Reticle Technology Center
     will allow us to leverage the combined strength and insights of the
     participating companies to accelerate the development of advanced
     photomasks, and enable us to provide the benefits of technological
     leadership 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, we
     believe our recently completed Singapore facility, which we are
     presently qualifying, will further strengthen our already strong
     competitive position in Asia. Furthermore, a global data

                                       5
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     transmission network integrates the manufacturing and delivery capabilities
     of these facilities, enabling efficient resource allocation and information
     sharing. 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. In addition, we benefit
     from beta-testing advanced production equipment and materials in the DPI
     Reticle Technology Center. We also believe that our strategic
     relationships with leading equipment suppliers, such as Etec Systems (an
     Applied Materials company) and KLA-Tencor, help ensure our ability to
     provide our customers with early access to the most advanced photomasks.
     As a result of all of the foregoing measures, we believe we can rapidly
     deliver to our customers the latest advances in photomask technologies.

  .  Leverage Our Vertically Integrated Position. We are the only photomask
     manufacturer in the world that also manufactures photoblanks and
     pellicles, the principal components of photomasks. As a result, we
     believe we have a competitive advantage because of our ability to manage
     the supply, quality and costs of these component materials. In addition,
     we intend to use this capability to develop the advanced photoblanks and
     pellicles necessary for the production of the next generation of
     photomasks. For example, we are currently developing numerous component
     material enhancements, including photoblanks for phase shift masks and
     improved deep ultraviolet pellicles, for 193 nanometer and 157 nanometer
     lithography, as part of an integrated effort to develop more advanced
     photomasks.

  .  Pursue New Business Opportunities. We believe that the dynamics of the
     semiconductor and microelectronics industries, and the growing
     importance of precision imaging in emerging technologies, are providing
     us with new business opportunities. These opportunities include
     expanding our photomask design services offering and marketing our
     photomask products and services into emerging markets such as biochips
     and microelectromechanical systems. We will continue to evaluate our
     core competencies and apply resources accordingly, including
     acquisitions or joint venture partnerships with other companies, in
     markets that we believe can benefit our customers and develop into
     profitable growth initiatives.

Products and Technology

 Photomasks

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

   We manufacture photomasks in accordance with semiconductor design and
specification data provided on a confidential basis by our customers. The final
design of each integrated circuit results in a set of precise individual
circuit patterns to be imaged onto a series of typically 15 to 25 separate
photomasks. The complete

                                       6
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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
     semiconductor 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 of photoblanks and pellicles
gives us a competitive advantage in managing the supply, quality and cost of
our principal component materials. We also sell a limited number of pellicles
to third parties.

   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 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 70.0 percent
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

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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 purchased approximately 30.0 percent 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. In fiscal 2000, approximately 59
percent of our sales were in North America, approximately 18.0 percent were in
Europe and approximately 23.0 percent were in 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 is needed, we believe we could
complete the Gresham facility within approximately six months. In Europe, our
manufacturing facilities are located in Corbeil-Essonnes, France, 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 recently completed construction of a
new photomask production facility in Singapore, which is undergoing customer
qualification testing. 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 attempt to optimize resource allocation,
thereby lowering production costs while providing effective customer service on
a local level.

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

Backlog

   At the end of fiscal 2000, backlog was $7.3 million, compared with backlog
of $5.6 million at the end of fiscal 1999, and backlog of $3.3 million at the
end of fiscal 1998. We do not believe that backlog is a meaningful indicator of
sales that can be expected for any period, and there can be no assurance that
the backlog at any point in time will translate into sales in any subsequent
period.

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Customers

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

<TABLE>
   <S>                        <C>                             <C>
   Advanced Micro Devices     Hyundai                         Philips
   Agilent Technologies       IBM                             Samsung
   AMI                        LSI Logic                       Seagate
   Atmel                      Lucent Technologies             STMicroelectronics
   Delphi Technologies        Maxim Integrated Products       Texas Instruments
   Fujitsu                    Micron Technology               UMC Group
   Hewlett-Packard            Motorola
   Hexfet                     National Semiconductor
</TABLE>

   In fiscal 2000, Texas Instruments accounted for approximately 12.0 percent
of our sales. Lucent Technologies and STMicroelectronics, in the aggregate,
accounted for approximately 22.0 percent of our sales in fiscal 1999 and
approximately 27.0 percent of our sales in fiscal 1998, and each individually
accounted for over ten percent of our sales in each of these fiscal years. Our
ten largest customers, in the aggregate, accounted for more than 60.0 percent
of our sales in each of fiscal 2000, fiscal 1999 and fiscal 1998.

   We or our subsidiaries have entered into multi-year, non-exclusive supply
agreements with some of our customers, including Agilent Technologies, Hewlett-
Packard, Hyundai, IBM, Lucent Technologies and UMC Group. These agreements
generally provide us for a given period of time with a minimum volume or
percentage of purchases, subject to various conditions such as quality of our
service and timeliness of delivery.

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

Competition

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

  In North America, we compete primarily with Photronics (which recently
  acquired Align-Rite and PSMC) and, to a lesser extent, with other smaller
  merchant photomask suppliers.

  In Europe, we compete with 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.

                                       9
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  Dai Nippon Printing, Hoya Corporation and Toppan Printing Company, as well
  as captive Japanese suppliers, are the predominant suppliers to 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, recent widespread consolidation in the photomask industry,
particularly in Japan, has enhanced the remaining companies' strength as
competitors. Also, captive photomask operations sometimes 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 require
significant capital investments and operating costs to develop the requisite
manufacturing expertise.

Research and Development Initiatives

   The photomask industry has been and is expected to continue to be
characterized by rapid technological change. We have historically made
significant investments in research and development to improve our
technological 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 begun in 1997 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 insights of
global leaders in memory, microprocessors and advanced logic design and
fabrication to accelerate the development of advanced photomasks. We recently
extended the joint venture, which is now scheduled to terminate in December
2002 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 binary
     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, 0.15
micron and 0.13 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.

                                       10
<PAGE>

   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 until
January 1, 2001 pursuant to a research, development and consulting agreement
with DuPont, which will provide us with a supplement to our core research and
development program. We also are a party to a research agreement with DuPont,
subject to the terms and conditions of the research, development and consulting
agreement described above. Under this second research agreement, DuPont has
agreed to undertake a research project involving research and materials
development in the area of advanced photomask technology. DuPont also granted
us a royalty-bearing, exclusive license to the technology developed under the
research agreement for 157 nanometer pellicles. Under the research agreement,
we will provide DuPont with a right of first refusal to supply us with
materials produced using the technology, and we will pay DuPont a royalty on
the sale of 157 nanometer pellicles manufactured using those materials. The new
research agreement terminates on December 31, 2001.

   We recently entered into a short-term funded development agreement with
International SEMATECH, Inc., whereby International SEMATECH agreed to
partially fund the development of 157 nanometer pellicle technology, and we
agreed to develop a commercialization plan for 157 nanometer pellicles if we
determine that such development is commercially viable. Funds we receive under
this agreement are used to defray our costs under our research agreement with
DuPont.

Intellectual Property

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

Employees

   As of June 30, 2000, we employed approximately 1,770 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.

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

                                       11
<PAGE>

environmental laws and regulations may be enacted in the future, which may
require us to expend additional amounts on environmental compliance or may
require modifications in our operations. Although we are unable to predict the
extent of our future liability with respect to any environmental matters, we
believe, based upon current information, that environmental liabilities will
not be material to our financial position or results of operations. DuPont has
agreed to indemnify us for any environmental contamination present on our
manufacturing sites at June 13, 1996, the date of our initial public offering,
or present at any such site due to the generation, use, treatment, storage,
release, emission, discharge or disposal of hazardous waste or hazardous
materials before such date. The Environmental Protection Agency is reviewing a
groundwater contamination issue at our Danbury, Connecticut site under
voluntary corrective action. Any such contamination is believed to be
historical and therefore any environmental liabilities would be covered by the
indemnification agreement with DuPont.

                                       12
<PAGE>

                                  Risk Factors

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

   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

                                       13
<PAGE>

experience material adverse fluctuations in our future operating results on a
quarterly or annual basis. Results of operations in any period, therefore,
should not be considered indicative of the results to be expected for any
future period.

We May Not Obtain Sufficient Capital to Fund Our Needs

   We will need to continue to make significant capital expenditures to expand
our operations and to enhance our manufacturing capability in order to keep
pace with rapidly changing technologies. Based on our current operating plans,
we will require external financing from time to time to fund our capital
expenditures. We 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.

We May Be Unable to Effectively Manage the Expansion of Our Manufacturing
Operations

   We recently completed construction of a photomask production facility in
Singapore, which is undergoing customer qualification procedures, and we intend
to relocate our recently acquired operations in Corbeil-Essonnes, France to a
new facility. In addition, we regularly establish new production lines or move
existing production lines within a given plant or among different plants. If we
do not adequately manage these changes and improvements, the productivity of
our plants will suffer, which could cause us to lose sales or customers.

Rapid Technological Change Could Render Our Products Obsolete

   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.

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

                                       14
<PAGE>

Our Market Is Highly Competitive and Subject to Pricing Pressures

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

  .  Dai Nippon Printing;

  .  Hoya Corporation;

  .  Photronics, which recently acquired Align-Rite and PSMC; and

  .  Toppan Printing Company.

   Our competitors can be expected to continue to develop and introduce new and
enhanced products, any of which could cause a decline in market acceptance of
our products or a reduction in our prices as a result of intensified price
competition. We also compete with captive photomask operations. Beginning in
the mid-1980's, a trend developed toward the divestiture or closing of captive
photomask operations by semiconductor manufacturers. We cannot assure you that
this trend will continue or that it will not reverse, thereby reducing the
demand for photomasks produced by merchant photomask suppliers like us and
increasing competition to the extent excess 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. In particular, recent
widespread consolidation in the photomask industry, particularly in Japan, has
enhanced the remaining companies' strength as competitors.

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

  .  Product quality;

  .  Delivery to schedule performance;

  .  Pricing;

  .  Technical capabilities;

  .  Location and capacity of manufacturing facilities; and

  .  Technical service.

   We recently announced the first general price increase on all of our
products in our history. The price increase has resulted in some lost volume
and in the future we cannot assure you that the price increase will not cause
us to lose more customers or market share to our competitors or otherwise have
a material adverse effect on our financial results.

Our International Operations Present Special Risks

   Approximately 40.0 percent of our sales in fiscal 1999 and 2000 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 values of currencies;

  .  Restrictive governmental actions; and

  .  Difficulties in managing a global enterprise.

                                       15
<PAGE>

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

Our Operating Results Are Influenced by the Performance of Asian Economies

   In recent years, Asian economies have been highly volatile and recessionary,
resulting in significant fluctuations in local currencies and other
instabilities. These instabilities may continue or worsen, which could have a
material adverse impact on our financial position and results of operations, as
approximately 21.0 percent of our sales in fiscal 1999 and approximately 23.0
percent in fiscal 2000 were derived from this region. Our exposure to the
business risks presented by Asian economies will increase to the extent that we
continue to expand our operations in that region.

We Face Risks Associated with Manufacturing Difficulties

   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.

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

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

We Depend on a Few Significant Customers

   Our ten largest customers, in the aggregate, accounted for more than 60.0
percent of our sales in both fiscal 1999 and 2000. Our largest customer
represented approximately 12.0 percent of sales in fiscal 2000. In fiscal 1999
our two largest customers, in the aggregate, accounted for approximately 22
percent 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.

                                       16
<PAGE>

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 a
disruption, we cannot assure you that we could develop alternative sources
within reasonable time frames, or if developed, that these sources would
provide supplies or equipment at prices comparable with those charged by our
suppliers before the disruption.

We Depend on a Limited Number of Management and Technical Personnel

   Our continued success depends, in part, upon key managerial, engineering and
technical personnel as well as our ability to continue to attract and retain
additional personnel. In the past, 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 our recruiting
efforts to attract and retain these personnel will be successful.

We Recently Hired New Chief Executive and Financial Officers, and Our Success
Depends on Their Ability to Learn Our Business and Integrate with the Existing
Management Team

   We hired Peter S. Kirlin, our Chairman of the Board and Chief Executive
Officer, in May 2000, and Gerd Stoecker, our Executive Vice President--Finance
and Chief Financial Officer, in June 2000. Our business may suffer if these new
executives do not quickly learn our business and successfully integrate with
the existing members of our senior management.

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

   DuPont owns approximately 35.2 percent of our outstanding common stock as of
September 1, 2000. As a result, DuPont will continue to have significant
influence on most matters submitted to our stockholders, including proposals
regarding:

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

  .  Electing the members of our board of directors; and

  .  Preventing or causing a change in control of our company.

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 a joint venture with UMC Group to manufacture
photomasks, acquired IBM's European photomask manufacturing operations and

                                       17
<PAGE>

extended through 2002 the DPI Reticle Technology Center, our photomask
development joint venture with Advanced Micro Devices, Micron Technology and
Motorola. The success of these transactions will depend on our ability to:

  .  Integrate acquired production equipment with our operations;

  .  Attract, train and retain additional personnel;

  .  Utilize any resulting additional production capacity; and

  .  Cooperate with our joint venture partners.

   The success of any joint venture will also depend on our ability to achieve
cooperation with each 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;

  .  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 acquisitions 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;

  .  Competitors will not independently develop similar technology;

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

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

   We may become 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,
diversion of resources and product shipment delays or could force us to enter
into royalty or license agreements rather than dispute the merits of these
claims. Any of the foregoing could have a material adverse effect on our
business, results of operations and financial position.

                                       18
<PAGE>

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.

We Face Uncertainty Implementing a New Global Information System

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

Our Market Price Is Volatile

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

  .  Quarterly variations in our results of operations;

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

  .  Technological innovations by us or our competitors;

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

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

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

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

Our Stock Price May Be Affected when Additional Shares Are Sold

   If our stockholders sell substantial amounts of our common stock in the
public market, the market price of our common stock could fall. Such sales
might make it more difficult for us to sell equity or equity-related securities
in the future at a time and place that we deem appropriate. As of the date of
the filing of this document, DuPont beneficially owns approximately 6.1 million
shares of our common stock. DuPont has advised us that it expects to continue
to reduce its ownership interest in our company over time, subject to
prevailing market conditions. We have granted DuPont certain rights with
respect to the registration of shares of our common stock held by DuPont,
including the right to require that we register under the Securities Act of
1933 the sale of all or part of the shares it holds, and to include such shares
in a registered offering of securities by us.

   In connection with our recent public offerings of common stock and
convertible subordinated notes, we, our directors and executive officers and
DuPont each entered into lock-up restrictions by which each agrees that, in
general, without the prior written consent of the underwriters of those
offerings, each will not, during the period ending October 17, 2000, sell or
agree to sell, any shares of common stock or any securities convertible into or
exercisable or exchangeable for common stock, other than pursuant to our stock
performance plans. Following the expiration of these lock-up restrictions, all
of the shares held by those persons will be eligible for immediate sale in the
public market, subject in some cases to compliance with the volume and manner
of sale requirements of Rule 144 under the Securities Act of 1933.

                                       19
<PAGE>

Our Certificate of Incorporation and Bylaws Have Anti-Takeover Provisions

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

Item 2. Properties

   We conduct manufacturing operations throughout the world. Virtually all of
our operations are ISO 9002 or QS9000TE and ISO 14001 qualified. We believe
that our facilities are adequate and suitable for their respective uses. The
table below presents certain information relating to our manufacturing and
support facilities.

<TABLE>
<CAPTION>
                                                      Type of
                      Location                        Interest         Use
                      --------                     -------------- --------------
   <S>                                             <C>            <C>
   North America
     Round Rock, Texas............................     Owned        Photomasks
     Kokomo, Indiana..............................     Owned        Photomasks
     Santa Clara, California......................     Leased       Photomasks
     Gresham, Oregon (delayed completion).........     Owned        Photomasks
     Poughkeepsie, New York.......................     Owned       Photoblanks
     Danbury, Connecticut.........................     Owned        Pellicles
     Round Rock, Texas............................     Owned         Research
     Round Rock, Texas............................     Owned      Administration

   Europe
     Corbeil-Essonnes, France.....................     Leased       Photomasks
     Rousset, France..............................     Leased       Photomasks
     Hamburg, Germany.............................     Leased       Photomasks
     Hamilton, Scotland...........................     Owned        Photomasks

   Asia
     Ichon, Korea.................................     Owned        Photomasks
     Shanghai, China.............................. Jointly Leased   Photomasks
     Singapore (in qualification testing).........     Owned        Photomasks
     Hsinchu, Taiwan.............................. Jointly Leased   Photomasks
</TABLE>

   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
primarily contains manufacturing equipment leased by the DPI Reticle Technology
Center from a third party. Facilities and property located in Santa Clara,
Corbeil-Essonnes, Rousset and Hamburg are leased under leases that expire in
2001, 2009, December 2000 and 2022, respectively. We also maintain customer
service data centers in leased facilities in Mesa, Arizona, Colorado Springs,
Colorado, Melbourne, Florida, Hillsboro, Oregon, Allentown, Pennsylvania,
Dallas, Texas and Tokyo, Japan.

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

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

Item 3. Legal Proceedings

   We are not currently involved in any material legal proceedings.

                                       20
<PAGE>

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

   None.

                                    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, 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.......................................... $56 1/2   $39
     Second Quarter.........................................  70 15/16  40 9/16
     Third Quarter..........................................  74 1/2    41 9/16
     Fourth Quarter.........................................  81 1/4    45 1/16

   Year Ending June 30, 2001:
     First Quarter (through September 15, 2000)............. $78 1/4   $55 3/4
</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. As of our date
of record on September 1, 2000 we had 87 shareholders of record.

                                       21
<PAGE>

Item 6. Selected Financial Data

   The following tables set forth our selected financial data. The balance
sheet data as of June 30, 1999 and 2000 and the data for the three years ended
June 30, 2000 has been derived from the audited financial statements appearing
elsewhere in this document. The data for the years ended June 30, 1996 and 1997
and as of June 30, 1996, 1997 and 1998 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,
                              ------------------------------------------------
                                1996      1997      1998      1999      2000
                              --------  --------  --------  --------  --------
                                 (in thousands, except per share data)
<S>                           <C>       <C>       <C>       <C>       <C>
Income Statement Data:
Sales.......................  $213,415  $261,185  $271,591  $264,015  $328,072
Cost of goods sold..........   142,200   163,319   179,369   187,427   225,400
Selling, general and
 administrative expense.....    25,167    31,611    29,509    33,944    39,456
Research and development
 expense....................     9,162    12,372    12,714    16,835    23,797
                              --------  --------  --------  --------  --------
Operating profit............    36,886    53,883    49,999    25,809    39,419
Other (expense) income,
 net........................    (7,964)    1,284       (27)     (717)     (443)
                              --------  --------  --------  --------  --------

Income before income taxes,
 minority interest and
 extraordinary item.........    28,922    55,167    49,972    25,092    38,976
Provision for income taxes..     2,678    19,308    17,127     7,763    10,150
                              --------  --------  --------  --------  --------
Income before minority
 interest and extraordinary
 item.......................    26,244    35,859    32,845    17,329    28,826
Minority interest in
 (income) loss of joint
 ventures...................       660       903       687       (59)   (2,726)
                              --------  --------  --------  --------  --------
Income before extraordinary
 item.......................    26,904    36,762    33,532    17,270    26,100
Extraordinary item..........        --   (22,242)       --        --        --
                              --------  --------  --------  --------  --------
Net income..................  $ 26,904  $ 59,004  $ 33,532  $ 17,270  $ 26,100
                              ========  ========  ========  ========  ========
Basic earnings per share
 before extraordinary item..  $   2.51  $   2.44  $   2.21  $   1.13  $   1.68
Diluted earnings per share
 before extraordinary item..  $   2.50  $   2.37  $   2.15  $   1.09  $   1.61
Basic weighted average
 shares outstanding.........    10,727    15,101    15,180    15,299    15,548
Diluted weighted average
 shares outstanding.........    10,743    15,520    15,612    15,780    16,227

<CAPTION>
                                                June 30,
                              ------------------------------------------------
                                1996      1997      1998      1999      2000
                              --------  --------  --------  --------  --------
                                             (in thousands)
<S>                           <C>       <C>       <C>       <C>       <C>
Balance Sheet Data:
Cash and cash equivalents...  $ 20,179  $ 51,351  $ 19,688  $ 61,311  $ 42,203
Working capital.............    34,458    66,082    33,052    71,134    30,213
Property and equipment,
 net........................   123,048   162,310   244,650   312,240   452,827
Total assets................   227,893   291,579   351,979   480,406   644,226
Long-term borrowings........     9,324    10,473     7,519     4,659     2,350
Long-term borrowings,
related parties.............        --        --     9,000   100,000   150,000
</TABLE>

                                       22
<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. All references to a year are
to our fiscal year which ends on June 30.

Overview

   Based on worldwide sales, we believe we are one of the largest photomask
manufacturers in the world. We sell our products to over 300 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:

  .  Proliferation of semiconductor applications;

  .  Customization of semiconductor designs;

  .  Increasing semiconductor device complexity;

  .  Decreasing size of semiconductor designs; and

  .  Shorter produce lifecycles.

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 12.0 percent from 1996 to 2000.

   Due to an upturn in the semiconductor industry, the acquisition of photomask
production equipment of Altis Semiconductor, a joint venture between IBM and
Infineon Technologies ("IBM acquisition"), additional production in Asia and
increase in the product mix of high end masks our sales increased 24.3 percent
from $264.0 million in 1999 to $328.1 million in 2000. We expect continued
growth in revenue in fiscal 2001 from an overall price increase, continued
increased demand from high end masks, a full year of production from our IBM
acquisition, additional capacity from our Singapore site as it comes online and
additional capacity through the overall worldwide expansion of our facilities.
The historical correlation of our photomask production with the semi-conductor
industry indicates continued demand increases.

   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, our operating costs continued
to increase as we added capacity to position ourselves for future growth, but
the utilization improved and our gross margin as a percentage of sales rose 2.3
percent over 1999. We anticipate continued improvement in our utilization and
gross margin in 2001 as demand increases. If our sales growth does not keep
pace with increases in operating costs, our operating margin will decline.

                                       23
<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,
                                                           -------------------
                                                           1998   1999   2000
                                                           -----  -----  -----
   <S>                                                     <C>    <C>    <C>
   Sales.................................................. 100.0% 100.0% 100.0%
   Cost of goods sold.....................................  66.0   71.0   68.7
   Selling, general and administrative expense............  10.9   12.8   12.0
   Research and development expense.......................   4.7    6.4    7.3
                                                           -----  -----  -----
   Operating profit.......................................  18.4    9.8   12.0
   Other expense..........................................    --   (0.3)  (0.1)
                                                           -----  -----  -----
   Income before income taxes and minority interest.......  18.4    9.5   11.9
   Provision for income taxes.............................   6.3    3.0    3.1
                                                           -----  -----  -----
   Income before minority interest........................  12.1    6.5    8.8
   Minority interest in (income) loss of joint ventures...   0.2     --   (0.8)
                                                           -----  -----  -----
   Net income.............................................  12.3%   6.5%   8.0%
                                                           =====  =====  =====
</TABLE>

 Year Ended June 30, 2000 Compared to Year Ended June 30, 1999

   Sales. Sales increased 24.3 percent from $264.0 million in 1999 to $328.1
million in 2000. From 1999 to 2000, sales increased in North America from
$157.4 million to $194.5 million, sales increased in Europe from $51.8 million
to $58.4 million and sales increased in Asia from $54.8 million to $75.2
million. Licensing revenue of $2.5 million was included in sales in 2000. 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 2000. The balance
of the revenue growth came from increased unit volume. Increased unit volume in
2000 was the result of the IBM acquisition and additional worldwide expansion
of our existing facilities. We expect continued growth in revenue in 2001 from
an overall price increase, continued increased demand from high end masks, a
full year of production from our IBM acquisition, additional capacity from our
Singapore site as it comes online and additional capacity through the overall
worldwide expansion of our facilities. The historical correlation of our
photomask production with the semiconductor industry indicates continued demand
increases. We do not anticipate significant future revenue from additional
licensing of technology.

   Cost of Goods Sold. Cost of goods sold increased 20.3 percent from $187.4
million in 1999 to $225.4 million in 2000, resulting primarily from higher
costs associated with increased sales, startup costs in Singapore, IBM
manufacturing costs, amortization of IBM acquisition costs and costs related to
continued capacity expansions at existing facilities. As a percentage of sales,
cost of goods sold decreased from 71.0 percent in 1999 to 68.7 percent in 2000.
This was the result of increased capacity utilization and product mix of higher
end masks primarily in the second half of 2000. We expect costs of goods sold
as a percentage of sales in 2001 will continue to decrease because of the
increase in prices, higher utilization and increase in advanced masks in our
product mix.

   Selling, General and Administrative Expense. Selling, general and
administrative expense as a percentage of sales decreased from 12.8 percent in
1999 to 12.0 percent in 2000 as utilization of facilities continues to
increase. Selling, general and administrative expense increased 16.2 percent
from $33.9 million in 1999 to $39.5 million in 2000 from expanding our global
selling activities in support of our new facilities, continued capacity
expansions at existing facilities, IBM acquisition and continued development of
our information system infrastructure. We anticipate the cost as a percentage
of sales to continue to decrease as demand grows, the Singapore facility comes
online and we increase utilization of our global manufacturing facilities.

                                       24
<PAGE>

   Research and Development Expense. Research and development expense increased
41.4 percent from $16.8 million in 1999 to $23.8 million in 2000. The increase
was due to expenses arising from our joint venture participation in the DPI
Reticle Technology Center, continued development of advanced masks, and costs
associated with development of 157 nanometer pellicles. We anticipate research
and development expenditures to increase approximately 30.0 percent per year
over the next two years.

   Other Expense, net. Other expense includes interest expense, interest income
and exchange gains and losses. Other expense decreased 38.2 percent to $0.4
million in 2000 compared to $0.7 million in 1999, primarily due to the
reduction of the interest rate on one of the lines of credit from DuPont to
0.25 percent. We anticipate the interest expense to remain nominal in 2001
because of our sale of $100 million of convertible notes discussed in the
liquidity and capital resources section and in the subsequent events footnote
to the financial statements.

   Provision for Income Taxes. Our tax expense has been determined in
accordance with Financial Accounting Standards Board, or FASB, Statement of
Financial Accounting Standards, or SFAS, No. 109 and is based on the statutory
rates in effect in the countries in which we operate. Our effective tax rate
was 31 percent in 1999 and was 28.0 percent in 2000. Our effective tax rate
varied from the maximum statutory rate primarily because certain of our
operations in Asia are subject to government granted tax exemptions. We
anticipate our effective tax rate to remain stable over the next two years
because of our government granted tax exemptions in Asia.

   Minority Interest in Joint Ventures. The minority interest impact of our
joint venture manufacturing facilities was $0.1 million in 1999 compared to
$2.7 million in 2000, reflecting the partners' share of income from our joint
ventures, which currently include our Shanghai, China and Hsinchu, Taiwan
operations. The $2.6 million change was the result of increased profitability
of these operations.

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

   Sales. Sales decreased 2.8 percent 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 11.0 percent in 1999. Unit
volume increased approximately six percent in 1999.

   Cost of Goods Sold. 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 percent in 1998 to
71.0 percent 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.

   Selling, General and Administrative Expense. Selling, general and
administrative expense as a percentage of sales increased from 10.9 percent in
1998 to 12.8 percent in 1999. In addition, selling, general and administrative
expense increased 15.0 percent 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.

   Research and Development Expense. 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, Korea and our joint venture participation in the DPI Reticle Technology
Center.

   Other Expense, net. Other 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.

                                       25
<PAGE>

   Provision for Income Taxes. Our tax expense has been determined in
accordance with SFAS No. 109 and is based on the statutory rates in effect in
the countries in which we operate. Our effective tax rate was 34.0 percent for
1998 and was 31.0 percent for 1999.

   Minority Interest in (Income) Loss of Joint Ventures. The minority interest
impact of our joint venture manufacturing facilities was $0.7 million in 1998
and was negligible in 1999.

Liquidity and Capital Resources

   Our working capital was $71.1 million at June 30, 1999 and $30.2 million as
of June 30, 2000. The decrease in working capital was due principally to lower
cash balances resulting from capital expenditures and the December 1999
acquisition from IBM. Cash and cash equivalents were $61.3 million as of June
30, 1999 and $42.2 million as of June 30, 2000. Cash provided by operating
activities increased from $65.0 million in the twelve months ended June 30,
1999 to $106.6 million in the twelve months ended June 30, 2000.

   Cash used in investing activities (capital expenditures and payments for
acquisitions) was $128.1 million in the twelve months ended June 30, 1999 and
$192.7 million in the twelve months ended June 30, 2000. Management expects
capital expenditures for 2001 to be approximately $150 million. Capital
expenditures have been and will be used primarily to expand our manufacturing
capacity and advance our technical capability. In addition, we may in the
future pursue additional acquisitions of businesses, products and technologies,
or enter into other joint venture arrangements, that could complement or expand
our business. Any material acquisition or joint venture could result in a
decrease to our working capital depending on the amount, timing and nature of
the consideration to be paid.

   Cash provided by financing activities was $106.2 million in the twelve
months ended June 30, 1999 and $67.6 million in the twelve months ended June
30, 2000.

   At June 30, 2000 we had a credit agreement with DuPont, which was comprised
of two separate facilities for $100 million each.

   The first facility expires in 2001 and any advances bear an interest rate at
LIBOR plus 0.25 percent per annum. At our option, advances under this credit
facility are convertible into term loans with maturities up to seven years. We
have borrowed a maximum of $75 million under this credit facility and, at June
30, 2000, borrowings of $50 million were outstanding under this credit
facility. In July of 2000, this credit facility was amended to increase the
interest charged on outstanding amounts from LIBOR plus 0.25 percent per annum
to LIBOR plus 1.875 percent per annum and terminate our ability to convert
outstanding amounts into term loans.

   The second facility had a term of three years and outstanding amounts bore
interest at 0.25 percent per annum for the first two years and LIBOR plus 0.25
percent per annum for the third year. We had borrowed a maximum of $100 million
under this credit facility and, at June 30, 2000, borrowings of $100 million
were outstanding under this credit facility. The amounts loaned under this
facility were unsecured and the agreement contained various representations,
covenants and events of default. At June 30, 2000, we were in compliance with
all of the loan covenants. In July 2000, we repaid all outstanding balances and
terminated the facility.

   In July of 2000, we completed two transactions in the equity and debt
markets with net proceeds of $201.4 million. A portion of the proceeds were
used to repay all of the outstanding borrowings from DuPont and we expect to
use the remaining proceeds for general corporate purposes, including potential
acquisitions, working capital and capital expenditures. The first transaction
was the sale of 3.2 million shares of stock of which 1.4 million shares
represented original issuance and 1.8 million shares represented registration
of outstanding shares owned by DuPont. The stock was offered to the public at
$77 per share with gross proceeds of $246.4 million, offering costs of $12.8
million, and net proceeds of $233.6 million. Our portion of the offering
proceeds were $103.8 million for the original issuance. We also sold $100
million of subordinated convertible notes with net proceeds of $97.6 million.
The notes are due in July 2004, with no stated interest, a conversion price of
$106.26 per share, an unconditional guarantee by DuPont, and no optional
redemption by us.

                                       26
<PAGE>

   Our ongoing cash requirements will be for capital expenditures,
acquisitions, research and development and working capital. We are constructing
a new photomask production facility in Corbeil-Essonnes, France. Additionally,
we are equipping our new photomask production facility in Singapore, and
construction of our photomask production facility in Gresham, Oregon has been
delayed indefinitely. If additional capacity is needed, we believe we could
complete the Gresham facility within approximately six months. Management
believes that cash on hand, cash provided by operations and the DuPont credit
agreement will be sufficient to meet our cash requirements for at least the
next 12 months. Thereafter, based on our current operating plans, we may
require external financing from time to time to fund our capital expenditure
requirements. There can be no assurance that alternative sources of financing
will be available upon expiration of the remaining DuPont credit facility or if
our capital requirements exceed the facility and cash flow from operations.
There can be no assurance that we will be able to obtain any additional
financing required to fund our capital needs on reasonable terms, or at all.

Other Matters

   New Accounting Pronouncements. In June 1998, FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. SFAS No.
133 is effective for all fiscal quarters of all fiscal years beginning after
June 15, 2000, with earlier application encouraged. We do not expect that the
adoption of SFAS No. 133 will have a material adverse impact on our financial
position or results of operations.

   In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities". This statement amends
the accounting and reporting standards of SFAS No. 133 for certain instruments
and certain hedging activities. SFAS No. 138 also amends SFAS No. 133 for
decisions made by the Board relating to the Derivative Implementation Group
(DIG) process. Certain decisions arising from the DIG process that required
specific amendments to SFAS No. 133 are incorporated in this Statement. The
statement is effective concurrently with SFAS No. 133 according to the
provisions of paragraph 48 of SFAS No. 133. The Company will adopt the standard
no later than the first quarter of fiscal year 2001 along with SFAS No. 133. We
do not expect that the adoption of SFAS No. 138 will have a material adverse
impact on our financial position or results of operations.

   In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 which summarizes certain of the staff's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. We anticipate that adoption will be no later than the
fiscal quarter ending June 30, 2001. We are currently evaluating the impact of
this Bulletin, but do not expect that its adoption will have a material adverse
impact on our financial position or results of operations.

   In April 2000, FASB issued Financial Interpretation Number, or FIN, 44,
"Accounting for Certain Transactions Involving Stock Compensation--an
Interpretation of Accounting Principles Board No. 25." FIN 44 clarifies the
application of Opinion No. 25. This Interpretation was effective immediately
and all issues are to be handled prospectively. The adoption of FIN 44 did not
have a material adverse impact on our financial position or results of
operations.

   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 forward contracts in currencies of
the countries in which we conduct business in order to reduce such exposure.
There can be no assurance that

                                       27
<PAGE>

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.

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 forward contracts in currencies of the countries in which
we conduct business in order to reduce such exposure. At June 30, 2000, we held
forward contracts with a notional amount of approximately $5.9 million, a
carrying amount of approximately $5.6 million and an unrealized loss of
approximately $0.3 million.

Item 8. Financial Statements and Supplementary Data

   Index to Financial Statements:

<TABLE>
<CAPTION>
                                                                     Page(s)
                                                                   -----------
   <S>                                                             <C>
   Report of Independent Accountants.............................. F-1
   Consolidated Income Statement for the Three Years Ended June
    30, 2000...................................................... F-2
   Consolidated Balance Sheet at June 30, 1999 and 2000........... F-3
   Consolidated Statement of Cash Flows for the Three Years Ended
    June 30, 2000................................................. F-4
   Consolidated Statement of Stockholders' Equity for the Three
    Years Ended June 30, 2000..................................... F-5
   Notes to Financial Statements.................................. F-6 to F-18
</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.

                                       28
<PAGE>

                                    PART III

   Information with respect to the following Items is incorporated by reference
to our Proxy Statement to be filed in connection with our 2000 Annual Meeting
of Stockholders. However, information regarding executive officers is listed
below pursuant to General Instruction 13G of this Form 10-K.

Item 10. Directors and Executive Officers

                               EXECUTIVE OFFICERS

   The following table sets forth as of June 30, 2000, the name, age and
position with DuPont Photomasks of each person who is an executive officer of
DuPont Photomasks.

<TABLE>
<CAPTION>
          Name           Age                              Position(s)
          ----           ---                              ----------
<S>                      <C> <C>
Peter S. Kirlin.........  39 Chairman of the Board and Chief Executive Officer
Preston M. Adcox........  57 President and Chief Operating Officer
Paul S. Chipman.........  43 Executive Vice President--Technology and Chief Technology Officer
Gerard Cognie...........  56 Executive Vice President--European Operations
John M. Lynn............  42 Executive Vice President, General Counsel and Secretary
Kenneth A. Rygler.......  56 Executive Vice President--Worldwide Marketing and Strategic Planning
Gerd Stoecker...........  57 Executive Vice President--Finance and Chief Financial Officer
</TABLE>

   Peter S. Kirlin is our Chairman of the Board and Chief Executive Officer.
From 1986 to 1988, he worked at American Cyanamid Corporation as a project
leader and conducted post-graduate research projects at the University of
Munich's Institute of Physical Chemistry. From 1988 until joining us in May
2000, he held various positions with ATMI, Inc., a supplier of materials,
equipment and services used in the manufacture of semiconductors, most recently
as Group Vice President, Technologies and Services. He has been one of our
directors since May 2000.

   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. From 1988 to 1999, he served on the Board of
Directors of Semiconductor Industry Suppliers Association (formerly Semi-
SEMATECH), an organization representing U.S. equipment and material suppliers
to the semiconductor manufacturing industry. He has been one of our directors
since May 2000. He has been an officer since our Initial Public Offering in
June of 1996 and one of our directors since May 2000.

   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.

   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.

                                       29
<PAGE>

   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.

   Gerd Stoecker is our Executive Vice President--Finance and Chief Financial
Officer, a position he has held since June 2000. From 1981 to 1984, he was
Vice President of International Finance for Atari Inc., a producer of
computers and electronic games. From 1984 to 1998, he held various positions
with Tandem Computers Incorporated, a provider of computer systems and
client/server solutions, most recently as Vice President and Treasurer.

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

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

Item 11. Executive Compensation

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

Item 12. Security Ownership of Certain Beneficial Owners and Management

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

Item 13. Certain Relationships and Related Transactions

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

                                      30
<PAGE>

                                    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 at Part II,
       Item 8 of this report

    2. Financial statement schedules--see Index to Financial Statements at
       Part II, Item 8 of this report

    3. Exhibits.

<TABLE>
<CAPTION>
     Exhibit
     Number                              Description
     -------                             -----------
     <C>      <S>
       3.1.1  Certificate of Incorporation of the Company, as amended and
              restated on April 3, 1996*

       3.1.2  Amendment to the Certificate of Incorporation of the Company*****

       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***

      10.17   2000 Employment Agreement with Peter S. Kirlin dated May 2, 2000
</TABLE>


                                       31
<PAGE>

<TABLE>
<CAPTION>
     Exhibit
     Number                             Description
     -------                            -----------
     <C>     <S>
      10.18  2000 Employment Agreement with Preston M. Adcox dated July 19,
             2000

      10.19  2000 Employment Agreement with Gerd Stoecker dated June 5, 2000

      10.20  DuPont Photomasks Credit Agreement Revision dated July 24, 2000

      10.21  DuPont Research Agreement dated April 21, 2000. Portions of this
             exhibit have been omitted pursuant to a request for confidential
             treatment.

      10.22  Teflon AF Agreement dated July 1, 2000. Portions of this exhibit
             have been omitted pursuant to a request for confidential
             treatment.

      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>

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

    Asterisk Definition

    *            Registration Statement on Form S-1, Registration No. 333-3386.
    **           Annual Report on Form 10-K for the year ended June 30, 1997.
    ***          Annual Report on Form 10-K for the year ended June 30, 1998.
    ****         Annual Report on Form 10-K for the year ended June 30, 1999.
    *****        Form 8-A12 G/A on June 23, 2000.

   (b) Reports on Form 8-K

     Our report on Form 8-K, dated May 15, 2000, announcing that the Board of
  Directors had named Peter S. Kirlin as our Chief Executive Officer and
  Chairman of our Board, and Preston M. Adcox had been elected to the Board
  of Directors.

     Our report on Form 8-K, dated June 15, 2000, announcing that Gerd
  Stoecker was named as Executive Vice President of Finance and Chief
  Financial Officer.

                                       32
<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 15, 2000                  DuPont Photomasks, Inc.

                                                  By: /s/ Gerd Stoecker
                                          -------------------------------------
                                                      Gerd Stoecker
                                            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 Gerd
Stoecker, 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>
              Signature                          Title                   Date
              ---------                          -----                   ----

<S>                                    <C>                        <C>
       /s/ Peter S. Kirlin             Chairman of our Board and  September 15, 2000
______________________________________  Chief Executive Officer
           Peter S. Kirlin              (Principal Executive
                                        Officer)

       /s/ Preston M. Adcox            Director, President and    September 15, 2000
______________________________________  Chief Operating Officer
           Preston M. Adcox

        /s/ Gerd Stoecker              Executive Vice President-- September 15, 2000
______________________________________  Finance and Chief
            Gerd Stoecker               Financial Officer
                                        (Principal Financial and
                                        Accounting Officer)

        /s/ John L. Doyle              Director                   September 15, 2000
______________________________________
            John L. Doyle

        /s/ John W. Himes              Director                   September 15, 2000
______________________________________
            John W. Himes
</TABLE>


                                       33
<PAGE>

<TABLE>
<CAPTION>
              Signature                          Title                   Date
              ---------                          -----                   ----

<S>                                    <C>                        <C>
       /s/ John C. Hodgson             Director                   September 15, 2000
______________________________________
           John C. Hodgson

      /s/ Gary W. Pankonien            Director                   September 15, 2000
______________________________________
          Gary W. Pankonien

     /s/ Susan Vladuchick Sam          Director                   September 15, 2000
______________________________________
         Susan Vladuchick Sam

       /s/ John C. Sargent             Director                   September 15, 2000
______________________________________
           John C. Sargent

      /s/ Marshall C. Turner           Director                   September 15, 2000
______________________________________
          Marshall C. Turner
</TABLE>

                                       34
<PAGE>

                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
 Exhibit
 Number                           Description
 -------                          -----------
 <C>      <S>
   3.1.1  Certificate of Incorporation of the Company, as amended and restated
          on April 3, 1996*

   3.1.2  Amendment to the Certificate of Incorporation of the Company*****

   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***

  10.17   2000 Employment Agreement with Peter S. Kirlin dated May 2, 2000

  10.18   2000 Employment Agreement with Preston M. Adcox dated July 19, 2000

  10.19   2000 Employment Agreement with Gerd Stoecker dated June 5, 2000

  10.20   DuPont Photomasks Credit Agreement Revision dated July 24, 2000

  10.21   DuPont Research Agreement dated April 21, 2000. Portions of this
          exhibit have been omitted pursuant to a request for confidential
          treatment.
</TABLE>


                                       35
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
 Number                            Description
 -------                           -----------
 <C>     <S>
  10.22  Teflon AF Agreement dated July 1, 2000. Portions of this exhibit have
         been omitted pursuant to a request for confidential treatment.

  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>

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

Asterisk Definition

*        Registration Statement on Form S-1, Registration No. 333-3386.
**       Annual Report on Form 10-K for the year ended June 30, 1997.
***      Annual Report on Form 10-K for the year ended June 30, 1998.
****     Annual Report on Form 10-K for the year ended June 30, 1999.
*****    Form 8-A12 G/A on June 23, 2000.

                                       36
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS

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

   In our opinion, the accompanying consolidated balance sheet and the related
consolidated income statement and consolidated statements of stockholders'
equity and of cash flows present fairly, in all material respects, the
financial position of DuPont Photomasks, Inc. and its subsidiaries at June 30,
2000 and 1999, and the results of their operations and their cash flows for
each of the three years in the period ended June 30, 2000 in conformity with
accounting principles generally accepted in the United States of America. 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
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

PricewaterhouseCoopers LLP

Austin, Texas
July 24, 2000

                                      F-1
<PAGE>

                    DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES

                         CONSOLIDATED INCOME STATEMENT

                   (Dollars in thousands, except share data)

<TABLE>
<CAPTION>
                                                 Year Ended June 30,
                                           ----------------------------------
                                              1998        1999        2000
                                           ----------  ----------  ----------
<S>                                        <C>         <C>         <C>
Sales..................................... $  271,591  $  264,015  $  328,072
Cost of goods sold........................    179,369     187,427     225,400
Selling, general and administrative
 expense..................................     29,509      33,944      39,456
Research and development expense..........     12,714      16,835      23,797
                                           ----------  ----------  ----------
Operating profit..........................     49,999      25,809      39,419
Other expense, net........................        (27)       (717)       (443)
                                           ----------  ----------  ----------
Income before income taxes and minority
 interest.................................     49,972      25,092      38,976
Provision for income taxes................     17,127       7,763      10,150
                                           ----------  ----------  ----------
Income before minority interest...........     32,845      17,329      28,826
Minority interest in (income) loss of
 joint ventures...........................        687         (59)     (2,726)
                                           ----------  ----------  ----------
Net income................................ $   33,532  $   17,270  $   26,100
                                           ==========  ==========  ==========
Basic earnings per share.................. $     2.21  $     1.13  $     1.68
                                           ==========  ==========  ==========
Basic weighted average shares
 outstanding.............................. 15,179,596  15,299,339  15,547,538
                                           ==========  ==========  ==========
Diluted earnings per share................ $     2.15  $     1.09  $     1.61
                                           ==========  ==========  ==========
Diluted weighted average shares
 outstanding.............................. 15,612,234  15,780,181  16,226,700
                                           ==========  ==========  ==========
</TABLE>


         The accompanying notes are an integral part of this statement.

                                      F-2
<PAGE>

                    DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEET

                   (Dollars in thousands, except share data)

<TABLE>
<CAPTION>
                                                                  June 30,
                                                              -----------------
                                                                1999     2000
                                                              -------- --------
<S>                                                           <C>      <C>
                           ASSETS
Current assets:
  Cash and cash equivalents.................................. $ 61,311 $ 42,203
  Accounts receivable, trade, net............................   45,272   57,479
  Accounts receivable, related parties.......................    1,388    1,518
  Inventories, net...........................................   12,707   15,569
  Deferred income taxes......................................    9,547   13,119
  Prepaid expenses and other current assets..................    9,421   16,077
                                                              -------- --------
    Total current assets.....................................  139,646  145,965
Property and equipment, net..................................  312,240  452,827
Accounts receivable, related parties.........................    1,324    1,406
Deferred income taxes........................................    3,596    2,756
Intangible assets, net.......................................   22,409   40,263
Other assets.................................................    1,191    1,009
                                                              -------- --------
    Total assets............................................. $480,406 $644,226
                                                              ======== ========
            LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable, trade.................................... $ 34,563 $ 74,190
  Accounts payable, related parties..........................    1,742    1,054
  Short-term borrowings......................................    2,702    3,797
  Income taxes payable.......................................    5,179    6,252
  Other accrued liabilities..................................   24,326   30,459
                                                              -------- --------
    Total current liabilities................................   68,512  115,752
Long-term borrowings.........................................    4,659    2,350
Long-term borrowings, related parties........................  100,000  150,000
Deferred income taxes........................................   13,644   15,804
Other liabilities............................................    2,837   16,043
Minority interest in net assets of joint ventures............   16,453   28,622
                                                              -------- --------
    Total liabilities........................................  206,105  328,571
                                                              -------- --------
Commitments and contingencies
Stockholders' equity:
  Common stock, $.01 par value; 100,000,000 shares
   authorized; 15,332,282 and 15,767,813 issued and
   outstanding, respectively.................................      153      158
  Additional paid-in capital.................................  164,342  179,591
  Retained earnings..........................................  109,806  135,906
                                                              -------- --------
    Total stockholders' equity...............................  274,301  315,655
                                                              -------- --------
     Total liabilities and stockholders' equity.............. $480,406 $644,226
                                                              ======== ========
</TABLE>

         The accompanying notes are an integral part of this statement.

                                      F-3
<PAGE>

                    DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF CASH FLOWS

                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                    Year Ended June 30,
                                               -------------------------------
                                                 1998       1999       2000
                                               ---------  ---------  ---------
<S>                                            <C>        <C>        <C>
Cash flows from operating activities:
 Net income................................... $  33,532  $  17,270  $  26,100
 Adjustments to reconcile net income to net
  cash provided by operations:
  Depreciation and amortization...............    31,869     41,784     58,398
  Other.......................................    (1,111)     2,011      5,022
  Deferred income tax provision (benefit).....     2,875     (2,937)      (572)
  Cash provided by (used in) changes in assets
   and liabilities:
   Accounts receivable, net...................   (10,309)     5,048    (11,473)
   Inventories, net...........................    (1,747)     6,370     (2,244)
   Prepaid expenses and other current assets..     2,641     (1,785)    (7,296)
   Accounts payable...........................    27,336     (3,226)    31,799
   Other accrued liabilities..................     2,828        510      6,848
                                               ---------  ---------  ---------
    Net cash provided by operating
     activities...............................    87,914     65,045    106,582
                                               ---------  ---------  ---------
Cash flows from investing activities:
 Additions of property and equipment, net.....  (100,200)   (87,772)  (181,425)
 Payments for acquisitions....................   (28,344)   (40,355)   (11,225)
                                               ---------  ---------  ---------
    Net cash used in investing activities.....  (128,544)  (128,127)  (192,650)
                                               ---------  ---------  ---------
Cash flows from financing activities:
 Proceeds from borrowings.....................       850        734      3,830
 Payments of borrowings.......................    (1,111)    (3,084)    (4,955)
 Proceeds from borrowings, related party......    35,000    175,000     55,000
 Payments of borrowings, related party........   (26,000)   (84,000)    (5,000)
 Net proceeds from issuance of common stock...     1,174      1,202      9,314
 Increase in minority interest in net assets
  of joint ventures...........................        --     16,394      9,442
                                               ---------  ---------  ---------
    Net cash provided by financing
     activities...............................     9,913    106,246     67,631
                                               ---------  ---------  ---------
Effect of exchange rate changes on cash.......      (946)    (1,541)      (671)
                                               ---------  ---------  ---------
Net (decrease) increase in cash and cash
 equivalents..................................   (31,663)    41,623    (19,108)
Cash and cash equivalents at beginning of
 year.........................................    51,351     19,688     61,311
                                               ---------  ---------  ---------
Cash and cash equivalents at end of year...... $  19,688  $  61,311  $  42,203
                                               =========  =========  =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
 INFORMATION:
 Cash paid for:
  Interest.................................... $     991  $   2,254  $   1,685
                                               ---------  ---------  ---------
  Taxes....................................... $  13,944  $   3,860  $   2,747
                                               ---------  ---------  ---------
Non-cash items:
  Contribution of capital..................... $      --  $   2,442  $   5,716
                                               ---------  ---------  ---------
  Issuance of common stock.................... $   2,354  $     430  $     224
                                               ---------  ---------  ---------
</TABLE>

          The accompanying notes are an integral part of this statement.

                                      F-4
<PAGE>

                    DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

                             (Dollars in thousands)

<TABLE>
<CAPTION>
                           Common Stock
                         -----------------
                                                                        Total
                                             Additional    Retained Stockholders'
                           Shares   Amount Paid-In Capital Earnings    Equity
                         ---------- ------ --------------- -------- -------------
<S>                      <C>        <C>    <C>             <C>      <C>
Balance at June 30,
 1997................... 15,104,568  $151     $156,742     $ 59,004   $215,897
  Issuance of common
   stock................    154,154     1        3,527           --      3,528
  Net income............         --    --           --       33,532     33,532
                         ----------  ----     --------     --------   --------
Balance at June 30,
 1998................... 15,258,722   152      160,269       92,536    252,957
  Contribution of
   capital..............         --    --        2,442           --      2,442
  Issuance of common
   stock................     73,560     1        1,631           --      1,632
  Net income............         --    --           --       17,270     17,270
                         ----------  ----     --------     --------   --------
Balance at June 30,
 1999................... 15,332,282   153      164,342      109,806    274,301
  Contribution of
   capital..............         --    --        5,716           --      5,716
  Issuance of common
   stock................    435,531     5        9,533           --      9,538
  Net income............         --    --           --       26,100     26,100
                         ----------  ----     --------     --------   --------
Balance at June 30,
 2000................... 15,767,813  $158     $179,591     $135,906   $315,655
                         ==========  ====     ========     ========   ========
</TABLE>




          The accompanying notes are an integral part of this statement.

                                      F-5
<PAGE>

                    DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES

                         NOTES TO FINANCIAL STATEMENTS

                   (Dollars in thousands, except share data)

1. Organization and Summary of Significant Accounting Policies

   Business: DuPont Photomasks, Inc. ("the Company") was incorporated in Texas
on June 25, 1985, and was reincorporated in Delaware on November 9, 1995. 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.

   Principles of Consolidation: The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries and our majority
controlled joint ventures. All significant intercompany balances and
transactions have been eliminated. The minority interest impact is reflected in
minority interest in (income) loss of joint ventures and is the partners' share
of majority controlled joint venture operations. We currently have two joint
ventures that are not majority controlled. They consist of the DPI Reticle
Technology Center ("RTC") that is 25 percent owned and DuPont Dai Nippon
Engineering that is 50 percent owned; both are reflected using the equity
method of accounting. The RTC is operated as a breakeven entity with our share
of the costs reflected in research and development expense.

   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. Deferred revenue is customer obligations that are not completed
and will be included in income when goods are shipped to our customers.

   Cash and Cash Equivalents: Cash and cash equivalents include highly liquid
investments with maturities of three months or less at the date of acquisition.

   Investments: The Company's investments are classified as available-for-sale
securities and are reported at fair value. Unrealized gains and losses are
reported, net of taxes, as a component of stockholders' equity. Unrealized
losses are charged against income when a decline in fair value is determined to
be other than temporary. The specific identification method is used to
determine the cost of securities sold. Realized gains and losses on investments
are included in other income when realized. At June 30, 1999 and 2000
respectively, there were no such investments reflected in the balance sheet. We
hold approximately 300,000 warrants from a vendor which are vested.

   Allowance for Doubtful Accounts: The Company provides an allowance for
doubtful accounts based upon an estimate of uncollectible accounts. Accounts
receivable, trade are net of allowances for doubtful accounts of $2,901 and
$2,482 at June 30, 1999 and 2000, respectively.

   Inventories, net: Inventories, which are substantially all raw materials,
are stated at the lower of cost or market. Cost is determined using standard
costs, which approximates the first in, first out (FIFO) method. Cost includes
the acquisition cost of purchased components, parts and subassemblies, labor
and overhead. Market with respect to raw materials, is replacement cost and,
with respect to work-in-process and finished goods, is net realizable value.

   Property and Equipment, net: Property and equipment are stated at cost and
are depreciated using the straight-line method over the estimated useful lives
of the assets. Leasehold improvements are depreciated using the straight-line
method over the shorter of the estimated useful lives of the assets or the
duration of the lease. 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
Company assesses long-lived assets for impairment under Financial Accounting
Standards Board's ("FASB") Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed
Of."

                                      F-6
<PAGE>

                    DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

Under those rules, long-lived assets are included in impairment evaluations
when events or circumstances exist that indicate the carrying amount of those
assets may not be recoverable. Should the review indicate that the long-lived
assets are not recoverable, the Company's carrying value of the long-lived
assets would be reduced by the estimated shortfall of the cash flows.

   Intangible Assets, net: Intangible assets are amortized using the straight-
line method over their estimated useful lives ranging from five to eight years.
Accumulated amortization was $1,968 and $7,009 at June 30, 1999 and 2000,
respectively. Under SFAS No. 121, goodwill associated with assets acquired in a
purchase business combination is included in impairment evaluations when events
or circumstances exist that indicate the carrying amount of those assets may
not be revcoverable. Should the review indicate that goodwill is not
recoverable, the Company's carrying value of the goodwill would be reduced by
the estimated shortfall of the cash flows.

   Fair Value of Financial Instruments: The carrying amounts reflected in the
accompanying balance sheet for cash and cash equivalents, accounts receivable,
inventory, prepaid expenses, accounts payable, borrowings and other liabilities
approximate fair value due to the short term nature of the instruments.

   Accounts Payable, Trade: Included in accounts payable, trade at June 30,
1999 and 2000, are bank overdrafts of $5,289 and $5,891, respectively, due to
outstanding checks and the timing of cash replenishments. The remaining balance
represents trade liabilities with due dates of less than one year.

   Research and Development Expense: Research and development costs are
expensed as incurred.

   Foreign Currencies: We have determined that the United States ("U.S.")
dollar is the functional currency of our worldwide operations. Monetary assets
and liabilities denominated in non-U.S. currencies are remeasured at current
rates into U.S. dollars and the resulting exchange gains and losses are
included in income in the period they occur. Nonmonetary assets and liabilities
are remeasured by using historical exchange rates, the rates in effect when the
transactions occurred, and the resulting exchange gains and losses are included
in income in the period they occur. Transaction gains (losses) were $131,
$(801) and $311 in the periods ending June 30, 1998, 1999 and 2000,
respectively. Remeasurement gains (losses) were $(308), $1,101 and $(620) in
the periods ending June 30, 1998, 1999 and 2000, respectively. Exchange gains
and losses are recorded net of the impact of hedging activities designed to
reduce exchange rate exposure. We have entered into forward contracts in
currencies of the countries in which we conduct business in order to reduce
such exposure. At June 30, 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. At June 30, 2000, we held forward
contracts with a notional amount of approximately $5,920, a carrying amount of
approximately $5,626 and an unrealized loss of approximately $294.

   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 in the event that realization of the assets is considered
unlikely. At June 30, 1999 and 2000 we had a valuation allowance of $1,997 and
$3,886, respectively. Certain of our operations in Asia are subject to
government granted tax exemptions.

   Comprehensive Income: Comprehensive income is comprised of two components,
net income and other comprehensive income. Other comprehensive income consists
of unrealized gains and losses in certain debt and equity securities. There
were no differences between our net income and comprehensive income during any
of the periods presented.

                                      F-7
<PAGE>

                    DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


   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 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 current year presentation.

   New Accounting Pronouncements: In June 1998, the FASB issued SFAS, No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. SFAS No.
133 is effective for all fiscal quarters of all fiscal years beginning after
June 15, 2000, with earlier application encouraged. We do not expect that the
adoption of SFAS No. 133 will have a material adverse impact on our financial
position or results of operations.

   In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities". This statement amends
the accounting and reporting standards of SFAS No. 133 for certain instruments
and certain hedging activities. SFAS No. 138 also amends SFAS No. 133 for
decisions made by the Board relating to the Derivative Implementation Group
(DIG) process. Certain decisions arising from the DIG process that required
specific amendments to SFAS No. 133 are incorporated in this Statement. The
statement is effective concurrently with SFAS No. 133 according to the
provisions of paragraph 48 of SFAS No. 133. The Company will adopt the standard
no later than the first quarter of fiscal year 2001 along with SFAS No. 133. We
do not expect that the adoption of SFAS No. 138 will have a material adverse
impact on our financial position or results of operations.

   In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 which summarizes certain of the staff's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. We anticipate that adoption will be no later than the
fiscal quarter ending June 30, 2001. We are currently evaluating the impact of
this Bulletin, but do not expect that its adoption will have a material adverse
impact on our financial position or results of operations.

   In April 2000, the Financial Accounting Standards Board issued Financial
Interpretation Number, or FIN, 44, "Accounting for Certain Transactions
Involving Stock Compensation--an Interpretation of Accounting Principles Board
No. 25." FIN 44 clarifies the application of Opinion No. 25. This
Interpretation was effective immediately and all issues are to be handled
prospectively. The adoption of FIN 44 did not have a material adverse impact on
our financial position or results of operations.

2. Concentrations of Credit Risk

   Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of foreign currency forward contracts, cash
and cash equivalents, short-term investments and trade accounts receivable. In
management's opinion, no significant concentrations of credit risk exist for
the Company.

   The Company's counterparties in its foreign currency forward contracts are
major financial institutions. We do not anticipate nonperformance by these
counterparties. We maintain cash and cash equivalents with various financial
institutions located in many countries worldwide. Our policy is to limit
exposure in foreign countries by transferring excess cash to the U.S. The
Company places its cash primarily in checking and money-market

                                      F-8
<PAGE>

                    DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

accounts. Cash equivalents are maintained with high-quality institutions that
are regularly monitored by management. The short-term investments are
diversified among and limited to high-quality securities with high credit
ratings. Concentrations of credit risk with respect to trade accounts
receivable are limited due to the large number of customers and their
dispersion across many countries.

   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
require collateral. Two of our customers each represented more than ten percent
of sales in 1998 and, in the aggregate, these two customers represented
approximately 27 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 22 percent of sales in the year. One of
our customers represented approximately 12 percent of sales in 2000. One
customer represented approximately 11 percent of accounts receivable, trade at
June 30, 2000. There were no customers with accounts receivable, trade balances
greater than ten percent of accounts receivable, trade at June 30, 1999.

3. Acquisitions

   In December 1999, we acquired the photomask production equipment of Altis
Semiconductor, a joint venture between IBM and Infineon Technologies ("IBM
acquisition"). The acquisition was accounted for under the purchase method of
accounting and included the purchase of equipment, the purchase of inventory,
the execution of a supply agreement with IBM and the hiring of employees in the
photomask manufacturing organization. Consideration for the acquisition was
approximately $40,000, $10,000 in cash at closing, with the remainder paid over
the next eight years. The cash payments were funded with borrowings under our
credit facility with DuPont. Approximately $23,300 has been assigned to
intangible assets and is being amortized over five to eight years. The results
of operations of the business and the estimated fair value of the assets
acquired and liabilities assumed are included in our financial statements from
the date of acquisition. The purchase price was allocated to the assets
acquired and liabilities assumed based on our estimates of fair value.

   In November 1998, we completed the acquisition of Hewlett-Packard's
photomask manufacturing organization. The acquisition was accounted for under
the purchase method of accounting and 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 and is being amortized over five to eight
years.

   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.

4. Related Party Transactions

   Effective January 1996, we entered into several transitional agreements with
DuPont. Charges for services under these agreements were $3,072 for 1998,
$2,375 for 1999 and $2,525 for 2000. Amounts charged to us for functions and
services provided by DuPont are principally included in general and
administrative expense.

                                      F-9
<PAGE>

                    DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


   Accounts receivable, related parties includes receivables from our employees
of $1,384 (Current $60, Non-Current $1,324) and $1,562 (Current $156, Non-
Current $1,406) at June 30, 1999 and 2000 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. Sales to related parties, including the RTC, were $10,933, $7,056 and
$1,743 for the years ended June 30, 1998, 1999 and 2000, respectively.

   Accounts payable, related parties represents payables to DuPont for benefits
paid by DuPont on our behalf and billed on a one-month-lag basis and amounts
payable under the transitional agreements with DuPont.

5. Prepaid Expenses and Other Current Assets

   Prepaid expenses and other current assets consist of the following:

<TABLE>
<CAPTION>
                                                                    June 30,
                                                                 --------------
                                                                  1999   2000
                                                                 ------ -------
   <S>                                                           <C>    <C>
   Taxes receivable, other than income taxes.................... $5,632 $ 9,511
   Prepaid expenses and deposits................................  3,677   4,343
   Other........................................................    112   2,223
                                                                 ------ -------
   Prepaid expenses and other current assets.................... $9,421 $16,077
                                                                 ====== =======
</TABLE>

6. Property and Equipment, net

   Property and equipment, net consist of the following:

<TABLE>
<CAPTION>
                                                                June 30,
                                              Estimated    --------------------
                                             Useful Lives    1999       2000
                                            -------------- ---------  ---------
   <S>                                      <C>            <C>        <C>
   Construction-in-progress................                $  80,140  $ 153,589
   Land....................................                    5,932      5,932
   Buildings............................... 10 to 20 years    85,735    106,905
   Equipment...............................  3 to 7 years    384,037    464,167
                                                           ---------  ---------
                                                             555,844    730,593
   Less: accumulated depreciation..........                 (243,604)  (277,766)
                                                           ---------  ---------
   Property and equipment, net.............                $ 312,240  $ 452,827
                                                           =========  =========
</TABLE>

   Construction-in-progress is comprised of the construction of new facilities,
equipment in the installation process and current development of information
technology infrastructure. Capital leases of approximately $3,056 as of June
30, 1999 and 2000, is included in buildings. Accumulated depreciation on
capital leases was $994 and $1,170 as of June 30, 1999 and 2000, respectively.
The accompanying consolidated income statements reflect depreciation expense of
$30,831, $38,962 and $52,606 for the years ending June 30, 1998, 1999 and 2000,
respectively.

                                      F-10
<PAGE>

                    DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


7. Other Accrued Liabilities

   Other accrued liabilities consist of the following:

<TABLE>
<CAPTION>
                                                                   June 30,
                                                                ---------------
                                                                 1999    2000
                                                                ------- -------
   <S>                                                          <C>     <C>
   Accrued compensation and benefits........................... $11,122 $12,429
   Accrued maintenance.........................................   2,341   4,605
   Accrued vacation pay........................................   3,409   3,584
   Deferred revenue............................................     115   2,570
   Accrued taxes, other than income taxes......................     700   2,493
   Other.......................................................   6,639   4,778
                                                                ------- -------
   Other accrued liabilities................................... $24,326 $30,459
                                                                ======= =======
</TABLE>

8. Credit Agreement

   At June 30, 2000 we had a credit agreement with DuPont, which was comprised
of two separate facilities for $100,000 each.

   The first facility expires in 2001 and any advances bear an interest rate at
LIBOR plus 0.25 percent per annum. At our option, advances under this credit
facility are convertible into term loans with maturities up to seven years. We
have borrowed a maximum of $75,000 under this credit facility and, at June 30,
2000, borrowings of $50,000 were outstanding under this credit facility. In
July of 2000, this credit facility was amended to increase the interest charged
on outstanding amounts from LIBOR plus 0.25 percent per annum to LIBOR plus
1.875 percent per annum and terminate our ability to convert outstanding
amounts into term loans.

   The second facility had a term of three years and outstanding amounts bore
interest at 0.25 percent per annum for the first two years and LIBOR plus 0.25
percent per annum for the third year. We had borrowed a maximum of $100,000
under this credit facility and, at June 30, 2000, borrowings of $100,000 were
outstanding under this credit facility. The amounts loaned under this facility
were unsecured and the agreement contained various representations, covenants
and events of default. At June 30, 2000, we were in compliance with all of the
loan covenants. In July 2000, we repaid all outstanding and terminated the
facility.

9. Borrowings

   Borrowings consist of the following:

<TABLE>
<CAPTION>
                                                               June 30,
                                                            ----------------
                                                             1999     2000
                                                            -------  -------
   <S>                                                      <C>      <C>
   Capital lease obligations: 6.6% to 7.0%, due through
    2013................................................... $ 2,162  $ 1,852
   Long term debt: 7.4% bank borrowings due through 2002...   3,750    2,250
   Other bank borrowings: up to 5.0% due through 2001......   1,449    2,045
                                                            -------  -------
                                                              7,361    6,147
     Less: short-term borrowings...........................  (2,702)  (3,797)
                                                            -------  -------
   Long-term borrowings.................................... $ 4,659  $ 2,350
                                                            =======  =======
</TABLE>

                                      F-11
<PAGE>

                    DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


   At June 30, 2000, future principal payments of borrowings excluding capital
leases are as follows:

<TABLE>
   <S>                                                                   <C>
   2001................................................................. $3,545
   2002.................................................................    750
   2003.................................................................     --
   2004.................................................................     --
   2005.................................................................     --
   Thereafter...........................................................     --
                                                                         ------
     Outstanding borrowings............................................. $4,295
                                                                         ======
</TABLE>

10. Leases

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

<TABLE>
<CAPTION>
                                                              Capital  Operating
                                                              Leases    Leases
                                                              -------  ---------
   <S>                                                        <C>      <C>
   2001...................................................... $  253    $ 5,066
   2002......................................................    253       2089
   2003......................................................    222        893
   2004......................................................    204        657
   2005......................................................    204        390
   Thereafter................................................  1,634      1,220
                                                              ------    -------
     Minimum lease payments..................................  2,770    $10,315
                                                                        =======
       Less: interest........................................   (918)
   Present value of minimum lease payments................... $1,852
                                                              ======
</TABLE>

The operating lease expense presented in the income statement was $1,364,
$2,880 and $4,189 for fiscal years ended June 30, 1998, 1999 and 2000,
respectively. We also guarantee certain lease obligations for the RTC joint
venture with future minimum lease payments of $29,674 at June 30, 2000. The RTC
joint venture is now scheduled to terminate in December 2002.

11. Employee Plans

Stock Performance 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; vesting generally occurs over three to
five years and stock options generally have a ten year life. At June 30, 2000,
there were 2,449,624 shares reserved for future

                                      F-12
<PAGE>

                    DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

grant or issuance under our stock plans. We apply Accounting Principles Board
Opinion, or APB, No. 25, "Accounting for Stock Issued to Employees," and its
related interpretations in accounting for our stock plans. A summary of stock
option activity for the periods ended June 30, is as follows:

<TABLE>
<CAPTION>
                                      1998                      1999                       2000
                            ------------------------- -------------------------- -------------------------
                                          Weighted                   Weighted                  Weighted
                            Number of     Average     Number of      Average     Number of     Average
                             Shares    Exercise Price   Shares    Exercise Price  Shares    Exercise Price
                            ---------  -------------- ----------  -------------- ---------  --------------
  <S>                       <C>        <C>            <C>         <C>            <C>        <C>
  Balance at beginning of
   year...................    990,544      $18.07      1,403,514      $30.27     2,004,136      $24.19
  Options granted.........    507,983      $52.10      1,722,485      $28.45     1,302,355      $51.39
  Options forfeited.......    (26,930)     $27.67     (1,053,047)     $39.69       (52,802)     $23.49
  Options exercised.......    (68,083)     $17.24        (68,816)     $17.47      (308,261)     $18.78
                            =========                 ==========                 =========
  Balance at end of year..  1,403,514      $30.27      2,004,136      $24.19     2,945,428      $36.79
  Exercisable at end of
   year...................    396,063      $17.64        578,504      $18.89     1,210,303      $22.65
</TABLE>

   Additional information related to stock options at June 30, 2000 is as
follows:

<TABLE>
<CAPTION>
                                     Options Outstanding           Options Exercisable
                            ------------------------------------- ----------------------
                                         Weighted      Weighted   Number     Weighted
                            Number of    Average     Average Life   of       Average
     Exercise Price Range    Shares   Exercise Price   (Years)    Shares  Exercise Price
     --------------------   --------- -------------- ------------ ------- --------------
   <S>                      <C>       <C>            <C>          <C>     <C>
   $17.00..................   502,560     $17.00         5.8      502,560     $17.00
   $23.25 to $33.69........   877,588     $23.76         7.0      608,105     $23.37
   $35.37 to $49.37........ 1,009,630     $46.96         9.1       53,813     $41.12
   $52.75 to $71.56........   555,650     $56.77         9.4       45,825     $53.47
</TABLE>

   A summary of restricted stock grant activity is as follows:

<TABLE>
<CAPTION>
                                   1998                   1999                   2000
                          ---------------------- ---------------------- ----------------------
                          Number of Market Value Number of Market Value Number of Market Value
                           Shares    Per Share    Shares    Per Share    Shares    Per Share
                          --------- ------------ --------- ------------ --------- ------------
<S>                       <C>       <C>          <C>       <C>          <C>       <C>
Balance at beginning of
 year...................    89,060     $17.54      4,744      $27.16      1,709      $35.12
Restricted stock
 granted................     1,755     $17.00      1,709      $35.12      3,027      $50.36
Restricted stock
 forfeited..............        --         --         --          --     (1,981)     $38.82
Restricted stock
 issued.................   (86,071)    $17.00     (4,744)     $27.16       (428)     $35.12
                           -------     ------     ------      ------     ------      ------
Balance at end of year..     4,744     $27.16      1,709      $35.12      2,327      $51.80
                           =======     ======     ======      ======     ======      ======
</TABLE>

   Assumptions utilized in calculating the Black Scholes pricing model and the
weighted average fair value of options granted:

<TABLE>
<CAPTION>
                                                      1998     1999     2000
                                                     -------  -------  -------
   <S>                                               <C>      <C>      <C>
   Risk Free Interest Rate..........................     5.5%     5.0%     6.2%
   Expected Dividend Yield.......................... $    --  $    --  $    --
   Expected Lives................................... 5 Years  5 Years  5 Years
   Volatility.......................................      68%      67%      67%
   Weighted Average Fair Value of Options Granted... $ 31.65  $ 21.16  $ 31.49
</TABLE>

                                      F-13
<PAGE>

                    DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


   Had compensation cost been determined based on the fair value of stock
option awards at the date of grant based on the Black Scholes pricing model,
net income and diluted earnings per share would have been:

<TABLE>
<CAPTION>
                                                         1998    1999    2000
                                                        ------- ------- -------
   <S>                                                  <C>     <C>     <C>
   Net Income
     As Reported....................................... $33,532 $17,270 $26,100
     Pro Forma......................................... $29,577 $10,739 $14,094
   Diluted Earnings Per Share
     As Reported....................................... $  2.15 $  1.09 $  1.61
     Pro Forma......................................... $  1.94 $  0.71 $  0.89
</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.

Stock Purchase Plan

   The Company has an Employee Stock Purchase Plan ("Stock Purchase Plan"). The
purpose of the Stock Purchase Plan is to allow employees of the Company to
participate in the Company's future. The Stock Purchase Plan is a payroll
deduction plan which permits employees who are employed on the purchase date to
purchase shares, on an after-tax basis, of the Company's common stock at
fifteen percent below market prices at the end of each purchase period. If you
are a full-service employee, you may enroll in the plan during January and
July. Our plan currently has a two-year offering period with four interim
purchase periods of six months. The plan has a look-back feature as well as a
reset feature.

Retirement Plan

   The Company has a 401(k) retirement plan ("401(k) Plan") for all eligible
U.S. employees of the Company, as defined in the 401(k) Plan document. The
401(k) Plan qualifies under Section 401(k) of the Internal Revenue Code as a
salary reduction plan. Employees may elect to contribute a certain percentage
of their salary on a before-tax basis. Employees are immediately fully vested
in both their contributions and in employer contributions, as defined in the
401(k) Plan document. The 401(k) Plan is a defined contribution plan with
employer matching dollar for dollar on the first three percent of salary
contributions and fifty cents for each dollar of salary contributions on the
next two percent. Company matching contributions to the 401(k) Plan totaled
approximately $1,440, $1,560 and $1,727 in 1998, 1999 and 2000, respectively.

12. Earnings Per Share

   Basic earnings per share ("EPS") is computed by dividing net income by the
weighted number of common shares outstanding during each period. Diluted EPS is
computed by dividing net income by the weighted average number of common share
and common share equivalents outstanding (if dilutive) during each period.
Common share equivalents include stock options. The number of common share
equivalents outstanding relating to stock options is computed using the
treasury stock method.

                                      F-14
<PAGE>

                    DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


   The reconciliation of the denominators used to calculate the basic EPS and
diluted EPS for the years ended December 31, 1998, 1999 and 2000, respectively,
are as follows:

<TABLE>
<CAPTION>
                                                    Year Ended June 30,
                                              --------------------------------
                                                 1998       1999       2000
                                              ---------- ---------- ----------
   <S>                                        <C>        <C>        <C>
   Weighted average shares outstanding--
    basic.................................... 15,179,596 15,299,339 15,547,538
     Plus: Common share equivalents..........    432,638    480,842    679,162
                                              ---------- ---------- ----------
   Weighted average shares outstanding--
    dilutive................................. 15,612,234 15,780,181 16,226,700
                                              ========== ========== ==========
</TABLE>

   Stock options to acquire 507,625, 97,650, and 10,500 shares for the years
ended June 30, 1998, 1999, and 2000, respectively were not included in the
computations of diluted earnings per share because the effect of including
these stock options would have been anti-dilutive.

13. Provision for Income Taxes

   The provision for income taxes consists of the following:

<TABLE>
<CAPTION>
                                                         Year Ended June 30,
                                                        -----------------------
                                                         1998    1999    2000
                                                        ------- ------  -------
   <S>                                                  <C>     <C>     <C>
   Current:
     Federal........................................... $ 8,909 $5,809  $ 8,018
     State.............................................   1,023  1,410    1,488
     Non-U.S...........................................   4,320    904    1,072

   Deferred:
     Federal...........................................   1,353   (443)  (2,104)
     State.............................................     155   (106)    (289)
     Non-U.S...........................................   1,367    189    1,965
                                                        ------- ------  -------
   Provision for income taxes.......................... $17,127 $7,763  $10,150
                                                        ======= ======  =======
</TABLE>

   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,
                                                     ------------------------
                                                      1998     1999    2000
                                                     -------  ------  -------
   <S>                                               <C>      <C>     <C>
   Tax at 35% statutory federal tax rate............ $17,490  $8,762  $12,688
   Difference in effective tax rate for non-U.S.
    operations......................................   1,752   1,460   (1,118)
   Tax exemptions...................................  (5,870) (4,987)  (3,893)
   Change in valuation allowance....................      --   1,997    1,889
   State taxes, net of federal......................   1,258     675      840
   Other............................................   2,497    (144)    (256)
                                                     -------  ------  -------
   Provision for income taxes....................... $17,127  $7,763  $10,150
                                                     =======  ======  =======
</TABLE>

                                      F-15
<PAGE>

                    DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


   Deferred tax assets (liabilities) consist of the following:

<TABLE>
<CAPTION>
                                                                  June 30,
                                                               ----------------
                                                                1999     2000
                                                               -------  -------
  <S>                                                          <C>      <C>
  Deferred tax assets:
    Inventories............................................... $   980  $ 1,082
    Depreciation..............................................   1,948      738
    Net Operating Losses--Non-U.S.............................   1,997    4,213
    Accrued liabilities.......................................   4,753    4,809
    Goodwill..................................................      --    1,568
    Credit facility...........................................   2,442    1,667
    Other.....................................................   3,073    5,684
                                                               -------  -------
      Deferred tax assets.....................................  15,193   19,761
                                                               -------  -------
  Deferred tax liabilities:
    Depreciation..............................................  (8,015) (10,122)
    Other.....................................................  (5,682)  (5,682)
                                                               -------  -------
      Deferred tax liabilities................................ (13,697) (15,804)
                                                               -------  -------
      Valuation allowance.....................................  (1,997)  (3,886)
                                                               -------  -------
      Deferred income taxes................................... $  (501) $    71
                                                               =======  =======
</TABLE>

   We have entered into a tax indemnification agreement with DuPont. The amount
due from DuPont under the tax indemnification agreement was negligible at June
30, 2000. We have U.S. capital loss carryforwards of $18,513. Benefit from this
carryforward, if and when realized, is payable to DuPont under the tax
indemnification agreement.

   A substantial portion of our Far East manufacturing operations in Korea,
China, Taiwan and Singapore operate at a reduced tax rate or free of tax under
various tax holidays which expire in whole or in part during fiscal years 2003
through 2010. Certain tax holidays may be extended if specific conditions are
met.

   At June 30, 2000, foreign subsidiaries had deferred tax assets relating to
net operating loss carryforwards for income tax purposes of $4,213 of which
$3,018 may be carried forward indefinitely and the remainder has approximately
a five-year carryforward period. For financial reporting purposes, a valuation
allowance of $3,886 was established to offset some of the deferred tax assets
relating to the net operating loss carryforwards. Income taxes have not been
provided on undistributed earnings of subsidiaries located outside the U.S.,
because in management's opinion such earnings have been indefinitely reinvested
in these operations or will be remitted as dividends with taxes substantially
offset by foreign tax credits.

   We recorded the deferred tax benefit arising from our second credit facility
with DuPont as well as the current tax benefit arising from exercises of stock
options as an additional contribution to additional paid-in capital.

                                      F-16
<PAGE>

                   DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES

                  NOTES TO FINANCIAL STATEMENTS--(Continued)


14. Segment Information

   In accordance with SFAS No. 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>
   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
   2000
   Sales.................................. $194,495 $ 58,416  $ 75,161 $328,072
   Transfers between geographic areas.....   22,627    3,856    14,344       --
                                           -------- --------  -------- --------
                                           $217,122 $ 62,272  $ 89,505 $328,072
                                           ======== ========  ======== ========
   Net income (loss)...................... $  7,731 $   (606) $ 18,975 $ 26,100
   Identifiable assets.................... $278,066 $110,531  $255,629 $644,226
</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.

15. 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 have a photomask production facility in
Gresham, Oregon that we have indefinitely delayed. If additional capacity were
to be needed, we could complete the Gresham facility within approximately six
months. Currently we are evaluating the potential opportunities for the
Gresham facility. In addition, we are in the customer qualification phase of
our photomask production facility in Singapore.

   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.

   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

                                     F-17
<PAGE>

                    DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

addition, such laws and regulations may impose liabilities on owners and
operators of businesses and real property without regard to fault and such
liabilities may be joint and several with other parties. More stringent
environmental laws and regulations may be enacted in the future, which may
require us to expend additional amounts on environmental compliance or may
require modifications in our operations. Although we are unable to predict the
extent of our future liability with respect to any environmental matters, we
believe, based upon current information, that environmental liabilities will
not be material to our financial position or results of operations. DuPont has
agreed to indemnify us for any environmental contamination present on our
manufacturing sites at June 13, 1996, the date of our initial public offering,
or present at any such site due to the generation, use, treatment, storage,
release, emission, discharge or disposal of hazardous waste or hazardous
materials before such date. The Environmental Protection Agency is reviewing a
groundwater contamination issue at our Danbury, Connecticut site under
voluntary corrective action. Any such contamination is believed to be
historical and therefore any environmental liabilities would be covered by the
indemnification agreement with DuPont.

16. Subsequent Events

   In July 2000, we completed two transactions in the equity and debt markets
with net proceeds of $201,400. A portion of the proceeds were used to repay all
of the outstanding borrowings from DuPont, and we expect to use the remaining
proceeds for general corporate purposes, including potential acquisitions,
working capital and capital expenditures. The first transaction was the sale of
3.2 million shares of stock of which 1.4 million shares represented original
issuance and 1.8 million shares represented registration of outstanding shares
held by DuPont. The stock was offered to the public at $77 per share with gross
proceeds of $246,400 , offering costs of $12,800 , and net proceeds of
$233,600. Our portion of the offering proceeds was $103,800 for the original
issuance. We also sold $100,000 of subordinated convertible notes with net
proceeds of $97,600 . The notes are due in July 2004, with no stated interest,
a conversion price of $106.26 per share, an unconditional guarantee by DuPont,
and no optional redemption by us.

17. Unaudited Quarterly Financial Data

   Unaudited quarterly financial data for 1999 and 2000 is as follows:

<TABLE>
<CAPTION>
                                                      Quarter
                                    -------------------------------------------
                                      First      Second     Third      Fourth
                                    ---------- ---------- ---------- ----------
   <S>                              <C>        <C>        <C>        <C>
   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
   2000
   Sales..........................  $   74,122 $   73,761 $   86,790 $   93,399
   Operating profit...............       9,355      5,898     10,914     13,252
   Net income.....................       6,577      4,312      7,112      8,099
   Basic earnings per share.......        0.43       0.28       0.45       0.52
   Diluted earnings per share.....        0.41       0.27       0.44       0.49
   Basic weighted average shares
    outstanding...................  15,364,005 15,479,965 15,636,474 15,709,708
   Diluted weighted average shares
    outstanding...................  16,003,505 16,144,735 16,281,769 16,477,490
</TABLE>


                                      F-18