**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

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**FORM 10-Q**

 

**QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterlyperiod ended September 30,  2003**

**Commission filenumber 0-20839**

 

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**DUPONT PHOTOMASKS, INC.**

(Exact name of registrant as specified in ourcharter)

 

| **Delaware**                                                                                                                 |   | **74-2238819**                        |
|------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or Other Jurisdiction  of Incorporation or Organization)                                                              |   | (I.R.S. Employer  Identification No.) |
|                                                                                                                         |
| **131 Old Settlers Boulevard  Round Rock, Texas 78664**                                                                      |
| (Address of Principal  Executive Offices)

Registrant’s telephone number,  including area code: **(512) 310-6500** |

 

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Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 during the preceding 12 months (or for suchshorter 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 ýNo o

 

Indicate bycheck mark whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Exchange Act).  Yes ýNo o

 

As ofNovember 6, 2003, 18,130,467 shares of common stock, $.01 par value, wereoutstanding.

 

 

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**TABLE OF CONTENTS**

 
| **Part I**  |    |                                                                                                                                                                       |
|-------------|---------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |    |                                                                                                                                                                       |
|        | Item 1. | Financial Statements                                                                                                                                                       |
|        |    | Consolidated Income Statements (unaudited) for the Three Months Ended  September 30, 2002 and 2003                                                                    |
|        |    | Consolidated Balance Sheets as of June 30, 2003 and  September 30, 2003 (unaudited)                                                                              |
|        |    | Consolidated Statements of Cash Flows  (unaudited) for the Three Months Ended September 30, 2002 and 2003                                                             |
|        |    | Consolidated Statements of  Stockholders’ Equity for the Twelve Months  Ended June 30, 2003 and the Three Months Ended September 30, 2003  (unaudited) |
|        |    | Notes to Consolidated Financial Statements  (unaudited)                                                                                                                    |
|        |    |                                                                                                                                                                       |
|        | Item 2. | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                                                                |
|        |    |                                                                                                                                                                       |
|        | Item 3. | Quantitative and Qualitative Disclosures  About Market Risk                                                                                                                |
|        |    |                                                                                                                                                                       |
|        | Item 4. | Controls and Procedures                                                                                                                                                    |
|        |    |                                                                                                                                                                       |
| **Part II** |    |                                                                                                                                                                       |
|        | Item 1. | Legal Proceedings                                                                                                                                                          |
|        |    |                                                                                                                                                                       |
|        | Item 6. | Exhibits and Reports on Form 8-K                                                                                                                                           |
|        |    | Signatures                                                                                                                                                                 |

 

2

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**PART I**

 

**Item1. Financial Statements**

 

**DUPONT PHOTOMASKS,INC. AND SUBSIDIARIES**

 

## **CONSOLIDATED INCOME STATEMENTS**

**(Dollars inthousands, except share data)**

**(unaudited)**

 
|                                                  |   | **Three Months Ended  September 30,** |   |
|-------------------------------------------------------|--------|--------------------------------------------|--------|
|                                                  |   | **2002**                                   |   | **2003** |   |
|                                                  |   |                                       |   |   |   |
| Revenue, net                                          |   | $                                          | 84,240 |   | $ | 82,374 |   |
| Cost of goods sold                                    |   | 70,734                                     |   | 75,647 |   |
| Selling, general and administrative expense           |   | 9,920                                      |   | 12,323 |   |
| Research and development expense                      |   | 7,574                                      |   | 7,051 |   |
| Special charges, net                                  |   | —                                     |   | 1,230 |   |
| Operating loss                                        |   | (3,988                                     | )      | (13,877 | ) |
| Other expense, net                                    |   | (126                                       | )      | (663 | ) |
| Loss before income taxes and minority  interest       |   | (4,114                                     | )      | (14,540 | ) |
| Provision for (benefit from) income taxes             |   | (411                                       | )      | 650 |   |
| Loss before minority interest                         |   | (3,703                                     | )      | (15,190 | ) |
| Minority interest in (income) loss of joint  ventures |   | (1,792                                     | )      | 86 |   |
| Net loss                                              |   | $                                          | (5,495 | ) | $ | (15,104 | ) |
|                                                  |   |                                       |   |   |   |
| Basic loss per share                                  |   | $                                          | (0.31  | ) | $ | (0.83 | ) |
|                                                  |   |                                       |   |   |   |
| Weighted average shares outstanding                   |   | 17,970,356                                 |   | 18,108,478 |   |
|                                                  |   |                                       |   |   |   |
| Diluted loss per share                                |   | $                                          | (0.31  | ) | $ | (0.83 | ) |
|                                                  |   |                                       |   |   |   |
| Weighted average shares outstanding                   |   | 17,970,356                                 |   | 18,108,478 |   |

 

The accompanying notes are an integral part of these consolidatedstatements.

 

3

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**DUPONTPHOTOMASKS, INC. AND SUBSIDIARIES**

 

## **CONSOLIDATEDBALANCE SHEETS**

**(Dollars inthousands, except share data)**

** **
|                                                                                                                          |   | **June 30,  2003** |       | **September 30,  2003** |       |
|-------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|------------|------------------------------|------------|
|                                                                                                                          |   |                    | ** ** | **(unaudited)**              | ** ** |
| **ASSETS**                                                                                                                    |   |                    | ** ** |                         | ** ** |
| Current assets:                                                                                                               |   |                    |       |                         |       |
| Cash and cash equivalents                                                                                                     |   | $                       | 250,355    |                         | $          | 234,942 |   |
| Accounts receivable, trade, net                                                                                               |   | 54,312                  |       | 56,165                       |       |
| Accounts receivable, related parties                                                                                          |   | 996                     |       | 1,677                        |       |
| Inventories, net                                                                                                              |   | 13,434                  |       | 11,662                       |       |
| Deferred income taxes                                                                                                         |   | 4,454                   |       | 440                          |       |
| Prepaid expenses and other current assets                                                                                     |   | 12,705                  |       | 15,153                       |       |
| Total current assets                                                                                                          |   | 336,256                 |       | 320,039                      |       |
| Assets held for sale                                                                                                          |   | 5,087                   |       | 9,319                        |       |
| Property and equipment, net                                                                                                   |   | 379,582                 |       | 383,855                      |       |
| Accounts receivable, related parties                                                                                          |   | 1,048                   |       | 1,018                        |       |
| Deferred income taxes                                                                                                         |   | 1,603                   |       | 1,627                        |       |
| Other assets, net                                                                                                             |   | 46,006                  |       | 38,484                       |       |
| Total assets                                                                                                                  |   | $                       | 769,582    |                         | $          | 754,342 |   |
|                                                                                                                          |   |                    |       |                         |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                 |   |                    |       |                         |       |
| Current liabilities:                                                                                                          |   |                    |       |                         |       |
| Accounts payable, trade                                                                                                       |   | $                       | 45,935     |                         | $          | 38,181 |   |
| Accounts payable, related parties                                                                                             |   | 4,553                   |       | 6,549                        |       |
| Income taxes payable                                                                                                          |   | 884                     |       | 738                          |       |
| Other accrued liabilities                                                                                                     |   | 59,559                  |       | 67,145                       |       |
| Short-term borrowings                                                                                                         |   | 11,903                  |       | 11,991                       |       |
| Convertible notes                                                                                                             |   | —                  |       | 100,000                      |       |
| Total current liabilities                                                                                                     |   | 122,834                 |       | 224,604                      |       |
| Long-term borrowings                                                                                                          |   | 1,973                   |       | 1,400                        |       |
| Long-term convertible notes                                                                                                   |   | 225,000                 |       | 125,000                      |       |
| Deferred income taxes                                                                                                         |   | 8,427                   |       | 4,436                        |       |
| Other liabilities                                                                                                             |   | 6,967                   |       | 6,836                        |       |
| Minority interest in net assets of joint  ventures                                                                            |   | 45,436                  |       | 45,349                       |       |
| Total liabilities                                                                                                             |   | 410,637                 |       | 407,625                      |       |
|                                                                                                                          |   |                    |       |                         |       |
| Commitments and contingencies                                                                                                 |   |                    |       |                         |       |
| Stockholders’ equity:                                                                                                    |   |                    |       |                         |       |
| Preferred stock, $.01 par value; 5,000,000  shares authorized; none issued and outstanding                                    |   | —                  |       | —                       |       |
| Common stock, $.01 par value; 100,000,000  shares authorized; 18,064,964 and 18,130,395 issued and outstanding,  respectively |   | 181                     |       | 181                          |       |
| Additional paid-in capital                                                                                                    |   | 317,220                 |       | 318,374                      |       |
| Retained earnings                                                                                                             |   | 41,544                  |       | 26,440                       |       |
| Accumulated other comprehensive income                                                                                        |   | —                  |       | 1,722                        |       |
| Total stockholders’ equity                                                                                               |   | 358,945                 |       | 346,717                      |       |
| Total liabilities and stockholders’ equity                                                                               |   | $                       | 769,582    |                         | $          | 754,342 |   |

 

The accompanying notes are anintegral part of these consolidated statements.

 

4

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**DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES**

 

## **CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Dollars in thousands)**

**(unaudited)**

** **
|                                                                             |   | **Three Months Ended  September 30,** |    |
|----------------------------------------------------------------------------------|--------|--------------------------------------------|---------|
|                                                                             |   | **2002**                                   |    | **2003** |   |
|                                                                             |   |                                       |    |   |   |
| Cash flows from operating activities:                                            |   |                                       |    |   |   |
| Net loss                                                                         |   | $                                          | (5,495  | ) | $ | (15,104 | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities: |   |                                       |    |   |   |
| Depreciation and amortization                                                    |   | 24,150                                     |    | 23,176 |   |
| Minority interest in income (loss) of joint  ventures                            |   | 1,792                                      |    | (86 | ) |
| Deferred income taxes                                                            |   | 1,971                                      |    | — |   |
| Special charges, net                                                             |   | —                                     |    | 1,230 |   |
| Other                                                                            |   | (41                                        | )       | 169 |   |
| Changes in assets and liabilities:                                               |   |                                       |    |   |   |
| Accounts receivable, trade, net                                                  |   | 2,722                                      |    | (6,046 | ) |
| Accounts receivable, related parties                                             |   | 1,495                                      |    | (631 | ) |
| Inventories, net                                                                 |   | (42                                        | )       | 1,649 |   |
| Other assets, net                                                                |   | 7,179                                      |    | 4,341 |   |
| Accounts payable, trade                                                          |   | (8,341                                     | )       | (3,025 | ) |
| Accounts payable, related parties                                                |   | 60                                         |    | 1,996 |   |
| Other liabilities                                                                |   | (6,310                                     | )       | (3,566 | ) |
|                                                                             |   |                                       |    |   |   |
| Net cash provided by operating activities                                        |   | 19,140                                     |    | 4,103 |   |
|                                                                             |   |                                       |    |   |   |
| Cash flows from investing activities:                                            |   |                                       |    |   |   |
| Additions of property and equipment, net                                         |   | (15,036                                    | )       | (20,046 | ) |
| Proceeds from sale of warrants and  investments                                  |   | 90                                         |    | — |   |
|                                                                             |   |                                       |    |   |   |
| Net cash used in investing activities                                            |   | (14,946                                    | )       | (20,046 | ) |
|                                                                             |   |                                       |    |   |   |
| Cash flows from financing activities:                                            |   |                                       |    |   |   |
| Proceeds from borrowings                                                         |   | 1,566                                      |    | 41 |   |
| Payments on borrowings                                                           |   | (2,113                                     | )       | (968 | ) |
| Proceeds from issuance of common stock  under employee plans                     |   | 1,443                                      |    | 1,154 |   |
|                                                                             |   |                                       |    |   |   |
| Net cash provided by financing activities                                        |   | 896                                        |    | 227 |   |
|                                                                             |   |                                       |    |   |   |
| Effect of exchange rate changes on cash                                          |   | 472                                        |    | 303 |   |
|                                                                             |   |                                       |    |   |   |
| Net increase (decrease) in cash and cash  equivalents                            |   | 5,562                                      |    | (15,413 | ) |
| Cash and cash equivalents at beginning of  period                                |   | 138,918                                    |    | 250,355 |   |
|                                                                             |   |                                       |    |   |   |
| Cash and cash equivalents at end of period                                       |   | $                                          | 144,480 |   | $ | 234,942 |   |
|                                                                             |   |                                       |    |   |   |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW  INFORMATION:                               |   |                                       |    |   |   |
| Cash paid (received) for:                                                        |   |                                       |    |   |   |
| Interest                                                                         |   | $                                          | 136     |   | $ | 179 |   |
|                                                                             |   |                                       |    |   |   |
| Taxes, net                                                                       |   | $                                          | (4,600  | ) | $ | 275 |   |

 

The accompanying notes are an integral part of these consolidatedstatements.

 

5

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**DUPONTPHOTOMASKS, INC. AND SUBSIDIARIES**

 

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**

**(Dollars inthousands)**

** **
|                                               |   | **Common Stock** |   | **Additional  Paid-In  Capital** |   | **Retained  Earnings** |   | **Accumulated Other  Comprehensive  Income** |   | **Total  Stockholders’ Equity** |    |
|----------------------------------------------------|--------|------------------|--------|----------------------------------|--------|------------------------|--------|----------------------------------------------|--------|--------------------------------------|---------|
| **Shares**                                         |   | **Amount**       |
|                                               |   |             |   |                             |   |                   |   |                                         |   |                                 |    |   |   |
| Balance as of June 30, 2002                   |   | 17,927,294       |   | $                                | 179    |                   | $      | 314,430                                      |   | $                                    | 155,054 |   | $ | — |   | $ | 469,663 |   |
|                                               |   |             |   |                             |   |                   |   |                                         |   |                                 |    |   |   |
| Issuance of common stock under employee  plans     |   | 137,670          |   | 2                                |   | 2,790                  |   | —                                       |   | —                               |    | 2,792 |   |
| Net loss                                           |   | —           |   | —                           |   | —                 |   | (113,510                                     | )      | —                               |    | (113,510 | ) |
|                                               |   |             |   |                             |   |                   |   |                                         |   |                                 |    |   |   |
| Balance as of June 30, 2003                   |   | 18,064,964       |   | 181                              |   | 317,220                |   | 41,544                                       |   | —                               |    | 358,945 |   |
|                                               |   |             |   |                             |   |                   |   |                                         |   |                                 |    |   |   |
| Issuance of common stock under employee  plans     |   | 65,431           |   | —                           |   | 1,154                  |   | —                                       |   | —                               |    | 1,154 |   |
| Foreign currency translation adjustments           |   | —           |   | —                           |   | —                 |   | —                                       |   | 1,722                                |    | 1,722 |   |
| Net loss                                           |   | —           |   | —                           |   | —                 |   | (15,104                                      | )      | —                               |    | (15,104 | ) |
|                                               |   |             |   |                             |   |                   |   |                                         |   |                                 |    |   |   |
| Balance as of September 30, 2003  (unaudited) |   | 18,130,395       |   | $                                | 181    |                   | $      | 318,374                                      |   | $                                    | 26,440  |   | $ | 1,722 |   | $ | 346,717 |   |

 

Theaccompanying notes are an integral part of these consolidated statements.

 

6

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**DUPONTPHOTOMASKS, INC. AND SUBSIDIARIES**

## **NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Dollars inthousands, except share data)**

**(unaudited)**

 

**1.****             Basis of Presentation**

 

Theinterim consolidated financial statements presented in this report include theaccounts of DuPont Photomasks, Inc. and our controlled and wholly-ownedsubsidiaries. All significant intercompany transactions and accounts have beeneliminated in consolidation. These interim consolidated financial statementshave been prepared by us, without audit, pursuant to the rules and regulationsof the Securities and Exchange Commission, or SEC. All adjustments have beenmade to the accompanying interim consolidated financial statements which are,in the opinion of management, necessary for a fair presentation of ouroperating results and include all adjustments of a normal recurring nature.Certain information and footnote disclosures normally included in financialstatements prepared in accordance with accounting principles generally acceptedin the United States of America have been condensed or omitted pursuant to therules and regulations of the SEC. It is recommended that these interimconsolidated financial statements be read in conjunction with the consolidatedfinancial statements and the notes thereto included in our Annual Report onForm 10-K for the year ended June 30, 2003. The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires the use of estimates and assumptions bymanagement in determining the reported amounts of assets and liabilities,disclosures of contingent liabilities as of the date of the financialstatements and the reported amounts of revenue and expenses during the period.Actual results could differ from those estimates. The results of operations forany interim period are not necessarily indicative of the results of operationsfor the entire fiscal year. Certain reclassifications have been made in theprior period consolidated financial statements to conform with the currentperiod presentation.

 

**2.****             Property and Equipment**

 

Propertyand equipment are stated at cost. Property and equipment under capital leasesare stated at the present value of future minimum lease payments. Property andequipment are depreciated using the straight-line method over the estimateduseful lives of the assets ranging from three to seven years for equipment and10 to 20 years for buildings. Property and equipment held under capital leasesand leasehold improvements are amortized using the straight-line method overthe shorter of the estimated useful lives of the assets or the estimatedremaining term of the lease. Accumulated depreciation and amortization was$443,410 as of June 30, 2003 and $462,859 as of September 30, 2003.Assets held for sale relate to the Gresham, Danbury, and Rousset facilities andcertain other equipment. We are actively marketing these assets and will sellthe assets after appropriate evaluation of all proposals.

 

**3.****             New Accounting Pronouncements**

 

InApril 2003, the Financial Accounting Standards Board, or FASB, issuedStatement of Financial Accounting Standard, or SFAS No. 149, *Amendment ofStatement 133 on Derivative Instruments and Hedging Activities*. SFASNo. 149 amends and clarifies financial accounting and reporting for derivativeinstruments, including certain derivative instruments embedded in othercontracts and for hedging activities under SFAS No. 133, *Accounting for Derivative Instrumentsand Hedging Activities*. SFAS No. 149 is effective for contractsentered into or modified after June 30, 2003, except to the extent theprovisions of this statement relate to previously effective SFAS No. 133implementation issues and for hedging relationships designated afterJune 30, 2003.  The adoption ofthis pronouncement had no impact on our consolidated financial condition orresults of operations.

 

In May 2003,the FASB issued SFAS No. 150, *Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity*. SFAS No. 150establishes standards for how an issuer classifies and measures certainfinancial instruments with characteristics of both liabilities and equity. Itrequires that an issuer classify a financial instrument that is within itsscope as a liability (or an asset in some circumstances). SFAS No. 150 iseffective in its entirety at the beginning of the first interim periodbeginning after June 15, 2003. The adoption of this pronouncement had noimpact on our consolidated financial condition or results of operations.

 

InJanuary 2003, the FASB issued FASB Interpretation No. 46, or FIN No. 46, *Consolidationof Variable Interest Entities* (“VIE”).  FIN No. 46 requiresthat if an entity is the primary beneficiary of a VIE, the assets, liabilities,and results of operations of the VIE should be consolidated on the entity’sfinancial statements.  InOctober 2003, the FASB issued FASB Staff Position No. FIN 46-6, deferringthe effective date of applying the provisions of FIN No. 46 to the firstinterim or annual period ending after December 15, 2003, for qualifyingVIE’s.  In addition, FASB plans tomodify FIN No. 46 during the three months ending December 31, 2003.  We are currently assessing the impact thatFIN No. 46 may have on our consolidated financial condition or results ofoperations. 

 

7

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InJanuary 2003, the SEC issued a final rule requiring enhanced disclosure ofmaterial off-balance sheet transactions, arrangements, and other relationshipswith unconsolidated entities. The rule also requires a tabular disclosure offuture payments due under contractual commitments. The disclosure requirementswill become effective for our fiscal 2004 Annual Report on Form 10-K.  We do not expect this pronouncement to havea material impact on our consolidated financial condition or results of operations.

 

**4.****             Derivative Instruments and Hedging Activities**

 

Forwardforeign exchange contracts are utilized to mitigate the risks associated withcurrency fluctuations on certain foreign currency  balance sheet exposures, and are, therefore, held primarily forpurposes other than trading. These foreign exchange contracts do not qualifyfor hedge accounting under SFAS No. 133, as amended. Unrealized gains andlosses resulting from the impact of currency exchange rate movements on forwardforeign exchange contracts designated to offset certain non-U.S. dollardenominated assets and liabilities are recognized as other income or expense onthe accompanying consolidated income statements in the period in which theexchange rates change. These gains and losses offset the foreign currencyexchange gains and losses on the underlying exposures being hedged. Anunrealized gain of $152 for the three months ended September 30, 2003 isrecorded in other expense, net on the accompanying consolidated incomestatement in relation to our forward exchange contracts outstanding as ofSeptember 30, 2003.  Theseinstruments may involve elements of credit and market risk in excess of theamounts recognized on the consolidated financial statements. We monitor ourpositions and the credit quality of counterparties, consisting primarily ofmajor financial institutions, and do not anticipate nonperformance by anycounterparty, although nonperformance could occur.

 

**5.****             Earnings (Loss) Per Share**

 

Basicearnings (loss) per share, or basic EPS, is computed by dividing net income (loss)by the weighted number of common shares outstanding during each period. Dilutedearnings (loss) per share, or diluted EPS, is computed by dividing net income(loss) after adjustments for the dilutive effect of our convertible notes (ifdilutive), by the weighted average number of common shares and common shareequivalents outstanding (if dilutive) during each period. Common shareequivalents include stock options and assumed conversion of the convertiblenotes. The number of common share equivalents outstanding relating to stockoptions is computed using the treasury stock method and the number of commonshare equivalents outstanding relating to the convertible notes is computedusing the if-converted method.

 

Thereconciliation of the amounts used to calculate the basic EPS and diluted EPSis as follows:

 
|                                               |   | **Three Months Ended  September 30,** |   |
|----------------------------------------------------|--------|--------------------------------------------|--------|
|                                               |   | **2002**                                   |   | **2003** |   |
|                                               |   |                                       |   |   |   |
| Net loss for the period—basic                 |   | $                                          | (5,495 | ) | $ | (15,104 | ) |
| Dilutive effect of convertible notes               |   | —                                     |   | — |   |
|                                               |   |                                       |   |   |   |
| Net loss for the period—diluted               |   | $                                          | (5,495 | ) | $ | (15,104 | ) |
|                                               |   |                                       |   |   |   |
| Weighted average shares outstanding—basic     |   | 17,970,356                                 |   | 18,108,478 |   |
| Plus: Common share equivalents                     |   | —                                     |   | — |   |
|                                               |   |                                       |   |   |   |
| Weighted average shares  outstanding—dilutive |   | 17,970,356                                 |   | 18,108,478 |   |
|                                               |   |                                       |   |   |   |
| Basic loss per share                               |   | $                                          | (0.31  | ) | $ | (0.83 | ) |
|                                               |   |                                       |   |   |   |
| Diluted loss per share                             |   | $                                          | (0.31  | ) | $ | (0.83 | ) |

 

Stockoptions to acquire 4,396,749 shares for the three months endedSeptember 30, 2002 and 4,598,313 shares for the three months endedSeptember 30, 2003 were not included in common share equivalents becausethe effect of including these stock options would have been anti-dilutive. Forthe three months ended September 30, 2002 and 2003, 941,088 and 5,824,850shares, respectively, were not included in the computations of diluted EPSbecause the effect of including the shares to be issued upon the conversion ofconvertible notes would have been anti-dilutive. These options and theconvertible notes may become dilutive in the future.

 

 

8

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**6.****             Comprehensive Income**

 

Our comprehensive income for the three monthsended September 30, 2003 is comprised of net loss and foreign currencytranslation adjustments.  We had noitems of comprehensive income other than net loss for the three months endedSeptember 30, 2002.

 

**7.****             Employee Plans**

 

We apply the intrinsic-value-based method ofaccounting prescribed by Accounting Principles Board, or APB, Opinion No. 25, *Accountingfor Stock Issued to Employees*, and related interpretations includingFASB Interpretation No. 44, *Accounting for Certain Transactions involving StockCompensation, an interpretation of APB Opinion No. 25*, to accountfor our stock performance plans. Under this method, compensation expense isrecorded on the date of grant only if the current market price of theunderlying stock exceeded the exercise price. We also have an Employee StockPurchase Plan. SFAS No. 123, *Accounting for Stock Based Compensation*,established accounting and disclosure requirement alternatives which involveusing a different accounting method for expensing the calculated value ofoption awards. As allowed by SFAS No. 123, we have elected to continue to applythe intrinsic-value-based method of accounting described above, and haveadopted only the disclosure requirements of SFAS No. 123. We use theBlack-Scholes model to calculate pro forma expense for disclosure purposes. TheBlack-Scholes option valuation model was developed for use in estimating thefair value of traded options that have no vesting restrictions and are fullytransferable. Option valuation models require the input of highly subjectiveassumptions including the expected stock price volatility. We use projectedvolatility rates which are based upon historical volatility rates. Because ouremployee stock options and Employee Stock Purchase Plan shares havecharacteristics significantly different from those of traded options, andbecause changes in the subjective input assumptions can materially affect thefair value estimate, in management’s opinion, the existing models do notnecessarily provide a reliable single measure of the fair value of our employeestock options and Employee Stock Purchase Plan shares.

 

SFAS No. 148, *Accountingfor Stock-Based Compensation—Transition and Disclosure, an amendment of FASBStatement No. 123*, amends the disclosure requirements of SFAS No.123. The following table illustrates the effect on net loss if thefair-value-based method had been applied to our stock-based employeecompensation plans in each period.

 
|                                                                                                                                    |   | **Three Months Ended  September 30,** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|--------|
|                                                                                                                                    |   | **2002**                                   |   | **2003** |   |
| Net loss:                                                                                                                               |   |                                       |   |   |   |
| As reported                                                                                                                             |   | $                                          | (5,495 | ) | $ | (15,104 | ) |
| Deduct total stock-based employee  compensation expense determined under the Black-Scholes valuation method for  all awards, net of tax |   | (3,976                                     | )      | (3,580 | ) |
|                                                                                                                                    |   |                                       |   |   |   |
| Pro forma net loss                                                                                                                      |   | $                                          | (9,471 | ) | $ | (18,684 | ) |
|                                                                                                                                    |   |                                       |   |   |   |
| Basic loss per share:                                                                                                                   |   |                                       |   |   |   |
| As reported                                                                                                                             |   | $                                          | (0.31  | ) | $ | (0.83 | ) |
| Pro forma                                                                                                                               |   | $                                          | (0.53  | ) | $ | (1.03 | ) |
|                                                                                                                                    |   |                                       |   |   |   |
| Diluted loss per share:                                                                                                                 |   |                                       |   |   |   |
| As reported                                                                                                                             |   | $                                          | (0.31  | ) | $ | (0.83 | ) |
| Pro forma                                                                                                                               |   | $                                          | (0.53  | ) | $ | (1.03 | ) |

 

9

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**8.****             Segment Information**

 

TheCompany conducts operations worldwide and is managed on a geographic basis,with those geographic segments being North America, Europe and Asia. The NorthAmerica segment consists only of the U.S., the Europe segment includes Franceand Germany and the Asia segment includes China, Japan, Korea, Taiwan andSingapore.

 
|                                            |   | **North  America** |       | **Europe** |       | **Asia** |       | **Eliminations** |       | **Total** |       |
|-------------------------------------------------|--------|--------------------|------------|------------|------------|----------|------------|------------------|------------|-----------|------------|
|                                            |   |               |       |       |       |     |       |             |       |      |       |
| **Three Months Ended  September 30, 2002** |   |               | ** ** |       | ** ** |     | ** ** |             | ** ** |      | ** ** |
| Revenue, net                                    |   | $                  | 39,339     |       | $          | 13,996   |       | $                | 30,905     |      | $          | — |   | $ | 84,240 |   |
| Transfers between geographic segments           |   | 1,641              |       | 43         |       | 4,823    |       | (6,507           | )          | —    |       |
|                                            |   | $                  | 40,980     |       | $          | 14,039   |       | $                | 35,728     |      | $          | (6,507 | ) | $ | 84,240 |   |
|                                            |   |               |       |       |       |     |       |             |       |      |       |
| Net income (loss)                               |   | $                  | (11,948    | )          | $          | (2,758   | )          | $                | 9,211      |      | $          | — |   | $ | (5,495 | ) |
|                                            |   |               |       |       |       |     |       |             |       |      |       |
| **June 30, 2003**                          |   |               |       |       |       |     |       |             |       |      |       |
| Identifiable assets                             |   | $                  | 308,821    |       | $          | 113,787  |       | $                | 346,974    |      | $          | — |   | $ | 769,582 |   |
|                                            |   |               |       |       |       |     |       |             |       |      |       |
| **Three Months Ended  September 30, 2003** |   |               | ** ** |       | ** ** |     | ** ** |             | ** ** |      | ** ** |
| Revenue, net                                    |   | $                  | 34,080     |       | $          | 19,691   |       | $                | 28,603     |      | $          | — |   | $ | 82,374 |   |
| Transfers between geographic segments           |   | 6,105              |       | 53         |       | 5,444    |       | (11,602          | )          | —    |       |
|                                            |   | $                  | 40,185     |       | $          | 19,744   |       | $                | 34,047     |      | $          | (11,602 | ) | $ | 82,374 |   |
|                                            |   |               |       |       |       |     |       |             |       |      |       |
| Net income (loss)                               |   | $                  | (12,720    | )          | $          | (7,801   | )          | $                | 5,417      |      | $          | — |   | $ | (15,104 | ) |
|                                            |   |               |       |       |       |     |       |             |       |      |       |
| **September 30, 2003**                     |   |               |       |       |       |     |       |             |       |      |       |
| Identifiable assets                             |   | $                  | 268,458    |       | $          | 128,357  |       | $                | 357,527    |      | $          | — |   | $ | 754,342 |   |

 

Productsare transferred between geographic areas on a basis intended to approximate themarket value of such products.

 

**9.**             **Income Taxes**

 

The provision for (benefit from) income taxesdiffers from amounts computed by applying the federal statutory rate of 35% toloss before income taxes and minority interest as a result of our reduced taxrates in certain Asian jurisdictions and our inability to record deferred taxbenefits for net operating losses generated in certain tax jurisdictions.

 

**10.****          Special Charges, net**

 

During the year ended June 30, 2003, werecorded special charges as a result of programs we implemented to reduce costsassociated with our North America, Europe and Asia segments. The integrationand consolidation initiatives in North America and Asia were completed as ofMarch 31, 2003 and the related liabilities were settled as of September 30,2003. We plan to complete the consolidation initiatives in Europe and settlethe related liabilities during fiscal 2004. During the three months ended September 30, 2003, we reducedaccrued liabilities for lease termination and asset disposal related costs by$367 as a result of our renegotiation of our lease termination agreement forour Hamburg facility.

 

During the three months endedSeptember 30, 2003, we signed a multi-year pellicle supply agreement withMicro Lithography, Inc., or MLI, while concurrently deciding to close ourpellicle production facility in Danbury, Connecticut.  The decision to close our Danbury facility was a result of ourefforts to reduce costs. In relation to our decision to close our Danburyfacility, we recorded special charges of $2,722 for employee severance andasset disposal costs and received proceeds of $1,200 from the sale of certainpellicle technology.  The charges, netof sale proceeds, have been recorded as Special Charges, net on theaccompanying consolidated income statement. We expect to extinguish these restructuring liabilities during the threemonths ending December 31, 2003; however, we expect to record and payadditional special charges during the three months ending December 31,2003 of approximately $600 in association with the Danbury closure.

 

10

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A summary of the related accrued liabilitiesis shown below:

 
|                                                                           |   | **Employee  Severance** |   | **Asset  Disposals and  Related  Costs** |   | **Lease  Termination  and Other  Costs** |   | **Total** |   |
|--------------------------------------------------------------------------------|--------|-------------------------|--------|------------------------------------------|--------|------------------------------------------|--------|-----------|--------|
|                                                                           |   |                    |   |                                     |   |                                     |   |      |   |
| Remaining liability as of June 30,  2003                                  |   | $                       | 11,404 |                                     | $      | 1,307                                    |   | $         | 1,949  |   | $ | 14,660 |   |
|                                                                           |   |                    |   |                                     |   |                                     |   |      |   |
| Charges during the quarter ended  September 30, 2003                      |   | 2,057                   |   | 740                                      |   | —                                   |   | 2,797     |   |
|                                                                           |   |                    |   |                                     |   |                                     |   |      |   |
| Adjustments to the liability during the  quarter ended September 30, 2003 |   | —                  |   | (129                                     | )      | (238                                     | )      | (367      | )      |
|                                                                           |   |                    |   |                                     |   |                                     |   |      |   |
| Utilized during the quarter ended  September 30, 2003                     |   | (4,526                  | )      | (715                                     | )      | —                                   |   | (5,241    | )      |
|                                                                           |   |                    |   |                                     |   |                                     |   |      |   |
| Remaining liability as of  September 30, 2003                             |   | $                       | 8,935  |                                     | $      | 1,203                                    |   | $         | 1,711  |   | $ | 11,849 |   |

 

**11.****          Commitments and Contingencies**

 

*RTC*

 

Weguarantee a portion of certain equipment leases of the DPI Reticle TechnologyCenter, LLC, or RTC. Our portion of the future minimum lease payments of theRTC aggregated $3,266 as of September 30, 2003.

 

*AMTC and BAC*

 

We, alongwith Infineon and AMD, have established joint ventures in Dresden, Germany toconduct leading edge photomask research and pilot manufacturing. The venturesconsist of the Advanced Mask Technology Center GmbH & Co. KG, or AMTC, andthe Maskhouse Building Administration GmbH & Co., or BAC. The AMTC conductsphotomask research and pilot manufacturing. The BAC is the owner of astate-of-the-art photomask research and manufacturing facility.

 

We lease approximately 50% ofthe facility from the BAC for advanced photomask manufacturing and theremainder is leased by the AMTC. Both leases are for 10-year terms andcommenced July 2003.  The BAC hasexecuted a term loan agreement for the construction of its research andmanufacturing facility.  The term loanhad 65,000 Euro ($74,584 as of September 30, 2003) outstanding as of September30, 2003.  Subsequent to the occupancyof the building and the initiation of lessee rental payments, we were releasedfrom our one-third guarantee related to the BAC indebtedness, which will not bereinstated unless the lenders become liable to return monies received inpayment of the indebtedness as a result of any bankruptcy, composition orsimilar proceedings affecting the BAC.

 

We arecommitted to funding a portion of the operating cash requirements of the AMTCunder research and development reimbursement and capacity utilizationobligations through June 30, 2007. We expect our portion of theseoperating cash requirements to vary between approximately 22% to 26% throughJune 30, 2007.  Included in theseamounts are our guarantees of a portion of the operating lease payments of theAMTC to the BAC.  The estimatedguarantees related to the 10-year term of the AMTC lease agreement aggregate$16,200 as of September 30, 2003.

 

The AMTChas executed a 120,000 Euro revolving credit facility to be used for equipmentpurchases.  The revolving creditfacility had 33,000 Euro ($37,866 as of September 30, 2003) outstanding asof September 30, 2003. Each of the partners of the joint venture executedone-third guarantees for up to 32,000 Euro and certain additional costs asdefined in the revolving credit facility agreement for as long as anyobligation remains outstanding under the revolving credit facility. We will berequired to honor our guarantee if the AMTC fails to make timely payments underthe revolving credit facility; breaches certain financial covenants; becomesinsolvent; or in any other way defaults under the revolving credit facility. Wewill also be required to honor our guarantee if any of the owners of the AMTCbreach certain terms of the joint venture agreement, become insolvent or ceasedoing business, experience a material adverse change affecting theirobligations under the guarantee, fail to pay their respective indebtedness inexcess of 50,000 Euro or otherwise experience an event constituting a defaultunder the revolving credit facility.

 

11

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*Infineon*

 

InMay 2002, we entered into an agreement to acquire photomask productionequipment from Infineon’s internal photomask manufacturing operations inMunich, Germany and become Infineon’s strategic photomask supplier. Inconsideration for the acquisition of certain photomask production assets andthe agreement to supply Infineon with photomasks over a 10 year term, we agreedto pay Infineon $53,500 over a seven-year period ending in March 2009. Wealso agreed to purchase from Infineon, additional photomask productionequipment for approximately $28,100 payable over a five-year period ending inDecember 2006. We have made purchases of $20,636 in association with thisagreement as of September 30, 2003, $10,636 of which is reflected as anon-cash transaction on the accompanying consolidated statement of cash flowsfor the three months ended September 30, 2003. We expect to fund allpayments to Infineon from cash provided by operations; however, we may elect tosatisfy a portion of these amounts by issuing shares of our common stock.  The amount of which we may satisfy with ourcommon stock approximated  $24,600 as ofSeptember 30, 2003.

 

*BindKey*

 

We haveestablished a profit sharing plan with the BindKey employees. ThroughMarch 2006, BindKey employees may earn amounts annually based on theannual after-tax earnings of BindKey. Upon the termination of the final yearsubject to the profit sharing plan, the employees may earn an additionallump-sum amount based on the after-tax earnings of BindKey in the final year.Any amounts earned in relation to the profit sharing plan will be expensed inthe period earned.

 

*Schott*

 

InMarch 2002, we sold all of our photoblank manufacturing assets to SchottLithotec AG, or Schott. We also entered into a supply agreement with Schott fora significant portion of our future purchases of photoblanks.

 

*MLI*

 

In July 2003,we signed a multi-year pellicle supply agreement with MLI for a significantportion of our future purchases of pellicles.

 

*General*

 

As ofSeptember 30, 2003, minimum lease payments for noncancelable operatinglease obligations are estimated to be $11,500, $10,200, $9,500, $9,400, $9,100for annual periods ending September 30, 2004 through 2008, respectively, and$39,000 in the aggregate thereafter.

 

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

 

We aresubject to litigation in the normal course of business. We believe the effect,if any, of an unfavorable settlement of such litigation would not have amaterial adverse impact on our financial position, results of operations, cashflows or liquidity.

 

Our operations and our ownership of realproperty are subject to various environmental laws and regulations that govern,among other things, the discharge of pollutants into the air and water and thehandling, use, storage, disposal and clean-up of solid and hazardous wastes.Compliance with such laws and regulations requires that we incur capitalexpenditures and operating costs in connection with our ongoing operations. Inaddition, such laws and regulations may impose liabilities on owners andoperators of businesses and real property without regard to fault and suchliabilities may be joint and several with other parties. More stringentenvironmental laws and regulations may be enacted in the future, which mayrequire us to expend additional amounts on environmental compliance or mayrequire modifications to our operations. Although we are unable to predict theextent of our future liability with respect to any environmental matters, webelieve, based upon current information, that environmental liabilities willnot be material to our financial position or results of operations. E.I. duPont de Nemours and Company, has agreed to indemnify us for any environmentalcontamination present on our manufacturing sites at June 13, 1996, thedate of our initial public offering, or present at any such site due to thegeneration, use, treatment, storage, release, emission, discharge or disposalof hazardous waste or hazardous materials before such date. The EnvironmentalProtection Agency is reviewing a groundwater contamination issue at ourDanbury, Connecticut site under voluntary corrective action. Any suchcontamination is believed to be offsite or historical, and, if that is thecase, any environmental liabilities would be covered by the indemnificationagreement with E.I. du Pont de Nemours and Company.

 

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**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

The following discussion and analysis of thefinancial condition and results of operations should be read in conjunctionwith our consolidated financial statements and related notes included elsewherein this document. All references to years are to our fiscal years, which end onJune 30.  Results for interimperiods are not necessarily indicative of results for the full year.  Statements in this report that relate tofuture results and events are based on our current expectations.  Actual results in future periods may differmaterially from those currently expected or desired because of a number ofrisks and uncertainties.   For adiscussion of factors affecting our business, see “Item 1-Business” in ourAnnual Report on Form 10-K for the fiscal year ended June 30, 2003.

 

**Overview**

 

We are a leading global provider ofmicroimaging solutions.  We develop andproduce advanced photomasks, a key enabling technology used in the manufactureof semiconductor and other microelectronic devices.

 

Recent semiconductor industry data suggestsimproving conditions on many fronts. Utilization rates at our customer fabs have edged up, exceeding 90% inthe leading edge nodes.  Chip averageselling prices have trended up over the last few months, signaling, perhaps,greater pricing leverage.  We believethat chip inventories are being managed very well in the early stages of thisupturn as opposed to excessive inventories during calendar year 2000.  We expect photomask demand to improvesteadily as end-user markets steadily improve and as incremental leading edgechip capacity ramps up over the next year. In the short term, customer decisions on 130nm design starts will definethe photomask market.  During the threemonths ended September 30, 2003, our leading edge revenue, defined as130nm and below design rules, increased 6.4% sequentially and represented 18.1%of our total revenue.

 

We continue making progress with ourrestructuring plans in Europe.  DuringJuly 2003, mask production ended in our Rousset, France facility accordingto schedule.  During fiscal 2004, weplan to wind down mask production in our Hamburg, Germany facility.  Our Corbeil-Essonnes, France facility ismaking progress ramping up to volume production as it absorbs production fromRousset and Hamburg.  Also, we closedour pellicle production facility in Danbury during September 2003 aftersigning a multi-year pellicle supply agreement with MLI.  Our new advanced mask operation in Dresden,Germany is on track to ramp throughout calendar 2004.  This facility also houses the AMTC, which is a critical part ofour strategy to develop and build 90nm and below mask technology.  By leveraging the costs and know-how withtwo technology leaders – AMD and Infineon – we expect to rebuild a leadershipposition at the leading edge of the market.

 

**Results of Operations**

 

*Revenue, net.*  Revenue,net is comprised primarily of photomask sales to semiconductor manufacturers.Revenue, net decreased 2.2% from $84.2 million in the three months endedSeptember 30, 2002 to $82.4 million in the three months endedSeptember 30, 2003. From September 30, 2002 to September 30,2003, revenue, net produced in North America decreased from $39.3 millionto $34.1 million, in Europe increased from $14.0 million to $19.7 millionand in Asia decreased from $30.9 million to $28.6 million. The overalldecrease was primarily attributable to average selling prices and unit demanddropping slightly.

 

*Cost of Goods Sold.*  Cost ofgoods sold consists of materials, labor, depreciation and overhead. Cost ofgoods sold increased 6.9% from $70.7 million to $75.6 million for thethree months ended September 30, 2002 and 2003, respectively.   Gross profit margin decreased from 16.0%for the three months ended September 30, 2002 to 8.2% for the three monthsended September 30, 2003. Cost of goods sold increased over the sameperiod last year due to the ramp-up of our advanced production facility inDresden, expenses related to the consolidation of trailing edge production inEurope and costs related to the closure of our pellicle production facility inDanbury.  Also, labor costs that hadbeen previously included in our RTC joint venture prior to the modification ofthe agreement with the RTC partners contributed to the increase.   These increases in cost of goods sold werepartially offset by benefits in depreciation expense realized from theimpairment of certain long-lived assets during 2003 as well as a refundof $0.8 million related to sales taxes previously paid by the Company for thepurchase of software products for internal use.   In the short term, we expectto continue to incur costs associated with the consolidation of trailing edgeproduction in Europe and the ramp-up of our Dresden facility.  These costs will be partially offset bysavings related to the closure of our facility in Danbury that ceased theproduction of pellicles in September 2003.

 

13

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*Selling, General andAdministrative Expense.*  Selling, general andadministrative expense includes salaries of sales and administrative personnel,marketing expense, general and administrative expense and product distributionexpense. Selling, general and administrative expense increased 24.2% from$9.9 million for the three months ended September 30, 2002 to$12.3 million for the three months ended September 30, 2003. Selling,general and administrative expense as a percentage of sales increased from11.8% for the three months ended September 30, 2002 to 15.0% for the threemonths ended September 30, 2003.  Increases in cost resulted from the ramp-up of BindKey and our advancedproduction facility in Dresden, shipping, customs and duty cost associated withan increase in work transferred between regions and certain personnel relatedexpenses.

 

*Research andDevelopment Expense.*  Research and development expense consistsprimarily of employee costs, cost of consumed materials, depreciation,engineering related costs and our share of costs of the RTC and AMTC jointventures. Research and development expense decreased 6.9% from$7.6 million for the three months ended September 30, 2002 to$7.1 million for the three months ended September 30, 2003. As apercentage of sales it decreased from 9.0% for the three months endedSeptember 30, 2002 to 8.6% for the three months ended September 30,2003. The decrease in research and development expense resulted primarily froma $0.7 million subsidy received in Europe during September 2003 and amodification of the agreement with the RTC partners in December 2002 whichled to reduced costs of the RTC.  Thesedecreases in research and development expense were partially offset byincreases in BindKey software development expense and ramp-up expense of theAMTC.   In the near term, we expect thecosts of the AMTC to continue to increase with its ramp-up.

 

*Special Charges, net.*  During the three months endedSeptember 30, 2003, we signed a multi-year pellicle supply agreement withMLI while concurrently deciding to close our pellicle production facility inDanbury.  The decision to close ourDanbury facility was a result of our efforts to reduce costs.  In relation to our decision to close ourDanbury facility, we recorded special charges of $2.7 million for employeeseverance and asset disposal costs and received proceeds of $1.2 million fromthe sale of certain pellicle technology. The charges, net of sale proceeds, have been recorded as SpecialCharges, net on the accompanying interim unaudited consolidated incomestatement. We expect to extinguish these restructuring liabilities during thethree months ending December 31, 2003; however, we expect to record andpay additional special charges during the three months ending December 31,2003 of approximately $0.6 million in association with the Danbury closure.

 

In addition and during the three months endedSeptember 30, 2003, we reduced accrued liabilities for lease terminationand asset disposal related costs by $0.4 million as a result of ourrenegotiation of our lease termination agreement for our Hamburg facility.

 

*Other Income(Expense), net.*  Other expense, net includes interestexpense, interest income and exchange gains and losses. Other expense, net wasan expense of $0.1 million for the three months ended September 30, 2002and an expense of $0.7 million for the three months ended September 30,2003. The increase in other expense, net was primarily due to interest expenseon our $125.0 million convertible subordinated notes issued and sold in May 2003.

 

*Provision For(Benefit From) Income Taxes.  *Our income taxes are based on the statutory ratesin effect in the countries in which we operate.  Certain of our operations in Asia are subject to various taxholidays. We recorded a benefit fromincome taxes of $0.4 million and a provision for income taxes of $0.7 millionduring the three months ended September 30, 2002 and 2003,respectively.  The provision for andbenefit from income taxes differs from the amounts computed by applying thefederal statutory rate of 35% to loss before income taxes and minority interestprimarily as a result of ourinability to record deferred tax benefits for net operating losses generated incertain jurisdictions and reduced tax rates in certain Asian jurisdictions.  During the three months ended September 30,2002, we recorded a valuation allowance against our net deferred tax asset(including the net operating loss carryforwards) in North America.

 

*Minority Interest in(Income) Loss of Joint Ventures.*  Minorityinterest reflects our partners’ share of the earnings or losses of ourconsolidated joint venture operations, which currently include our Shanghai,China and Hsinchu, Taiwan operations. The minority interest impact of our jointventures was an increase of $1.8 million to our net loss for the three monthsended September 30, 2002 and a decrease of $0.1 million to our netloss for the three months ended September 30, 2003. The change from thesame quarter of last year was a result of lower revenue and higher productioncost driven largely by depreciation expense from added equipment in our Taiwanfacility.

 

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**Liquidity and Capital Resources**

 

Ourworking capital was $213.4 million as of June 30, 2003 and$95.4 million as of September 30, 2003. The decrease in workingcapital was primarily due to the reclassification of our $100.0 million ofconvertible subordinated notes from a non-current liability to a currentliability combined with cash used for capital expenditures.  The notes mature in July 2004.

 

Cash usedin investing activities was $14.9 million and $20.0 million for thethree months ended September 30, 2002 and 2003, respectively. Cash usedfor capital expenditures was $15.0 million and $20.0 million for thethree months ended September 30, 2002 and 2003, respectively. Managementexpects capital expenditures for 2004 to be approximately $60.0 million to$65.0 million. Capital expenditures have been and will be used primarily toadvance our technical capability. Additionally, in the future we may pursue acquisitions of businesses,products and technologies, or enter into joint venture arrangements, that couldcomplement or expand our business. Any material acquisition or joint venturecould result in a decrease to our working capital depending on the amount,timing and nature of the consideration to be paid.

 

Cashprovided by financing activities was $0.9 million and $0.2 millionfor the three months ended September 30, 2002 and 2003, respectively. Thisreduction was the result of reduced borrowing and fewer common stock purchasesunder our employee plans.

 

Ourongoing cash requirements will be for capital expenditures, acquisitions,research and development and working capital. Management believes that cash onhand and any cash provided by operations will be sufficient to meet our cashrequirements for at least the next 12 months. Thereafter, based on ourcurrent operating plans, we may require external financing from time to time tofund our capital expenditure requirements. There can be no assurance thatalternative sources of financing will be available if our capital requirementsexceed cash flows from operations. There can be no assurance that we will beable to obtain any additional financing required to fund our capital needs onreasonable terms, or at all.

 

Thefollowing summarizes our contractual cash obligations as of September 30,2003 (in millions):

 
|                                          |   | **Payments Due for the Periods ending  September 30,** |   |
|-----------------------------------------------|--------|-------------------------------------------------------------|--------|
|                                          |   | **Total**                                                   |   | **Year  2004** |   | **Two Years  2005-2006** |   | **Two Years  2007-2008** |   | **Beyond** |   |
|                                          |   |                                                        |   |   |   |   |   |   |   |   |   |
| Short-term and long-term borrowings           |   | $                                                           | 11.0   |   | $ | 10.9 |   | $ | 0.1 |   | $ | — |   | $ | — |   |
| Convertible notes                             |   | 225.0                                                       |   | 100.0 |   | — |   | 125.0 |   | — |   |
| Capital lease obligations                     |   | 2.4                                                         |   | 1.1 |   | 0.3 |   | 0.3 |   | 0.7 |   |
| Operating leases (BAC estimated)              |   | 88.7                                                        |   | 11.5 |   | 19.7 |   | 18.5 |   | 39.0 |   |
| Other long-term obligations (AMTC  estimated) |   | 56.9                                                        |   | 11.2 |   | 30.3 |   | 12.2 |   | 3.2 |   |
|                                          |   |                                                        |   |   |   |   |   |   |   |   |   |
| Total contractual cash obligations            |   | $                                                           | 384.0  |   | $ | 134.7 |   | $ | 50.4 |   | $ | 156.0 |   | $ | 42.9 |   |

 

We lease approximately 50% ofthe facility from the BAC for advanced photomask manufacturing.  This operating lease is for a 10-year termand commenced July 2003.  Inaddition, we are committed to funding a portion of the operating cashrequirements of the AMTC under research and development reimbursement andcapacity utilization obligations through June 30, 2007. We expect ourportion of these operating cash requirements to vary between approximately 22%to 26% through June 30, 2007.

 

Thefollowing summarizes our commercial commitments as of September 30, 2003(in millions):

 
|                         |   | **Amounts of Commitment Expiration by Periods Ending  September 30,** |   |
|------------------------------|--------|----------------------------------------------------------------------------|--------|
|                         |   | **Total**                                                                  |   | **Year  2004** |   | **Two Years  2005-2006** |   | **Two Years  2007-2008** |   | **Beyond** |   |
|                         |   |                                                                       |   |   |   |   |   |   |   |   |   |
| Guarantees (AMTC estimated)  |   | $                                                                          | 25.1   |   | $ | 15.9 |   | $ | — |   | $ | 1.9 |   | $ | 7.3 |   |
| Other commercial commitments |   | 61.0                                                                       |   | 3.7 |   | 37.7 |   | 16.1 |   | 3.5 |   |
|                         |   |                                                                       |   |   |   |   |   |   |   |   |   |
| Total commercial commitments |   | $                                                                          | 86.1   |   | $ | 19.6 |   | $ | 37.7 |   | $ | 18.0 |   | $ | 10.8 |   |

 

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Guaranteesinclude our proportionate share of the AMTC lease payments to the BAC in excessof our commitment to fund the operating cash requirements of the AMTC throughJune 30, 2007. We estimate these guarantees to be $9.2 million as ofSeptember 30, 2003. We have also guaranteed up to 32.0 million Euro of theAMTC’s 120.0 million Euro revolving credit facility. The revolving creditfacility had 33.0 million Euro ($37.9 million as of September 30, 2003)outstanding as of September 30, 2003. Guarantees also includes our portion of certain equipment leases of theRTC with future minimum lease payments aggregating approximately$3.3 million as of September 30, 2003.

 

InMay 2002, we entered into an agreement to acquire photomask productionequipment from Infineon’s internal photomask manufacturing operations inMunich, Germany and become Infineon’s strategic photomask supplier. Inconsideration for the acquisition of certain photomask production assets andthe agreement to supply Infineon with photomasks over a 10-year term, we agreedto pay Infineon $53.5 million over a seven-year period ending inMarch 2009.  We also agreed topurchase from Infineon additional photomask production equipment forapproximately $28.1 million payable over a five-year period ending inDecember 2006. We have made purchases of $20.6 million in association withthis agreement as of September 30, 2003, $10.6 million of which isreflected as a non-cash transaction on the accompanying interim unauditedconsolidated statement of cash flows for the three months ended September 30,2003.  We expect to fund all payments toInfineon from cash provided by operations; however, we may elect to satisfy aportion of these amounts by issuing shares of our common stock.  The amount of which we may satisfy with ourcommon stock approximated  $24.6 millionas of September 30, 2003.

 

Inaddition to the commitments in the tables above, the following commitments andcontingencies exist:

 

·         We have established a profit sharing planwith the BindKey employees. Through March 2006, BindKey employees may earnamounts annually based on the annual after-tax earnings of BindKey. Upon thetermination of the final year subject to the profit sharing plan, the employeesmay earn an additional lump-sum amount based on the after-tax earnings ofBindKey in the final year. Any amounts earned in relation to the profit sharingplan will be expensed in the period earned.

 

·         In March 2002, we sold all of ourphotoblank manufacturing assets to Schott. We also entered into a supplyagreement with Schott for a significant portion of our future purchases ofphotoblanks.

 

·         In July 2003, we signed a multi-yearpellicle supply agreement with MLI for a significant portion of our futurepurchases of pellicles.

 

·         We also have various purchase commitmentsincidental to the normal course of business, including non-refundable depositsto purchase equipment. In the aggregate, such commitments are not at prices inexcess of current market.

 

**Critical Accounting Policies**

 

Our critical accountingpolicies are as follows:

 

•      Revenuerecognition

 

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

 

•      Estimates,specifically sales return allowances, the allowance for doubtful accountsreceivable, allowance for excess and obsolete inventory and depreciationexpense

 

The preparation of consolidated financial statements requires us tomake estimates and assumptions that affect the reported amount of assets anddisclosure of contingent assets and liabilities at the date of the consolidatedfinancial statements and the reported amounts of revenue and expenses duringthe reported period.

 

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

 

•      Similarly,we must make estimates of the collectability of our accounts receivable. Weconsider trends of historical bad debts, customer concentrations, customer credit-worthiness,current economic trends and changes in our

 

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customer payment terms when evaluating the adequacy of the allowancefor doubtful accounts. If circumstances change or if our original estimates areotherwise incorrect, we may have to reduce our estimates of the recoverabilityof amounts due us by a material amount.

 

•      Wemaintain inventory reserves for estimated obsolescence or unmarketableinventory equal to the difference between the cost of inventory and estimatedmarket value based on assumptions of future demands and market conditions. Ifactual market conditions are materially less favorable than those projected bymanagement, or if our estimates of market value are later determined to havebeen materially incorrect, additional inventory writedowns may be required.

 

•      Propertyand equipment are depreciated using the straight-line method over the estimateduseful lives of the assets ranging from three to seven years for equipment and10 to 20 years for buildings. Property and equipment held under capital leasesand leasehold improvements are amortized using the straight-line method overthe shorter of the estimated useful lives of the assets or the estimatedremaining term of the lease.

 

•              Valuationof identifiable intangibles and other long-lived assets

 

We assess the impairment of identifiable intangibles subject toamortization and other long-lived assets whenever events or changes incircumstances indicate that the carrying value may not be recoverable. Factorsconsidered important which could trigger an impairment review include thefollowing:

 

•      Significantunderperformance relative to expected historical or projected future operatingresults;

 

•      Significantchanges in the manner of our use of the acquired assets or the strategy for ouroverall business;

 

•      Significantnegative industry or economic trends; and

 

•      Ourmarket capitalization relative to net book value.

 

When it is determined that the carrying value of intangibles subject toamortization and other long-lived assets may not be recoverable based upon theexistence of one or more of the above indicators of impairment, the measurementof any impairment is determined and the carrying value is reduced asappropriate.

 

•              Accountingfor income taxes

 

We are required to consider our income taxes in each of the taxjurisdictions in which we operate in computing our effective income tax rate.This process involves estimating our current tax exposure together withassessing temporary differences resulting from differing treatment of items fortax and financial reporting purposes. These differences result in deferred taxassets and liabilities, which are included on our consolidated balance sheets.Further, the actual annual amount of taxable income in each tax jurisdictionmay differ from the estimates we use to compute the effective tax rate duringour first, second and third quarters. Additionally, we evaluate therecoverability of the deferred tax assets from future taxable income and establishvaluation allowances if recovery is not more likely than not. Our income taxprovision on the consolidated income statements are impacted by changes in thevaluation allowance. This process is complex and involves significantmanagement judgment in determining our provision for income taxes, deferred taxassets and liabilities and any valuation allowance recorded against our netdeferred tax assets.

 

•              Consolidation

 

The consolidated financial statements presented herein include theaccounts of DuPont Photomasks, Inc. and our controlled and wholly ownedsubsidiaries. All significant intercompany transactions and accounts areeliminated in consolidation. Entities that are not controlled but on which wecan exercise significant influence are recorded under the equity method ofaccounting.

 

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**Other Matters**

 

InApril 2003, the Financial Accounting Standards Board, or FASB, issuedStatement of Financial Accounting Standard, or SFAS No. 149, *Amendment ofStatement 133 on Derivative Instruments and Hedging Activities*. SFASNo. 149 amends and clarifies financial accounting and reporting for derivativeinstruments, including certain derivative instruments embedded in othercontracts and for hedging activities under SFAS No. 133, *Accounting for Derivative Instrumentsand Hedging Activities*. SFAS No. 149 is effective for contractsentered into or modified after June 30, 2003, except to the extent theprovisions of this statement relate to previously effective SFAS No. 133implementation issues and for hedging relationships designated afterJune 30, 2003.  The adoption ofthis pronouncement had no impact on our consolidated financial condition orresults of operations.

 

InMay 2003, the FASB issued SFAS No. 150, *Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity*.SFAS No. 150 establishes standards for how an issuer classifies and measurescertain financial instruments with characteristics of both liabilities andequity. It requires that an issuer classify a financial instrument that iswithin its scope as a liability (or an asset in some circumstances). SFAS No.150 is effective in its entirety at the beginning of the first interim periodbeginning after June 15, 2003. The adoption of this pronouncement had noimpact on our consolidated financial condition or results of operations.

 

InJanuary 2003, the FASB issued FASB Interpretation No. 46, or FIN No. 46, *Consolidationof Variable Interest Entities* (“VIE”).  FIN No. 46 requires that if an entity is the primary beneficiaryof a VIE, the assets, liabilities, and results of operations of the VIE shouldbe consolidated on the entity’s financial statements.  In October 2003, the FASB issued FASB Staff Position, or FSPNo. FIN 46-6, deferring the effective date of applying the provisions of FINNo. 46 to the first interim or annual period ending after December 15,2003, for qualifying VIE’s.  Inaddition, FASB intends to modify FIN No. 46 during the three months endingDecember 31, 2003.  We arecurrently assessing the impact that FIN No. 46 may have on our consolidatedfinancial condition or results of operations.

 

InJanuary 2003, the SEC issued a final rule requiring enhanced disclosure ofmaterial off-balance sheet transactions, arrangements, and other relationshipswith unconsolidated entities. The rule also requires a tabular disclosure offuture payments due under contractual commitments. The disclosure requirementswill become effective for our fiscal 2004 Annual Report on Form 10-K.  We do not expect this pronouncement to havea material impact on our consolidated financial condition or results ofoperations.

 

**Forward Looking Statements**

 

This report contains forward-lookingstatements within the meaning of Section 27A of the Securities Act of 1933and Section 21E of the Securities Exchange Act of 1934, that involve anumber of risks and uncertainties.  Suchforward-looking statements are generally accompanied by words such as  “intend”, “may”, “plan”,  “expect”, “believe”,  “should”,  “would”, “could”, “anticipate” or other words that convey uncertainty of futureevents or outcomes. Although we believe that the expectations reflected in suchforward-looking statements are reasonable, such forward-looking statements aresubject to risks and uncertainties that could cause actual results to differmaterially from those indicated by the forward looking statements. Such risksand uncertainties include, without limitation, the following:

 

•                    The current downturn in thesemiconductor industry could lead to a decrease in the demand for our photomaskproducts;

 

•                    The semiconductor industry ishighly cyclical and has been subject to significant economic downturns atvarious times;

 

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

 

•                    Lack of visibility and short turnaround time of orders may impact our ability to respond to a changing businessenvironment;

 

•                    We may not obtain sufficientcapital to fund our needs;

 

•                    Our operating results could beadversely affected by under-utilized production capacity;

 

•                    A significant portion of ourrevenue is derived from Asia and Europe, and therefore, our business, financialcondition and results of operations are to a significant degree subject toeconomic, political and social events in these regions;

 

•                    Macroeconomic conditions may haveeffects on the semiconductor industry;

 

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•                    We may be unable to enhance ourexisting products and develop and manufacture new products and upgrades withimproved capabilities to satisfy anticipated demand for more technologicallyadvanced photomasks;

 

•                    Rapid technological change couldrender our products obsolete or our manufacturing processes ineffective;

 

•                    We may not remain competitive andincreased competition could seriously harm our business;

 

•                    We may be unable to successfullydevelop or market our EDA software;

 

•                    E.I. du Pont de Nemours and Companyhas influence on all stockholder votes;

 

•                    Our success depends, in part, uponkey managerial, engineering and technical personnel as well as our ability tocontinue to attract and retain additional personnel and integrate new personnelinto key positions; and

 

•                    Other risks indicated in our otherfilings with the SEC, including but not limited to those factors which arefully discussed under the caption “Risk Factors” in our Annual Report onForm 10-K filed with the SEC on September 10, 2003.

 

Theserisks and uncertainties are beyond our control and, in many cases, we cannotpredict the risks and uncertainties that could cause our actual results todiffer materially from those indicated by the forward-looking statements.

 

Theforward-looking statements are made as of the release date hereof, and wedisclaim any intention or obligation to update or revise any forward-lookingstatements or to update the reasons why the actual results could differmaterially from those projected in the forward-looking statements, whether as aresult of new information, future events or otherwise.

 

**Item3.   Quantitative and QualitativeDisclosures About Market Risk**

 

**Market Risk**

 

Marketrisks relating to our operations result primarily from changes in interestrates and changes in foreign currency exchange rates. As of September 30,2003, we had outstanding $100.0 million in non-interest bearingconvertible subordinated notes, $125.0 million in 1.25% convertiblesubordinated notes and approximately $13.3 million in interest bearingborrowings of which $11.9 million were short-term borrowings. As a result,changes in the interest rate market would change the estimated fair value ofour convertible notes and other interest bearing borrowings. We believe that a10% change in interest rates would not have a material effect on our business,financial condition, results of operations or cash flows.

 

Foreigncurrency exposures are primarily due to non-North America operations which aresubject to certain risks inherent in conducting business abroad, includingprice and currency exchange controls, fluctuation in the relative value ofcurrencies and restrictive governmental actions. Changes in the relative valueof currencies occur from time to time and may, in certain instances, have amaterial effect on our consolidated financial condition and results ofoperations. Any exchange rate fluctuations can affect our margins since we mayhave imbalances between some foreign currency denominated revenue and expenses.Our consolidated financial statements reflect remeasurement and translation ofitems denominated in non-U.S. currencies to U.S. dollars, our functionalcurrency. Exchange gains or losses are included in comprehensive income in theperiod in which they occur. We monitor our exchange rate exposure and attemptto reduce such exposure by hedging. We have entered into forward contracts incurrencies of the countries in which we conduct business in order to reducesuch exposure.   An unrealized gain of$0.2 million for the three months ended September 30, 2003 is recorded inother expense, net on the accompanying interim unaudited consolidated incomestatement in relation to our forward exchange contracts outstanding as ofSeptember 30, 2003.  An unrealizedgain of $1.7 million as of September 30, 2003 is recorded in accumulatedother comprehensive income on the accompanying interim unaudited consolidatedbalance sheet and statement of stockholders’ equity in relation to foreigncurrency translation adjustments.  Theseinstruments may involve elements of credit and market risk in excess of theamounts recognized on the interim unaudited consolidated financial statements.We believe that a 10% change in exchange rates would not have a material effecton our business, financial condition, results of operations or cash flows. Wemonitor our positions and the credit quality of counterparties, consistingprimarily of major financial institutions, and do not anticipate nonperformanceby any counterparty, although nonperformance could occur. There can be noassurance that such forward contracts or any other hedging activity will beavailable or adequate to eliminate, or even mitigate, the impact of ourexchange rate exposure. There can be no assurance that such risks will not havea material adverse impact on our liquidity, financial condition and results ofoperations in the future.

 

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**Financial Risk Management**

 

Ourinternational revenue is subject to inherent risks, including fluctuations inlocal economies; difficulties in staffing and managing foreign operations;greater difficulty in accounts receivable collection; costs and risks oflocalizing products for foreign countries; unexpected changes in regulatoryrequirements, tariffs and other trade barriers; difficulties in therepatriation of earnings; and burdens of complying with a wide variety offoreign laws. Some of our sales outside of North America are denominated inlocal currencies, and accordingly, we are subject to the risks associated withfluctuations in currency rates. In general, increases in the value of thedollar against foreign currencies decrease the U.S. dollar value of foreignsales requiring us either to increase our price in the local currency, whichcould render our product prices noncompetitive, or to suffer reduced revenueand gross margins as measured in U.S. dollars. Our foreign currency hedgingprogram is not designed to hedge the margin risks associated with foreignexchange rate changes. Our hedging is comprised of foreign currency forwardexchange contracts utilized to mitigate the risks associated with foreigncurrency fluctuations on certain balance sheet exposures. However, the hedgingprogram will not eliminate all of our foreign exchange risks.

 

Themarketplace for our products dictates that we maintain inventories of rawmaterials. Therefore, inventory obsolescence is a risk for us due to frequentengineering changes, shifting customer demand, the emergence of new industrystandards and rapid technological advances including the introduction by ourcompetitors or us of products embodying new technology. While we maintainvaluation allowances for excess and obsolete inventory and management continuesto monitor the adequacy of such valuation allowances, there can be no assurancethat such valuation allowances will be sufficient.

 

As ofSeptember 30, 2003, we had outstanding foreign currency denominatedshort-term borrowings, including capital lease obligations, totalingapproximately $7.2 million.  As ofSeptember 30, 2003, we did not have any relationships with anyunconsolidated entities or financial partnerships, such as entities oftenreferred to as structured finance or special purpose entities, which would havebeen established for the purpose of facilitating off-balance sheet arrangementsor other contractually narrow or limited purposes. Accordingly, we are notexposed to any financing, liquidity, market or credit risk that could arise ifwe were engaged in such relationships.

 

As ofSeptember 30, 2003 we had $100.0 million of convertible subordinatednotes outstanding due in July 2004.  Thenotes have no stated interest, are convertible at any time into shares of ourcommon stock at a conversion price of $106.26 per share, are unconditionallyguaranteed by E.I. du Pont de Nemours and Company and are not callable by us.In the event of a fundamental change in our company, each holder of notes willhave the right to require us to redeem, in cash, any or all of such holder’snotes at a price equal to 100% of the principal amount to be redeemed.  If a fundamental change were to occur, wecannot assure you that we will have sufficient funds to pay the redemptionprice for all the notes tendered by the holders, although E.I. du Pont deNemours and Company would be required to pay the redemption price under itsguarantee. In that case, our failure to redeem tendered notes would constitutean event of default under the indenture for the notes, and may constitute adefault under the terms of other indebtedness that we may enter into from timeto time.

 

Inaddition, we had $125.0 million of convertible subordinated notesoutstanding as of September 30, 2003 that are due in May 2008.  The notes accrue interest at an annual rateof 1.25% and are convertible at any time into shares of our common stock at aconversion price of $25.595 per share. Interest on the notes is payablesemi-annually on May 15 and November 15 of each year beginningNovember 15, 2003. If a change of control occurs, each holder of noteswill have the right to require us to redeem, in cash, any or all of suchholder’s notes at a price equal to 100% of the principal amount to beredeemed.  If a change of control wereto occur, we cannot assure you that we will have sufficient funds to pay theredemption price for all the notes tendered by the holders. In that case, ourfailure to redeem tendered notes would constitute an event of default under theindenture for the notes, and may constitute a default under the terms of otherindebtedness that we may enter into from time to time. In connection with theissuance of the notes, we entered into a Registration Rights Agreement andfiled a shelf registration statement covering resales of the notes and thecommon stock issuable upon conversion of the notes. If we fail to comply withcertain of our obligations under the Registration Rights Agreement, additionalinterest will accrue on the affected notes at an annual rate of 0.5%.

 

### **Item 4. Controls and Procedures**

 

Our chiefexecutive officer and our chief financial officer, based on their evaluation ofthe effectiveness of our disclosure controls and procedures (as defined inRules 13a-15(e) and 15d -15(e) under the Securities and Exchange Act of 1934)as of the end of the period covered by this report on Form 10-Q of DuPontPhotomasks, Inc., have concluded that our disclosure controls and procedureswere effective. There were no changes in internal control over financialreporting or in other factors during our most recent fiscal quarter that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

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## **PART II**

 

# **Item 1. LegalProceedings**

 

We are notcurrently involved in any material legal proceedings.

 

###### **Item 6. Exhibits and Reports on Form 8-K**

 

(A)          Exhibits

 
| 3.1.1      |   | Certificate  of Incorporation of the Company, as amended and restated on April 3,  1996. (A)                                                                                                                                                                                                                                                                                                                                                            |
|------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1.2      |   | Amendment to  the Certificate of Incorporation of the Company. (B)                                                                                                                                                                                                                                                                                                                                                                                           |
| 3.2        |   | Bylaws, as  amended on October 26, 1999. (B)                                                                                                                                                                                                                                                                                                                                                                                                            |
| 3.2.1      |   | Amendments  to the Bylaws Of DuPont Photomasks, Inc. as approved by the Board Of  Directors on June 23, 2003. (E)                                                                                                                                                                                                                                                                                                                                       |
| 4.1        |   | Specimen  Certificate for Common Stock. (A)                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.2        |   | Form of  Indenture, between DuPont Photomasks, Inc. and Chase Bank of Texas, N.A., as  trustee, including the form of Convertible Subordinated Notes due  July 24, 2004 attached as Exhibit A thereto. (F)                                                                                                                                                                                                                                              |
| 4.3        |   | Indenture,  between DuPont Photomasks, Inc. and JPMorgan Chase Bank, as trustee,  including Form of 1.25% Convertible Subordinated Notes due 2008 (144A Global  Note and Reg S. Global Note). (C)                                                                                                                                                                                                                                                            |
| 4.4        |   | Rights  Agreement, dated as of January 30, 2001, between DuPont Photomasks, Inc.  and EquiServe Trust Company, N.A., as Rights Agent, together with the  following exhibits thereto: Exhibit A-Form of Certificate of Designation of  Series A Junior Participating Preferred Stock of DuPont Photomasks, Inc.;  Exhibit B-Form of Right Certificate; Exhibit C-Summary of Rights to Purchase  Shares of Preferred Stock of DuPont Photomasks, Inc. (D) |
| 4.5        |   | Amendment  No. 1 to Rights Agreement, between DuPont Photomasks, Inc. and EquiServe  Trust Company, N.A., as Rights Agent, dated as of April 29, 2003. (C)                                                                                                                                                                                                                                                                                              |
| 4.6        |   | Registration  Rights Agreement among DuPont Photomasks, Inc., Credit Suisse First Boston  LLC and Lehman Brothers Inc. dated as of May 5, 2003. (C)                                                                                                                                                                                                                                                                                                     |
| 10.1       |   | 2003  Employment Agreement with Marshall C. Turner dated September 10, 2003  (E)                                                                                                                                                                                                                                                                                                                                                                        |
| 10.2       |   | First  Amendment, dated as of October 8, 2003, to 2002 Employment Agreement with  James Northup dated December 27, 2001.                                                                                                                                                                                                                                                                                                                                |
| 31.1       |   | Certification  of Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange  Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                                                                                       |
| 31.2       |   | Certification  of Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange  Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                                                                                       |
| 32         |   | Certifications  of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                 |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| **Letter** |   | **Definition**                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (A)        |   | Registration  Statement on Form S-1, Registration No. 333-33869.                                                                                                                                                                                                                                                                                                                                                                                             |
| (B)        |   | Form 8-A12  G/A on June 23, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (C)        |   | Quarterly  Report on Form 10-Q for the quarterly period ended March 31, 2003.                                                                                                                                                                                                                                                                                                                                                                           |
| (D)        |   | Form 8-A12B  on January 30, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (E)        |   | Annual  Report on Form 10-K for the fiscal year ended June 30, 2003.                                                                                                                                                                                                                                                                                                                                                                                    |
| (F)        |   | Amendment  No. 2 to Form S-3 filed on July 19, 2000.                                                                                                                                                                                                                                                                                                                                                                                                    |

 

(B)           Reportson Form 8-K

 

Our report onForm 8-K, dated July 8, 2003, reporting our announcement on July 8,2003 of our signing of a multi-year supply agreement with Micro Lithography,Inc. and our intent to end pellicle production at our Danbury, Connecticutfacility.

 

Our report on Form 8-K, dated July 23, 2003, reporting our announcementon July 23, 2003 of our financial results for the fiscal quarter and yearended June 30, 2003 and certain other information.

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities and Exchange Act of 1934, the registranthas duly caused this report to be signed on its behalf by the undersignedthereunto duly authorized.

 
|                         | DUPONT PHOTOMASKS, INC. |
|------------------------------|-------------------------|
|                         |  (Registrant)      |
|                         |                    |
|                         | By:                     | /s/ SATISH RISHI |   |
| Date: November 12, 2003 |                    | Satish Rishi*Executive Vice President–Finance  and Chief Financial Officer (Principal  Financial and Accounting Officer)* |

 

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