DUPONT PHOTOMASKS INC - 10-K Annual Report

Back to GetFilings.com

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

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1998

COMMISSION FILE NUMBER 0-20839
------------------------

DUPONT PHOTOMASKS, INC.
(Exact name of registrant as specified in its charter)

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

131 OLD SETTLERS BOULEVARD
ROUND ROCK, TEXAS 78664
(Address of principal executive offices)

Registrant's telephone number, including area code: 512-310-6500

Securities registered pursuant to Section 12(b) of the Act
(Each class is registered on the NASDAQ National Market):

TITLE OF EACH CLASS
Common stock ($.01 par value)

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /

Aggregate market value of voting stock held by nonaffiliates of the
registrant (excludes outstanding shares beneficially owned by directors and
executive officers and shares held by E.I. du Pont de Nemours and Company) as of
September 8, 1998, was approximately $131 million. As of such date, 15,293,097
shares of the registrant's common stock, $.01 par value, were outstanding.

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

INCORPORATED BY
REFERENCE IN PART NO.
-----------------------

The Company's Proxy Statement filed in connection with its 1998 Annual Meeting of
Stockholders............................................................................... III

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

DUPONT PHOTOMASKS, INC.

"Company" as used herein refers to DuPont Photomasks, Inc. and its
consolidated subsidiaries, as the context may indicate. "DuPont" as used herein
refers to E.I. duPont de Nemours and Company and its consolidated subsidiaries,
as the context may indicate. The Company has licensed from DuPont use of the
tradename "DuPont" and the DuPont in Oval logo. All other trademarks or
tradenames referred to in this document are the property of their respective
owners. References in this document to "$" or "dollars" are to United States of
America currency.

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

TABLE OF CONTENTS

PAGE
-----

PART I
Item 1. Business.................................................................................... 3
Item 2. Properties.................................................................................. 17
Item 3. Legal Proceedings........................................................................... 18
Item 4. Submission of Matters to a Vote of Security Holders......................................... 18
Executive Officers of the Company........................................................... 18
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters................... 19
Item 6. Selected Financial Data..................................................................... 20
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 21
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................................. 27
Item 8. Financial Statements and Supplementary Data................................................. 27
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........ 27
PART III
Item 10. Directors and Executive Officers of the Registrant.......................................... 27
Item 11. Executive Compensation...................................................................... 28
Item 12. Security Ownership of Certain Beneficial Owners and Management.............................. 28
Item 13. Certain Relationships and Related Transactions.............................................. 28
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................. 28
Signatures.................................................................................. 29

NOTE ON INCORPORATION BY REFERENCE

Throughout this report, various information and data are incorporated by
reference to portions of the Company's 1998 Proxy Statement. Any reference in
this report to disclosures in the Company's 1998 Proxy Statement shall
constitute incorporation by reference of that specific material into this Form
10-K.

FORWARD-LOOKING STATEMENTS

Certain statements contained in this document that are not historical facts,
are "forward-looking statements," as that term is defined in Section 27A of the
Securities Act of 1933 (the "Securities Act') and Section 21E of the Securities
Exchange Act of 1934, that involve a number of risks and uncertainties. Such
forward-looking statements may concern growth and future operating results,
potential acquisitions and joint ventures, new manufacturing facilities, capital
expenditures, economic climate, new products and product enhancements, the
future importance of photomask technology, the demand for products,

2

competitive factors, research and development activities and expenditures,
strategic relationships with third parties, liquidity and the Company's
strategy. Such forward-looking statements are generally accompanied by words
such as "plan," "estimate," "expect," "believe," "should," "would," "could,"
"anticipate" or other words that convey uncertainty of future events or
outcomes. Such forward-looking statements are based upon management's current
plans, expectations, estimates and assumptions and are subject to a number of
risks and uncertainties that could significantly affect current plans,
anticipated actions, the timing of such actions and the Company's business,
financial position and results of operations. As a consequence, actual results
may differ materially from expectations, estimates or assumptions expressed in
or implied by any forward-looking statements made by or on behalf of the
Company. Factors which could cause or contribute to such differences include,
but are not limited to, those factors discussed under the caption "Risk Factors"
in Item 1 as well as cautionary statements and other factors set forth elsewhere
herein.

PART I

ITEM 1. BUSINESS

THE COMPANY

Based on worldwide sales, the Company believe it is the largest photomask
manufacturers in the world. The Company sells its products to approximately 200
customers in 20 different countries. Essentially all of the Company's sales are
to customers in the semiconductor manufacturing industry. The Company
manufactures a broad range of photomasks based on customer-supplied design data.
The Company also manufactures photoblanks and pellicles, the principal
components of photomasks, primarily for internal consumption. The Company
operates globally from ten established manufacturing facilities in North
America, Europe and Asia and numerous customer service centers. The Company's
executive offices are located at 131 Old Settlers Boulevard, Round Rock, Texas
78664 and its telephone number is (512) 310-6500.

INDUSTRY BACKGROUND

Photomasks are high purity quartz or glass plates containing precision
images of integrated circuits and are used as masters by semiconductor
manufacturers to optically transfer these precision images onto semiconductor
wafers. Each integrated circuit design consists of a series of separate
patterns, each of which is imaged onto a different photomask. The resulting
series of photomasks is then used to successively layer the circuit patterns
onto the semiconductor wafer. Photomasks are a necessary component in the
production of semiconductors, and advanced photomask technologies are critical
to enabling the manufacture of increasingly complex semiconductor devices. In
addition, advanced photomask technologies such as phase shift masks and optical
proximity correction masks can extend the optical resolution of existing
photolithography equipment, thereby delaying the otherwise significant
investment required for new semiconductor manufacturing equipment. The demand
for photomasks is driven largely by increases in the number of semiconductor
designs and the complexity of integrated circuits. Growth in the photomask
market has not always correlated with increases in semiconductor sales.
According to industry sources, the total worldwide market for photomasks has
grown from approximately $1.3 billion in 1995 to approximately $2.0 billion in
1997. The Company estimates that the photomask market in North America, Europe
and non-Japan Asia represented approximately 50% of the worldwide market over
the last five years.

Historically, photomasks were generally designed and manufactured internally
by semiconductor manufacturers in captive production facilities. Since the
mid-1980s, however, the market for merchant photomask manufacturers has grown
substantially. The Company estimates that during 1997 merchant photomask sales
in North America, Europe and non-Japan Asia were approximately $700 million. As
a result of a number of factors, including the increasing complexity and pace of
technological change in the

3

photomask industry, the emergence of reliable merchant photomask manufacturers
and a trend by semiconductor manufacturers to focus capital resources on their
core business, a number of semiconductor manufacturers have divested their
captive photomask operations and chosen to rely on merchant photomask
manufacturers for their photomask needs. Other semiconductor manufacturers who
have retained captive photomask operations have increasingly turned to merchant
manufacturers to produce more technically advanced photomasks rather than invest
in new capital equipment. Finally, the increasing capital requirements and
competitive pressures in the photomask market have contributed to a significant
consolidation among merchant photomask manufacturers.

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

The Company believes that the following trends are increasing the demand for
photomasks and the photomask industry's importance in the semiconductor
manufacturing process:

CUSTOMIZATION OF SEMICONDUCTOR DESIGNS. Growing demand for semiconductors,
including application specific integrated circuits (ASICs), application specific
standard products (ASSPs), embedded microcontrollers and a growing variety of
memory products, has generated increasing demand for photomasks as each new type
of semiconductor device requires additional new and often more advanced
photomasks.

INCREASING DEVICE COMPLEXITY. As the complexity of semiconductor devices
has increased in response to continued efforts to improve the performance and
functionality of these devices through greater transistor densities and smaller
feature sizes, the number of successive layers of patterns required to
manufacture an integrated circuit has increased, resulting in an increase in the
number of photomasks used to manufacture that circuit. For example, the number
of photomasks typically required for the manufacture of microprocessors in 1991
was 14 as compared to 25 photomasks now required for the most advanced
generation of microprocessors.

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

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

The Company believes that all of these changes in the semiconductor industry
are increasing the demand for, and the already important role of, photomasks,
and driving the need for the continuing development of advanced photomasks.

4

STRATEGY

The Company's objective is to be the world's premier supplier of photomasks,
providing superior service and advanced technology, by implementing the
following strategies:

ADVANCE TECHNOLOGICAL LEADERSHIP. The Company intends to continue to invest
in research and development and advanced equipment to enhance its technological
leadership position. The Company believes this strategy is essential to
continuing to develop and deliver leading-edge photomasks, which are required to
meet the demands of the leading global semiconductor manufacturers. The Company
also believes that by providing leading-edge photomasks it can position itself
as the preferred provider of photomasks to its customers. For example, the
Company has partnered with Advanced Micro Devices, Micron Technology and
Motorola in the formation and ongoing operation of the DPI Reticle Technology
Center, LLC ("RTC"), a unique facility dedicated solely to advanced photomask
technology development and pilot line fabrication of leading-edge photomasks.
The technological advancements developed by the RTC are generally available to
the Company for the development and manufacture of photomasks and related
products in its manufacturing facilities.

EXPAND STRATEGIC RELATIONSHIPS WITH CUSTOMERS. A key component of the
Company's ongoing strategy is to continue to develop and expand its strategic
relationships with the world's leading semiconductor manufacturers. The Company
believes that these joint development relationships, such as its alliance with
Hyundai to jointly develop leading-edge photomasks and its participation in the
RTC, will enable it to share the risks and benefits of developing the next
generation of photomasks. In addition, the Company believes these relationships
will help to solidify its position as, or provide it with the opportunity to
become, the primary supplier of advanced photomasks and key enabling
technologies to its customers.

CAPITALIZE ON ESTABLISHED GLOBAL MANUFACTURING AND SUPPORT NETWORK. Since
1991, the Company has operated globally with integrated manufacturing facilities
in North America, Europe and Asia. The Company's facilities are strategically
located in proximity to its customers, many of whom have multiple facilities
located throughout the world and prefer global suppliers to serve their
photomasks needs. In addition, the Company's facilities are linked by a global
data transmission network that integrates the manufacturing and delivery
capabilities of these facilities, enabling efficient resource allocation and
information sharing. The Company believes these factors provide it with a
competitive advantage by enabling it to consistently deliver high quality
products and services, on a timely basis, to each customer's various facilities
around the world.

LEVERAGE STRATEGIC RELATIONSHIPS WITH KEY SUPPLIERS. The Company draws on
its internal skills and capabilities to develop advanced photoblanks, a critical
component of photomasks, and to identify suppliers of products and materials
critical to improving photomask technology. For example, the Company has entered
into a strategic alliance with Hoya Corporation to develop and produce advanced
photoblanks supporting the manufacture of semiconductor devices with 0.18 micron
design rules and below. The Company also believes that its strategic
relationships with leading equipment suppliers help ensure that it can provide
its customers with early access to the most advanced photomasks. In this regard,
the Company has entered into an exclusive agreement with Etec to significantly
upgrade the capability and capacity of the Company's existing MEBES-Registered
Trademark-electron-beam pattern generation tools, which is expected to
significantly expand the Company's leading-edge photomask capability. As a
result of all of the foregoing measures, the Company believes that it can
rapidly deliver to customers the latest advances in photomask technologies.

PRODUCTS AND TECHNOLOGY

PHOTOMASKS

Photomasks are high-purity quartz or glass plates containing precision,
microscopic images of integrated circuits that are used as masters (similar to
negatives in a photographic process) to optically transfer

5

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

Photomasks are manufactured by the Company in accordance with semiconductor
design data provided on a confidential basis by its customers. The final design
of each integrated circuit results in a set of precise individual circuit
patterns to be imaged onto a series of typically 10 to 25 separate photomask
levels. The complete set of patterned photomasks is required to manufacture the
customer's integrated circuit design. Upon receipt of a customer's circuit
design, the Company converts the design to pattern data, which are used to
control an electron beam or laser beam that exposes the circuit pattern onto a
thin layer of photosensitive polymer, called a photoresist, covering the opaque
chrome layer of the photoblank. The exposed areas are dissolved by chemical
developers and the thin chrome layer of the photoblank is etched to replicate
the customer design pattern on the photomask. Subsequently, the photomask is
inspected for defects, its critical dimensions are confirmed and any defects are
repaired. Pellicles are then mounted onto the masks and the masks are delivered
to the customer.

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

The Company has developed advanced photomask products for customers using
leading-edge lithography technologies in three categories: (i) masks with
extremely tight specifications, (ii) phase shift masks and (iii) masks with
optical proximity correction. Advanced specification photomasks permit the
customer to use a variety of lithography technologies since the high quality and
tight tolerances of the photomask permit greater flexibility in the
semiconductor manufacturing process. Phase shift masks and masks with optical
proximity correction typically require extremely tight specifications coupled
with additional unique characteristics. Phase shift masks are photomasks that
alter the phase of the light passing through the photomask permitting improved
depth of focus and resolution on the wafer. Optical proximity correction masks
are photomasks with submicron features that help minimize optical distortions on
the wafer and therefore permit improved image fidelity. The demand for these
products has grown during the past two years as customers search for
cost-effective, less capital intensive methods for improving current
semiconductor fabrication yields and shrinking feature sizes. All three of these
product categories provide opportunities for semiconductor manufacturers to
produce more advanced products with existing lithography equipment. Therefore,
these advanced photomasks are expected by the Company to enable semiconductor
manufacturers to delay significant capital investment in new generation
steppers.

PHOTOBLANKS AND PELLICLES

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

6

The production of photoblanks requires ultra-pure chrome deposition on
highly polished and extremely flat quartz or glass substrates. The quality and
properties of photoblanks strongly affect the yield and quality of photomasks.
The Company purchases virgin quartz substrates from a limited number of
suppliers. In addition, the Company recycles quartz substrates which have been
repolished in order to reduce cost and dependence on external suppliers.
Historically, the Company has purchased between 20% and 30% of the photoblanks
it uses to manufacture photomasks from Hoya Corporation. The Company has entered
into a strategic alliance with Hoya Corporation to develop and produce advanced
photoblanks supporting the manufacture of semiconductor devices with 0.18 micron
design rules and below. The Company believes that this alliance, coupled with
the Company's internally developed knowledge of photoblank technology, enhances
the Company's ability to develop and deliver advanced photomasks.

Pellicles are produced from nitrocellulose or other polymer solutions that
the Company prepares or purchases. The ultra-thin film is typically
precision-coated with an anti-reflective layer to improve optical performance
characteristics. The Company has introduced proprietary pellicle films that are
specifically designed to withstand the powerful DUV radiation found in the
emerging generation of advanced steppers. The Company holds several patents
covering various aspects of pellicle technology and from time to time may have
various patents pending. Historically, the Company has purchased approximately
20% to 30% of the pellicles it uses to manufacture photomasks from third-party
suppliers. See "--Risk Factors-- Concentration of and Dependence on Suppliers."

GLOBAL MANUFACTURING AND OPERATIONS

Since 1991, the Company has operated globally with established manufacturing
facilities in North America, Europe and Asia. Approximately 56%, 25% and 19% of
the Company's sales in fiscal 1998 were in North America, Europe and Asia. In
North America, the Company operates photomask manufacturing facilities in Round
Rock, Texas, Santa Clara, California, and Kokomo, Indiana. Additionally, the
Company has begun construction on a photomask manufacturing facility in Gresham,
Oregon. In Europe, the Company's manufacturing facilities are located in
Rousset, France, Hamburg, Germany and Hamilton, Scotland. In Asia, the Company
currently operates a manufacturing facility in Ichon, Korea, is participating in
the operation of a facility with its joint venture partner in Shanghai, China,
has plans to build a new photomask production facility in Singapore and has
executed an agreement with United Microelectronics Corporation to establish a
joint venture to produce photomasks in Taiwan. The Company is serving
semiconductor manufacturers in Japan through its facility in Ichon, Korea. The
Japanese market is predominantly served by captive Japanese suppliers and three
significant local independent suppliers.

The Company believes that its global presence is important for meeting the
supply needs of multi-national customers as it facilitates the Company's ability
to supply quality products to its customers' worldwide locations on a timely
basis. Close proximity to customers is important because of rapid delivery
requirements and the need for frequent personal interactions. As a result, each
manufacturing facility primarily supplies local semiconductor manufacturers.
Moreover, each of the Company's manufacturing facilities is connected by a
global data transmission network, which allows these facilities to transfer
confidential customer design data and manufacturing instructions rapidly and
coordinate manufacturing responsibility with the Company's other facilities. By
being able to transfer information throughout the world with this network, the
Company is able to optimize resource allocation, thereby lowering production
costs while providing effective customer service on a local level.

Each of the Company's wholly owned manufacturing sites is ISO 9002
qualified. The Company manufactures photomasks in clean rooms designed to
provide a contamination-free, temperature and humidity controlled environment.
These clean rooms are similar to those used in the manufacture of
semiconductors. The Company's historical emphasis on product research and
development has carried over to process technology and has resulted in the
development of production facilities equipped with state-of-the-art
manufacturing equipment. See "--Risk Factors--Significant International
Operations."

7

CUSTOMERS

The Company is a principal photomask supplier to many of the leading global
semiconductor manufacturers. Essentially all the Company's sales are to
customers in the semiconductor manufacturing industry. The Company's largest
customers during 1998 included the following:

Advanced Micro Devices LSI Logic Samsung
AMI Lucent Technologies Seagate
Atmel Maxim Silicon Valley Group
Delco/General Motors Micron Technology STMicroelectronics
Hexfet Motorola Texas Instruments
Hyundai National Semiconductor VLSI Technology
LG Semicon Philips

In fiscal 1998, the Company's two largest customers, Lucent Technologies and
STMicroelectronics, in the aggregate, accounted for approximately 27% of the
Company's sales and individually each accounted for over 10% of the Company's
sales. The Company's ten largest customers, in the aggregate, accounted for more
than 60% of sales.

The Company has entered into multi-year, non-exclusive supply agreements
with some of its customers, including Hyundai, Lucent Technologies, Philips and
STMicroelectronics. Each agreement is separately negotiated and therefore
specific terms vary.

WORLDWIDE SALES AND SUPPORT

Because each photomask is unique, the Company works closely with each
customer to define and communicate precisely the specifications required by the
customer. The Company sells and services its products principally through its
own employees based at its manufacturing sites throughout the world.

The Company has established customer service centers inside several of its
customers' design centers and wafer fabrication facilities. Employees located at
these centers routinely interact with customer engineers to improve the accuracy
of the customers' design data and documentation and ensure that the customers'
order receives the appropriate priority at the manufacturing facility and that
routine problems are resolved promptly. The Company believes that these centers
located in customers' facilities reduce errors and returns and improve on time
delivery, each of which improves customer satisfaction.

COMPETITION

The photomask industry is highly competitive and most of the Company's
customers utilize more than one photomask supplier. Because of its global
presence, the Company competes with various merchant manufacturers in each local
geographic region in which it operates. In North America, the Company competes
with Align-Rite and Photronics and, to a lesser extent, with other smaller
merchant photomask suppliers. In Europe, the Company competes with Align-Rite,
Compugraphics and Photronics. In Asia, the Company competes with Dai Nippon
Printing, Hoya Corporation, Photronics, P.K. Limited, Taiwan Mask Corporation
and Toppan Printing Company. The Company expects that some of its competitors
will expand operations in order to better meet the needs of customers and take
advantage of new growth opportunities. In addition, captive photomask operations
can, and sometimes do, sell into the merchant market.

The Company believes that with the increasing importance of leading-edge
photomask technology in the semiconductor manufacturing process, the ability to
manufacture these advanced photomasks will be an important competitive factor.
On time delivery of defect-free photomasks at competitive prices historically
has also been an important competitive factor in the industry. The Company also
believes that its ability to develop the most advanced photomasks provides a
more cost-effective alternative to the

8

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

RESEARCH AND DEVELOPMENT

The photomask industry has been and is expected to continue to be
characterized by rapid technological change. The Company has historically made
significant investments in research and development in order to improve its
technological leadership. In order to maintain its technological leadership, the
Company expects that it will be required to anticipate, respond to and utilize
changing technologies.

The Company, along with Advanced Micro Devices, Micron Technology and
Motorola, has begun operation of the RTC, a joint venture for advanced photomask
technology development and pilot line fabrication of leading-edge photomasks.
The RTC is located in a fully equipped, free-standing facility adjacent to the
photomask manufacturing facility the Company operates in Round Rock, Texas. The
Company believes that the collaborative effort under way at the RTC leverages
the combined strength and insights of global leaders in memory, microprocessors
and advanced logic design and fabrication to accelerate the development of
advanced photomasks.

The Company, independently and through its participation in the RTC, intends
to continue to invest in research and development in order to ensure its
technological capabilities. The Company is focusing its research and development
in three areas: (i) the enhancement of existing products by improving
manufacturing techniques and technologies; (ii) the development of leading-edge
photomask products such as phase shift masks, masks with optical proximity
correction and advanced specification masks; and (iii) the development of
advanced materials needed for the manufacture of leading-edge photomasks.

The Company is enhancing its existing products through worldwide integrated
engineering, capital investment for improved capability and beta testing of
leading-edge equipment. Product enhancements in the past led to the development
of technology currently used to produce photomasks compatible with 0.35 micron
semiconductor lithography. This technology is providing the platform for the
development of manufacturing technologies consistent with 0.25 micron
semiconductor lithography at high yields and rapid cycle times. The Company has
been a leader in the development of leading-edge photomasks products, such as
phase shift, optical proximity and advanced specification masks. In addition to
its internal development efforts, the Company has participated in several
development programs supported by SEMATECH in the United States and the Joint
European Submicron Strategic Initiative in Europe with respect to advanced
products. The Company's research and development of photomask component
materials is also responding to the technology demands of semiconductor
manufacturers through the development of improved materials needed to produce
advanced photomasks. Recent examples of such materials developments include low
stress chrome blanks, pellicles with contamination-control features and
attenuated embedded chrome blanks for phase shift masks.

The Company has established a research and development group that consists
of trained and experienced personnel. The capabilities of this group have been
augmented by its access to DuPont's corporate science and engineering resources.
There are certain elements of DuPont's material science expertise and its
analytical capabilities that are relevant to photomask research and development.
The Company will continue to have access to DuPont's corporate science and
engineering through 2000 pursuant to a research, development and consulting
agreement between the Company and DuPont, which will provide the Company with a
supplement to its core research and development program. See "--Risk
Factors--Rapid Technological Change" and "--Risk Factors--Manufacturing Risks."

9

PATENTS, COPYRIGHTS, TRADEMARKS AND LICENSES

INTELLECTUAL PROPERTY

The Company believes that the success of its business depends primarily on
its proprietary technology, information, processes and know-how, rather than on
patents or trademarks. Much of the Company's proprietary information and
technology relating to manufacturing processes is not patented and may not be
patentable. Certain aspects of the Company's photoblanks and pellicles
technologies are, however, protected by a number of patents and patent
applications. They include product patents for certain types of attenuated,
embedded phase shift blanks and DUV pellicles. While the Company considers its
patents to be valuable assets, it does not believe that its competitive position
is dependent on patent protection or that its operations are dependent on any
individual patent. The Company believes instead that the success of its business
depends primarily on its ability to maintain lead time in developing its
proprietary technology, information, processes and know-how. Nevertheless, the
Company attempts to protect its intellectual property rights with respect to its
products and manufacturing processes through patents and trade secrets when
appropriate as part of its ongoing research, development and manufacturing
activities. The Company also relies on non-disclosure agreements with employees
and vendors to protect its proprietary processes.

CORPORATE TRADENAME AND TRADEMARK AGREEMENT

The Company and DuPont have entered into a corporate tradename and trademark
agreement (the "Corporate Tradename Agreement") whereby DuPont licenses to the
Company (i) use of the tradename "DuPont" as part of the Company's corporate
name, (ii) use of the tradename "DuPont" as part of the name of an affiliated
company of the Company and (iii) use of the trademark DuPont in Oval as part of
the Company's corporate logo. DuPont may terminate the Corporate Tradename
Agreement upon two years prior written notice in the event that DuPont and/or
its affiliates cease to hold 20% of the total outstanding Common Stock of the
Company and upon 90 days written notice in the event that (i) DuPont ceases to
be the largest holder of Common Stock of the Company, (ii) the Company purports
to assign or otherwise transfer the Corporate Tradename Agreement without
DuPont's written consent, or (iii) the Company uses the tradename "DuPont" other
than under the terms of the Corporate Tradename Agreement. In addition, DuPont
may terminate the Corporate Tradename Agreement upon 90 days written notice for
any reason after January 1, 2008. In the Corporate Tradename Agreement, the
Company grants DuPont the right to inspect and test products manufactured by or
for the Company and intended to be sold bearing the DuPont in Oval logo to
determine uniform quality and compliance with quality standards of DuPont and
agrees to hold DuPont harmless from any and all liabilities arising from the
manufacture, sale, transportation, storage or use of products manufactured by or
for the Company bearing the DuPont in Oval logo. Upon termination of the
Corporate Tradename Agreement, the Company will be obligated to: (i) change its
name so that the tradename "DuPont" is omitted therefrom; (ii) cease to use the
tradename "DuPont" or any similar tradename as part of its corporate name or in
any other manner whatsoever; and (iii) cease to use the DuPont in Oval logo.

EMPLOYEES

As of June 30, 1998, the Company had approximately 1,500 employees
worldwide. The Company has no employees who are represented by a union. The
Company's German subsidiary, however, is subject to German law, which binds it,
as a member of a selected industry group, to agreements reached by industry
management and employee representatives. The Company believes that it has a good
relationship with its employees. See "--Risk Factors--Dependence on Management
and Technical Personnel."

10

ENVIRONMENTAL MATTERS

The operations of the Company and its ownership of real property are subject
to various environmental laws and regulations that govern, among other things,
the discharge of pollutants into the air and water and the handling, use,
storage, disposal and clean-up of solid and hazardous wastes. Compliance with
such laws and regulations requires the Company to incur capital expenditures and
operating costs in connection with its ongoing operations. In addition, such
laws and regulations may impose liabilities on owners and operators of
businesses and real property without regard to fault and may be joint and
several with other parties. More stringent environmental laws and regulations
may be enacted in the future, which may require the Company to expend additional
amounts on environmental compliance or may require modifications in the
Company's operations. A potential groundwater contamination issue at the
Company's Danbury, Connecticut site is being reviewed under voluntary corrective
action by the Environmental Protection Agency. Although the Company is unable to
predict the extent of its future liability with respect to any environmental
matters, the Company believes, based upon current information, that
environmental liabilities will not be material to its financial position or
results of operations. See "Business--Risk Factors--Changes in Governmental Laws
and Regulations." With respect to any environmental contamination present on the
Company's manufacturing sites at June 13, 1996, the date of the Company's
initial public offering, or present at any such site due to the generation, use,
treatment, storage, release, emission, discharge or disposal of hazardous waste
of hazardous materials prior to such date, the Company is indemnified by DuPont
pursuant to an agreement between DuPont and the Company.

RISK FACTORS

THE COMPANY'S BUSINESS IS SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES,
INCLUDING, BUT NOT LIMITED TO, THOSE DESCRIBED BELOW. SEE "FORWARD-LOOKING
STATEMENTS."

CAPITAL INTENSIVE INDUSTRY; SIGNIFICANT FIXED COSTS. The manufacture of
photomasks requires a significant investment in fixed assets. The Company
expects that it will be required to continue to make significant capital
expenditures in connection with the expansion of its operations. Based on its
current operating plans, the Company will require external financing from time
to time to fund its capital expenditures. There can be no assurance that the
Company will be able to obtain the additional capital required in connection
with such expansion on reasonable terms, or at all, or that any such expansion
will not have a material adverse effect on the Company's business and results of
operations, particularly during the start-up phase of new operations. In
addition, due to the capital-intensive nature of photomask manufacturing
operations, at a given threshold of manufacturing capacity, a high proportion of
the Company's operating costs remain relatively constant as sales volume
increases or decreases. To the extent the Company has under-utilized production
capacity, operating profit increases or decreases significantly as sales volume
increases or decreases. The Company anticipates that operating costs will
increase as it adds capacity to position itself for future growth. A decrease in
capacity utilization could have a material adverse effect on the Company's
results of operations. See "--Industry Background."

RAPID TECHNOLOGICAL CHANGE. The photomask and semiconductor industries are
characterized by rapid technological change and new product introductions and
enhancements that require photomask manufacturers to make significant and
ongoing capital investments. In particular, as semiconductor pattern sizes
continue to decrease, the demand for more technologically advanced photomasks is
likely to increase, and the Company believes it must continue to enhance its
existing products and to develop and manufacture new products and upgrades with
improved capabilities in order to satisfy this anticipated demand. The Company's
inability to anticipate, respond to or utilize changing technologies could have
a material adverse effect on the Company's results of operations. Also, there
can be no assurance that additional research and development investments by the
Company will result in any technological innovations. See "--Products and
Technology" and "--Research and Development."

11

Technological advances achieved by a competitor or a customer leading to the
commercial availability of alternate methods of transferring circuit designs
onto semiconductor wafers without the use of photomasks, including direct-write
lithography, could have a material adverse effect on the Company's results of
operations or financial position. Direct-write lithography, an alternative to
photomask lithography, writes the circuit pattern directly onto the
semiconductor wafer without the use of a photomask. The direct-write method
generates patterns onto a wafer slowly and therefore is not currently useful for
high-volume, commercial device manufacturing. A significant advance in this
technology or other technologies which transfer circuit designs without the use
of photomasks, however, would have a material adverse effect on the Company's
business and results of operations. See "--Products and Technology" and
"--Competition."

RELATIONSHIP WITH AND DEPENDENCE ON SEMICONDUCTOR INDUSTRY. Substantially
all of the Company's sales are derived from semiconductor manufacturers. Growth
in the demand for semiconductors does not necessarily lead to an increase in the
demand for photomasks. Changes in semiconductor designs, or applications, such
as a reduction in customization, increased standardization, a reduction in
design complexity, other technological and manufacturing advances or a slowdown
in the introduction of new semiconductor designs, could reduce demand for
photomasks even if the demand for semiconductors increases. Technological and
manufacturing advances in the semiconductor industry could have a material
adverse effect on the demand for photomasks.

In addition, contractions or downturns in the semiconductor industry could
lead to a decrease in the demand for photomasks. The semiconductor industry is
highly cyclical and has been subject to significant economic downturns at
various times. Future downturns in the semiconductor industry could have a
material adverse effect on the Company's results of operations. The Company's
investment in new sites and equipment is based, in part, on the announced
expansion plans of the semiconductor industry. From time to time, the
semiconductor industry has developed slower than originally anticipated. A lack
of development in the semiconductor industry in a location in which the Company
operates could have a material adverse impact on the Company's business. For
example, the semiconductor industry in China has developed more slowly than
originally anticipated and, as a result, the Company continues to experience
losses from its joint venture participation in China. In addition, there are
certain risks associated with new sites, including the risk that the Company's
revenue does not increase commensurate with the increases in capacity and
expenses. If revenue does not increase accordingly, the Company's business,
financial position and results of operations could be materially impacted. See
"--Industry Background."

FLUCTUATIONS IN QUARTERLY AND ANNUAL EARNINGS. The Company's quarterly and
annual operating results are affected by a wide variety of factors that could
adversely affect sales or profitability or lead to significant variability of
operating results. These factors include the volume, timing and product mix of
orders shipped. Since the Company's business is characterized by short-term
orders and shipment schedules without a significant backlog for products,
substantially all of the Company's sales in any quarter are dependent upon
orders received during that quarter, which limits the Company's ability to
respond to a changing business environment. In addition, changes in the mix of
products sold, market acceptance of the Company's and its customers' products,
competitive pricing pressures, the Company's ability to meet increasing demand
and delivery schedules, fluctuations in manufacturing yields, fluctuations in
currency exchange rates, cyclical semiconductor industry conditions, the
Company's access to advanced process technologies and the timing and extent of
product and process development costs could also affect operating results.
Moreover, the Company is limited in its ability to reduce costs quickly in
response to any revenue shortfalls due to the need to make ongoing and
significant capital investments. As a result of the foregoing and other factors,
there can be no assurance that the Company will not experience material adverse
fluctuations in future operating results on a quarterly or annual basis. Results
of operations in any period, therefore, should not be considered indicative of
the results to be expected for any future period.

12

See "--Risk Factors--Capital Intensive Industry; Significant Fixed Costs,"
"--Risk Factors--Rapid Technological Change" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

COMPETITION. The photomask industry is highly competitive. The Company's
ability to compete in this market is primarily based on product quality,
delivery to schedule performance, pricing, technical capabilities, the location
and capacity of its manufacturing facilities and technical service. Significant
competitors include other merchant manufacturers of photomasks, including
Align-Rite, Compugraphics, Dai Nippon Printing, Hoya Corporation, Photronics,
P.K. Limited, Taiwan Mask Corporation and Toppan Printing Company. The Company's
competitors can be expected to continue to develop and introduce new and
enhanced products, any of which could cause a decline in market acceptance of
the Company's products or a reduction in the Company's prices as a result of
intensified price competition. The Company also competes with captive photomask
operations. Beginning in the mid-1980's, a trend developed toward the
divestiture or closing of captive photomask operations by semiconductor
manufacturers. There can be no assurance that this trend will continue or that
it will not reverse, thereby reducing the demand for photomasks produced by
merchant photomask suppliers like the Company and increasing competition to the
extent excess capacity is used to supply non-captive needs. In particular, as
photomasks continue to reemerge as a critical and enabling technology in the
semiconductor manufacturing process, there can be no assurance that
semiconductor manufacturers will not form new captive operations to ensure that
their photomask needs are met, particularly for advanced and leading-edge
photomasks. Certain of the Company's competitors may have greater financial,
technical, marketing and other resources than the Company, each of which could
provide them with a competitive advantage over the Company. There can be no
assurance that competition will not have a material adverse effect on the
Company's business, financial position or results of operations. See "--Industry
Background" and "--Competition."

SIGNIFICANT INTERNATIONAL OPERATIONS. Approximately 44% of the Company's
sales in fiscal 1998 were derived from sales in non-U.S. markets. The Company
expects sales from non-U.S. markets to continue to represent a significant
portion of total sales. The Company operates four manufacturing facilities as
well as sales and technical support service centers in Europe and Asia. In
addition, the Company is currently participating in the operation of a
manufacturing facility in Shanghai, China as part of a joint venture arrangement
with the Shanghai Institute of Metallurgy, has executed a joint venture
agreement with United Microelectronics Corporation to produce photomasks in
Taiwan and recently announced plans to construct a manufacturing facility in
Singapore.

Non-U.S. operations are subject to certain risks inherent in conducting
business abroad, including price and currency exchange controls, fluctuation in
the relative value of currencies and restrictive governmental actions. Changes
in the relative value of currencies occur from time to time and may, in certain
instances, have a material effect on the Company's results of operations. The
Company's financial statements reflect remeasurement of items denominated in
non-U.S. currencies to U.S. Dollars, the Company's functional currency. Exchange
gains or losses are included in income in the period in which they occur. The
Company monitors its exchange rate exposure and attempts to reduce such exposure
by hedging. The Company has entered into Korean Won and French Franc forward
contracts designed to reduce such exposure. There can be no assurance that such
forward contracts or any other hedging activity will be available or adequate to
eliminate, or even mitigate, the impact of the Company's exchange rate exposure.
There can be no assurance that such risks will not have a material adverse
impact on the Company's liquidity and results of operations in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "--Global Manufacturing and Operations."

ASIAN MARKET VOLATILITY. In recent months, Asian capital markets have been
highly volatile, resulting in significant fluctuations in local currencies and
other economic instabilities. These instabilities may continue or worsen, which
could have a material adverse impact on the Company's financial position or
results of operations as approximately 19% of the Company's sales in fiscal 1998
were derived from this

13

region. As a result of this instability, the Company has experienced a reduction
in revenue and net income from its operations in Asia during fiscal 1998. There
can be no assurance that these reductions will not continue or worsen. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

MANUFACTURING RISKS. The Company's manufacturing processes are highly
complex, require the use of expensive and technologically sophisticated
equipment and materials and are continuously subject to modification in an
effort to improve manufacturing yields and product quality. Minute impurities or
other difficulties in the manufacturing process can lower manufacturing yields
and make products unmarketable. Moreover, manufacturing leading-edge photomasks
is relatively more complex and time-consuming than manufacturing high-volume,
less advanced photomasks, and may lead to general delays in the manufacturing of
all levels of photomasks. The Company has, on occasion, experienced
manufacturing difficulties and capacity limitations that have delayed the
Company's ability to deliver products within the time frames contracted for by
some or all of its customers. There can be no assurance that the Company will
not experience these or other manufacturing difficulties, increased costs or
production capacity constraints in the future, any of which could result in a
loss of customers or could otherwise have a material adverse effect on the
Company's business or results of operations. See "--Global Manufacturing and
Operations."

CONCENTRATION OF CUSTOMERS. In fiscal 1998, the Company's ten largest
customers, in the aggregate, accounted for more than 60% of sales. All these
customers are in the semiconductor industry. The loss of, or a significant
reduction of orders from, any of these customers could have a material adverse
effect on the Company's results of operations. While the Company believes it has
strategic relationships with a number of its customers, its customers place
orders on an as-needed basis and can change their suppliers without penalty. See
"--Customers."

CONCENTRATION OF AND DEPENDENCE ON SUPPLIERS. The Company relies on a
limited number of photomask equipment manufacturers to develop and supply the
equipment used in the photomask manufacturing process. There are currently lead
times of approximately 10 to 14 months between the order and the delivery of
certain photomask imaging and inspection equipment, including electron beam and
laser beam photomask imaging systems. There can be no assurance that the
equipment manufacturers will successfully develop or deliver on a timely basis
such imaging and inspection equipment. Failure to develop on a timely basis such
equipment could have a material adverse effect on the Company's business or
results of operations. See "--Industry Background."

In addition, the Company has a limited number of long-term supply agreements
with its raw materials suppliers and it has historically relied primarily on a
limited number of suppliers for the quartz plates used in the manufacture of
photoblanks, which are a key component in the manufacture of photomasks. Any
disruption in the Company's supply relationships or any delays in the shipment
of supplies or equipment, particularly the supply of quartz plates, could result
in delays or reductions in product shipments by the Company or increases in
product costs that could have a material adverse effect on the Company's
operating results in any given period. In the event of such disruption, there
can be no assurance that the Company could develop alternative sources within
reasonable time frames, or if developed, that such sources would provide such
supplies or equipment at prices comparable with those charged by the Company's
suppliers prior to such disruption. See "--Products and Technology--Photoblanks
and Pellicles."

DEPENDENCE ON MANAGEMENT AND TECHNICAL PERSONNEL. The Company's continued
success depends, in part, upon key managerial, engineering and technical
personnel, as well as the Company's ability to continue to attract and retain
additional personnel. The loss of certain key personnel could have a material
adverse effect on the Company's business or results of operations. There can be
no assurance that the Company can retain its key managerial, engineering and
technical employees. The Company's growth may be dependent on its ability to
attract new highly skilled and qualified personnel. There can be no assurance

14

that its recruiting efforts to attract and retain such personnel will be
successful. See "--Employees" and "Executive Officers of the Company."

CONTROL BY AND RELATIONSHIP WITH DUPONT. DuPont currently owns
approximately 69% of the outstanding Common Stock of the Company. As a result,
DuPont is able to control the vote of most matters submitted to stockholders,
including any merger, consolidation or sale of all or substantially all of the
assets of the Company, to elect the members of the Board of Directors of the
Company and to prevent or cause a change in control of the Company. DuPont has
advised the Company that it expects to continue to reduce its ownership interest
in the Company over time, subject to prevailing market conditions. The Company
has granted DuPont certain rights with respect to the registration of shares of
Common Stock of the Company held by DuPont under the Securities Act of 1933, as
amended, including the right to require that the Company register under the
Securities Act the sale of all or part of the shares it holds, and to include
such shares in a registered offering of securities by the Company for its own
account.

Historically, the Company has derived certain tangible and intangible
benefits from being affiliated with DuPont. The current relationship between the
Company and DuPont is defined pursuant to several transitional agreements. While
these agreements will continue to provide the Company with certain benefits, the
Company is only entitled to the ongoing assistance of DuPont for a limited time
and it may not enjoy benefits from its relationship with DuPont beyond the term
of the agreements, including benefits derived from DuPont's reputation, research
and development, supply of raw materials, trade names and trademarks and credit
support. There can be no assurance that the Company, upon termination of such
assistance from DuPont, will be able to provide adequately such services
internally or obtain favorable arrangements from third parties to replace such
services.

VOLATILITY OF MARKET PRICE. The market price of the Common Stock has been
and can be expected to be significantly affected by factors such as quarterly
variations in the Company's results of operations, the announcement of new
products or product enhancements by the Company or its competitors,
technological innovations by the Company or its competitors, changes in earnings
estimates or buy/sell recommendations by analysts, and general market conditions
or market conditions specific to particular industries. In particular, the stock
prices for many companies in the technology sector have experienced wide
fluctuations which have often been unrelated to the operating performance of
such companies. Such fluctuations may adversely affect the market price of the
Common Stock. See "Market for Registrant's Common Equity and Related Stockholder
Matters."

POTENTIAL ACQUISITIONS. The Company has in the past and may in the future
pursue acquisitions of businesses, products and technologies, or enter into
joint venture arrangements, that could complement or expand the Company's
business. For example, the Company recently announced plans to acquire Hewlett-
Packard's photomask manufacturing business and the Company has executed an
agreement with United Microelectronics Corporation to establish a joint venture
to produce photomasks in Taiwan. The negotiation of potential acquisitions or
joint ventures as well as the integration of an acquired business, product or
technology could cause diversion of management's time and resources. Future
acquisitions by the Company could result in potentially dilutive issuances of
equity securities, the incurrence of debt and contingent liabilities,
amortization of goodwill and other intangibles, research and development
write-offs and other acquisition-related expenses. Further, no assurances can be
given that any acquired business will be successfully integrated with the
Company's operations. If any such acquisition were to occur, there can be no
assurance that the Company would receive the intended benefits of the
acquisition. Future acquisitions, whether or not consummated, could have a
material adverse effect on the Company's business, results of operations or
financial position. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."

INTELLECTUAL PROPERTY. The Company believes that the success of its
business depends primarily on its proprietary technology, information and
processes and know-how, rather than on patents or trademarks. Much of the
Company's proprietary information and technology relating to manufacturing
processes is not

15

patented and may not be patentable. There can be no assurance that the Company
will be able to adequately protect its technology, that competitors will not be
able to develop similar technology independently, that the claims allowed on any
patents held by the Company will be sufficiently broad to protect the Company's
technology or that foreign intellectual property laws will adequately protect
the Company's intellectual property rights. The Company may receive notices
claiming that it is infringing the proprietary rights of third parties, and
there can be no assurance that the Company will not become the subject of
infringement claims or legal proceedings by third parties with respect to
current or future products or processes. Any such claims or litigation, with or
without merit, to enforce patents issued to the Company, to protect trade
secrets or know-how possessed by the Company or to defend the Company against
claimed infringement of the rights of others could result in substantial costs
and diversion of resources, or could result in product shipment delays or force
the Company to enter into royalty or license agreements rather than dispute the
merits of such claims, any of which could have a material adverse effect on the
Company's business, results of operations or financial position. See "--Patents,
Copyrights, Trademarks and Licenses--Intellectual Property."

CHANGES IN GOVERNMENTAL LAWS AND REGULATIONS. The Company is subject to
numerous governmental laws and regulations including, for example, tax,
occupational safety and health, and environmental laws and regulations.
Environmental laws and regulations impose various environmental controls on,
among other things, the discharge of pollutants into the air and water and the
handling, use, storage, disposal and clean-up of solid and hazardous wastes.
Changes in these laws and regulations may have a material adverse effect on the
Company's financial position and results of operations. Any failure by the
Company to adequately comply with such laws and regulations could subject the
Company to significant future liabilities. See "Properties--Environmental
Matters."

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

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

The Company has reviewed its information and operational systems and
manufacturing processes in order to identify those products, services or systems
that are not Year 2000 compliant. As a result of this review, the Company has
determined that it will be required to modify or replace certain information and
operational systems so they will be Year 2000 compliant. These modifications and
replacements are being, and will continue to be, made in conjunction with the
Company's overall systems initiatives. The total cost of these Year 2000
compliance activities, estimated at less than $2.0 million, has not been, and is
not anticipated to be, material to the Company's financial position or its
results of operations. The Company expects to complete its Year 2000 project
during 1999. Based on available information, the Company does not believe any
material exposure to significant business interruption exist as a result of Year
2000 compliance issues. Accordingly, the Company has not adopted any formal
contingency plan in the event its Year 2000 project is not completed in a timely
manner. These costs and the timing in which the Company plans to complete its
Year 2000 modification and testing processes are based on management's best
estimates. However, there can be no assurance that the Company will timely
identify and remediate all significant Year 2000 problems, that remedial efforts
will not involve significant time and expense, or that

16

such problems will not have a material adverse effect on the Company's business,
results of operations or financial position.

The Company also faces risk to the extent that suppliers of products,
services and systems purchased by the Company and others with whom the Company
transacts business on a worldwide basis do not comply with Year 2000
requirements. The Company has initiated formal communications with significant
suppliers and customers to determine the extent to which the Company is
vulnerable to these third parties failure to remediate their own Year 2000
issues. In the event any such third parties cannot provide the Company with
products, services or systems that meet the Year 2000 requirements on a timely
basis, or in the event Year 2000 issues prevent such third parties from timely
delivery of products or services required by the Company, the Company's results
of operations could be materially adversely affected. To the extent Year 2000
issues cause significant delays in, or cancellation of, decisions to purchase
the Company's products or services, the Company's business, results of
operations and financial position would be materially adversely affected. See
"--Risk Factors--Concentration and Dependence on Suppliers."

POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION
RIGHTS. Sales of a substantial number of shares of Common Stock in the public
market could adversely affect the market price of the Common Stock. DuPont
beneficially owns 10,500,000 shares of Common Stock. The Company has granted
DuPont certain rights with respect to the registration under the Securities Act
of shares of Common Stock of the Company held by DuPont, including the right to
require that the Company register under the Securities Act the sale of all or
part of the shares it holds, and to include such shares in a registered offering
of securities by the Company for its own account.

ITEM 2. PROPERTIES

The Company conducts manufacturing operations throughout the world. Each of
the Company's wholly owned operations is ISO 9002 qualified. The Company
believes that its facilities are adequate and suitable for their respective
uses. The table below presents certain information relating to the Company's
principal manufacturing and support facilities.

LOCATION IN SQUARE FEET TYPE OF INTEREST USE
- ----------------------------------------- ----------------------- ---------------- -----------------

NORTH AMERICA
Round Rock, Texas........................ 54,000 Owned Photomasks
Kokomo, Indiana.......................... 42,000 Owned Photomasks
Santa Clara, California.................. 38,000 Leased Photomasks
Gresham, Oregon.......................... (under construction ) Owned Photomasks
Poughkeepsie, New York................... 23,000 Owned Photoblanks
Danbury, Connecticut..................... 55,000 Owned Pellicles
Round Rock, Texas........................ 17,000 Owned Research
Round Rock, Texas........................ 27,000 Owned Administration

EUROPE
Rousset, France.......................... 24,000 Leased Photomasks
Hamburg, Germany......................... 22,000 Leased Photomasks
Hamilton, Scotland....................... 15,000 Owned Photomasks

ASIA
Ichon, Korea............................. 102,000 Owned Photomasks
Shanghai, China.......................... 16,000 Jointly Owned Photomasks

The research facility in Round Rock is leased to the RTC and contains
primarily RTC manufacturing equipment leased by the RTC from a third party.
Facilities and property located in Santa Clara and Hamburg are leased under
leases that expire in 2001 and 2022, respectively. The facility at Rousset is
leased under a lease which provides the Company to take ownership of the
facility upon payment of taxes

17

and expenses relating to the conveyance. The Company also maintains customer
service data centers in leased facilities in Mesa, Arizona, Beaverton, Oregon
and Dallas, Texas.

The Company's Santa Clara facility is in a seismically active area. Although
the Company has obtained business interruption insurance, a major catastrophe
(such as an earthquake or other natural disaster) at any of its sites could
result in a prolonged interruption of the Company's business.

ITEM 3. LEGAL PROCEEDINGS

The Company is not currently involved in any material legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

EXECUTIVE OFFICERS OF THE COMPANY

The following table sets forth the name, age (as of June 30, 1998) and
position with the Company of each person who is an executive officer of the
Company.

NAME AGE POSITION(S)
- -------------------------------- --- ---------------------------------------------------------------

J. Michael Hardinger............ 51 Chairman of the Board and Chief Executive Officer
Preston M. Adcox................ 55 President and Chief Operating Officer
Gerard Cognie................... 54 Executive Vice President--European Operations
David S. Gino................... 40 Executive Vice President--Finance and Chief Financial Officer
Arthur W. Launder............... 58 Executive Vice President--North American Photomask Operations
John M. Lynn.................... 40 Executive Vice President, General Counsel and Secretary
Kenneth A. Rygler............... 54 Executive Vice President--Worldwide Marketing and Strategic
Planning
Chulwoo Won..................... 46 Executive Vice President--Asian Operations

J. MICHAEL HARDINGER. Mr. Hardinger is Chairman of the Board of Directors
and Chief Executive Officer of the Company, positions he assumed as a part of
the global realignment of the photomask business. He joined DuPont in 1970 and
has served in a number of management positions with DuPont, including Vice
President and General Manager of DuPont's Acrylics and Consumer Products
Business from 1990 until 1993. He was Vice President--DuPont Corporate Sourcing
prior to assuming his position with the Company. Mr. Hardinger is a member of
the Chase Bank of Texas Austin Advisory Board of Directors and a member of the
Board of Directors of the Capital of Texas Public Telecommunications Council.

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

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

18

DAVID S. GINO. Mr. Gino is Executive Vice President--Finance and Chief
Financial Officer of the Company. Prior to assuming his position with the
Company, he was Chief Financial Officer and Controller of Master Images, Inc.
until it was acquired by DuPont in 1987. He held a number of financial and
business management positions with DuPont's semiconductor materials, imaging
systems and printing and publishing businesses.

ARTHUR W. LAUNDER. Mr. Launder is Executive Vice President--North American
Photomask Operations. He joined the Company in 1996 after serving as President
of ASM America, Inc. Prior to joining ASM America, Inc. in 1994, he had been
President and Chief Operating Officer of Photronics, Inc. from 1987 to 1994 and
Senior Vice President and General Manager of Micro Mask, Inc. from 1983 to 1987.

JOHN M. LYNN. Mr. Lynn is Executive Vice President and General Counsel of
the Company. He also serves as Corporate Secretary. He joined DuPont in 1980 as
a chemical engineer and then, after a departure for law school, rejoined DuPont
as a lawyer in 1985. He held a number of legal advisory positions with DuPont
prior to joining the Company in 1996.

KENNETH A. RYGLER. Mr. Rygler is Executive Vice President--Worldwide
Marketing and Strategic Planning of the Company. He joined DuPont in 1964 and
held numerous sales, marketing, planning and business development management
positions.

CHULWOO WON. Mr. Won is Executive Vice President--Asian Operations. He
became involved with the Company while it was still a business unit of DuPont.
Mr. Won joined DuPont in 1980 and became actively engaged with the photomask
business in 1989. He was named Vice President of the region in 1995 until his
appointment as an executive officer of the Company in 1997.

The Company's executive officers are appointed annually by the Board of
Directors in accordance with the Company's Bylaws.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's Common Stock has been quoted on the Nasdaq National Market
under the symbol "DPMI" since June 14, 1996. The following table sets forth, for
the periods indicated, the high and low sale prices per share of the Company's
Common Stock as reported on the Nasdaq National Market.

HIGH LOW
---------- ----------

YEAR ENDED JUNE 30, 1997:
First Quarter................................................................ $ 291/4 $ 177/8
Second Quarter............................................................... 471/2 263/4
Third Quarter................................................................ 63 361/4
Fourth Quarter............................................................... 591/2 363/4

YEAR ENDING JUNE 30, 1998:
First Quarter................................................................ $ 741/8 $ 463/4
Second Quarter............................................................... 727/8 273/4
Third Quarter................................................................ 477/8 253/8
Fourth Quarter............................................................... 58 287/8

YEAR ENDING JUNE 30, 1999
First Quarter (through September 8).......................................... 381/2 261/4

The Company has not paid any dividends. The Company currently intends to
retain its earnings to finance future growth and therefore does not anticipate
paying any cash dividends in the foreseeable future. The declaration and payment
of dividends, if any, will be subject to the discretion of the Company's

19

Board of Directors and will depend on the Company's earnings, capital
requirements, financial position, statutory restrictions and other factors
deemed to be relevant by the Board of Directors.

ITEM 6. SELECTED FINANCIAL DATA

The following tables set forth selected financial data of the Company. The
following data should be read in conjunction with, and are qualified by
reference to, the financial statements and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" appearing elsewhere in this
document.

The following amounts are expressed in thousands except per share amounts.

AS OF OR FOR THE YEAR ENDED JUNE 30,
----------------------------------------------------------

1994 1995 1996 1997 1998
---------- ---------- ---------- ---------- ----------
Sales................................................ $ 134,548 $ 161,514 $ 213,415 $ 261,185 $ 271,591
Income (loss) before extraordinary item.............. (10,865) 4,119 26,904 36,762 33,532
Total assets......................................... 160,901 171,701 227,893 291,579 351,979
Long-term borrowings................................. 6,704 4,265 9,324 10,473 7,519
Long-term borrowings, related parties................ 140,846 125,570 9,000
Basic earnings (loss) per share before extraordinary
item............................................... $ (1.03) $ 0.39 $ 2.51 $ 2.44 $ 2.21
Diluted earnings (loss) per share before
extraordinary item................................. $ (1.03) $ 0.39 $ 2.50 $ 2.37 $ 2.15
Basic weighted average shares outstanding............ 10,500 10,500 10,727 15,101 15,180
Diluted weighted average shares outstanding.......... 10,500 10,500 10,743 15,520 15,612

20

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion and analysis of the financial condition and results
of operations should be read in conjunction with the Company's financial
statements and related notes included elsewhere in this document. References to
years are to fiscal years ended June 30.

OVERVIEW

Based on worldwide sales, the Company believes it is the largest photomask
manufacturer in the world. The Company sells its products to approximately 200
customers in 20 different countries. Essentially all of the Company's sales are
to customers in the semiconductor manufacturing industry. The Company
manufactures a broad range of photomasks based on customer-supplied design data.
The Company also manufactures photoblanks and pellicles, the principal
components of photomasks, primarily for internal consumption. The Company
operates globally with established manufacturing facilities in North America,
Europe and Asia.

Prior to the Company's initial public offering on June 13, 1996, it was a
wholly owned subsidiary of DuPont. Therefore, the Company's historical results
prior to such date are not necessarily indicative of the results that would have
been achieved if the Company had been independent.

The Company's sales increased from $213.4 million in 1996 to $271.6 million
in 1998. The increase of over 27% was primarily the result of a number of recent
trends in the semiconductor industry which have fueled growth in design
activity, including: (i) increasing customization of semiconductor designs; (ii)
growing complexity of semiconductor devices; (iii) decreasing feature size of
semiconductor designs; and (iv) the proliferation of semiconductor applications.
The impact of these trends has been to increase the importance of photomask
technology in the semiconductor manufacturing process. Sales increased 4.0% from
$261.2 million in 1997 to $271.6 million in 1998. The strength of the U.S.
Dollar against the Korean Won, and to a lesser extent, the German Mark and
French Franc, adversely impacted sales by approximately $15 million in 1998 and
thus adversely impacted sales growth in 1998 as compared to the previous year.

Due to the capital intensive nature of photomask manufacturing operations,
at a given threshold of manufacturing capacity, a high proportion of the
Company's operating costs remain relatively constant as sales volume increases
or decreases. To the extent that the Company has under-utilized production
capacity, operating profit increases or decreases significantly as sales volume
increases or decreases. In the early 1990's, the Company had excess capacity.
Therefore, as sales increased in 1996 and 1997, costs associated with
manufacturing remained relatively unchanged and the Company's operating profit
during such periods benefited. As occurred during 1998, the Company anticipates
that operating costs will continue to increase as it adds capacity to position
itself for future growth.

21

RESULTS OF OPERATIONS

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

YEAR ENDED JUNE 30,
-------------------------------

1996 1997 1998
--------- --------- ---------
Sales.................................................................................... 100.0% 100.0% 100.0%
Cost of goods sold....................................................................... 66.6 62.6 66.0
Selling, general and administrative expense.............................................. 11.8 12.1 10.9
Research and development expense......................................................... 4.3 4.7 4.7
--------- --------- ---------
Operating profit......................................................................... 17.3 20.6 18.4
Interest (income) expense................................................................ 3.3 (0.8) (0.1)
Exchange loss............................................................................ 0.4 0.3 0.1
--------- --------- ---------
Income before income taxes, minority interest and extraordinary item..................... 13.6 21.1 18.4
Provision for income taxes............................................................... 1.3 7.4 6.3
--------- --------- ---------
Income before minority interest and extraordinary item................................... 12.3 13.7 12.1
Minority interest in loss of majority owned joint venture................................ (0.3) (0.4) (0.2)
--------- --------- ---------
Income before extraordinary item......................................................... 12.6 14.1 12.3
Extraordinary item....................................................................... (8.5)
--------- --------- ---------
Net income............................................................................... 12.6% 22.6% 12.3%
--------- --------- ---------
--------- --------- ---------

YEAR ENDED JUNE 30, 1998 COMPARED TO YEAR ENDED JUNE 30, 1997

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

COST OF GOODS SOLD. Cost of goods sold consists of material, labor,
depreciation and overhead. Cost of goods sold increased 9.8% from $163.3 million
in 1997 to $179.4 million in 1998 resulting primarily from higher costs
associated with increased sales, costs related to new facilities and costs
related to continued capacity expansions at existing facilities. As a percentage
of sales, cost of goods sold increased from 62.6% in 1997 to 66.0% in 1998. The
percentage of sales increase was primarily due to margin compression as a result
of the strength of the U.S. Dollar, costs related to new facilities and costs
related to continued capacity expansions at existing facilities. As the Company
adds capacity to position itself for future growth, it will incur additional
costs related to new facilities and costs related to capacity expansions at
existing facilities.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense includes salaries of sales personnel, marketing expense,
general and administrative expense and product distribution expense. Since
January 1, 1996, general and administrative expense includes fees incurred by
the

22

Company under administrative service agreements with DuPont, the Company's
majority stockholder, and certain DuPont subsidiaries. Selling, general and
administrative expense as a percentage of sales decreased from 12.1% in 1997 to
10.9% in 1998. Selling, general and administrative expense decreased 6.6% from
$31.6 million in 1997 to $29.5 million in 1998 as a result of reductions in
discretionary spending including reduced incentive compensation expense. The
Company anticipates that selling, general and administrative expense will
increase in the future.

RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense consists
primarily of employee costs, cost of material consumed, depreciation,
engineering related costs and the Company's share of costs of the limited
liability company discussed below. Research and development expense increased
from $12.4 million in 1997 to $12.7 million in 1998. The increase was due
primarily to the Company's joint venture participation with Advanced Micro
Devices, Micron Technology and Motorola in a limited liability company called
the RTC which was formed to develop advanced photomask technology and pilot line
fabricate leading-edge photomasks. The Company believes that, through its
participation in the RTC, it will be able to help meet the future technology
needs of the semiconductor industry for advanced photomasks. There can be no
assurance that the RTC will yield results that are favorable to the Company.

The Company anticipates that research and development expense will continue
to increase in absolute dollars in the future reflecting the Company's strategy
of advancing its technological leadership. However, there can be no assurance
that such expenditures will enable the Company to develop new technologies or to
maintain its technological leadership.

INTEREST INCOME. Interest income was $2.1 million in 1997 and $0.1 million
in 1998. Interest income results from short-term investment of the Company's
cash balances.

EXCHANGE LOSS. Exchange loss consists of net gains and losses resulting
from the remeasurement of the Company's accounts denominated in non-U.S.
currencies into U.S. Dollars, which is the Company's functional currency.
Exchange loss was $0.8 million in 1997 compared to $0.2 million in 1998
primarily due to fluctuations of the U.S. Dollar against the Korean Won, German
Mark and French Franc. Exchange loss is net of the impact of hedging activities
designed to reduce exchange rate exposure.

PROVISION FOR INCOME TAXES. The Company's tax expense has been determined
in accordance with FAS 109 and is based on the statutory rates in effect in the
countries in which the Company operates. The Company's operations in Korea are
subject to a government granted tax exemption. The Company will continue to
enjoy the full benefits of the tax exemption in Korea until 2001 and a partial
benefit thereafter until the tax exemption terminates in 2003.

MINORITY INTEREST IN LOSS OF MAJORITY OWNED JOINT VENTURE. The minority
interest impact of the Company's joint venture in China was ($0.9 million) in
1997 compared to ($0.7 million) in 1998. Minority interest reflects the
partner's share of losses from the joint venture.

YEAR ENDED JUNE 30, 1997 COMPARED TO YEAR ENDED JUNE 30, 1996

SALES. Sales increased 22.4% from $213.4 million in 1996 to $261.2 million
in 1997. Sales in North America, Europe and Asia increased from $121.6 million,
$52.9 million and $38.9 million in 1996 to $145.6 million, $63.0 million and
$52.6 million in 1997. A continued increase in the demand for advanced
photomasks, which have higher average selling prices, was a primary contributor
to the increase in sales during this period. This shift in demand reflects what
the Company believes to be a continued trend toward higher utilization of
complex semiconductor devices with finer linewidths. The increase in sales
during this period also reflects the overall increase in demand for photomasks.

COST OF GOODS SOLD. Cost of goods sold increased 14.9% from $142.2 million
in 1996 to $163.3 million in 1997 resulting primarily from higher costs
associated with increased sales. As a percentage of

23

sales, cost of goods sold decreased from 66.6% in 1996 to 62.6% in 1997. The
decrease was primarily due to continued improvements in capacity utilization
including increased use of internally sourced photoblanks and pellicles.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Prior to January 1, 1996,
general and administrative expense principally included allocated costs for
services provided by centralized DuPont organizations. These allocated costs are
not necessarily indicative of the costs that would have been incurred if the
Company had been independent. Since January 1, 1996, general and administrative
expense includes fees incurred by the Company under administrative service
agreements with DuPont, the Company's majority stockholder, and certain DuPont
subsidiaries. Selling, general and administrative expense as a percentage of
sales increased from 11.8% in 1996 to 12.1% in 1997. Selling, general and
administrative expense increased 25.6% from $25.2 million in 1996 to $31.6
million in 1997. The increases were due largely to increases in selling expenses
corresponding to increased sales and increases in incentive compensation expense
corresponding to increases in earnings.

RESEARCH AND DEVELOPMENT EXPENSE. The Company's allocated share of DuPont's
central research and development was $1.1 million in 1996. Such allocations
terminated December 31, 1995. Research and development expense, excluding DuPont
allocations, increased from $8.1 million in 1996 to $12.4 million in 1997. As a
percentage of sales, research and development expense increased slightly
compared to the prior year. These increases reflect the Company's joint venture
participation in the RTC.

INTEREST (INCOME) EXPENSE. Interest expense was $7.1 million in 1996 and
interest income was $2.1 million in 1997. The primary source of interest expense
in 1996 was the Company's master note arrangements with DuPont. On June 28,
1996, DuPont contributed the $90.5 million balance outstanding on the master
notes to the Company as a capital contribution. Interest income results from
short-term investment of the Company's cash balances.

EXCHANGE LOSS. Exchange loss was $0.9 million in 1996 and $0.8 million in
1997. The loss is primarily due to fluctuations of the U.S. Dollar against the
German Mark, French Franc and Korean Won. Exchange loss is net of the impact of
hedging activities designed to reduce exchange rate exposure.

PROVISION FOR INCOME TAXES. Prior to the initial public offering, tax
expense was determined and allocated to the Company by applying the separate
taxpayer approach outlined in FAS 109. Under this approach, the Company had net
operating loss carry forwards in the U.S. and Europe, some of which became fully
utilized during 1996. The Company's operations in Korea are subject to a
government granted tax exemption. The Company will continue to enjoy the full
benefits of the tax exemption in Korea until 2001 and a partial benefit
thereafter until the tax exemption terminates in 2003. In actuality, the
Company's results prior to the initial public offering were included in
consolidated tax returns filed by DuPont and the tax benefit of prior year
losses was realized by DuPont. Since the initial public offering, tax expense
has been determined in accordance with FAS 109 and is based on the statutory
rates in effect in the countries in which the Company operates.

MINORITY INTEREST IN LOSS OF MAJORITY OWNED JOINT VENTURE. The minority
interest impact of the Company's joint venture in China was ($0.7 million) in
1996 compared to ($0.9 million) in 1997, reflecting increased pre-operating
losses from, and partner funding of, the joint venture.

EXTRAORDINARY ITEM. In January 1997, the Company sold its entire investment
in Etec common stock. Aggregate net proceeds from the sale of $39.2 million were
used in operations. The Company realized a $34.2 million gain on the sale. The
related provision for income taxes was $12.0 million.

LIQUIDITY AND CAPITAL RESOURCES

The Company's working capital was $66.1 million at June 30, 1997 and $33.1
million at June 30, 1998. The decrease in working capital is due principally to
lower cash balances, as partially offset by higher

24

accounts receivable, resulting from higher sales and a slow down in payment
terms principally from customers in Asia, and inventory balances, resulting
partially from the acquisition of inventory described below, and higher accounts
payable and accrued liabilities.

Cash and cash equivalents were $51.4 million at June 30, 1997 and $19.7
million at June 30, 1998. Cash provided by operations was $41.7 million in 1997
and $87.9 million in 1998.

Cash used in investing activities was $11.8 million in 1997 and $128.5
million in 1998. The cash used in investing activities in 1997 is the net of
cash proceeds from the sale of the Company's investment in Etec common stock
($39.2 million) and capital expenditures ($51.1 million). The cash used in
investing activities in 1998 is a combination of capital expenditures and
payment made with respect to the Company's strategic alliance with Hyundai
whereby the Company purchased selected photomask manufacturing equipment located
at Hyundai's captive photomask manufacturing facility in Kanam, Korea and
entered into a five-year sales and supply agreement with Hyundai. The Company
acquired, through its Korean subsidiary, approximately $29 million of equipment
and approximately $1 million in inventory. Consideration for the assets was
principally cash, and was partially financed by $24.0 million in borrowings on
the Company's credit facility with DuPont. In recent periods, the Company's most
significant use of cash in investing activities has been capital expenditures.
Management expects capital expenditures for 1999 will be approximately $100
million. Capital expenditures have been and will be used primarily to expand the
Company's manufacturing capacity and advance the Company's technical capability.
The Company may in the future pursue additional acquisitions of businesses,
products and technologies, or enter into other joint venture arrangements that
could complement or expand the Company's business. Any material acquisition or
joint venture could result in a decrease to the Company's working capital
depending on the amount, timing and nature of the consideration to be paid.

Cash provided by financing activities was $2.5 million in 1997 and $9.9
million in 1998 and, for 1998, primarily reflects net borrowings on the
Company's credit agreement. The Company and DuPont have entered into a credit
agreement (the "Credit Agreement") pursuant to which DuPont has agreed to
provide a credit facility to the Company in an aggregate amount of $100.0
million. The Credit Agreement expires in 2001 and any loans thereunder will bear
interest at LIBOR plus 25 basis points. At the Company's option, advances under
the Credit Agreement are convertible into term loans with maturities up to seven
years. To date, the Company has borrowed a maximum of $35.0 million under the
credit facility and at June 30, 1998 borrowings of $9.0 million were outstanding
under the Credit Agreement. The Credit Agreement contains, among other things,
covenants restricting the Company's ability to incur additional debt.

The Company's ongoing cash requirements will be for capital expenditures,
acquisitions, research and development and working capital. The Company has
executed an agreement with United Microelectronics Corporation to establish a
joint venture to produce photomasks in Taiwan, has announced that it plans to
build a new photomask production facility in Singapore, has begun construction
on a new photomask production facility in Gresham, Oregon, has announced that it
has entered into an agreement with Etec to upgrade its existing MEBES-Registered
Trademark- electron-beam pattern generation tools and has recently announced
plans to acquire Hewlett-Packard's photomask manufacturing business. These plans
reflect a significant capital investment over the next five years. Management
believes that cash provided by operations and the Credit Agreement will be
sufficient to meet the Company's cash requirements for at least the next 12
months. Based on its current operating plans, the Company will require external
financing from time to time to fund its capital expenditures. There can be no
assurance that the Company will be able to obtain the additional financing
required to fund these capital investments on reasonable terms, or at all.

Furthermore, there can be no assurance that alternative sources of financing
will be available upon expiration of the Credit Agreement or that alternative
sources of funding will be available if the Company's borrowing requirements
exceed the facility. In addition, there can be no assurance that, even if
funding is available, the terms thereof will be attractive to the Company.

25

OTHER MATTERS

In June 1997, the Financial Accounting Standards Board issued FAS 130 and
FAS 131. Neither FAS is expected to have a material impact on the Company. In
June 1998, the Financial Accounting Standards Board issued FAS 133 which is also
not expected to have a material impact on the Company.

Non-U.S. operations are subject to certain risks inherent in conducting
business abroad, including price and currency exchange controls, fluctuation in
the relative value of currencies and restrictive governmental actions. Changes
in the relative value of currencies occur from time to time and may, in certain
instances, have a material effect on the Company's results of operations. The
Company's financial statements reflect remeasurement of items denominated in
non-U.S. currencies to U.S. Dollars, the Company's functional currency. Exchange
gains or losses are included in income in the period in which they occur. The
Company monitors its exchange rate exposure and attempts to reduce such exposure
by hedging. The Company has entered into Korean Won and French Franc forward
contracts designed to reduce such exposure. There can be no assurance that such
forward contracts or any other hedging activity will be available or adequate to
eliminate, or even mitigate, the impact of the Company's exchange rate exposure.
There can be no assurance that such risks will not have a material adverse
impact on the Company's liquidity and results of operations in the future.

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

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

The Company has reviewed its information and operational systems and
manufacturing processes in order to identify those products, services or systems
that are not Year 2000 compliant. As a result of this review, the Company has
determined that it will be required to modify or replace certain information and
operational systems so they will be Year 2000 compliant. These modifications and
replacements are being, and will continue to be, made in conjunction with the
Company's overall systems initiatives. The total cost of these Year 2000
compliance activities, estimated at less than $2.0 million, has not been, and is
not anticipated to be, material to the Company's financial position or its
results of operations. The Company expects to complete its Year 2000 project
during 1999. Based on available information, the Company does not believe any
material exposure to significant business interruption exist as a result of Year
2000 compliance issues. Accordingly, the Company has not adopted any formal
contingency plan in the event its Year 2000 project is not completed in a timely
manner. These costs and the timing in which the Company plans to complete its
Year 2000 modification and testing processes are based on management's best
estimates. However, there can be no assurance that the Company will timely
identify and remediate all significant Year 2000 problems, that remedial efforts
will not involve significant time and expense, or that such problems will not
have a material adverse effect on the Company's business, results of operations
or financial position.

The Company also faces risk to the extent that suppliers of products,
services and systems purchased by the Company and others with whom the Company
transacts business on a worldwide basis do not comply with Year 2000
requirements. The Company has initiated formal communications with significant

26

suppliers and customers to determine the extent to which the Company is
vulnerable to these third parties failure to remediate their own Year 2000
issues. In the event any such third parties cannot provide the Company with
products, services or systems that meet the Year 2000 requirements on a timely
basis, or in the event Year 2000 issues prevent such third parties from timely
delivery of products or services required by the Company, the Company's results
of operations could be materially adversely affected. To the extent Year 2000
issues cause significant delays in, or cancellation of, decisions to purchase
the Company's products or services, the Company's business, results of
operations and financial position would be materially adversely affected.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Non-U.S. operations are subject to certain risks inherent in conducting
business abroad, including fluctuation in the relative value of currencies. The
Company monitors its exchange rate exposure and attempts to reduce such exposure
by hedging. The Company has entered into Korean Won and French Franc forward
contracts designed to reduce such exposure.. At June 30, 1998, the Company held
forward contracts with a notional amount of approximately $12 million, a
carrying amount of approximately $10.5 million and an unrealized loss of
approximately $1.5 million. The strength of the U.S. Dollar against the Korean
Won, and to a lesser extent, the German Mark and French Franc, adversely
impacted sales by approximately $15 million in 1998 and thus adversely impacted
sales growth in 1998 as compared to the previous year

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Financial Statements:

PAGE(S)
-------------

Report of Independent Accountants.................................................................. F-1
Income Statement for the Three Years Ended June 30, 1998........................................... F-2
Balance Sheet at June 30, 1997 and 1998............................................................ F-3
Statement of Cash Flows for the Three Years Ended June 30, 1998.................................... F-4
Notes to Financial Statements...................................................................... F-5 to F-16

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

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

Information with respect to the following Items is incorporated by reference
to the pages indicated in the Company's Proxy Statement filed in connection with
the 1998 Annual Meeting of Stockholders. However, information regarding
executive officers is contained in Part I of this report (page 18) pursuant to
General Instruction G(3) of this Form 10-K.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

PAGE(S)
---------

Election of Directors.................................................................................. 3 to 4
Compliance With Section 16(a) of the Exchange Act...................................................... 9

27

ITEM 11. EXECUTIVE COMPENSATION

PAGE(S)
---------

Executive Compensation and Other Information........................................................... 12 to 14
Director Compensation.................................................................................. 14
Employment Contracts................................................................................... 14

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

PAGE(S)
---------

Beneficial Ownership of Securities..................................................................... 1 to 2

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

PAGE(S)
---------

Transactions and Relationship Between the Company and DuPont........................................... 5 to 9

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

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

1. Financial statements--see Index to Financial Statements on page 27

2. Financial statement schedules--see Index to Financial Statements on
page 27

3. Exhibits--see Index to Exhibits on page 31

(b) Reports on Form 8-K

None.

28

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

Date: September 18, 1998 DUPONT PHOTOMASKS, INC.
(Registrant)

By: /s/ DAVID S. GINO
------------------------------------
EXECUTIVE VICE PRESIDENT--FINANCE
AND CHIEF FINANCIAL OFFICER

POWER OF ATTORNEY

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

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

NAME TITLE DATE
- ------------------------------ --------------------------- -------------------

Chairman of the Board and
/s/ J. MICHAEL HARDINGER Chief Executive Officer
- ------------------------------ (Principal Executive September 18, 1998
J. Michael Hardinger Officer)

/s/ PRESTON M. ADCOX President and Chief
- ------------------------------ Operating Officer September 18, 1998
Preston M. Adcox

Executive Vice
/s/ DAVID S. GINO President--Finance and
- ------------------------------ Chief Financial Officer September 18, 1998
David S. Gino (Principal Financial and
Accounting Officer)

/s/ JOHN L. DOYLE Director
- ------------------------------ September 18, 1998
John L. Doyle

/s/ JOHN W. HIMES Director
- ------------------------------ September 18, 1998
John W. Himes

/s/ JOHN C. HODGSON Director
- ------------------------------ September 18, 1998
John C. Hodgson

29

NAME TITLE DATE
- ------------------------------ --------------------------- -------------------

/s/ GARY W. PANKONIEN Director
- ------------------------------ September 18, 1998
Gary W. Pankonien

/s/ JOHN C. SARGENT Director
- ------------------------------ September 18, 1998
John C. Sargent

/s/ MARSHALL C. TURNER Director
- ------------------------------ September 18, 1998
Marshall C. Turner

/s/ SUSAN A. VLADUCHICK Director
- ------------------------------ September 18, 1998
Susan A. Vladuchick

30

INDEX TO EXHIBITS

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

EXHIBIT
NUMBER
- -----------

3.1 Certificate of Incorporation of the Company, as amended and restated on April 3, 1996*

3.2 Bylaws, as amended on December 31, 1995*

4.1 Specimen Certificate for Common Stock*

10.1 Transitional Administrative Services Agreement between the Company and E.I. du Pont de Nemours and
Company dated as of January 1, 1996*

10.2 Environmental Indemnification Agreement between the Company and E.I. du Pont de Nemours dated April 30,
1996*

10.3 Amended Bonus Plan, as adopted by the Company's Board of Directors on October 28, 1996**

10.4 Second Amended and Restated Non-employee Directors Stock Option Plan as adopted by the Company's Board
of Directors on July 27, 1998

10.5 Amended and Restated Stock Performance Plan as adopted by the Company's Board of Directors on June 9,
1997**

10.6 Founders Stock Option Plan, as adopted by the Company's Board of Directors on March 26, 1996*

10.7 Registration Rights Agreement between the Company and DuPont Chemical and Energy Operations, Inc. dated
as of December 31, 1995*

10.8 Tax Indemnification Agreement among the Company, DuPont Chemical and Energy Operations, Inc. and E.I. du
Pont de Nemours and Company dated May 14, 1996*

10.9 Amended Credit Agreement between the Company and DuPont Chemical and Energy Operations, Inc. dated as of
August 1, 1997*

10.10 Letter Agreement between J. M. Hardinger and E.I. du Pont de Nemours and Company dated as of September
21, 1995*

10.11 Research, Development and Consulting Agreement between the Company and E.I. du Pont de Nemours and
Company dated as of January 1, 1996*

10.12 Business Transfer Agreement between DuPont Korea, Ltd. and DuPont Photomasks Korea, Ltd. Dated December
22, 1995*

10.13 Form of Indemnification Agreement between the Company and its Directors and Officers*

10.14 Corporate Tradename and Trademark Agreement between the Company and E.I. du Pont de Nemours and Company
dated May 7, 1998

10.15 1997 Stock Option and Restricted Stock Plan as adopted by the Company's Board of Directors on June 9,
1997**

10.16 1998 Employee Stock Purchase Plan as adopted by the Company's Board of Directors on July 27, 1998

31

EXHIBIT
NUMBER
- -----------

11 Statement re Computation of Per Share Earnings

21 List of principal subsidiaries of the Company

23 Consent of PricewaterhouseCoopers LLP

24 Power of Attorney (included on the signature page contained in Part IV hereof)

27 Financial Data Schedule

32

REPORT OF INDEPENDENT ACCOUNTANTS

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

In our opinion, the accompanying balance sheet and the related income
statement and statement of cash flows present fairly, in all material respects,
the financial position of DuPont Photomasks, Inc. and its subsidiaries at June
30, 1997 and 1998, and the results of their operations and their cash flows for
each of the three years in the period ended June 30, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

PricewaterhouseCoopers LLP

Austin, Texas
July 27, 1998

F-1

DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES

INCOME STATEMENT

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

YEAR ENDED JUNE 30,
----------------------------------
1996 1997 1998
---------- ---------- ----------

Sales................................................. $ 213,415 $ 261,185 $ 271,591
Cost of goods sold.................................... 142,200 163,319 179,369
Selling, general and administrative expense........... 25,167 31,611 29,509
Research and development expense...................... 9,162 12,372 12,714
---------- ---------- ----------
Operating profit...................................... 36,886 53,883 49,999
Interest (income) expense............................. 7,078 (2,080) (150)
Exchange loss......................................... 886 796 177
---------- ---------- ----------
Income before income taxes, minority interest and
extraordinary item.................................. 28,922 55,167 49,972
Provision for income taxes............................ 2,678 19,308 17,127
---------- ---------- ----------
Income before minority interest and extraordinary
item................................................ 26,244 35,859 32,845
Minority interest in loss of majority owned joint
venture............................................. (660) (903) (687)
---------- ---------- ----------
Income before extraordinary item...................... 26,904 36,762 33,532
Extraordinary item.................................... (22,242)
---------- ---------- ----------
Net income............................................ $ 26,904 $ 59,004 $ 33,532
---------- ---------- ----------
---------- ---------- ----------
Basic earnings per share before extraordinary item.... $ 2.51 $ 2.44 $ 2.21
Extraordinary item.................................... (1.47)
---------- ---------- ----------
Basic earnings per share.............................. $ 2.51 $ 3.91 $ 2.21
---------- ---------- ----------
---------- ---------- ----------
Basic weighted average shares outstanding............. 10,726,849 15,100,521 15,179,596
---------- ---------- ----------
---------- ---------- ----------
Diluted earnings per share before extraordinary
item................................................ $ 2.50 $ 2.37 $ 2.15
Extraordinary item.................................... (1.43)
---------- ---------- ----------
Diluted earnings per share............................ $ 2.50 $ 3.80 $ 2.15
---------- ---------- ----------
Diluted weighted average shares outstanding........... 10,743,006 15,520,239 15,612,234
---------- ---------- ----------
---------- ---------- ----------

The accompanying notes are an integral part of this statement.

F-2

DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES

BALANCE SHEET

(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)

JUNE 30,
----------------------

1997 1998
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 51,351 $ 19,688
Accounts receivable, trade.............................................................. 38,973 47,471
Accounts receivable, related parties.................................................... 3,670 3,349
Inventories............................................................................. 15,651 18,236
Deferred income taxes................................................................... 3,351 6,389
Prepaid expenses and other current assets............................................... 8,711 6,574
---------- ----------
Total current assets.................................................................. 121,707 101,707
Property and equipment.................................................................... 162,310 244,650
Accounts receivable, related parties...................................................... 1,746 1,106
Deferred income taxes..................................................................... 2,386 2,221
Other assets.............................................................................. 3,430 2,295
---------- ----------
Total assets.......................................................................... $ 291,579 $ 351,979
---------- ----------
---------- ----------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade................................................................. $ 27,207 $ 30,197
Accounts payable, related parties....................................................... 4,889 10,391
Short-term borrowings................................................................... 1,845 2,143
Income taxes payable.................................................................... 1,295 1,828
Other accrued liabilities............................................................... 20,389 24,096
---------- ----------
Total current liabilities............................................................. 55,625 68,655
Long-term borrowings...................................................................... 10,473 7,519
Long-term borrowings, related parties..................................................... 9,000
Deferred income taxes..................................................................... 6,300 12,048
Other liabilities......................................................................... 2,597 1,800
Minority interest in net assets of majority owned joint venture........................... 687
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value; 25,000,000 shares authorized; 15,104,568 and 15,258,722
issued and outstanding................................................................ 151 152
Additional paid-in capital.............................................................. 156,742 160,269
Retained earnings....................................................................... 59,004 92,536
---------- ----------
Total liabilities and stockholders' equity............................................ $ 291,579 $ 351,979
---------- ----------
---------- ----------

The accompanying notes are an integral part of this statement.

F-3

DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES

STATEMENT OF CASH FLOWS

(DOLLARS IN THOUSANDS)

YEAR ENDED JUNE 30,
-------------------------------
1996 1997 1998
--------- --------- ---------

Cash flows from operating activities:
Net income.................................................. $ 26,904 $ 59,004 $ 33,532
Adjustments to reconcile net income to net cash provided by
operations:
Depreciation and amortization............................. 26,882 26,593 31,869
Other..................................................... (2,028) (494) 1,764
Gain...................................................... (34,219)
Cash provided (used) by changes in assets and liabilities
Accounts receivable..................................... (7,706) (6,945) (10,309)
Inventories............................................. (3,399) (5,444) (1,747)
Prepaid expenses and other current assets............... (1,021) (5,038) 2,641
Accounts payable........................................ (4,190) 2,470 27,336
Other accrued liabilities............................... 14,989 5,814 2,828
--------- --------- ---------
Net cash provided by operating activities............. 50,431 41,741 87,914
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures........................................ (24,294) (51,057) (100,200)
Payments for acquisitions................................... (6,000) (28,344)
Other....................................................... 920
Proceeds from sale of investment............................ 39,219
--------- --------- ---------
Net cash used in investing activities................. (29,374) (11,838) (128,544)
--------- --------- ---------
Cash flows from financing activities:
Increase (decrease) in borrowings........................... (1,666) 2,394 8,739
Net proceeds from issuance of common stock.................. 72,066 61 1,174
Net cash paid to DuPont..................................... (78,908)
--------- --------- ---------
Net cash (used in) provided by financing activities... (8,508) 2,455 9,913
--------- --------- ---------
Effect of exchange rate changes on cash....................... (782) (1,186) (946)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents.......... 11,767 31,172 (31,663)
Cash and cash equivalents at beginning of year................ 8,412 20,179 51,351
--------- --------- ---------
Cash and cash equivalents at end of year...................... $ 20,179 $ 51,351 $ 19,688
--------- --------- ---------
--------- --------- ---------

The accompanying notes are an integral part of this statement.

F-4

DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

(DOLLARS IN THOUSANDS)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION: The accompanying financial statements include the
accounts of DuPont Photomasks, Inc. and its subsidiaries (the "Company"). All
significant intercompany balances and transactions have been eliminated. The
Company's principal business is the manufacture and sale of photomasks,
high-purity quartz or glass plates containing precision microscopic images of
integrated circuits, to semiconductor manufacturers.

Prior to the Company's initial public offering (the "IPO") on June 13, 1996,
the Company was a wholly owned subsidiary of E.I. duPont de Nemours and Company
("DuPont"). DuPont, through its wholly owned subsidiary, DuPont Chemical and
Energy Operations, Inc. ("DCEO"), owns 10,500,000 shares of the Company's common
stock. On the IPO date, 4,000,000 shares of the Company's common stock were sold
to the public. An additional 600,000 shares of common stock were sold to the
public on June 14, 1996 pursuant to an over-allotment option. Retained earnings
are shown assuming that the IPO occurred on June 30, 1996, the Company's year
end.

DuPont's photomask business was realigned (the "Realignment") during the
year preceding the IPO so that photomask operations in Germany, France, the
Republic of Korea ("Korea") and the Peoples Republic of China ("China") which
were previously owned by various DuPont subsidiaries are owned by wholly owned
subsidiaries of the Company. Income and expenses related to the Realignment have
been eliminated and are not presented in the financial statements.

The historical financial statements of the Company prior to the IPO have
been derived from the accounting records of DuPont and reflect all sales and
costs directly attributable to DuPont's photomask business during the periods
presented as well as certain charges and allocations from DuPont which were
based primarily on usage. For purposes of the historical financial statements
prior to the IPO, charges and allocations between the Company and DuPont are
deemed to have been settled in the period in which they originated.

REVENUE RECOGNITION: Sales and related costs of goods sold are included in
income when goods are shipped to the customer. Provision is made for estimated
sales returns.

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

INVENTORIES: Inventories are valued at the lower of cost or market, with
cost being determined using the average cost method.

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

INTANGIBLE ASSETS: Intangible assets are amortized using the straight-line
method over their estimated useful lives. Net intangible assets, primarily
supply agreements, were $2,750 and $1,750 at June 30, 1997 and 1998 and are
included in other assets. The future economic benefit of long-lived assets is
reviewed periodically through an undiscounted cash flow analysis to determine if
an impairment has occurred.

F-5

DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PENSIONS, OTHER POST RETIREMENT BENEFITS AND PROFIT SHARING: Through June
30, 1996, the Company's active U.S. employees were covered by DuPont defined
benefit pension and other postretirement benefit plans. The cost of these plans
was determined and allocated on an actuarial basis in accordance with Statement
of Financial Accounting Standards No. ("FAS") 87 and FAS 106 and is principally
included in cost of goods sold. Effective July 1, 1996, the Company eliminated
the DuPont plans and implemented a defined contribution retirement plan covering
substantially all of the active U.S. employees. The defined contribution
retirement plan provided for the Company to contribute three to five percent of
an employee's compensation into a participant directed investment account.
Effective July 1, 1997, the Company suspended the defined contribution
retirement plan and implemented a profit sharing plan covering substantially all
of the active U.S. employees.

Pension coverage for non-U.S. employees is provided through separate plans.
Obligations under these plans are systematically provided for principally by
establishing book reserves. Certain non-U.S. employees are covered by separate
profit sharing plans.

RESEARCH AND DEVELOPMENT: Research and development costs are expensed as
incurred. The Company is party to certain contracts which provide for partial
funding of its research and development costs. Funding under these contracts has
been recognized as an offset to research and development expense. The Company
participates in a joint venture for advanced photomask development and pilot
line fabrication of leading-edge photomasks.

NON-U.S. CURRENCIES: The Company has determined that the U.S. Dollar is the
functional currency of its worldwide operations. Accounts denominated in
non-U.S. currencies are remeasured into U.S. Dollars and the resulting exchange
gains and losses are included in income in the period they occur. Exchange gains
and losses are recorded net of the impact of hedging activities designed to
reduce exchange rate exposure. The Company has entered into Korean Won and
French Franc forward contracts designed to reduce such exchange rate exposure.
At June 30, 1998, the Company held forward contracts with a notional amount of
approximately $12,000, a carrying amount of approximately $10,500 and an
unrealized loss of approximately $1,500.

INCOME TAXES: The Company accounts for income taxes using an asset and
liability approach that requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
recognized in the Company's financial statements or tax returns. In estimating
future tax consequences, all expected future events are considered other than
enactments of changes in tax laws or rates. Valuation allowances are established
as necessary to reduce deferred tax assets to their expected realizable value.

Prior to the IPO, the taxable income (loss) of the Company was included in
the consolidated tax returns of the DuPont entities of which it was a part. As
such, separate income tax returns were not prepared or filed for the Company.
Income tax expense was determined and allocated to the Company by applying the
separate taxpayer approach outlined in FAS 109.

The Company's operations in Korea operate under a government granted tax
exemption which expires in 2003.

F-6

DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions, based upon all known facts and circumstances, that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates.

RECLASSIFICATIONS: The Company adopted FAS 128 in the quarter ended
December 31, 1997. Earnings per share have been restated for all periods
presented to conform to the requirements of FAS 128.

2. ACQUISITION

On March 16, 1998, the Company entered into a strategic alliance with
Hyundai Electronics Industries Co., Ltd. ("Hyundai") whereby the Company
purchased selected photomask manufacturing equipment located at Hyundai's
captive photomask manufacturing facility in Kanam, Korea and entered into a
five-year sales and supply agreement with Hyundai. The Company acquired, through
its Korean subsidiary, approximately $28,800 of equipment and approximately
$1,000 in inventory. Consideration for the assets was principally cash, and was
partially financed by $24,000 in borrowings under the Company's credit facility
with DuPont.

3. RELATED PARTY TRANSACTIONS

The financial statements include significant transactions with other DuPont
business units involving functions and services (such as cash management, tax
administration, accounting, legal and data processing) that were provided by
centralized DuPont organizations outside the photomask business. Prior to the
IPO, the costs of these functions and services were directly charged and/or
allocated to the photomask business using methods that DuPont management
believes were reasonable. Such charges and allocations are not necessarily
indicative of the costs that would have been incurred if the Company had been a
separate entity. Amounts charged and allocated for these functions and services
were $7,251 for the period July 1, 1995 to December 31, 1995. Effective January
1, 1996, the Company entered into several transitional agreements which set
forth services to be provided to the Company and the fees to be paid by the
Company for such services. Charges to the Company under these agreements were
$1,661 for the period January 1, 1996 to June 30, 1996 and $3,944 for 1997 and
$3,072 for 1998. Amounts charged and allocated to the Company for functions and
services provided by DuPont are principally included in general and
administrative expense.

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

Accounts receivable, related parties includes receivables from employees of
the Company of $1,836 (Current $90, Non-Current $1,746) and $1,154 (Current $48,
Non-Current $1,106) at June 30, 1997 and 1998 which relate principally to
housing and automobile loans to non-U.S. employees. The remainder represents
receivables for goods sold to various DuPont entities and other related parties
and amounts due to the Company under the tax indemnification agreement with
DuPont and the Administrative Service

F-7

DUPONT PHOTOMASKS, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS)

3. RELATED PARTY TRANSACTIONS (CONTINUED)
Agreements. Sales to related parties, principally various DuPont entities who
serve as resellers for the Company, were $8,214, $8,764 and $10,933 for the
years ended June 30, 1996, 1997 and 1998.

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

4. ACCOUNTS RECEIVABLE, TRADE

Essentially all of the Company's sales are to customers in the semiconductor
manufacturing industry. The Company assesses the financial strength of its
customers prior to extending credit in order to reduce the risk of loss as the
Company generally does not require collateral. Two of the Company's customers
each represented more than ten percent of sales in 1996 and, in the aggregate,
these two customers represented approximately twenty-five percent of sales in
the year. One of the Company's customers represented approximately twelve
percent of sales in 1997. Two of the Company's customers each represented more
than ten percent of sales in 1998 and, in the aggregate, these two customers
represented approximately twenty-seven percent of sales in the year.

5. INVENTORIES

Inventories consist of the following:

JUNE 30,
--------------------
1997 1998
--------- ---------

Raw materials and supplies.............................................. $ 13,122 $ 14,843
Work-in-process......................................................... 902 1,090
Finished product........................................................ 1,627 2,303
--------- ---------
Inventories............................................................. $ 15,651 $ 18,236
--------- ---------
--------- ---------

F-8

6. PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

JUNE 30,
------------------------

ESTIMATED USEFUL
LIVES 1997 1998
--------------------- ----------- -----------
Construction-in-progress..................... $ 30,873 $ 64,221
Land......................................... 5,627 5,932
Buildings.................................... 10 to 20 years 51,899 76,775
Equipment.................................... 3 to 7 years 259,114 313,010
----------- -----------
347,513 459,938
Less: accumulated depreciation............... (185,203) (215,288)
----------- -----------
Property and equipment....................... $ 162,310 $ 244,650
----------- -----------
----------- -----------

7. OTHER ACCRUED LIABILITIES

Other accrued liabilities consist of the following:

JUNE 30,
--------------------

1997 1998
--------- ---------
Accrued vacation pay.................................................... $ 3,454 $ 3,180
Accrued compensation and benefits....................................... 11,815 7,483
Other................................................................... 5,120 13,433
--------- ---------
Other accrued liabilities............................................... $ 20,389 $ 24,096
--------- ---------
--------- ---------

8. BORROWINGS

Borrowings consist of the following:

JUNE 30,
--------------------

1997 1998
--------- ---------
Capital lease obligations................................................ $ 5,073 $ 2,374
6% bank borrowings due 2000 through 2007................................. 4,500 4,500
10% bank borrowings due 1998 through 2001................................ 2,745 2,788
--------- ---------
12,318 9,662
Less: short-term borrowings............................................ (1,845) (2,143)
--------- ---------
Long-term borrowings..................................................... $ 10,473 $ 7,519
--------- ---------
--------- ---------

F-9

9. LEASES

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

CAPITAL OPERATING
LEASES LEASES
--------- -----------

1999.................................................................... $ 289 $ 432
2000.................................................................... 289 446
2001.................................................................... 289 460
2002.................................................................... 289 207
2003.................................................................... 254 156
Thereafter.............................................................. 2,336 1,560
--------- -----------
Minimum lease payments................................................ 3,746 $ 3,261
-----------
-----------
Less: interest...................................................... (1,372)
---------
Present value of minimum lease payments................................. $ 2,374
---------
---------

10. MASTER NOTES AND CREDIT AGREEMENT

Interest expense includes $7,016 paid to DuPont under the master notes in
1996. The interest rate charged on the notes was generally equivalent to the
rate DuPont paid for its commercial paper borrowings. In conjunction with the
IPO, DuPont, on June 28, 1996, contributed the $90,453 balance outstanding on
the master notes to the Company as a capital contribution.

The Company and DCEO have entered into a credit agreement (the "Credit
Agreement") pursuant to which DCEO has agreed to provide a credit facility to
the Company in an aggregate amount of $100,000. The Credit Agreement expires in
2001 and any loans thereunder will bear interest at LIBOR plus 25 basis points.
At the Company's option, advances under the Credit Agreement are convertible
into term loans with maturities up to seven years. The amounts loaned under the
Credit Agreement are unsecured and the Credit Agreement contains various
representations, covenants and events of default typical for financings of a
similar size and nature. To date, the Company has borrowed a maximum of $35.0
million under the credit facility and at June 30, 1998 borrowings of $9.0
million were outstanding under the Credit Agreement.

F-10

11. STOCKHOLDERS' EQUITY

Stockholders' equity at June 30 is as follows:

ADDITIONAL
COMMON PAID-IN UNREALIZED RETAINED
STOCK CAPITAL HOLDING GAIN EARNINGS
----------- -------------- ------------ ---------

Realignment and contribution of
capital................................ $ 105 $ 80,860
Issuance of common stock................. 46 72,020
Unrealized holding gain.................. $ 11,583
----- -------------- ------------
Balance at 1996........................ 151 152,880 11,583
Contribution of capital.................. 3,745
Issuance of common stock................. 117
Unrealized holding gain.................. 10,659
Sale of investment....................... (22,242)
Net income............................... $ 59,004
----- -------------- ------------ ---------
Balance at 1997........................ 151 156,742 59,004
Issuance of common stock 1 3,527
Net income............................... 33,532
----- -------------- ------------ ---------
Balance at 1998........................ $ 152 $ 160,269 $ -- $ 92,536
----- -------------- ------------ ---------
----- -------------- ------------ ---------

12. STOCK PERFORMANCE PLANS

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

1996 1997 1998
------------------------------ ------------------------------ -----------------------------

NUMBER OF WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
----------- ----------------- ----------- ----------------- ---------- -----------------
Balance at beginning of
year........................ 953,784 $ 17.00 990,544 $ 18.07
Options granted............... 953,784 $ 17.00 86,976 $ 29.21 507,983 $ 52.10
Options forfeited............. (46,640) $ 17.00 (26,930) $ 27.67
Options exercised............. (3,576) $ 17.00 (68,083) $ 17.24
----------- ----------- ----------
Balance at end of year........ 953,784 $ 17.00 990,544 $ 18.07 1,403,514 $ 30.27
----------- ----------- ----------
----------- ----------- ----------
Exercisable at end of year.... 223,210 $ 17.00 396,063 $ 17.64
----------- ----------
----------- ----------

F-11

12. STOCK PERFORMANCE PLANS (CONTINUED)
Additional information related to stock options at June 30, 1998 is as
follows:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- --------------------------

WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE
NUMBER OF EXERCISE AVERAGE LIFE NUMBER OF EXERCISE
EXERCISE PRICE RANGE SHARES PRICE (YEARS) SHARES PRICE
- --------------------------------------------- ----------- ------------- --------------- ----------- -------------
$17.00 to $18.50............................. 865,013 $ 17.07 8.0 386,716 $ 17.04
$27.31 to $32.50............................. 8,413 $ 30.77 8.9 476 $ 31.56
$35.37 to $45.88............................. 59,904 $ 42.33 8.9 8,753 $ 42.72
$52.75 to $71.56............................. 470,184 $ 52.92 9.1 118 $ 53.19

A summary of restricted stock grant activity is as follows:

1996 1997 1998
-------------------------- ------------------------------- --------------------------

NUMBER OF MARKET VALUE NUMBER OF MARKET VALUE NUMBER OF MARKET VALUE
SHARES PER SHARE SHARES PER SHARE SHARES PER SHARE
----------- ------------- ----------- ------------------ ----------- -------------
Balance at beginning of year........ 94,913 $17.00 89,060 $ 17.54
Restricted stock granted............ 94,913 $ 17.00 4,744 $18.50 to $45.88 1,755 $ 17.00
Restricted stock forfeited.......... (9,605) $17.00
Restricted stock issued............. (992) $17.00 (86,071) $ 17.00
----------- ----------- -----------
Balance at end of year.............. 94,913 $ 17.00 89,060 $17.54 4,744 $ 27.16
----------- ----------- -----------
----------- ----------- -----------

At June 30, 1998, there were 2,853,443 shares reserved for future grants
under existing stock performance plans. The Company applies APB 25 and its
related interpretations in accounting for its stock performance plans. The
weighted average fair values of stock options granted in 1996, 1997 and 1998
were $9.41, $16.16 and $31.65. The weighted average fair values were determined
using the Black-Scholes option-pricing model with the following assumptions: a
risk-free interest rate of 6.5% for 1996 and 1997 and a risk free rate of
interest of 5.5% for 1998, no dividend yield, expected term of five years and
volatility of 58% for 1996 and 1997 and volatility of 68% for 1998. Had
compensation cost been determined based on the fair value of stock option awards
at the date of grant, net income (diluted earnings per share) would have been
$26,904, $57,456 and $29,577 ($2.50, $3.76 and $1.94) in 1996, 1997 and 1998.

13. PROVISION FOR INCOME TAXES

The provision for income taxes consists of the following:

YEAR ENDED JUNE 30,
--------------------------------
1996 1997 1998
---------- --------- ---------

Current:
Federal................................................... $ 10,706 $ 25,819 $ 8,909
State..................................................... 1,738 787 1,023
Non-U.S................................................... 4,572 4,679 4,320
Deferred:
Federal................................................... (10,706) (1,039) 1,353
State..................................................... (1,738) (59) 155
Non-U.S................................................... (1,894) 1,098 1,367
---------- --------- ---------
Provision for income taxes.................................. $ 2,678 $ 31,285 $ 17,127
---------- --------- ---------
---------- --------- ---------

F-12

13. PROVISION FOR INCOME TAXES (CONTINUED)
The provision for income taxes differs from the amount computed by applying
the federal statutory rate as a result of the following:

YEAR ENDED JUNE 30,
-------------------------------
1996 1997 1998
--------- --------- ---------

Tax at 35% statutory federal tax rate........................ $ 10,123 $ 31,285 $ 17,490
Higher effective tax rate on non-U.S. operations............. 2,657 2,158 1,752
Tax exemption................................................ (3,081) (4,809) (5,870)
Change in valuation allowance................................ (7,808) (243)
State taxes, net of federal.................................. 586 633 1,258
Other........................................................ 201 2,261 2,497
--------- --------- ---------
Provision for income taxes................................... $ 2,678 $ 31,285 $ 17,127
--------- --------- ---------
--------- --------- ---------

Deferred tax assets (liabilities) consist of the following:

JUNE 30, 1998
-------------

Deferred tax assets:
Inventories.................................................................. $ 971
Depreciation................................................................. 2,218
Accrued liabilities.......................................................... 4,051
Other........................................................................ 1,922
-------------
Deferred tax assets........................................................ 9,162
-------------
Deferred tax liabilities:
Depreciation................................................................. (7,579)
Other........................................................................ (5,021)
-------------
Deferred tax liabilities................................................... (12,600)
-------------
Deferred income taxes...................................................... $ (3,438)
-------------
-------------

Prior to the IPO, DuPont utilized various tax planning strategies and
elections to minimize its total income tax expense. It is not practicable to
identify the effects of these strategies and elections on the results of
operations of the Company.

In conjunction with the IPO, the Company, DuPont and DCEO entered into a tax
indemnification agreement pursuant to which the Company will make payments to
DuPont and/or DuPont will make payments to the Company, as appropriate, of taxes
payable or receivable at the IPO date. The amount due from DuPont under the tax
indemnification agreement was $256 and $571 at June 30, 1997 and 1998. The
Company has a capital loss carryforward of $18,513 arising from the Realignment.
Benefit from this carryforward, if and when realized, is payable to DuPont under
the tax indemnification agreement.

F-13

14. GEOGRAPHIC INFORMATION

The Company operates within a single industry segment. Geographic
information as of or for the years ended June 30 is as follows:

UNITED
STATES EUROPE ASIA TOTAL
------------ --------- --------- ----------

1996
Sales............................................................ $ 121,620 $ 52,910 $ 38,885 $ 213,415
Transfers between geographic areas............................... 14,613 2,278 79
------------ --------- --------- ----------
136,233 55,188 38,964 213,415
------------ --------- --------- ----------
------------ --------- --------- ----------
Net income....................................................... 14,987 7,154 4,479 26,904
Identifiable assets.............................................. 126,540 36,214 65,139 227,893

1997
Sales............................................................ $ 145,621 $ 62,988 $ 52,576 $ 261,185
Transfers between geographic areas............................... 21,973 1,019 649
------------ --------- --------- ----------
167,594 64,007 53,225 261,185
------------ --------- --------- ----------
------------ --------- --------- ----------
Net income....................................................... 38,836 9,037 11,131 59,004
Identifiable assets.............................................. 151,293 50,877 89,409 291,579

1998
Sales............................................................ $ 152,213 $ 66,953 $ 52,425 $ 271,591
Transfers between geographic areas............................... 22,654 2,002 603
------------ --------- --------- ----------
174,867 68,955 53,028 271,591
------------ --------- --------- ----------
------------ --------- --------- ----------
Net income....................................................... 13,808 5,702 14,022 33,532
Identifiable assets.............................................. 164,699 71,618 115,662 351,979

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

15. COMMITMENTS AND CONTINGENCIES

The Company has executed an agreement with United Microelectronics
Corporation to establish a joint venture to produce photomasks in Taiwan. There
can be no assurance that the joint venture will yield results that are favorable
to the Company.

In 1998, the Company announced that it plans to build a new photomask
production facility in Singapore. The site will service the growing number of
semiconductor manufacturers in Singapore and the rest of Southeast Asia. Current
plans are to invest $50,000 over the next five years. The Company previously
announced plans for, and has begun construction on, a new photomask production
facility in Gresham, Oregon. The site will service the growing number of
semiconductor manufacturers in the northwest United States. Current plans are to
invest $75,000 over the next four years. There can be no assurance that
construction on either facility will be completed or that, if completed, either
facility will yield results that are favorable to the Company.

In 1998, the Company announced that it had entered into an agreement with
Etec to upgrade its existing MEBES-Registered Trademark- electron-beam pattern
generation tools. The hardware and software upgrades will enhance the capability
of the tools while simultaneously increasing the speed at which they operate. As
part of the agreement, Etec has purchased the use of technology developed by the
Company. The tools to be upgraded currently reside throughout the Company's
integrated network of production facilities. As

F-14

15. COMMITMENTS AND CONTINGENCIES (CONTINUED)
part of the agreement, Etec is scheduled to deliver, and the Company is
committed to purchase, the initial upgraded MEBES-Registered Trademark- tool in
1999, with additional tools scheduled for upgrades over the course of the next
four years. There can be no assurance that the Company will be successful in
upgrading its tools or that such upgraded tools will yield results that are
favorable to the Company.

Also in 1998, the Company announced the formation of a strategic alliance
with Hoya Corporation ("Hoya") to develop and produce advanced photoblanks. A
primary goal of the alliance will be the development of advanced photoblanks
used in the production of binary and phase shift photomasks supporting the
manufacture of semiconductor devices with 0.18 micron design rules and below.
The companies have also agreed to exchange technical information related to the
production of photoblanks. The relationship calls for Hoya to supply the Company
with developmental photoblanks based on agreed-upon design and performance
specifications. As part of the agreement, the Company will have exclusive rights
to use photoblanks and technology developed under the relationship.
Additionally, the Company has agreed to utilize Hoya's photoblanks in its
photomask manufacturing operations, supplementing its internal supply. There can
be no assurance that the alliance will yield results that are favorable to the
Company.

The Company has various purchase commitments incident to the normal course
of business including non-refundable deposits to purchase equipment. In the
aggregate, such commitments are not at prices in excess of current market. The
Company is subject to litigation in the normal course of business. Management
believes the effect, if any, of an unfavorable settlement of such litigation
would not have a material adverse effect on the financial position, results of
operations, cash flows or liquidity of the Company.

F-15

16. UNAUDITED QUARTERLY FINANCIAL DATA

Unaudited quarterly financial data for 1997 and 1998 is as follows:

QUARTER
----------------------------------------------------------

FIRST SECOND THIRD FOURTH
------------- ------------- ------------- -------------
1997
Sales............................................... $ 64,244 $ 64,260 $ 62,760 $ 69,921
Operating profit.................................... 13,740 13,962 13,920 12,261
Income before extraordinary item.................... 9,015 9,433 9,722 8,592
Net income.......................................... 9,015 9,433 31,964 8,592
Basic earnings per share before extraordinary
item.............................................. 0.60 0.62 0.64 0.57
Diluted earnings per share before extraordinary
item.............................................. 0.59 0.61 0.62 0.55
Basic earnings per share............................ 0.60 0.62 2.12 0.57
Diluted earnings per share.......................... 0.59 0.61 2.05 0.55
Basic weighted average shares outstanding........... 15,100,000 15,100,000 15,100,000 15,100,521
Diluted weighted average shares outstanding......... 15,346,912 15,539,182 15,596,131 15,597,064

1998
Sales............................................... $ 68,809 $ 67,328 $ 67,563 $ 67,891
Operating profit.................................... 13,488 11,691 11,961 12,859
Net income.......................................... 9,203 8,261 7,785 8,283
Basic earnings per share............................ 0.61 0.54 0.51 0.54
Diluted earnings per share.......................... 0.59 0.53 0.50 0.53
Basic weighted average shares outstanding........... 15,129,611 15,165,132 15,167,645 15,255,996
Diluted weighted average shares outstanding......... 15,684,990 15,605,359 15,554,304 15,604,281

F-16