CABOT MICROELECTRONICS CORP - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2003

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 000-30205
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CABOT MICROELECTRONICS CORPORATION
(Exact name of registrant as specified in its charter)

DELAWARE 36-4324765
(State of Incorporation) (I.R.S. Employer
Identification No.)

870 NORTH COMMONS DRIVE 60504
AURORA, ILLINOIS (Zip Code)
(Address of principal executive offices)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(630) 375-6631

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.001 PAR VALUE

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

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

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

The aggregate market value of the registrant's Common Stock held
beneficially or of record by stockholders who are not affiliates of the
registrant, based upon the closing price of the Common Stock on March 31, 2003
as reported by the Nasdaq National Market, was approximately $1,022,000,000. For
the purposes hereof, "affiliates" include all executive officers and directors
of the registrant.

As of November 28, 2003, the Company had 24,744,572 shares of Common Stock
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on March 9, 2004 are incorporated by
reference in Part III of this Form 10-K to the extent stated herein.

This Form 10-K includes statements that constitute "forward-looking
statements" within the meaning of federal securities regulations. For more
detail regarding "forward-looking statements" see item 7 of Part II of this Form
10-K.
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CABOT MICROELECTRONICS CORPORATION
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2003

INDEX

1

PART I

ITEM 1. BUSINESS

OUR COMPANY

Cabot Microelectronics Corporation ("Cabot Microelectronics," "the
Company," "us," "we," or "our") is the leading supplier of high-performance
polishing slurries used in the manufacture of the most advanced integrated
circuit ("IC") devices within the semiconductor industry, in a process called
chemical mechanical planarization ("CMP"). CMP is a polishing process used by IC
device manufacturers to planarize or flatten many of the multiple layers of
material that are built upon silicon wafers, and is a necessary step in the
production of advanced ICs. Planarization is a polishing process that uses CMP
slurries and pads to level, smooth and remove excess material from the surfaces
of these layers. CMP slurries are liquid formulations that facilitate and
enhance this polishing process and generally contain engineered abrasives and
proprietary chemicals. CMP pads are typically flat engineered "disks" made of
polymeric materials that help to distribute and transport the slurry to the
surface of the wafer and distribute it across the wafer.

CMP enables IC device manufacturers to produce smaller, faster and more
complex IC devices with fewer defects. We believe CMP will become increasingly
important in the future as manufacturers continue to shrink the size of these
devices and to improve their performance. Our CMP products are used for a number
of applications, such as polishing insulating layers, the tungsten plugs that go
through the insulating layers and connect the multiple wiring layers of IC
devices, and copper wiring. In addition, we have developed and sell CMP slurries
for polishing certain components in hard disk drives, specifically rigid disk
substrates and magnetic heads, and we believe we are one of the leading
suppliers in this area. We are continuing to develop slurries for new
applications such as direct shallow trench isolation, used to electrically
isolate adjoining transistors. In addition, we operate as a value-added reseller
of polishing pads and are developing our own polishing pads for use in the CMP
process.

Prior to our initial public offering in April 2000, we operated as a
division of Cabot Corporation ("Cabot Corporation"), a global chemical
manufacturing company based in Boston, Massachusetts. Following our initial
public offering, Cabot Corporation owned approximately 80.5 percent of Cabot
Microelectronics. In September 2000, Cabot Corporation effected the spin-off of
Cabot Microelectronics by distributing 0.280473721 shares of our common stock as
a dividend on each outstanding share of Cabot Corporation common stock
outstanding on September 13, 2000, or an aggregate of 18,989,744 shares of our
common stock.

IC DEVICE MANUFACTURING

Advanced IC devices are composed of millions of transistors and other
electronic components connected by miles of wiring. The wiring, today composed
primarily of aluminum and tungsten but also increasingly consisting of copper in
advanced applications, carries electric signals through the multiple layers of
the IC device. Insulating material is used throughout the IC device to isolate
the electronic components and the wiring, thereby preventing short circuiting
and improving the efficiency of the travel of the electric signal within the
device. To enhance performance, IC device manufacturers have progressively
increased the number, or density, of transistors and other electronic components
in each IC device. As a result, the number of wires and the number of layers
have also increased. We expect this trend towards increased complexity to
continue.

The multi-step manufacturing process for IC devices typically begins with a
circular wafer of pure silicon. A large number of identical IC devices, or dies,
are manufactured on each wafer at the same time, and at the end of the process,
the wafer is cut into the individual dies. The dies are then packaged to form
individual chips. The first step in the manufacturing process builds transistors
and other electronic components on the silicon wafer. These are then isolated
from each other to prevent electrical signals from bridging from one transistor
to another by using a technique called shallow trench isolation ("STI"). Once
the transistors and other electronic components are in place on the silicon
wafer, they are usually covered with a layer of insulating material, most often
silicon dioxide. These components are then wired together in a particular
sequence to produce a functional IC device with particular characteristics.

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CMP is used to planarize the insulating layers of an IC device and prepare
them for a process known as metallization. During metallization, wiring is added
to the surface of the insulating layer through a series of steps involving the
following: deposition of a metal onto the surface of the layer; projection of an
image of the desired wiring pattern on the layer using a process known as
photolithography; and removal of the excess deposited metal from the surface of
the insulating layer, which leaves behind the desired wiring pattern. If the IC
device uses aluminum wiring, the excess metal is removed using a process called
etching. If the IC device is more advanced and uses copper wiring, the excess
metal is removed by a CMP process step.

When the wiring is finished, another layer of insulating material is added
and may be planarized using CMP. This process of alternating insulating and
wiring layers is repeated until the desired wiring within the IC device is
completed. The electronic components and wiring layers are connected by
conductive plugs that are formed by making holes in the insulating layers and
filling those holes with metal, usually tungsten or copper. After these holes
have been filled with metal, either an etching process or CMP is used to remove
all the excess metal above the surface of the insulating layer so that the top
of the plug is level with the surface of the insulating layer before the next
wiring layer is built.

The number of transistors on a chip has increased exponentially since the
inception of the IC industry. This phenomenon, called "Moore's law", states that
the number of transistors on an integrated circuit should double every 12-18
months. This has driven relentless improvement in the speed and a reduction in
the cost of computing power available today. As a result of this evolution, the
number of wires and the number of wiring layers in an IC device have also
increased. To accommodate and standardize these increases, the semiconductor
industry follows generally accepted design rules that describe current and
projected size and spacing of electronic components and wiring in IC devices.
The size and spacing in these design rules have been progressively decreasing to
accommodate the demand for increased circuit density and transistor
miniaturization. As the density increases, the amount of wiring needed to
connect the transistors and other electronic components to each other also
increases. As IC devices become smaller, this increase in wiring requires
tighter and more precise spacing of the wiring, and an increased number of
wiring layers in IC devices.

Most IC devices today are manufactured on 200 mm silicon wafers. However, a
significant development for the IC industry is the onset of IC device
manufacturing using 300 mm wafers. The industry leaders are driving this change
from 200 mm to 300 mm wafers to reduce the cost of making each chip. In general,
300 mm wafer manufacturing began in 2003 and this trend is expected to
accelerate in the future. The larger 300 mm wafers contain more IC devices and
typically use less CMP slurry per device.

The International Technology Roadmap for Semiconductors ("ITRS") is a set
of guidelines sponsored by the Semiconductor Industry Association and others
that provides design guidance and targets for the semiconductor industry. The
2002 edition helps quantify the miniaturization and complexity trends expected
in future IC devices. For example, today's leading edge logic microprocessors
are operating at the 130 nanometer node and utilize a maximum of eight levels of
metal interconnect wiring. The ITRS calls for those microprocessors to operate
at the 90 nanometer node and a maximum of nine levels of metal wiring starting
in 2004. Similarly, leading edge DRAM memory chips are projected to be at four
levels of metal wiring in 2004. CMP is used to polish the insulating layers,
tungsten plugs, and copper wiring that make up the interconnects in IC devices.
CMP is also utilized in the formation of the transistors in the processes that
precede the formation of interconnects. We believe that the use of CMP in the
manufacture of IC devices will continue to increase as the feature size of these
devices decreases, the number of CMP applications increases, and the number of
layers in the device increases. We expect that increased demand for CMP will
have a greater impact on CMP slurry and pad usage than efficiencies that may be
obtained by semiconductor manufacturers in their transition from 200 mm to 300
mm wafers.

CHEMICAL MECHANICAL PLANARIZATION

The CMP process utilizes both chemical reactions and mechanical abrasion to
planarize the insulating and conductive layers of an IC device that are built
upon a silicon wafer. During the IC device manufacturing process the wafer is
typically held on a rotating carrier, which is spun at high speed and pressed
against a rotating polishing table. The portion of the table that comes in
contact with the wafer is covered by a textured

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polishing pad. A CMP slurry is continuously applied to the polishing pad to
facilitate and enhance the polishing process. CMP slurries are liquid solutions
generally composed of high-purity deionized water, proprietary chemical
additives and engineered abrasives that chemically and mechanically interact
with the surface material of the IC device at an atomic level. CMP pads are
engineered polymeric materials designed to transfer the slurry to and distribute
it evenly across the wafer.

BENEFITS OF CMP

CMP provides IC device manufacturers with a number of advantages. CMP
enables IC device manufacturers to produce smaller IC devices with greater
density, both of which improve the performance and capabilities of the device.
As IC devices shrink and become denser, they require smaller feature sizes and
tighter spacing among the device wiring. If the surface is not level, the
smaller feature size and tighter spacing make it more difficult for the
photolithography equipment to focus accurately and create the desired wiring
pattern. In addition, because today's smaller, denser IC devices have more
layers than previous devices, any unevenness of a layer at or near the bottom of
an IC device will be magnified in the additional layers that are added to the
device. Defects caused by problems in the photolithography process or unevenness
in the layers can lead to short circuits, reduced performance and at worst,
failure of the IC device. By using CMP, IC device manufacturers can eliminate or
minimize these problems.

By enabling IC device manufacturers to make smaller IC devices, CMP allows
them to increase the number of IC devices that fit on a wafer. This in turn
increases their throughput, or the number of IC devices they can manufacture in
a given time period. CMP also helps reduce the number of defective or
substandard IC devices produced, which increases the device yield. Improvements
in throughput and yield reduce an IC device manufacturer's unit production
costs. Manufacturers can achieve further improvements in throughput and yield as
new improvements to the CMP process help to reduce defect rates and decrease the
amount of time required for the polishing process.

CMP SLURRIES AND PADS

The characteristics that are important for an effective CMP process
include:

- high polishing rates, which increase productivity and throughput;

- high selectivity, which is the ability to enhance the polishing of
specific materials while at the same time inhibiting the polishing of
other materials;

- uniform planarity, which minimizes unevenness as different layers are
built on the wafer;

- uniformity of polishing, which means that different surface materials can
be polished to the same degree at the same time across the wafer, leading
to uniformity of all dies on the wafer; and

- low defectivity, which means that the devices have fewer imperfections
and therefore produce higher yield.

These attributes may be achieved through technical optimization of both the
slurry and the pad in conjunction with an appropriately designed CMP process.
These qualities affect and enhance the performance of IC devices, and most also
have the ability to reduce the cost of ownership of the CMP process for IC
device manufacturers. Cost of ownership is a calculation by which IC device
manufacturers evaluate the benefits and costs of each production step by
analyzing the impact of that step on throughput and yield, compared with the
costs of the production inputs of that step.

Prior to introducing a new or different CMP slurry or pad into its
manufacturing process, an IC device manufacturer generally requires the product
to be qualified in its plant through a series of tests and evaluations. These
qualifications are intended to ensure that the product will function properly in
the manufacturing process, as well as to optimize its application. These tests
may require changes to the CMP process, the CMP slurry and/or the CMP polishing
pad. While this qualification process varies depending on numerous factors, it
is not unusual for it to be very costly and to take six months or more to
complete. IC

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device manufacturers usually take the cost, time delay and impact on production
into account when they consider implementing or switching to a new CMP slurry or
pad.

INDUSTRY TRENDS

The semiconductor industry has experienced rapid growth over the past three
decades, but it has also been highly cyclical and prone to downturns on a
regular two to three year basis. Over the past few years, companies in this
industry have been challenged by one of the most significant downturns in its
history, which appeared to be primarily driven by three factors:

- overall economic factors, including an end to the late 1990's technology
boom that had stimulated large demand for IC devices;

- a build up of excess IC device inventory throughout the supply chain, and

- oversupply of IC devices caused by the building of multiple manufacturing
fabs in the late 90's and early 2000.

As we begin our fiscal year 2004, we see some encouraging signs for
recovery in the semiconductor industry. Overall semiconductor sales appear to be
on an upward trend, with growth at the leading technology nodes even more
pronounced.

We expect the CMP consumable market to grow in the future, driven in large
part by the significant growth and technological advances the semiconductor
industry has experienced over the past decade. IC devices are critical
components in an increasingly wide variety of products and applications,
including computers, data processing, communications, the internet, automobiles
and consumer and industrial electronics.

This growth, along with increasing demand for smaller, higher performance
and more complex IC devices, pressure on IC device manufacturers to reduce their
costs, and the growth of new leading-edge technologies that require CMP, such as
copper interconnect and direct STI, has led to more widespread use of CMP and
consumption of CMP slurries and polishing pads. We anticipate the worldwide
market for these CMP consumables used by IC device manufacturers will grow in
the future as a result of expected increases in the number of IC devices
produced, the percentage of IC devices produced using CMP and the number of CMP
polishing steps used to produce each device. In addition, we believe that IC
manufacturers have continued to increase their use of CMP because the CMP
process represents an enabling technology and a means by which their yield can
be improved. We expect this anticipated growth will be mitigated somewhat by
efficiencies in CMP slurry and pad usage, as IC device manufacturers move from
200 mm to 300 mm wafers.

STRATEGY

We intend to pursue the following strategies:

REMAIN THE TECHNOLOGY LEADER IN CMP SLURRIES

We believe that technology is vital to success in the CMP slurry market and
we plan to continue to devote significant resources to research and development.
We need to keep pace with the rapid technological advances in the semiconductor
industry so we can continue to deliver products that meet our customers'
evolving needs. We intend to: use our advanced research and development,
polishing and metrology capabilities to advance our understanding of our
customers' technology, processes, and performance requirements; improve the
chemical and mechanical qualities of our CMP products; and, demonstrate and
deliver advanced CMP solutions to the semiconductor industry.

ACHIEVE OPERATIONS EXCELLENCE

Our customers demand increasing performance of our products in terms of
product quality and consistency and expect a reliable supply source. We intend
to advance our strict quality controls on a continual basis in order to improve
the uniformity and consistency of performance of our CMP products. This year we

5

introduced our Operations Excellence initiative, which we believe over time will
enable our manufacturing operations to meet these increasing requirements and
improve the performance of our products in the manufacturing process of our
customers. In addition, the capacity and the location of our production
facilities in the United States, Europe and Asia allow us to provide a reliable
supply chain to meet our customers' CMP slurry requirements in a consistent,
timely manner.

BUILD AND MAINTAIN CUSTOMER INTIMACY

We believe that building intimacy and close relationships with our
customers is another cornerstone to long-term success in our business. We work
closely with our customers to identify and develop new and better CMP
consumables, to integrate our products into their manufacturing processes and to
assist them with supply, warehousing, packaging and inventory management. We
have devoted significant resources to enhancing our close customer relationships
and we are committed to continuing this effort. We increased our focus this year
on building our customer support organization as we transitioned from a
distributor to direct sales in Europe and Southeast Asia, thereby more closely
aligning with our customers in each of these regions.

EXPAND INTO NEW APPLICATIONS AND PRODUCTS

We intend to leverage our CMP experience and technology to explore new
applications and products. We are increasing our sales of slurries for polishing
copper used in the wiring layers of some IC devices, which represents the
leading edge of IC technology. We are also increasing emphasis on CMP polishing
for magnetic heads and the coating on hard disks in the data storage arena and
are beginning our sales of slurries for direct STI. Additionally, we are using
our knowledge of CMP consumables to expand into CMP polishing pads so that we
can provide our customers with a broader range of solutions for use in the CMP
process.

EXPAND GLOBAL PRESENCE

We believe that having production facilities, personnel and technical
resources in strategic locations around the world is important to the success of
our business, particularly in light of increased IC device manufacturing in
Asia. Accordingly, we have established a global presence with production
facilities in the United States, Barry, Wales and Geino, Japan. We also have
assembled a team of business and account managers and technical support
personnel strategically located in the United States, Europe, Taiwan, Singapore,
Japan, China and South Korea. We intend to expand our production capacity,
technical and sales support in many of the locations around the world where IC
device production is concentrated.

ATTRACT AND RETAIN WORLD-CLASS PERSONNEL

We have assembled a highly skilled and dedicated workforce that includes a
wide range of scientists and applications specialists, many of whom have
significant experience in the semiconductor industry. We plan to continue to
attract, retain and motivate experienced personnel who are committed to
providing high-performance products and strong customer and applications
support.

PRODUCTS

CMP SLURRIES FOR IC DEVICES

We produce CMP slurries of various formulations for polishing a wide
variety of materials. In addition to our existing tungsten and oxide slurries,
we have developed new, improved generations of each of our slurries as well as
new slurries to keep pace with our customers' evolving needs. Our new
generations of tungsten and oxide slurries, which are currently the most common
use of CMP in IC device manufacturing, are designed to reduce both defectivity
in IC devices and the required polishing time.

We also manufacture slurry products for polishing copper used in the wiring
layers of the most advanced IC devices and are working on next generation
slurries for these applications. These products include different slurries for
polishing the primary copper film, as well as the thin barrier metal layer used
in copper wiring. We are also developing a slurry for direct STI which should
eliminate a number of manufacturing steps for our

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customers. We continue to work closely with our customers to develop advanced
slurries to meet their evolving technological needs.

CMP SLURRIES FOR THE DATA STORAGE INDUSTRY

We produce CMP slurries for polishing the magnetic heads and the coating on
disks in hard disk drives by leveraging our core slurry technology and
manufacturing capacity, as well as by hiring industry experts who understand the
needs of the data storage industry. We believe CMP significantly improves the
surface finish of these coatings, resulting in greater storage capacity of the
substrates, and also improves the production efficiency of manufacturers of hard
disk drives by helping them increase their throughput and yield. We have also
established a dedicated research and development team and an applications
support team who employ a process solution approach similar to that used for our
other slurry products. We have promising results in these areas, and believe
that they offer solid potential. Moreover, we believe that our slurry products
for the data storage industry offer improved performance compared with other
materials currently used in the industry.

CMP POLISHING PADS

CMP polishing pads are consumable materials used in the CMP process that
work in conjunction with CMP slurries to facilitate the polishing process. We
believe the CMP polishing pad market is currently led by one principal supplier,
Rohm and Haas (through its Rodel subsidiary). Through discussions with our
customers, as well as our own examination of the CMP polishing pad market, we
have determined that a demand exists for higher quality, more reliable and
consistent polishing pads. We have identified an opportunity to provide our
customers with technology and quality improvements through the ability to
provide our technically optimized CMP slurries and polishing pads to them. We
are currently operating as a value-added reseller of pads produced by a third
party. This approach is intended to expedite our entry into the market by
satisfying the needs of our customers' current applications for improved
performance and consistency. In addition, we recently entered into a technology
licensing and co-marketing agreement with a semiconductor equipment manufacturer
under which we plan to develop, manufacture and sell polishing pads utilizing
endpoint detection window technology licensed from the manufacturer for use on
the manufacturer's equipment. We are also developing multiple pad technologies
with the goal of providing a portfolio of pads that are optimized with our
slurries to meet customers' emerging needs and applications.

CUSTOMERS, SALES AND MARKETING

Our marketing begins with development teams who work closely with our
customers, using our research and development facilities to design CMP products
tailored to their precise needs. Next, our applications teams work with
customers to integrate our products into their manufacturing processes. Finally,
our logistics and sales personnel work to provide reliable supply, warehousing,
packaging and inventory management to our customers. Through our interactive
approach, we are able to build close relationships with our customers in a
variety of areas.

We also market our products through independent distributors in certain
regions of the world. This fiscal year we decreased our reliance on independent
distributors and in June 2003, began selling directly to customers in Europe,
Singapore and Malaysia. These customers previously had been serviced through
Metron, a third party distributor. We have retained Metron as our distributor in
Israel.

In response to significant growth in the IC device manufacturing industry
in Asia, we have increased our focus in Asia over the last few years by
increasing the number of account managers and technical and customer support
personnel present in this region. In addition, we plan to establish cleanroom
capabilities within this region in 2004 that would provide customers with more
responsive applications and technical support than are currently possible by
relying on our infrastructure based primarily in the United States. By enhancing
this regional infrastructure, we are demonstrating our commitment to the Asian
marketplace.

In fiscal year 2003, our five largest customers, of which two are
distributors, accounted for approximately 61% of our revenue, with Marketech (a
distributor we use in Taiwan and China), and Intel accounting for approximately
28% and 15% of our revenue, respectively. In fiscal year 2002, our five largest
customers, of

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which two are distributors, accounted for approximately 63% of our revenue, with
Marketech and Intel accounting for approximately 24% and 16% of our revenue,
respectively.

CABOT CORPORATION AS OUR MAJOR SUPPLIER OF RAW MATERIALS

The base ingredients for most of our CMP slurries are fumed metal oxides,
primarily fumed silica, which is an ultra-fine, high purity silica produced by a
flame process, and, to a lesser extent, fumed alumina. We currently purchase
fumed silica under a fumed metal oxide agreement with Cabot Corporation, which
became effective at the time of our initial public offering in April 2000 and
which expires in June 2005, but may be extended. We also purchase fumed alumina
under this agreement. In order to meet our growing needs for fumed alumina, in
December 2001 we entered into a fumed alumina supply agreement with Cabot
Corporation, and amended certain terms related to fumed alumina under the fumed
metal oxide agreement.

FUMED METAL OXIDE AGREEMENT

Under the fumed metal oxide supply agreement Cabot Corporation continues to
be our primary supplier, subject to certain terms and conditions, of certain
fumed metal oxides for our slurry products produced as of the date of our
initial public offering with respect to fumed silica. For products developed
since that time, we have the flexibility to purchase from Cabot Corporation or
other parties. Approximately 75% of the fumed metal oxides that we currently
purchase from Cabot Corporation are manufactured at its facility in Tuscola,
Illinois.

This agreement provides for a fixed annual increase in the price of fumed
silica of approximately 2% of the initial price and additional increases if
Cabot Corporation's raw material costs increase. We are required to provide
Cabot Corporation with quarterly, six-month, annual and 18-month forecasts of
our expected fumed silica purchases and Cabot Corporation's obligation to
provide us with fumed silica to specified percentages in excess of those
forecasted volumes is limited.

Under the agreement and the amendment entered into in December 2001, Cabot
Corporation also supplies us with fumed alumina from its Tuscola, Illinois
facility on terms generally similar to those described above. The price is fixed
and unchanged for a base level of production, and we agreed to pay a higher
incentive price for volumes above that level. The agreement prohibits Cabot
Corporation from selling fumed metal oxides to third parties for use in CMP
applications.

FUMED ALUMINA SUPPLY AGREEMENT

Under the fumed alumina supply agreement, Cabot Corporation expanded its
capacity for the manufacture of fumed alumina. The expansion is dedicated to our
fumed alumina requirements, subject to certain terms and conditions, and we have
a first right on all production and capacity from the expansion. The agreement
provides that the price Cabot Corporation charges us for fumed alumina is based
on all of its fixed and variable costs for producing the fumed alumina, plus its
capital costs for expanding its capacity, plus an agreed upon rate of return on
investment, plus incentive payments if Cabot Corporation produces more than a
certain amount of fumed alumina per year that meets our specifications. Under
this agreement, up to certain quantities and for products produced on the
effective date of the agreement, Cabot Corporation is the exclusive supplier of
fumed alumina for these products, subject to certain terms and conditions. For
amounts over these quantities, and for technologies since that time, we have the
flexibility to purchase from other parties. The agreement prohibits Cabot
Corporation from selling fumed alumina to third parties, or engaging itself in
its use in CMP applications. The agreement has an initial five year term and we
may renew the agreement for an additional five years to 2011.

If Cabot Corporation fails to supply us with our requirements for any
reason, including if we require product specification changes that Cabot
Corporation cannot meet, we have the right to purchase products meeting those
specifications from other suppliers.

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DISPERSION SERVICES AGREEMENT WITH DAVIES

At the time of our initial public offering, Cabot Corporation assigned to
us a dispersion services agreement with Davies Imperial Coatings, Inc.
("Davies") pursuant to which Davies produces slurries for us. Under this
agreement, we provide raw materials to Davies and it performs dispersion
services for us. The price for these services is set at a negotiated price,
subject to increases. We have agreed to purchase minimum amounts of services for
each year of the agreement. If Davies fails to supply us with required
dispersion services, we have the right to provide these services for ourselves
or purchase them from third parties. Over time we have invested in equipment and
improvements for the Davies facility and we now own most of the dispersion
equipment at that facility. The agreement has an initial term that expires in
October 2004, and is renewable.

RESEARCH AND DEVELOPMENT

We believe our leadership position depends in part on our ability to
develop CMP applications tailored to our customers' needs. In our product
development and dispersion technology laboratories, our skilled technical
personnel study different aspects of the CMP process and CMP products, such as
various studies of the chemical reactions on the surface of the wafer. Results
from these studies allow us to adjust the composition of our slurries to achieve
uniform polishing performance. Understanding the chemical processes on the
surface of the polished wafer allows us to compose slurries with specifically
tailored selectivity, that interact with one material and then slow or
essentially stop planarization as soon as this particular material has been
polished. We have also assembled dedicated development teams that work closely
with customers to identify their specific technology and manufacturing
challenges and to translate these challenges into viable CMP process solutions.
We have dedicated substantial resources to copper technology in research &
development (R&D) and manufacturing to support our customers' requirements
around this very challenging technology and we continue to follow our business
model of continuous product innovation for our tungsten and oxide product lines.

We expanded our existing R&D capabilities in fiscal 2002 with the opening
of our new research and development facility in Aurora, Illinois. This facility
is staffed by a team that includes experts from the semiconductor industry and
scientists from key disciplines required for the development of high-performance
CMP products and features a state-of-the-art Class 1 clean room and advanced
equipment for slurry and pad product development. We have also invested in 300
mm polishing capability to remain aligned with our technology leading customers
and our ability to replicate their CMP activities in our cleanroom. We are now
in the process of enhancing our capability to provide our customers in the Asia
Pacific region with robust local technical support. We plan to establish
cleanroom capability within this region in 2004 that would provide customers
with more responsive applications and technical support than is currently
possible by relying on our infrastructure based primarily in the United States.
We believe competitive advantage lies in technology and that our existing and
planned investments in R&D provide us with leading edge polishing and metrology
capabilities to support the most advanced and challenging customer technology
requirements on a global basis.

We expensed approximately $41.5 million, $33.7 million and $25.8 for
research and development in fiscal years 2003, 2002 and 2001, respectively.
Investments in research and development property, plant and equipment are
capitalized and depreciated over their useful life.

COMPETITION

We are aware of several other manufacturers with significant commercial
sales of CMP slurries for IC devices and competition continues to increase as
other companies are attempting to enter this market. We believe no other CMP
competitor has the track record we do of meeting performance demands associated
with developing advanced technology, improving existing technology and
successfully meeting the stringent supply requirements of the IC industry. In
the data storage area we are aware of only two other manufacturers with
significant commercial sales of CMP slurries for polishing the magnetic heads
and the coating on hard disks in hard disk drives. We believe the CMP polishing
pad market is currently led by one principal supplier, Rohm and Haas (through
its Rodel subsidiary). We may also face competition from other companies that
develop

9

CMP products, customers that currently have, or that may develop, in-house
capability to produce their own CMP products, and from significant changes in
technology, such as the development of polishing pads containing abrasives and
emerging technologies such as electrical chemical mechanical planarization
("ECMP"). We expect ECMP to use an electrolyte solution to polish certain metal
surfaces and be used in conjunction with traditional CMP slurries.

During this fiscal year, pricing pressure in our business has continued.
This is based both on IC manufacturers' pursuit of lower supply costs during the
sustained industry downturn as well as from CMP competitors. We believe that
customers make supplier decisions based on three factors, in this order of
priority: first, product performance; second, supply assurance, which entails
not only redundancy in manufacturing but the ability of the supplier to reliably
deliver consistent product and provide technical and manufacturing support for
the product globally; and third, product price. We believe that we are presently
well positioned with respect to these factors.

INTELLECTUAL PROPERTY

Our intellectual property is important to our success and ability to
compete. We currently have 55 U.S. patents and 72 pending U.S. patent
applications covering CMP related products and processes. In most cases we file
counterpart foreign patent applications. Many of these patents are important to
our continued development of new and innovative products for CMP and related
processes. Our patents have a range of duration and we do not expect to lose any
material patent through the expiration of such patent in the next seven years.
We attempt to protect our intellectual property rights through a combination of
patent, trademark, copyright and trade secret laws, as well as employee and
third party nondisclosure and assignment agreements.

ENVIRONMENTAL MATTERS

Our facilities are subject to various environmental laws and regulations,
including those relating to air emissions, wastewater discharges, the handling
and disposal of solid and hazardous wastes, and occupational safety and health.
We believe that our facilities are in substantial compliance with applicable
environmental laws and regulations. Our facilities have incurred, and will
continue to incur, capital and operating expenditures and other costs in
complying with these laws and regulations in both the United States and abroad.
However, we currently do not anticipate that the future costs of environmental
compliance will have a material adverse effect on our business, financial
condition or results of operations.

EMPLOYEES

As of September 30, 2003, we employed 549 individuals, including 262 in
operations, 183 in research and development, 54 in sales and marketing and 50 in
administration. None of our employees are covered by collective bargaining
agreements. We have not experienced any work stoppages and in general consider
our relations with our employees to be good.

FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS

Our revenue from customers in the United States totaled $79.9 million,
$81.0 million and $87.1 million, and total revenue in other geographic locations
totaled $171.8 million, $154.2 million and $140.1 million for fiscal years 2003,
2002 and 2001, respectively. Revenue from both Taiwan and Japan accounted for
more than ten percent of our total revenue. Our revenue from customers in Taiwan
totaled $63.8 million, $54.9 million and $46.6 million for fiscal years 2003,
2002 and 2001, respectively. Our revenue from customers in Japan totaled $40.3
million, $34.2 million and $35.8 million for fiscal years 2003, 2002 and 2001,
respectively. Revenue attributable to foreign regions are based upon the
customer location and not the geographic location from which our products were
shipped.

Net property, plant and equipment in the United States totaled $102.8
million, $100.9 million and $64.2 million and net property, plant and equipment
in other geographic locations totaled $30.9 million, $31.4 million and $33.3
million at September 30, 2003, 2002 and 2001, respectively. More than ten
percent of
10

our net property, plant and equipment is located in Japan, having a net book
value of $28.1 million, $27.1 million and $29.4 million at September 30, 2003,
2002 and 2001, respectively.

AVAILABLE INFORMATION

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, definitive
proxy statements on Form 14a, current reports on Form 8-K, and any amendments to
those reports, are made available free of charge on our company web site at
www.cabotcmp.com as soon as reasonably practicable after such reports are filed
with the Securities and Exchange Commission (SEC). Statements of changes in
beneficial ownership of our securities on Form 4 by our executive officers and
directors are made available on our company web site by the end of the business
day following the submission to the SEC of such filings. In addition, the SEC's
website, www.sec.gov, contains reports, proxy statements, and other information
regarding reports that we file electronically with the SEC.

ITEM 2. PROPERTIES

Our principal U.S. facilities that we own consist of:

- a global headquarters and research and development facility in Aurora,
Illinois, comprising approximately 200,000 square feet;

- a commercial dispersion plant and distribution center in Aurora,
Illinois, comprising approximately 175,000 square feet;

- a commercial dispersion plant in Aurora, Illinois, comprising
approximately 48,000 square feet; and

- an additional 13.2 acres of vacant land in Aurora, Illinois to
accommodate the possibility of future growth.

Our principal foreign facilities that we own consist of:

- a commercial dispersion plant in Geino, Japan, consisting of
approximately 113,000 square feet.

We lease land and a building from Cabot Corporation at a commercial
dispersion plant in Barry, Wales consisting of approximately 22,000 square feet.
We also lease office and lab space in Hsin-Chu, Taiwan consisting of
approximately 5,000 square feet and office space in Tokyo, Japan of 2,000 square
feet.

As a result of the change in our business needs in South Korea, in January
2003, we sold our distribution center and land in Ansung, South Korea to a third
party. The final proceeds approximated the net book value of the assets sold.

In addition, we plan to establish cleanroom capability within the Asia
Pacific region that would provide customers with more responsive applications
and technical support than is currently possible by relying on our
infrastructure which is based primarily in the United States. We expect the Asia
Pacific cleanroom to be operational in 2004. We believe that such investments in
R&D, will enhance our ability to provide optimized CMP solutions to our
customers.

We believe that our current facilities are suitable and adequate for their
intended purpose and provide us with sufficient capacity and capacity expansion
opportunities and technological capability to meet our current and expected
demand in the foreseeable future.

11

ITEM 3. LEGAL PROCEEDINGS

We are not currently involved in any material legal proceedings.

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

None.

EXECUTIVE OFFICERS OF THE REGISTRANT

Set forth below is information concerning our executive officers and their
ages as of December 1, 2003.

William P. Noglows was elected Chairman, President and Chief Executive
Officer in November 2003. Mr. Noglows had previously served as a director of our
company from 2000 until April 2002. Prior to joining us, Mr. Noglows served as
an Executive Vice President of Cabot Corporation from 1998 to June 2003. Prior
to that, Mr. Noglows held various management positions at Cabot Corporation
including General Manager of Cabot Corporation's Cab-O-Sil Division, where he
was one of the primary founders of Cabot Microelectronics and was responsible
for identifying and encouraging the development of the CMP application, which is
the core Cabot Microelectronics technology. Mr. Noglows received his B.S. in
Chemical Engineering from the Georgia Institute of Technology.

Matthew Neville served as Chairman of the Board of our company from March
2001 through October 2003 and served as our President, Chief Executive Officer
and a director of our company from December 1999 through October 2003, at which
time he resigned from those positions and from the Board to pursue other
opportunities. He remains an employee of Cabot Microelectronics, in an advisory
role, for a period of two years. Dr. Neville was a Vice President of Cabot
Corporation from 1997 to 1999. He received his Ph.D. in Chemical Engineering
from the Massachusetts Institute of Technology.

H. Carol Bernstein has served as our Vice President, Secretary and General
Counsel since August 2000. From January 1998 until joining us, Ms. Bernstein
served as the General Counsel and Director of Industrial Technology Development
of Argonne National Laboratory, which is operated by the University of Chicago
for the United States Department of Energy. From May 1985 until December 1997,
she served in various positions with the IBM Corporation, culminating in serving
as an Associate General Counsel, and was the Vice President, Secretary and
General Counsel of Advantis Corporation, a joint venture between IBM and Sears
Roebuck and Co. Ms. Bernstein received her B.A. from Colgate University and her
J.D. from Northwestern University; she is a member of the Bar of the States of
Illinois and New York.

J. Michael Jenkins has served as our Vice President of Human Resources
since December 1999 and previously had been our Director of Human Resources.
Prior to joining us in May 1999, Mr. Jenkins was employed for 15 years by the
Gas Chromatography Division of Hewlett-Packard holding various positions,
including Human Resources and Quality Manager. Mr. Jenkins received his M.H.S.
from Lincoln University.

12

William S. Johnson has served as our Vice President, Chief Financial
Officer and Treasurer since April 2003. Prior to joining us, Mr. Johnson served
as Executive Vice President and Chief Financial Officer for Budget Group, Inc.
from 2000 through the sale and transition of its business to Cendant
Corporation. Before that, Mr. Johnson spent 16 years at BP Amoco in various
senior finance and management positions. Mr. Johnson received his B.S. in
Mechanical Engineering from the University of Oklahoma and his M.B.A. from the
Harvard Business School.

Jeremy K. Jones has served as our Vice President, New Business Development
since January 2001 and previously was our Director of New Business Development
from March 2000. Mr. Jones also served as Pad Business Manager upon joining us
in January 1999. Prior to joining us, Mr. Jones served as Market Development
Manager at Motorola from 1997 to January 1999 and spent 20 years at Polaroid
Corporation in various management positions. Mr. Jones holds a M.S. in Materials
Engineering and a B.S. in Mechanical Engineering from Worcester Polytechnic
Institute, and a M.B.A. from Babson College.

Hiroyuki Nishiya has served as our Vice President, Asia Pacific Business
Region since January 2001 and previously was our Japan Business Manager since
April 1997. Prior to joining us, Mr. Nishiya held various positions at OKIDATA
and Materials Research Corporation. Mr. Nishiya received a B.B.A. from George
Washington University.

Daniel J. Pike has served as our Vice President of Operations since
December 1999 and was our Director of Global Operations from 1996 to 1999. Prior
to joining us, Mr. Pike worked for FMC Corporation as a Marketing Manager. Mr.
Pike received his B.S. in Chemical Engineering from the University of Buffalo
and his M.B.A. from the Wharton School of Business of the University of
Pennsylvania.

Stephen R. Smith has served as our Vice President of Marketing and Sales
since October 2001. Prior to joining us, Mr. Smith served as Vice President,
Sales & Business Development for Buildpoint Corporation from 2000 to October
2001. Prior to that, Mr. Smith spent 17 years at Tyco Electronics Group,
formerly known as AMP Incorporated, in various management positions. Mr. Smith
earned a B.S. in Industrial Engineering from Grove City College and a M.B.A.
from Wake Forest University.

Clifford L. Spiro was appointed Vice President, Research and Development in
December 2003. Prior to joining us, Dr. Spiro served as Vice President of
Research and Development at Ondeo-Nalco from 2001 through November 2003. Prior
to that, Dr. Spiro held R&D management and senior technology positions at the
General Electric Company from 1980 through 2001, the most recent of which was
Global Manager -- Technology for Business Development. Dr. Spiro received his
B.S. in Chemistry from Stanford University and holds a Ph.D in Chemistry from
the California Institute of Technology.

Daniel S. Wobby has served as our Corporate Controller since April 2000 and
Principal Accounting Officer since June 2000. He also served as our Acting
Principal Financial Officer from November 2002 through March 2003. Mr. Wobby had
served as our Director of Finance since October 1997 and had held various
accounting and operations positions with Cabot Corporation since 1989. Prior to
that, Mr. Wobby worked for Arthur Andersen LLP. Mr. Wobby earned a B.S. in
Accounting from St. Michael's College and a M.B.A. from the University of
Chicago's Graduate School of Business.

13

PART II

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

Our common stock has traded publicly on the Nasdaq National Market under
the symbol "CCMP" since our initial public offering in April 2000. The following
table sets forth the range of quarterly high and low closing sales prices for
our common stock on the Nasdaq National Market.

As of November 28, 2003, there were approximately 1,248 of record of our
common stock. No dividends were declared or paid in either fiscal 2003 or fiscal
2002 and we currently do not anticipate paying cash dividends in the future.

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data for each of the five years ended
September 30, 2003 has been derived from the audited consolidated financial
statements. Certain amounts in the prior fiscal years have been reclassified to
conform with the current year presentation.

Basic and diluted net income per share for the year ended September 30,
1999 have been calculated using the pro forma 18.99 million shares owned by
Cabot Corporation for the period prior to our initial public offering. Basic and
diluted net income per share for the year ended September 30, 2000 have been
calculated using the pro forma 18.99 million shares owned by Cabot Corporation
for the period prior to our initial public offering in the weighted average
shares outstanding calculation.

14

The information set forth below is not necessarily indicative of results of
future operations and should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and notes to those statements included in
Items 7 and 8 of Part II of this Form 10-K.

CABOT MICROELECTRONICS CORPORATION

SELECTED FINANCIAL DATA -- FIVE YEAR SUMMARY

Certain amounts in the prior fiscal years have been reclassified to conform with
the current year presentation.
15

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

The following "Management's Discussion and Analysis of Financial Condition
and Results of Operations", as well as disclosures included elsewhere in this
Form 10-K, include "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. This Act provides a "safe
harbor" for forward-looking statements to encourage companies to provide
prospective information about themselves so long as they identify these
statements as forward-looking and provide meaningful cautionary statements
identifying important factors that could cause actual results to differ from the
projected results. All statements other than statements of historical fact we
make in this Form 10-K are forward-looking. In particular, the statements herein
regarding industry or general economic prospects or trends, our future results
of operations or financial position and statements preceded by, followed by or
that include the words "intends", "estimates", "plans", "believes", "expects",
"anticipates", "should", "could", or similar expressions, are forward-looking
statements. Forward-looking statements reflect our current expectations and are
inherently uncertain. Our actual results may differ significantly from our
expectations. We assume no obligation to update this forward-looking
information. The section entitled "Factors Affecting Future Operating Results"
describes some, but not all, of the factors that could cause these differences.

The following discussion and analysis should be read in conjunction with
our historical financial statements and the notes to those financial statements
which are included in Item 8. of Part II of this Form 10-K.

OVERVIEW

Cabot Microelectronics Corporation ("Cabot Microelectronics," "the
Company," "us," "we," or "our") is the leading supplier of high-performance
polishing slurries used in the manufacture of the most advanced integrated
circuit ("IC") devices within the semiconductor industry, in a process called
chemical mechanical planarization ("CMP"). CMP is a polishing process used by IC
device manufacturers to planarize or flatten many of the multiple layers of
material that are built upon silicon wafers, and is a necessary step in the
production of advanced ICs. Planarization is a polishing process that uses CMP
slurries and pads to level, smooth and remove excess material from the surfaces
of these layers. CMP slurries are liquid formulations that facilitate and
enhance this polishing process and generally contain engineered abrasives and
proprietary chemicals. CMP pads are typically flat engineered "disks" made of
polymeric materials that help to distribute and transport the slurry to the
surface of the wafer and distribute it across the wafer.

CMP enables IC device manufacturers to produce smaller, faster and more
complex IC devices with fewer defects. We believe CMP will become increasingly
important in the future as manufacturers continue to shrink the size of these
devices and to improve their performance. Our CMP products are used for a number
of applications, such as polishing insulating layers, the tungsten plugs that go
through the insulating layers and connect the multiple wiring layers of IC
devices, and copper wiring. In addition, we have developed and sell CMP slurries
for polishing certain components in hard disk drives, specifically rigid disk
substrates and magnetic heads, and we believe we are one of the leading
suppliers in this area. We are continuing to develop slurries for new
applications such as direct shallow trench isolation, used to electrically
isolate adjoining transistors. In addition, we operate as a value-added reseller
of polishing pads and are developing our own polishing pads for use in the CMP
process.

Prior to our initial public offering in April 2000, we operated as a
division of Cabot Corporation ("Cabot Corporation"), a global chemical
manufacturing company based in Boston, Massachusetts. Following our initial
public offering, Cabot Corporation owned approximately 80.5 percent of Cabot
Microelectronics. In September 2000, Cabot Corporation effected the spin-off of
Cabot Microelectronics by distributing 0.280473721 shares of our common stock as
a dividend on each outstanding share of Cabot Corporation common stock
outstanding on September 13, 2000, or an aggregate of 18,989,744 shares of our
common stock.

BASIS OF PRESENTATION

The following "Management's Discussion of Results of Operations" contains
financial comparisons with prior periods that are affected by certain agreements
entered into with Cabot Corporation during the fiscal

16

year ended September 30, 2002. The effects of these agreements on the comparison
of operating results are disclosed in the discussion that follows.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The following "Management's Discussion and Analysis of Financial Condition
and Results of Operations", as well as disclosures included elsewhere in this
Form 10-K, are based upon our audited consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingencies. On
an on-going basis, we evaluate the estimates used, including those related to
product returns, bad debts, inventory valuation, impairments of tangible and
intangible assets, income taxes, warranty obligations, other accruals,
contingencies and litigation. We base our estimates on historical experience,
current conditions and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources, as well as identifying and assessing
our accounting treatment with respect to commitments and contingencies. Actual
results may differ from these estimates under different assumptions or
conditions. We believe the following critical accounting policies involve more
significant judgments and estimates used in the preparation of the consolidated
financial statements.

We maintain an allowance for doubtful accounts for estimated losses
resulting from the potential inability of our customers to make required
payments. If the financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required.

We maintain a warranty reserve which provides for the estimated cost of
product returns based upon historical experience and any known conditions or
circumstances. Our warranty obligation is affected primarily by product that
does not meet specifications and performance requirements and any related costs
of addressing such matters.

We value inventory at the lower of cost or market and write down the value
of inventory for estimated obsolescence or unmarketable inventory. An inventory
reserve is maintained based upon a historical percentage of actual inventory
written off and for known conditions and circumstances. Should actual product
marketability and raw material fitness for use be affected by conditions that
are different from those projected by management, revisions to the estimated
inventory reserve may be required. Also, the purchase cost of one of our key raw
materials from one supplier changes significantly based on the total quantity of
in-specification product purchased in a given fiscal year. During interim
periods we determine inventory valuation and the amount charged to cost of goods
sold for this raw material from this supplier based on the expected average cost
over the entire fiscal year using our current full year forecast of purchases of
this raw material from this supplier.

We have entered into unconditional purchase obligations, which include
noncancelable purchase commitments and take-or-pay arrangements with suppliers.
We review our agreements and make an assessment of the likelihood of a shortfall
in purchases and determine if it is necessary to record a liability.

In accordance with the provisions of Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation -- Transition and
Disclosure" ("SFAS 148") and No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"), we have elected to account for stock-based compensation plans in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"), and related interpretations. We disclose
the summary of pro forma effects to reported net income as if we had elected to
recognize compensation cost based on the fair value of stock based awards to
employees of Cabot Microelectronics as prescribed by SFAS 123.

17

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, the percentage
of revenue of certain line items included in our historical statements of
income:

YEAR ENDED SEPTEMBER 30, 2003 VERSUS YEAR ENDED SEPTEMBER 30, 2002

REVENUE

Total revenue was $251.7 million in 2003, which represented a 7.0%, or
$16.5 million, increase from 2002. Of this increase, $9.7 million was due to a
4.1% increase in volume and $6.8 million was due to increased weighted average
selling prices driven by improved sales mix. Revenue related to copper products
increased 25% over the prior year. Fiscal 2003 revenue would have been $1.7
million lower had the Japanese Yen average exchange rate for the year held
constant with the prior year average. Also, in June 2003, we began selling
directly to customers in Europe, Singapore and Malaysia. These customers
previously had been serviced through Metron, a third party distributor. During
this transition period we discontinued sales to Metron while they drew down
their inventory of our products, which we believe resulted in an adverse revenue
impact of $3.7 million during our third quarter of fiscal 2003.

We did not see a significant improvement in demand driven by our customers'
end markets in fiscal year 2003, as a lack of corporate information technology
spending appears to have weighed heavily on the PC and computer-related markets.
We also experienced continued competition and pricing pressure this fiscal year
and expect these factors to continue. As we begin our fiscal year 2004, we see
some encouraging signs in the semiconductor industry. Overall semiconductor
sales appear to be on an upward trend, with growth in the leading technologies
even more pronounced. Although overall semiconductor sales appear to be on an
upward trend, the continued uncertainty in the semiconductor industry and the
worldwide economy make it difficult for us to predict future revenue trends.

COST OF GOODS SOLD

Total cost of goods sold was $124.3 million in 2003, which represented an
increase of 9.9% or $11.2 million from 2002. Of this increase, $4.6 million was
due to higher sales volume, $4.6 million was due to higher average costs per
gallon associated with meeting our customers' more stringent product quality
requirements and $2.0 million was due to a charge related to the remaining
minimum purchase obligation of a raw material supply agreement for a polishing
pad technology that was previously under development but is no longer being
pursued. Our total cost of this supply agreement was $2.9 million in fiscal
2003, compared to

18

$0.8 million in the prior fiscal year. We do not expect to incur any additional
costs with respect to this agreement.

The increase in cost of goods sold were partially offset by the absence of
the Rippey royalty payments which ended in August 2002, following the expiration
of a contingent payment arrangement with Rippey resulting from our 1995
acquisition of selected assets used or created in connection with the
development and sale of polishing slurries. We had made payments under this
agreement of 2.5% of applicable slurry revenue from July 1995 through our last
payment in August 2002.

With respect to the key raw materials used to make our products, we expect
that the cost of fumed silica we purchase from Cabot Corporation used in the
manufacture of CMP slurries will continue to increase according to the terms of
our existing fumed metal oxide agreement with Cabot Corporation, which provides
for a fixed annual increase in the price of silica of 2.0% of the initial price
and additional price adjustments corresponding to Cabot Corporation's raw
material cost increases or decreases. Also, under the fumed alumina supply
agreement with Cabot Corporation, the overall price of fumed alumina fluctuates
since it is based on all of Cabot Corporation's fixed and variable costs for
producing the fumed alumina, plus its capital costs for expanding its capacity,
plus an agreed upon rate of return on investment, plus incentive payments if
more than a certain amount of fumed alumina per year is produced that meets our
specifications.

Our need for additional quantities of key raw materials in the future has
required and will continue to require that we enter into new supply arrangements
with third parties. We may enter into arrangements in the future that could
result in costs which are higher than those in the existing agreements. We also
expect to continue to invest in our Operations Excellence initiative to improve
our manufacturing capabilities to meet our customers' increasing product
performance requirements.

GROSS PROFIT

Our gross profit as a percentage of total revenue was 50.6% in 2003 as
compared to 51.9% in 2002. The decrease in gross profit resulted primarily from
an increase in manufacturing costs to support our customers' increasing quality
requirements, pricing pressure from certain key customers and our recognition of
the minimum purchase obligation referred to above. In the near term, we expect
gross profit will be in the 50% range, plus or minus 2%, as we continue to add
staffing and make improvements in manufacturing processes.

RESEARCH AND DEVELOPMENT

Total research and development expenses were $41.5 million in 2003, which
represented an increase of 23.3% or $7.8 million, from 2002. Research and
development expense increased $1.6 million due to increased staffing, $1.7
million due to higher wafer purchases and $2.7 million due to depreciation and
operating costs of our R&D facility and other new equipment. Since the R&D
facility was opened during the prior fiscal year, 2002 does not represent a full
year of depreciation and operating costs related to the facility. An additional
$1.0 million increase resulted from allocating certain common facility operating
costs to R&D. These costs had previously been treated as general and
administrative expense prior to the R&D facility construction. Additional costs
were incurred in technical service support and other areas to support the
overall increase in R&D activities. R&D efforts were mainly related to new and
enhanced CMP products including slurry products for copper applications, new CMP
polishing pad technology and advanced chemistry and particle technology.

SELLING AND MARKETING

Selling and marketing expenses were $11.2 million in 2003, which
represented an increase of 16.1%, or $1.6 million, over 2002. The increase
resulted primarily from higher staffing costs associated with our increased
customer support initiatives including our transition to selling direct to
customers in Europe, Singapore and Malaysia, rather than through a distributor.

19

GENERAL AND ADMINISTRATIVE

General and administrative expenses were $18.2 million in 2003, which
represented an increase of 4.4%, or $0.8 million, from 2002. Increases include
depreciation of our business information systems, higher directors and officers
liability insurance premiums of $1.2 million and increased staffing costs of
$0.6 million. These increases were partially offset by a $0.8 million reduction
in legal and professional expenses, primarily due to the absence of legal fees
associated with the Rodel litigation, discussed further below, a decrease in
facilities charges due to the change in allocation of certain common facility
operating costs described under Research and Development and the absence of a
$0.2 million non-cash charge related to the modification of a former director's
stock option agreement in fiscal 2002.

LITIGATION SETTLEMENT

During the second fiscal quarter of 2002, we settled all pending patent
infringement litigation with Rodel, which resulted in a one-time payment of $1.0
million. Under the settlement agreement, we received a fully paid-up, worldwide
royalty-free license to all technology that was the subject of the litigation
and their foreign equivalents, and we have no further financial obligation with
respect to this matter.

AMORTIZATION OF INTANGIBLES

Amortization of intangibles was $0.3 million in 2003 and 2002.

OTHER INCOME, NET

Other expense was negligible in 2003 compared to $0.8 million of other
income in 2002. The decrease in other income in 2003 is due to the absence of
foreign exchange gains recorded in the prior year resulting from the
strengthening of the Japanese Yen, which were partially offset by a payment made
to Cabot Corporation in 2002 as reimbursement for certain capital improvements
made to equipment used to supply us with raw materials, which is no longer in
service.

PROVISION FOR INCOME TAXES

The effective income tax rate was 32.7% in 2003 and 33.0% in 2002. The
decrease in the effective tax rate was due to an increase in tax credits from
expanded research and experimentation activities.

NET INCOME

Net income was $37.7 million in 2003, which represented a decrease of 7.3%,
or $3.0 million, from 2002 as a result of the factors discussed above.

YEAR ENDED SEPTEMBER 30, 2002 VERSUS YEAR ENDED SEPTEMBER 30, 2001

REVENUE

Total revenue was $235.2 million in 2002, which represented a 3.5%, or $8.0
million, increase from 2001. Of this increase, $5.2 million was due to a 2.3%
increase in volume and $2.8 million was due to increased weighted average
selling prices. Revenue related to copper products increased 115% over the prior
year. Fiscal 2002 revenue would have been $2.0 million higher had the Japanese
Yen average exchange rate for the year held constant with the prior year
average. Total revenue in the second half of fiscal 2002 increased 32% over the
first half of the year. We believe this was primarily due to higher production
by our customers as a result of improvement in IC device inventories, which
appeared to return to more normal levels during 2002.

COST OF GOODS SOLD

Total cost of goods sold was $113.1 million in 2002, which represented an
increase of 4.3% or $4.6 million from 2001. Of this increase, $2.5 million was
due to higher sales volume and $2.1 million was due to higher weighted average
costs per gallon. The cost of fumed silica we purchase from Cabot Corporation
increased

20

according to the terms of our existing fumed metal oxide agreement with Cabot
Corporation, which provides for a fixed annual increase in the price of silica
of 2.0% of the initial price and additional increases based upon an increase in
Cabot Corporation's raw material costs. In order to meet certain of our needs
for fumed alumina given the anticipated growth in sales of fumed alumina based
slurries, in December 2001, we entered into a fumed alumina supply agreement
with Cabot Corporation and an amendment to the fumed metal oxide agreement with
respect to its fumed alumina terms. The terms of this agreement, along with
those contained in the amendment to the fumed metal oxide agreement, were
retroactive to October 2001 and our average cost per pound for alumina from
Cabot Corporation since that time is higher than paid previously under the
original fumed metal oxide agreement. Had we paid this higher average cost per
pound for all fumed alumina purchased in fiscal 2001, cost of goods sold in that
period would have increased by approximately $1.0 million.

During fiscal 2002, certain costs decreased following the final payment in
August 2002 associated with the expiration of a contingent payment arrangement
with Rippey resulting from our 1995 acquisition of selected assets used or
created in connection with the development and sale of polishing slurries. We
had made payments under this agreement of 2.5% of applicable slurry revenue from
July 1995 through our last payment in August 2002.

GROSS PROFIT

Our gross profit as a percentage of total revenue was 51.9% in 2002 as
compared to 52.3% in 2001. The decrease in gross profit resulted primarily from
an increase in fixed manufacturing costs offset partially by an increase in
weighted average selling prices.

RESEARCH AND DEVELOPMENT

Total research and development expenses were $33.7 million in 2002, which
represented an increase of 30.5% or $7.9 million, from 2001. Research and
development expense increased $2.3 million due to increased staffing, $2.0
million due to higher wafer purchases and $1.5 million due to depreciation and
operating costs of our new R&D facility, which opened in April 2002. An
additional $1.1 million increase resulted from allocating certain common
facility operating costs to R&D. These costs had previously been treated as
general and administrative expense prior to the R&D facility addition to our
existing office building. Key activities during the year involved the continued
development of new and enhanced CMP products, with a significant focus on
slurries for polishing copper, and new CMP polishing pad technology.

SELLING AND MARKETING

Selling and marketing expenses were $9.7 million in 2002, which represented
an increase of 10.4%, or $0.9 million, over 2001. The increase was primarily due
to increased staffing in North America.

GENERAL AND ADMINISTRATIVE

General and administrative expenses were $17.5 million in 2002, which
represented a decrease of 17.1%, or $3.6 million, from 2001. The decrease was
primarily due to the absence of $0.7 million of stock compensation and other
costs associated with an executive leaving the business in fiscal 2001, a net
decrease in non-cash charges related to modifications of stock option agreements
of $0.7 million, reduced relocation and recruiting costs of $0.5 million,
decrease in professional fees of $0.7 million, decrease in facilities charges of
$1.5 million due to the change in allocation of certain common facility
operating costs described under Research and Development and a net decrease in
the provision for doubtful accounts of $0.9 million. These reductions were
partially offset by an increase in depreciation of $1.4 million associated with
administrative areas of the R&D facility addition.

LITIGATION SETTLEMENT

During the second fiscal quarter of 2002, we settled all pending patent
infringement litigation with Rodel, which resulted in a one-time payment of $1.0
million. Under the settlement agreement, we received a fully

21

paid-up, worldwide royalty-free license to all technology that was the subject
of the litigation and their foreign equivalents, and we have no further
financial obligation with respect to this matter.

AMORTIZATION OF INTANGIBLES

Amortization of intangibles was $0.3 million in 2002 compared to $0.7
million in 2001. The reduction of approximately $0.4 million occurred as we
adopted SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and
Other Intangible Assets", effective October 1, 2001, which required the
amortization of goodwill to be discontinued and that goodwill be instead tested
for impairment at least annually.

OTHER INCOME, NET

Other income was $0.8 million in 2002, compared to $1.0 million in 2001.
The decrease of approximately $0.2 million was primarily due to $0.7 million of
interest expense from capital leases entered into during fiscal 2002, a payment
of $0.3 million to Cabot Corporation in reimbursement for certain capital
improvements made to equipment used to supply us with material that is no longer
in use, and the absence of $0.2 million interest income on accounts receivable
balances. These decreases were almost entirely offset by unrealized foreign
exchange gains resulting from the strengthening of the Japanese Yen and
increased interest income due to higher cash balances over the prior year.

PROVISION FOR INCOME TAXES

The effective income tax rate was 33.0% in 2002 and 34.0% in 2001. The
decrease in the effective tax rate was mainly due to an increase in tax credits
from expanded research and experimentation activities.

NET INCOME

Net income was $40.7 million in 2002, which represented a decrease of 2.9%,
or $1.2 million, from 2001 as a result of the factors discussed above.

LIQUIDITY AND CAPITAL RESOURCES

We had cash flows from operating activities of $47.6 million in 2003, $53.5
million in 2002 and $62.5 million in 2001. Our cash provided by operating
activities in 2003 originated from net income from operations of $37.7 million
and non-cash items of $27.1 million, which were partially offset by a net
increase in working capital of $17.2 million. Working capital increased
primarily in customer receivables due to higher sales levels, our transition
from a distributor to selling direct in Europe, Singapore and Malaysia,
extension of payment terms to a limited number of customers and also due to a
stronger Japanese Yen. Inventory also increased to support the higher level of
sales and income taxes shifted from a payable to a refundable position driven
mainly by research and experimentation tax credits. Our principal funding
requirements have been for additions to property, plant and equipment that
support the expansion of our business and technological capability.

In 2003 cash flows used in investing activities were $14.5 million,
primarily due to $16.4 million in purchases of additional production-related
equipment, establishment of 300 mm polishing capability and for metrology tools
to support increased polishing capacity in our Class 1 clean room. These capital
expenditures were partially offset by $1.9 million in cash received from the
sale of assets, of which $1.8 million related to the January 2003 sale of our
distribution center and land in Ansung, South Korea, which is described more
fully below. In 2002, cash flows used in investing activities were $35.3
million, primarily due to the construction and completion of our new research
and development facility in Aurora, Illinois, and equipping the facility with
additional research and development equipment. We also purchased additional
production-related equipment to be used in Aurora, Illinois and invested in the
development and implementation of our business information system. In 2001, cash
flows used in investing activities were $35.3 million, primarily related to the
capacity expansion of our Geino, Japan facility and construction of our new
Aurora, Illinois research and development facility.

22

We had cash flows from financing activities of $8.5 million in 2003 which
resulted from the issuance of common stock of $12.8 million for the exercise of
stock options and to a much lesser extent, the Employee Stock Purchase Plan,
offset by a $3.5 million loan repayment, which is described below, and principal
payments of $0.7 million made under capital lease obligations. We had cash flows
from financing activities of $3.6 million in 2002 which resulted from the
issuance of common stock of $4.5 million for both the exercise of stock options
and the Employee Stock Purchase Plan, offset partially by principal payments of
$0.9 million made under capital lease obligations. In 2001 cash flows from
financing activities of $10.4 million resulted from the exercise of stock
options and issuance of shares under our Employee Stock Purchase Plan.

In February 2003, we prepaid the entire $3.5 million unsecured term loan
that had been funded on the basis of the Illinois State Treasurer's Economic
Program which had been due in April 2005 and had incurred interest at an annual
rate of 4.68%. No gain or loss was recognized with respect to the prepayment. As
a result of this prepayment, we have no outstanding long term debt.

In July 2001 we entered into a $75.0 million unsecured revolving credit and
term loan facility with a group of commercial banks and in February 2002 and
August 2003, this agreement was amended with no material changes in terms. On
November 24, 2003, the existing agreement was terminated and replaced with an
amended and restated unsecured revolving credit facility of $50.0 million with
an option to increase the facility by up to $30.0 million. Under this agreement,
which terminates in November 2006, but can be renewed for two one year terms,
interest accrues on any outstanding balance at either the institution's base
rate or the eurodollar rate plus an applicable margin. A non-use fee also
accrues. Loans under this facility are anticipated to be used primarily for
general corporate purposes, including working capital and capital expenditures.
The credit agreement also contains various covenants. No amounts are currently
outstanding under this credit facility and we believe we are currently in
compliance with the covenants.

We estimate that our total capital expenditures in fiscal year 2004 will be
approximately $22.0 million, approximately $0.3 million of which we have already
spent as of October 31, 2003. Our major capital expenditures in 2004 are
currently expected to be:

- approximately $8.0 million to equip a cleanroom in the Asia Pacific
region;

- approximately $5.0 million for advanced clean room equipment, polishing
and other equipment primarily for use in our Aurora, IL research and
development facility; and

- approximately $9.0 million for general expansion of operations.

As our business needs in South Korea have changed, in November 2002 we
entered into a purchase and sale agreement with a third party to sell our
distribution center and land in Ansung, South Korea. The sale was completed in
January 2003, and the final proceeds approximated the net book value of the
assets sold.

We believe that cash generated by our operations and available borrowings
under our revolving credit facility will be sufficient to fund our operations
and expected capital expenditures for the foreseeable future. However, we plan
to expand our business and continue to improve our technology and, to do so, we
may be required to raise additional funds in the future through public or
private equity, debt financing or other arrangements.

OFF-BALANCE SHEET ARRANGEMENTS

At September 30, 2003 and 2002, we did not have any unconsolidated entities
or financial partnerships, such as entities often referred to as structured
finance or special purpose entities, which might have been established for the
purpose of facilitating off-balance sheet arrangements.

TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

The following summarizes our contractual obligations at September 30, 2003
and the effect such obligations are expected to have on our liquidity and cash
flow in future periods.

23

CONTRACTUAL OBLIGATIONS

CAPITAL LEASE OBLIGATIONS

In December 2001 we entered into a fumed alumina supply agreement with
Cabot Corporation. Under this agreement, Cabot Corporation expanded its capacity
in Tuscola, Illinois for the manufacture of fumed alumina. Payments by us with
respect to capital costs for the facility have been treated as a capital lease
for accounting purposes and the present value of the minimum quarterly payments
of approximately $0.3 million resulted in a $9.8 million lease obligation and
$9.8 million related leased asset. The agreement has an initial five year term,
which expires in 2006, but we can choose to renew the agreement for another five
year term, which would expire in 2011. We also can choose to not renew the
agreement subject to certain terms and conditions and the payment of certain
costs, after the initial five year term.

In January 2002 we entered into a CMP tool and polishing consumables
transfer agreement with a third party under which we agreed to transfer
polishing consumables to them in return for a CMP polishing tool. The polishing
tool has been treated as a capital lease and the aggregate fair market value of
the polishing consumables resulted in a $2.0 million lease obligation. The term
of the agreement is approximately three years, expiring in November 2004.

OPERATING LEASES

We lease certain vehicles, warehouse facilities, office space, machinery
and equipment under cancelable and noncancelable operating leases, most of which
expire within ten years and may be renewed by us.

PURCHASE OBLIGATIONS

Purchase obligations include our take-or-pay arrangements with suppliers,
and purchase orders and other obligations entered into in the normal course of
business regarding the purchase of goods and services. In the fourth quarter of
fiscal 2003, we recorded a $2.0 million liability for a raw material supply
agreement for a polishing pad technology that was previously under development,
but is no longer being pursued. Our total obligation with respect to this
agreement is $2.2 million, of which $1.1 million is recorded in current
liabilities and shown in the preceding table under purchase obligations and $1.1
million is included in other long-term liabilities, which is discussed below.

We operate under an amended fumed metal oxide agreement with Cabot
Corporation for the purchase of two key raw materials, fumed silica and fumed
alumina. We are obligated to purchase at least 90% of our six-month volume
forecast of fumed silica from Cabot Corporation and must pay for the shortfall
if we purchase less than that amount. We currently anticipate meeting minimum
forecasted purchase volume requirements. Also, under our fumed alumina supply
agreement with Cabot Corporation we are obligated to pay certain fixed, capital
and variable costs through December 2006. This agreement has an initial five
year term, but we can choose to renew the agreement for another five year term,
which would expire in December 2011. If we do not renew the agreement, we will
become subject to certain terms and conditions and the payment of certain costs.
Purchase obligations include $23.5 million of contractual commitments based upon
our anticipated renewal of the agreement through December 2011.

24

We have an agreement with a toll manufacturer pursuant to which the
manufacturer performs certain agreed-upon dispersion services. We have agreed to
purchase minimum amounts of services per year and to invest approximately $0.2
million per year in capital improvements or other expenditures to maintain
capacity at the manufacturer's dispersion facility. The initial term of the
agreement expires in October 2004, with automatic one-year renewals, and
contains a 90-day cancellation clause executable by either party. We are
obligated to make a termination payment if the agreement is not renewed.
Purchase obligations include $14.3 million of contractual commitments related to
this agreement.

We have a distribution agreement with an existing supplier of polishing
pads to the semiconductor industry pursuant to which the supplier sells product
to us for our resale to end users. The initial term of the contract runs through
September 2007 and we are required to make certain agreed-upon purchases in
order to maintain the agreement. Included in purchase obligations is $5.9
million for product which we are required and intend to purchase by September
2004. We currently anticipate meeting minimum forecasted purchase requirements
for periods subsequent to September 2004. We have the ability to cancel the
agreement at any time with no cancellation fee.

In June 2003 we entered into a technology licensing and co-marketing
agreement with a semiconductor equipment manufacturer under which we plan to
develop, manufacture and sell polishing pads utilizing endpoint detection window
technology licensed from the manufacturer for use on the manufacturer's
equipment. Under this agreement, we are obligated to pay $6.6 million for the
purchase of capital equipment, approximately one year of certain marketing and
technical support services, and equipment services. As of September 30, 2003, we
have paid $4.6 million of this balance. In addition, we are obligated to supply
this manufacturer with free polishing pads, up to an agreed upon dollar amount,
for particular uses over a seven year period. We currently estimate our total
cost associated with these products will be $2.2 million over the remaining
period. We are also obligated to supply the equipment manufacturer with
polishing pads, up to an agreed upon dollar amount over the seven year period,
which the manufacturer will purchase from us at our cost. We will also pay a
royalty to the equipment manufacturer and, in certain circumstances, to another
party to whom we are a sub-licensee under our agreement, based upon net revenue
earned with respect to commercial sales of polishing pads covered under the
agreement. The agreement's term lasts as long as the patents on the technology
subject to the license agreement remain valid and enforceable.

OTHER LONG-TERM LIABILITIES

Other long-term liabilities include the $1.1 million long-term portion of
the $2.2 million total purchase obligation discussed above, that we recorded for
a raw material supply agreement for a polishing pad technology that was
previously under development, but is no longer being pursued.

EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS

In April 2003, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities" ("SFAS 149") which applies to contracts entered into or modified
after June 30, 2003. SFAS 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." We do not expect the adoption of SFAS 149
will have a material impact on our consolidated financial position, results of
operations or cash flows.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS 150") which improves the accounting for certain financial instruments
that, under previous guidance, issuers could account for as equity. Examples of
such financial instruments include mandatorily redeemable shares, put options
and forward purchase contracts that may require the issuer to buy back some of
its shares in exchange for cash or other assets and obligations that can be
settled with shares. We have not issued these types of financial instruments.

25

NON-AUDIT SERVICES PERFORMED BY EXTERNAL AUDITORS

Pursuant to Section 10A(i)(2) of the Securities Exchange Act of 1934, as
added by Section 202 of the Sarbanes-Oxley Act of 2002, we are responsible for
disclosing to investors the non-audit services approved by our Audit Committee
to be performed by PricewaterhouseCoopers LLP, our external auditor. Non-audit
services are defined in the law as services other than those provided in
connection with an audit or a review of the financial statements of the Company.
During the period covered by this filing our Audit Committee preapproved the
following non-audit services, which subsequently were or are being performed by
PricewaterhouseCoopers LLP: (1) tax compliance and research and experimentation
credit consultations; (2) tax compliance and consultations related to our
foreign operations; and (3) tax consultations with respect to our Equity
Incentive Plan and other compensation plans.

FACTORS AFFECTING FUTURE OPERATING RESULTS

RISKS RELATING TO OUR BUSINESS

WE HAVE A NARROW PRODUCT RANGE AND OUR PRODUCTS MAY BECOME OBSOLETE, OR
TECHNOLOGICAL CHANGES MAY REDUCE OR LIMIT INCREASES IN CMP CONSUMPTION

Our business is substantially dependent on a single class of products, CMP
slurries, which historically has accounted for almost all of our revenue. Our
business would suffer if these products became obsolete or if consumption of
these products decreased. Our success depends on our ability to keep pace with
technological changes and advances in the semiconductor industry and to adapt
and improve our products in response to evolving customer needs and industry
trends. Since its inception, the semiconductor industry has experienced rapid
technological changes and advances in the design, manufacture, performance and
application of IC devices and these changes and advances, including 300 mm
wafers, are expected to continue in the future. Developments in the
semiconductor industry could render our products obsolete or less important to
the IC device manufacturing process.

A SIGNIFICANT AMOUNT OF OUR BUSINESS COMES FROM A LIMITED NUMBER OF LARGE
CUSTOMERS AND OUR REVENUE AND PROFITS COULD DECREASE SIGNIFICANTLY IF WE LOST
ONE OR MORE OF THEM AS CUSTOMERS

Our customer base is concentrated among a limited number of large
customers. One or more of these principal customers may stop buying CMP slurries
from us or may substantially reduce the quantity of CMP slurries they purchase
from us. They also hold considerable purchasing power which can impact the
pricing and terms of sale of our products. Any cancellation, deferral or
significant reduction in CMP slurries sold to these principal customers or a
significant number of smaller customers could seriously harm our business,
financial condition and results of operations. In fiscal year 2003, our five
largest customers, of which two are distributors, accounted for approximately
61% of our revenue, with Marketech (a distributor we use in Taiwan and China),
and Intel accounting for approximately 28% and 15% of our revenue, respectively.
In June 2003, we completed our transition to selling directly to customers in
Europe, Singapore and Malaysia who previously had been serviced through Metron.
As a result, we expect this distributor will no longer be one of our top five
customers. In fiscal year 2002, our five largest customers, of which two are
distributors, accounted for approximately 63% of our revenue, with Marketech and
Intel accounting for approximately 24% and 16% of our revenue, respectively.

DEMAND FOR OUR PRODUCTS AND OUR BUSINESS MAY BE ADVERSELY AFFECTED BY
WORLDWIDE ECONOMIC AND INDUSTRY CONDITIONS

Our business is affected by current economic and industry conditions and it
is extremely difficult to predict sales of our products given uncertainties in
these factors. For example, our quarterly revenue trends in fiscal years 2001
through 2003 have been affected by the global economic slowdown and weakening in
demand for electronic systems, coupled with higher than normal chip inventories.
Sales improved in the second half of fiscal 2002 in anticipation of an industry
recovery which did not materialize. We believe this resulted in an overbuilding
of inventory of IC devices which adversely impacted the first half of fiscal
2003. While there are

26

currently some encouraging signs of a semiconductor industry recovery, any
further declines or lack of improvement in current economic and industry
conditions could continue to adversely affect our business.

ANY PROBLEM OR INTERRUPTION IN SUPPLY OF OUR MOST IMPORTANT RAW MATERIALS,
INCLUDING FUMED METAL OXIDES, COULD DELAY OUR SLURRY PRODUCTION AND ADVERSELY
AFFECT OUR SALES

Fumed metal oxides, both fumed silica and fumed alumina, are significant
raw materials we use in many of our CMP slurries. Our business would suffer from
any problem or interruption in our supply of fumed metal oxides or other key raw
materials. We entered into a fumed metal oxide agreement with Cabot Corporation,
which became effective upon completion of our initial public offering in April
2000. In December 2001 we entered into a fumed alumina supply agreement with
Cabot Corporation and an amendment to the fumed metal oxide agreement with
respect to fumed alumina. Under these agreements, Cabot Corporation continues to
be our primary supplier of certain fumed metal oxides for our slurry products
produced as of the date of our initial public offering with respect to fumed
silica and as of the effective date of the fumed alumina supply agreement with
respect to certain amounts of fumed alumina. We believe it would be difficult to
secure alternative sources of fumed metal oxides in the event Cabot Corporation
or another supplier is unable to supply us with sufficient quantities of fumed
metal oxides which meet the quality and technical specifications required by our
customers. In addition, contractual amendments to the existing agreements with,
or non-performance by, Cabot Corporation or another supplier, could adversely
affect us as well.

In addition, if we change the supplier or type of key raw materials such as
fumed metal oxides we use to make our existing CMP slurries or are required to
purchase them from a different manufacturer or manufacturing facility, whether
Cabot Corporation or another party, or otherwise modify our products, in certain
circumstances our customers might have to requalify our CMP slurries for their
manufacturing processes and products. The requalification process could take a
significant amount of time to complete, possibly interrupting or reducing our
sales of CMP slurries to these customers.

OUR BUSINESS COULD BE SERIOUSLY HARMED IF OUR EXISTING OR FUTURE COMPETITORS
DEVELOP SUPERIOR SLURRY PRODUCTS, OFFER BETTER PRICING TERMS OR SERVICE,
OBTAIN CERTAIN INTELLECTUAL PROPERTY RIGHTS OR IF ANY OF OUR MAJOR CUSTOMERS
DEVELOP OR INCREASE IN-HOUSE SLURRY MANUFACTURING CAPABILITY

Competition from current CMP slurry manufacturers, new entrants to the CMP
slurry market or a decision by any of our major customers to produce, or
increase the production of slurry products in-house could seriously harm our
business and results of operations. Competition has increased from other
existing providers of CMP slurries and opportunities exist for other companies
with sufficient financial or technological resources to emerge as potential
competitors by developing their own CMP slurry products. The existence or threat
of increased competition and additional in-house production could impact the
prices we are able to charge for our slurry products. We may also face
competition arising from significant changes in technology, such as the
development of polishing pads containing abrasives and emerging technologies
such as electrical chemical mechanical planarization ("ECMP"). In addition, our
competitors could have or obtain intellectual property rights which could
restrict our ability to market our existing products and/or to innovate and
develop new products.

BECAUSE WE HAVE LIMITED EXPERIENCE IN MANUFACTURING AND SELLING CMP POLISHING
PADS, EXPANSION OF OUR BUSINESS INTO THIS AREA MAY NOT BE SUCCESSFUL

An element of our strategy is to leverage our current customer
relationships and technological expertise to expand our business into new
product areas and applications, including manufacturing and distributing CMP
polishing pads. We have had limited experience in developing, manufacturing and
marketing these products, which involve technologies and production processes
that are relatively new to us. We, our suppliers of the raw materials that we
use to develop our polishing pads, or our provider of pads for whom we act as
value-added reseller, may not be able to produce products that satisfy our
customers' needs. In addition, we, our suppliers or pad provider may be unable
to keep pace with technological or other developments in the design and
production of polishing pads. Also, our competitors may have or obtain
intellectual property rights which could restrict our ability to market our
existing products and/or to innovate and develop new products.
27

WE ARE SUBJECT TO SOME RISKS ASSOCIATED WITH OUR FOREIGN OPERATIONS

We currently have operations and a large customer base outside the United
States. For fiscal 2003, approximately 68% of our revenue was generated by sales
to customers outside the United States. For fiscal 2002, approximately 66% of
our revenue was generated by sales to customers outside the United States. We
encounter risks in doing business in certain foreign countries, including but
not limited to, adverse changes in economic and political conditions, as well as
the difficulty in enforceability of business and customer contracts and
agreements, including protection of intellectual property rights. In June 2003
we completed our transition to selling directly to customers in Europe,
Singapore and Malaysia who previously had been serviced through Metron, a third
party distributor. Selling directly may increase our risk of conducting business
in foreign countries.

BECAUSE WE RELY HEAVILY ON OUR INTELLECTUAL PROPERTY, OUR FAILURE TO
ADEQUATELY OBTAIN OR PROTECT IT COULD SERIOUSLY HARM OUR BUSINESS

Protection of intellectual property is particularly important in our
industry because CMP slurry and pad manufacturers develop complex and technical
formulas for CMP products which are proprietary in nature and differentiate
their products from those of competitors. Our intellectual property is important
to our success and ability to compete. We attempt to protect our intellectual
property rights through a combination of patent, trademark, copyright and trade
secret laws, as well as employee and third-party nondisclosure and assignment
agreements. Our failure to obtain or maintain adequate protection of our
intellectual property rights for any reason could seriously harm our business.

OUR INABILITY TO ATTRACT AND RETAIN KEY PERSONNEL COULD CAUSE OUR BUSINESS TO
SUFFER

If we fail to attract and retain the necessary managerial, technical and
customer support personnel, our business and our ability to maintain existing
and obtain new customers, develop new products and provide acceptable levels of
customer service could suffer. Competition for qualified personnel, particularly
those with significant experience in the CMP and IC device industries, is
intense. The loss of services of key employees could harm our business and
results of operations.

RISKS RELATING TO THE MARKET FOR OUR COMMON STOCK

THE MARKET PRICE MAY FLUCTUATE SIGNIFICANTLY AND RAPIDLY

The market price of our common stock has and could continue to fluctuate
significantly as a result of factors such as: economic and stock market
conditions generally and specifically as they may impact participants in the
semiconductor industry; changes in financial estimates and recommendations by
securities analysts following our stock; earnings and other announcements by,
and changes in market evaluations of, us or participants in the semiconductor
industry; changes in business or regulatory conditions affecting us or
participants in the semiconductor industry; announcements or implementation by
us, our competitors, or our customers of technological innovations or new
products; and trading volume of our common stock.

ANTI-TAKEOVER PROVISIONS UNDER OUR CERTIFICATE OF INCORPORATION AND BYLAWS AND
OUR RIGHTS PLAN MAY DISCOURAGE THIRD PARTIES FROM MAKING AN UNSOLICITED BID
FOR OUR COMPANY

Our certificate of incorporation, our bylaws, our rights plan and various
provisions of the Delaware General Corporation Law may make it more difficult to
effect a change in control of our company. For example, our amended certificate
of incorporation authorizes our board of directors to issue up to 20 million
shares of blank check preferred stock and to attach special rights and
preferences to this preferred stock. Also our amended certificate of
incorporation provides for the division of our board of directors into three
classes as nearly equal in size as possible with staggered three-year terms. In
addition, the rights issued to our stockholders under our rights plan may make
it more difficult or expensive for another person or entity to acquire control
of us without the consent of our board of directors.

28

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

EFFECT OF CURRENCY EXCHANGE RATES AND EXCHANGE RATE RISK MANAGEMENT

We conduct business operations outside of the United States through our
foreign operations. Our foreign operations maintain their accounting records in
their local currencies. Consequently, period to period comparability of results
of operations is affected by fluctuations in exchange rates. The primary
currencies to which we have exposure are the Japanese Yen and, to a lesser
extent, the British Pound and the Euro. From time to time we enter into forward
contracts in an effort to manage foreign currency exchange exposure. However, we
may be unable to hedge these exposures completely. Approximately 15% of our
revenue is transacted in currencies other than the U.S. dollar. We do not
currently enter into forward exchange contracts or other derivative instruments
for speculative or trading purposes.

MARKET RISK AND SENSITIVITY ANALYSIS FOREIGN EXCHANGE RATE RISK

During the third and fourth fiscal quarters of 2002 we had a foreign
exchange exposure related to a note receivable from our wholly-owned subsidiary
denominated in Japanese Yen which resulted in unrealized foreign exchange gains
of $1.5 million. In the fourth fiscal quarter of 2002, we hedged this exposure.
We continue to hedge this exposure and believe that our exposure to foreign
currency exchange rate risk on this note is not material.

We have performed a sensitivity analysis assuming a hypothetical 10%
adverse movement in foreign exchange rates. As of September 30, 2003, the
analysis demonstrated that such market movements would not have a material
adverse effect on our consolidated financial position, results of operations or
cash flows over a one-year period. Actual gains and losses in the future may
differ materially from this analysis based on changes in the timing and amount
of foreign currency rate movements and our actual exposures.

29

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CABOT MICROELECTRONICS CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

All other schedules are omitted, because they are not required, are not
applicable, or the information is included in the financial statements and notes
thereto.

30

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders of Cabot Microelectronics
Corporation

In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Cabot Microelectronics Corporation and its subsidiaries at September
30, 2003 and 2002, and the results of their operations and their cash flows for
each of the three years in the period ended September 30, 2003 in conformity
with accounting principles generally accepted in the United States of America.
In addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

/s/ PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
October 21, 2003, except for paragraph 2 of Note 7,
as to which the date is November 24, 2003

31

CABOT MICROELECTRONICS CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

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

32

CABOT MICROELECTRONICS CORPORATION

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these consolidated financial
statements.
33

CABOT MICROELECTRONICS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

34

CABOT MICROELECTRONICS CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

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

35

CABOT MICROELECTRONICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

1. BACKGROUND AND BASIS OF PRESENTATION

We believe we are the leading supplier of high performance polishing
slurries used in the manufacture of the most advanced integrated circuit ("IC")
devices, within a process called chemical mechanical planarization ("CMP"). CMP
is a polishing process used by IC device manufacturers to planarize many of the
multiple layers of material that are built upon silicon wafers to produce
advanced devices.

Cabot Microelectronics, which was incorporated in October 1999 and formed
from the assets of Cabot Corporation's Microelectronics Materials Division,
completed its initial public offering in April 2000. In September 2000 we became
a wholly independent entity upon Cabot Corporation's spin-off of its remaining
ownership ("spin-off") in us by its distribution of 0.280473721 shares of Cabot
Microelectronics common stock as a dividend on each share of Cabot Corporation
common stock.

The consolidated financial statements have been prepared by Cabot
Microelectronics Corporation ("Cabot Microelectronics", "the Company", "us",
"we", or "our"), pursuant to the rules of the Securities and Exchange Commission
("SEC") and accounting principles generally accepted in the United States of
America. We operate predominantly in one industry segment -- the development,
manufacture, and sale of CMP polishing slurries. The consolidated financial
statements include the accounts of Cabot Microelectronics and its subsidiaries
and all intercompany transactions and balances between the companies have been
eliminated.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CASH AND CASH EQUIVALENTS

We consider investments in all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.

INVENTORIES

Inventories are stated at the lower of cost, determined on the first-in,
first-out (FIFO) basis, or market. Finished goods and work in process
inventories include material, labor and manufacturing overhead costs.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are recorded at cost. Depreciation is based
on the following estimated useful lives of the assets using the straight-line
method:

Buildings................................................... 20-25 years
Machinery and equipment..................................... 5-10 years
Furniture and fixtures...................................... 5-10 years
Information systems......................................... 3-5 years
Assets under capital leases................................. 5-10 years

Expenditures for repairs and maintenance are charged to expense as
incurred. Expenditures for major renewals and betterments are capitalized and
depreciated over the remaining useful lives. As assets are retired or sold, the
related cost and accumulated depreciation are removed from the accounts and any
resulting gain or loss is included in the results of operations. Costs related
to internal use software are capitalized in accordance with AICPA Statement of
Position No. 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use".

36

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and other intangible assets were acquired in connection with a
July 1995 purchase of selected assets (see Note 3). Other intangible assets
consist of trade secrets and know-how, distribution rights and customer lists.
Goodwill has historically been amortized on a straight-line basis over 10 years.
Effective October 1, 2001, we adopted SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets". In accordance with the
statement, we ceased amortizing goodwill and perform impairment tests at least
annually. We determined that goodwill was not impaired as of September 30, 2003.
Intangible assets continue to be amortized over their estimated useful lives.

IMPAIRMENT OF LONG-LIVED ASSETS

We review long-lived assets for impairment whenever events or changes in
business circumstances indicate that the carrying amount of the assets may not
be fully recoverable or that the useful lives of these assets are no longer
appropriate. We believe that no material impairment exists at September 30,
2003.

FOREIGN CURRENCY TRANSLATION

Our operations in Europe and Asia operate primarily in local currency.
Accordingly, all assets and liabilities of these operations are translated using
exchange rates in effect at the end of the year, and revenue and costs are
translated using weighted average exchange rates for the year. The related
translation adjustments are reported in Comprehensive Income in stockholders'
equity. Gains and losses resulting from foreign currency transactions are
recorded in the statements of income for all periods presented.

FOREIGN EXCHANGE MANAGEMENT

We transact business in various foreign currencies, primarily the Japanese
Yen, British Pound and the Euro. Our exposure to foreign currency exchange risks
has not been significant because a significant portion of our foreign sales are
denominated in U.S. dollars. However, we have entered into forward contracts in
an effort to manage foreign currency exchange exposure regarding our receivable
and payable positions denominated in foreign currencies, and in fiscal 2001,
commitments for construction costs associated with our Geino, Japan expansion.
The purpose of our foreign currency management activity is to mitigate the risk
that eventual cash flow requirements from significant foreign currency
commitments or transactions may be adversely affected by changes in exchange
rates from the commitment or transaction date through the settlement date. We do
not currently use derivative financial instruments for trading or speculative
purposes.

FAIR VALUES OF FINANCIAL INSTRUMENTS

The recorded amounts of cash, accounts receivable and accounts payable
approximate their fair values.

CONCENTRATION OF CREDIT RISK

Financial instruments that subject us to concentrations of credit risk
consist principally of accounts receivable. We perform ongoing credit
evaluations of our customers' financial condition and generally do not require
collateral to secure accounts receivable. Our exposure to credit risk associated
with nonpayment is affected principally by conditions or occurrences within the
semiconductor industry and global economy. We historically have not experienced
material losses relating to accounts receivables from individual customers or
groups of customers and maintain an allowance for doubtful accounts based on an
assessment of the collectibility of such accounts.

37

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The portion of revenue from customers who represented more than 10% of
revenue were as follows:

Marketech is a distributor we use in Taiwan and China.

The two customers above accounted for 30.3% and 26.7% of net accounts
receivable at September 30, 2003 and 2002, respectively.

REVENUE RECOGNITION

Revenue is recognized upon completion of delivery obligations, provided
acceptance and collectibility are reasonably assured. A provision for the
estimated warranty cost is recorded at the time revenue is recognized based on
our historical experience.

RESEARCH AND DEVELOPMENT

Research and development costs are expensed as incurred.

INCOME TAXES

Deferred income taxes are determined based on the estimated future tax
effects of differences between financial statement carrying amounts and the tax
bases of existing assets and liabilities. Provisions are made for the U.S. and
any non-U.S. deferred income tax liability or benefit.

STOCK BASED COMPENSATION

We have adopted the disclosure requirements of SFAS No. 148, "Accounting
for Stock-Based Compensation -- Transition and Disclosure" ("SFAS 148")
effective December 2002. SFAS 148 amends the Financial Accounting Standards
Board ("FASB") Statement No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"), to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based compensation
and also amends the disclosure requirements of SFAS 123 to require prominent
disclosures in both annual and interim financial statements about the methods of
accounting for stock-based employee compensation and the effect of the method
used on reported results. As permitted by SFAS 148 and SFAS 123, we continue to
apply the accounting provisions of Accounting Principles Board ("APB") Opinion
Number 25, "Accounting for Stock Issued to Employees", and related
interpretations, with regard to the measurement of compensation cost for options
granted under the Cabot Microelectronics Corporation Amended and Restated 2000
Equity Incentive Plan ("Equity Incentive Plan") and shares issued under our
Employee Stock Purchase Plan.

All options granted had an exercise price equal to the market value of the
underlying common stock on the date of grant and no employee compensation
expense has been recorded. See Note 13 to consolidated financial statements for
a discussion of the assumptions used in the option valuation model and estimated
fair value for employee stock options.

38

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Had expense been recognized using the fair value method described in SFAS
123, using the Black-Scholes option-pricing model, we would have reported the
following results of operations:

EARNINGS PER SHARE

Basic earnings per share is calculated based on the weighted average shares
of common stock outstanding during the period, and diluted earnings per share is
calculated based on the weighted average of common stock outstanding, plus the
dilutive effect of stock options, calculated using the treasury stock method.

COMPREHENSIVE INCOME

Comprehensive income differs from net income due to foreign currency
translation adjustments and net unrealized gains and losses on derivative
instruments.

USE OF ESTIMATES

The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
certain estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and expenses
during the reported period. Actual results could differ from those estimates.

EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS 149") which applies to
contracts entered into or modified after June 30, 2003. SFAS 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
133, "Accounting for Derivative Instruments and Hedging Activities." We do not
expect the adoption of SFAS 149 will have a material impact on our consolidated
financial position, results of operations or cash flows.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS 150") which improves the accounting for certain financial instruments
that, under previous guidance, issuers could account for as equity. Examples of
such financial instruments include mandatorily redeemable shares, put options
and forward purchase contracts that may require the issuer to buy back some of
its shares in exchange for cash or other assets and obligations that can be
settled with shares. We currently do not hold these types of financial
instruments.

39

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. GOODWILL AND OTHER INTANGIBLE ASSETS

In July 1995, we acquired selected assets used or created in connection
with the development and sale of polishing slurries. The acquisition was
accounted for using the purchase method of accounting. Accordingly, the purchase
price of $9,800 was allocated to the net assets acquired based on their
estimated fair values. Identifiable intangible assets, consisting primarily of
trade secrets and know-how, distribution rights, customer lists and workforce in
place, were valued at $4,300 and were amortized on a straight-line basis over
their estimated useful lives of 7-10 years. The excess of purchase price over
the fair value of the net assets acquired (goodwill) was approximately $2,800.
Effective October 2001, we adopted SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets", which resulted in the
reclassification of a portion of intangible assets regarding workforce in place
to goodwill. We determined that the resulting unamortized goodwill balance was
not impaired. In accordance with the statement, we ceased amortizing goodwill
and perform impairment tests at least annually. In addition to the purchase
price, we also made contingent payments in the amount of 2.5% of applicable
slurry revenue. These payments were recorded and paid on a monthly basis and are
included in cost of goods sold. In fiscal 2002 we finished making these
contingent payments, which completely terminated our obligation under this
contract.

Goodwill of $1,373, as of September 30, 2003, was unchanged from September
30, 2002.

The components of intangible assets are as follows:

Estimated future amortization expense for fiscal 2004 and fiscal 2005 are
$340 and $255, respectively.

4. INVENTORIES

Inventories consisted of the following:

40

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following:

Depreciation expense, including amortization of assets recorded under
capital leases, was $15,392, $11,667 and $7,069 for the years ended September
30, 2003, 2002 and 2001, respectively.

6. ACCRUED EXPENSES, INCOME TAXES PAYABLE AND OTHER CURRENT LIABILITIES

Accrued expenses, income taxes and other current liabilities consisted of
the following:

We record actual warranty expense in cost of goods sold in the period in
which warranty claims occur. We calculate our warranty reserve shown above using
historical experience and any known conditions or circumstances, and we perform
periodic reviews of our warranty reserve requirements and make appropriate
adjustments to the reserve as necessary. Adjustments to the warranty reserve
affect cost of goods sold. Our warranty obligation is affected primarily by
product that does not meet specifications and performance requirements and any
related costs of addressing such matters. Our warranty reserve requirements
decreased during the fiscal 2003 as follows:

Balance as of September 30, 2002............................ $858
Net change.................................................. (22)
----
Balance as of September 30, 2003............................ $836
====

7. LONG-TERM DEBT

In February 2003, we prepaid the entire $3,500 unsecured term loan that had
been funded on the basis of the Illinois State Treasurer's Economic Program
which had been due in April 2005 and had incurred interest at an annual rate of
4.68%. No gain or loss was recognized with respect to the prepayment. As a
result of this prepayment, we have no outstanding long term debt.

41

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In July 2001 we entered into a $75,000 unsecured revolving credit and term
loan facility with a group of commercial banks and in February 2002 and August
2003, this agreement was amended with no material changes in terms. On November
24, 2003, the existing agreement was terminated and replaced with an amended and
restated unsecured revolving credit facility of $50,000 with an option to
increase the facility by up to $30,000. Under this agreement, which terminates
in November 2006, but can be renewed for two one year terms, interest accrues on
any outstanding balance at either the institution's base rate or the eurodollar
rate plus an applicable margin. A non-use fee also accrues. Loans under this
facility are anticipated to be used primarily for general corporate purposes,
including working capital and capital expenditures. The credit agreement also
contains various covenants. No amounts are currently outstanding under this
credit facility and we believe we are currently in compliance with the
covenants.

8. CAPITAL LEASE OBLIGATIONS

In December 2001 we entered into a fumed alumina supply agreement with
Cabot Corporation under which we agreed to pay Cabot Corporation for the
expansion of a fumed alumina manufacturing facility in Tuscola, Illinois. The
payments for the facility have been treated as a capital lease for accounting
purposes and the present value of the minimum quarterly payments resulted in a
$9,776 lease obligation and related leased asset. The agreement has an initial
five year term, which expires in 2006, but we can choose to renew the agreement
for another five year term, which expires in 2011. We also can choose not to
renew the agreement subject to certain terms and conditions and the payment of
certain costs, after the initial five year term.

In January 2002 we entered into a CMP tool and polishing consumables
transfer agreement with a third party under which we agreed to transfer
polishing consumables to them in return for a CMP polishing tool. The polishing
tool has been treated as a capital lease for accounting purposes and is valued
based on the aggregate fair market value of the polishing consumables, which
resulted in a $1,994 lease obligation. The agreement has approximately a
three-year term, which expires in November 2004.

In July 2003 we entered into a leasing arrangement for forklift trucks. The
lease has a five year term with a bargain purchase option at the end of the
term. The forklift trucks have been treated as a capital lease for accounting
purposes, resulting in a $114 lease obligation and related leased asset.

9. DERIVATIVES

In the first quarter of fiscal 2001, we adopted Statement of Financial
Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and for hedging activities. All
derivatives, whether designated in hedging relationships or not, are required to
be recorded on the balance sheet at fair value. If the derivative is designated
as a fair value hedge, the changes in the fair value of the derivative and of
the hedged item attributable to the hedged risk are recognized in earnings. If
the derivative is designated as a cash flow hedge, the effective portions of
changes in the fair value of the derivative are recorded in other comprehensive
income and are recognized in the income statement when the hedged item affects
earnings. Ineffective portions of changes in the fair value of cash flow hedges
are recognized in earnings.

During fiscal 2001 we entered into two cash flow hedges to cover
commitments involving construction contracts associated with our Geino, Japan
expansion. The adoption of SFAS 133 resulted in a reduction to comprehensive
income for the twelve months ended September 30, 2001 of $632. We reclassify
losses currently in other comprehensive income associated with the cash flow
hedges into earnings in the same period or periods in which the related assets
affect earnings, which resulted in a gain in other comprehensive income of $34
and $32 in fiscal 2003 and fiscal 2002, respectively. There were no other
significant derivatives as of September 30, 2003.

At September 30, 2003 we had one forward contract selling Japanese Yen
related to an intercompany note with one of our subsidiaries in Japan and for
the purpose of hedging the risk associated with a net transactional exposure in
Japanese Yen.

42

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. DEFERRED COMPENSATION

Under the Directors' Deferred Compensation Plan, which became effective in
March 2001, all of our non-employee directors have elected to defer their
compensation to future periods. In June 2003, this plan was amended to require
that payment of deferred amounts be made only in the form of Cabot
Microelectronics common shares. Amounts deferred under the plan were $481 and
$136 as of September 30, 2003 and 2002, respectively. We do not currently
maintain a deferred compensation plan for employees.

11. SAVINGS PLAN AND OTHER INCENTIVE COMPENSATION PLANS

Effective in May 2000, we adopted the Cabot Microelectronics Corporation
401(k) Plan (the "401k Plan") covering substantially all eligible employees
meeting certain minimum age and eligibility requirements, as defined by the 401k
Plan. Participants may make elective contributions up to 15% of their eligible
salary. All amounts contributed by participants and earnings on these
contributions are fully vested at all times. The 401(k) Plan provides for
matching and fixed nonelective contributions by the Company. Under the 401(k)
Plan, the Company will match 100% of the first four percent of the participant's
eligible compensation and 50% of the next two percent of the participant's
eligible compensation, subject to limitations required by government laws or
regulations. Under the 401(k) Plan, all employees, even non-participants, will
receive a contribution by the Company in an amount equal to 4% of eligible
compensation. Participants and employees are 100% vested in all Company
contributions. The Company's expense for the defined contribution plan totaled
$2,924, $2,043 and $1,693 for the periods ending September 30, 2003, 2002 and
2001, respectively.

Effective in May 2000, we adopted the Cabot Microelectronics Corporation
Supplemental Employee Retirement Plan ("SERP") covering all eligible employees
as defined by the SERP. Under the SERP, the Company contributes up to 4% of
these individual's eligible compensation. The purpose of the SERP is to provide
for the deferral of the Company contribution to certain highly compensated
employees as defined under the provision of the Employee Retirement Income
Security Act ("ERISA") of 1974. All amounts contributed by the Company and
earnings on these contributions are fully vested at all times. The Company's
expense for the SERP was de minimus for periods ending September 30, 2003, 2002
and 2001, respectively.

12. EMPLOYEE STOCK PURCHASE PLAN

In March 2000, Cabot Microelectronics adopted an Employee Stock Purchase
Plan ("ESPP") and authorized up to 475,000 shares of common stock to be
purchased under the plan. The ESPP allows all full and certain part-time
employees of Cabot Microelectronics and its subsidiaries to purchase shares of
our common stock through payroll deductions. Employees can elect to have up to
10% of their annual earnings withheld to purchase our stock, subject to certain
other criteria. The shares are purchased at a price equal to the lower of 85% of
the closing price at the beginning or end of each semi-annual stock purchase
period. A total of 32,132, 30,248 and 75,790 shares were issued under the ESPP
during fiscal 2003, 2002 and 2001, respectively.

13. EQUITY INCENTIVE PLANS

In March 2000, our Board of Directors and Cabot Corporation's Board of
Directors adopted the Company's 2000 Equity Incentive Plan (the "Plan"), which
was approved by Cabot Corporation as the sole stockholder of Cabot
Microelectronics. Our Board of Directors amended the Plan in September 2000 and
in December 2000, amended and restated the Plan, which was then approved by our
stockholders in March 2001. The Board and stockholders approved 6,500,000 shares
of common stock to be granted under the Plan, subject to adjustment for stock
splits and similar events. The Board made an additional non-material amendment
to the Plan in June 2003. The Plan allows for the granting of three types of
equity incentive awards: Restricted Stock, Stock Options, and Substitute Awards.
According to the Plan, all employees, directors, consultants and advisors of the
Company and its subsidiaries are eligible for awards under the Plan, which
awards will be

43

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

awarded subject to applicable Award Agreements. The Plan is administered by the
Compensation Committee of the Cabot Microelectronics Board of Directors.

RESTRICTED STOCK

Under the Plan, employees and non-employees are granted shares of
restricted stock at the discretion of the Compensation Committee. In general,
shares of restricted stock may not be sold, assigned, transferred, pledged,
disposed of or otherwise encumbered. Generally, under our Award Agreements to
date for restricted stock, restrictions have lapsed over a two-year period with
one-third becoming unrestricted immediately at the date of grant and the
remaining restrictions lapsing over a two-year period. Holders of restricted
stock have all the rights of stockholders, including voting and dividend rights,
subject to the above restrictions. In no event shall the Company issue more than
875,000 shares of restricted stock under the Plan. Restricted shares may also be
purchased and placed "on deposit" by executive level employees under the 2001
Deposit Share Plan. Shares purchased under this Deposit Share Plan receive a 50%
match in restricted shares, which vest over a three year period, and are subject
to forfeiture upon early withdrawal of deposit shares.

In fiscal 2003, we issued 636 restricted shares at $47.04 under the Deposit
Share Plan and 4,400 restricted shares to an employee at $60.24. In fiscal 2002,
we issued 369 restricted shares at $81.16 under the Deposit Share Plan and no
other restricted shares were granted during the fiscal year. In fiscal 2001, we
granted 10,000 shares of restricted stock to an employee at $39.19 per share and
4,000 shares of restricted stock to an employee at $67.07 per share, of which
the 1,334 shares that were still restricted were forfeited upon the employee's
resignation in October 2002. This forfeiture resulted in a reversal of
previously recognized compensation expense of $37, which was recorded in fiscal
2003 and offset compensation expense in that year of $18. Compensation expense
associated with restricted stock awards was $260 and $421 for fiscal 2002 and
2001, respectively. In fiscal 2003, unearned compensation of $209 was partially
offset by the reversal of $89 due to the previously mentioned forfeiture. In
fiscal 2002, $10 was recorded as unearned compensation. The number of shares
subject to restrictions were 5,405, 5,037 and 10,168 at September 30, 2003, 2002
and 2001, respectively.

STOCK OPTIONS

Under the Plan, employees and non-employees may be granted incentive stock
options ("ISO") to purchase common stock at not less than the fair value on the
date of grant, and non-qualified stock options ("NQSO"), as determined by the
Compensation Committee and set forth in an applicable Award Agreement. The Plan
provides that the term of the option may be as long as ten years. Options
granted during fiscal 2003 and 2002 generally provided for a ten year term, with
options vesting equally over a four year period, with first vesting on the
anniversary date of the grant. Options granted in 2001 generally provided for a
seven year term and also vested over a four year period. No more than 1,750,000
ISO shares may be issued under the Plan, and none have been granted to date.

In fiscal 2003, no compensation expense was recorded with respect to stock
options. In fiscal 2002 we recorded compensation expense of $178 associated with
revised stock option agreements involving a former director. In fiscal 2001, we
recorded compensation expense of $1,295 associated with revised stock option
agreements involving a former director and a former employee.

44

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following tables relate to stock options outstanding as of September
30, 2003:

We adopted the disclosure requirements of SFAS 123 upon establishing the
Plan. As permitted by SFAS 123, we continue to apply the accounting provisions
of Accounting Principles Board ("APB") Opinion Number 25, "Accounting for Stock
Issued to Employees" with regard to the measurement of compensation cost for
options granted under the Equity Incentive Plan and shares issued under our
ESPP. Had expense been recognized using the fair value method described in SFAS
123, using the Black-Scholes option-pricing model we would have reported the
following results of operations:

These costs may not be representative of the total effects on pro forma
reported income for future years. Factors that may also impact disclosures in
future years include the attribution of the awards to the service period, the
vesting period of stock options, timing of additional grants of stock option
awards and number of

45

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

shares granted for future awards. The fair value of our stock based awards to
employees under SFAS 123 was estimated assuming no expected dividends and the
following weighted-average assumptions:

14. STOCKHOLDERS' EQUITY

COMMON STOCK

Each share of common stock entitles the holder to one vote on all matters
submitted to a vote of Cabot Microelectronics' stockholders. Common stockholders
are entitled to receive ratably the dividends, if any, as may be declared by the
Board of Directors. Upon liquidation, dissolution or winding up of Cabot
Microelectronics, the common stockholders will be entitled to share, pro
ratably, in the distribution of assets available after satisfaction of all
liabilities and liquidation preferences of preferred stockholders, if any. The
number of authorized shares of common stock is 200,000,000 shares.

STOCKHOLDER RIGHTS PLAN

In March 2000, the Board of Directors of Cabot Microelectronics approved a
stock rights agreement and declared a dividend distribution of one right to
purchase one one-thousandth of a share of Series A Junior Participating
Preferred Stock for each outstanding share of common stock to stockholders of
record on April 7, 2000. The rights become exercisable based upon certain
limited conditions related to acquisitions of stock, tender offers and certain
business combination transactions.

15. INCOME TAXES

Income before income taxes was as follows:

46

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Taxes on income consisted of the following:

The provision for income taxes at our effective tax rate differed from the
provision for income taxes at the statutory rate as follows:

47

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Significant components of deferred income taxes were as follows:

16. COMMITMENTS AND CONTINGENCIES

LEASE COMMITMENTS

We lease certain vehicles, warehouse facilities, office space, machinery
and equipment under cancelable and noncancelable leases, most of which expire
within ten years and may be renewed by us. Rent expense under such arrangements
during fiscal 2003, 2002 and 2001 totaled $579, $482 and $1,400, respectively.

Future minimum rental commitments under noncancelable leases as of
September 30, 2003 are as follows:

PURCHASE OBLIGATIONS

We have entered into take-or-pay arrangements with suppliers, and purchase
orders and other obligations in the normal course of business regarding the
purchase of goods and services and other. In the fourth quarter of fiscal 2003,
we recorded a $1,959 liability for a raw material supply agreement for a
polishing pad technology that was previously under development, but is no longer
being pursued. Our total obligation with

48

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

respect to this agreement is $2,234, of which $1,100 has been recorded in
current liabilities and $1,134 in other long-term liabilities.

We operate under an amended fumed metal oxide agreement with Cabot
Corporation for the purchase of two key raw materials, fumed silica and fumed
alumina. We are obligated to purchase at least 90% of our six-month volume
forecast of fumed silica from Cabot Corporation and must pay for the shortfall
if we purchase less than that amount. We currently anticipate meeting minimum
forecasted purchase volume requirements. Also, under our fumed alumina supply
agreement with Cabot Corporation we are obligated to pay certain fixed, capital
and variable costs through December of 2006. This agreement has an initial five
year term, but we can choose to renew the agreement for another five year term,
which would expire in December 2011. If we do not renew the agreement, we will
become subject to certain terms and conditions and the payment of certain costs.
We are obligated to pay $23,504 of contractual commitments based upon our
anticipated renewal of the agreement through December 2011.

We have an agreement with a toll manufacturer pursuant to which the
manufacturer performs certain agreed-upon dispersion services. We have agreed to
purchase minimum amounts of services per year and to invest approximately $150
per year in capital improvements or other expenditures to maintain capacity at
the manufacturer's dispersion facility. The initial term of the agreement
expires in October 2004, with automatic one-year renewals, and contains a 90-day
cancellation clause executable by either party. We are obligated to pay $14,340
of contractual commitments related to this agreement and we would be obligated
to make a termination payment if the agreement is not renewed.

We have a distribution agreement with an existing supplier of polishing
pads to the semiconductor industry pursuant to which the supplier sells product
to us for our resale to end users. The initial term of the contract runs through
September 2007 and we are required to make certain agreed-upon purchases in
order to maintain the agreement. We are obligated to pay $5,877 for product
which we are required and intend to purchase by September 2004. We currently
anticipate meeting minimum forecasted purchase requirements for periods
subsequent to September 2004. We have the ability to cancel the agreement at any
time with no cancellation fee.

In June 2003 we entered into a technology licensing and co-marketing
agreement with a semiconductor equipment manufacturer under which we plan to
develop, manufacture and sell polishing pads utilizing endpoint detection window
technology licensed from the manufacturer for use on the manufacturer's
equipment. Under this agreement, we are obligated to pay $6,587 for the purchase
of capital equipment, approximately one year of certain marketing and technical
support services, and equipment services. As of September 30, 2003, we have paid
$4,628 of this balance. In addition, we are obligated to supply this
manufacturer with free polishing pads, up to an agreed upon dollar amount, for
particular uses over a seven year period. We currently estimate our total cost
associated with these products will be $2,213 over the remaining period. We are
also obligated to supply the equipment manufacturer with polishing pads, up to
an agreed upon dollar amount over the seven year period, which the manufacturer
will purchase from us at our cost. We will also pay a royalty to the equipment
manufacturer and, in certain circumstances, to another party to whom we are a
sub-licensee under our agreement, based upon net revenue earned with respect to
commercial sales of polishing pads covered under the agreement. The agreement's
term lasts as long as the patents on the technology subject to the license
agreement remain valid and enforceable.

INDEMNIFICATION DISCLOSURE

In the normal course of business, we are a party to a variety of agreements
pursuant to which we may be obligated to indemnify the other party with respect
to certain matters. Generally, these obligations arise in the context of
agreements entered into by us, under which we customarily agree to hold the
other party harmless against losses arising from a breach of representations and
covenants related to such matters as title to assets sold, certain intellectual
property rights and, in certain circumstances, specified environmental matters.
These terms are common in the industry in which we conduct business. In each of
these circumstances, payment by

49

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

us is subject to certain monetary and other limitations and is conditioned on
the other party making an adverse claim pursuant to the procedures specified in
the particular agreement, which typically allow us to challenge the other
party's claims.

We evaluate estimated losses for such indemnifications under SFAS No. 5,
"Accounting for Contingencies" as interpreted by FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" ("FIN 45"). We consider such
factors as the degree of probability of an unfavorable outcome and the ability
to make a reasonable estimate of the amount of loss. To date, we have not
encountered material costs as a result of such obligations and as of September
30, 2003, have not recorded any liabilities related to such indemnifications in
our financial statements as we do not believe the likelihood of a material
obligation is probable.

17. LITIGATION SETTLEMENT

We periodically become subject to legal proceedings in the ordinary course
of business. We are not currently involved in any legal proceedings which we
believe will have a material impact on our consolidated financial position,
results of operations, or cash flows.

In February 2002, we settled all pending patent infringement litigation
involving us and one of our major competitors, Rodel Inc., for a one-time
payment to Rodel of $1,000, which we recorded as expense in the second fiscal
quarter, and we have no further financial obligation with respect to this
matter. The litigation, entitled Rodel, Inc. v. Cabot Corporation (Civil Action
No. 98-352) and Rodel, Inc. and Rodel Holdings, Inc. v. Cabot Corporation (Civil
Action No. 99-256), had related to certain aspects of our slurry business and
had been controlled by us, but had been between Rodel and our former parent,
Cabot Corporation. Under the settlement, the suits were fully and permanently
dismissed, and neither party admits liability. In addition, Cabot
Microelectronics received from Rodel a fully paid-up, royalty free, worldwide
license in all patents that were the subject of the two suits and their foreign
equivalents.

18. EARNINGS PER SHARE

Statement of Financial Accounting Standards No. 128 "Earnings per Shares",
requires companies to provide a reconciliation of the numerator and denominator
of the basic and diluted earnings per share computations. Basic and diluted
earnings per share were calculated as follows:

50

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

19. FINANCIAL INFORMATION BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA

We operate predominantly in one industry segment -- the development,
manufacture, and sale of CMP slurries.

Revenues are attributed to the United States and foreign regions based upon
the customer location and not the geographic location from which our products
were shipped. Financial information by geographic area was as follows:

51

SELECTED QUARTERLY OPERATING RESULTS

The following table presents our unaudited financial information for the
eight quarters ended September 30, 2003. This unaudited financial information
has been prepared in accordance with accounting principles generally accepted in
the United States of America, applied on a basis consistent with the annual
audited financial statements and in the opinion of management, include all
necessary adjustments, which consist only of normal recurring adjustments
necessary to present fairly the financial results for the periods. The results
for any quarter are not necessarily indicative of results for any future period.

CABOT MICROELECTRONICS CORPORATION
SELECTED QUARTERLY OPERATING RESULTS

52

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

The following table sets forth activities in our allowance for doubtful
accounts:

We record actual warranty expense in cost of goods sold in the period in
which warranty claims occur. We calculate our warranty reserve using historical
experience and any known conditions or circumstances, and perform periodic
reviews of our warranty reserve requirements and make appropriate adjustments to
the reserve as necessary. Adjustments to the warranty reserve affect cost of
goods sold. Charges to expenses and deductions, shown below, represent the net
change required to maintain an appropriate reserve.

MANAGEMENT RESPONSIBILITY

The accompanying consolidated financial statements were prepared by Cabot
Microelectronics in conformity with accounting principles generally accepted in
the United States of America. Cabot Microelectronics' management is responsible
for the integrity of these statements and of the data, estimates and judgments
that underlie them.

Cabot Microelectronics maintains a system of internal accounting controls
designed to provide reasonable assurance that its assets are safeguarded from
loss or unauthorized use, that transactions are properly authorized and
recorded, and that financial records are reliable and adequate for public
reporting. The standard of reasonable assurance is based on management's
judgment that the cost of such controls should not exceed their associated
benefits. The system is monitored and evaluated on an ongoing basis by
management in conjunction with its internal audit function, independent
accountants, and the Audit Committee of the Board of Directors.

The Audit Committee of the Board of Directors provides general oversight
responsibility for the financial statements. Composed entirely of Directors who
are independent and not employees of Cabot Microelectronics, the Committee meets
periodically with Cabot Microelectronics' management, internal auditors and the
independent auditors to review the quality of the financial reporting and
internal controls, as well as the results

53

of the auditing efforts. The internal auditors and independent auditors have
full and direct access to the Audit Committee, with and without management
present.

/s/ WILLIAM P. NOGLOWS
--------------------------------------
William P. Noglows
Chief Executive Officer

/s/ WILLIAM S. JOHNSON
--------------------------------------
William S. Johnson
Chief Financial Officer

/s/ DANIEL S. WOBBY
--------------------------------------
Daniel S. Wobby
Principal Accounting Officer

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

None.

ITEM 9A. CONTROLS AND PROCEDURES.

Our management, with the participation of our Chief Executive Officer and
Chief Financial Officer, have conducted an evaluation of the effectiveness of
the design and operation of our disclosure controls and procedures pursuant to
Exchange Act Rule 13a-15(e) and 15d-15(e) as of the end of the period covered by
this report. Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures are
effective to make known to them in a timely fashion material information related
to the Company required to be filed in this report. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls subsequent to the date of their
evaluation.

While we believe the present design of our disclosure controls and
procedures is effective to make known to our senior management in a timely
fashion all material information concerning our business, we will continue to
improve the design and effectiveness of our disclosure controls and procedures
to the extent necessary in the future to provide our senior management with
timely access to such material information, and to correct any deficiencies that
we may discover in the future.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by Item 10 of Form 10-K with respect to
identification of directors and identification of an audit committee financial
expert is incorporated by reference from the information contained in the
sections captioned "Election of Directors" and "Board Structure and
Compensation" in Cabot Microelectronics' definitive Proxy Statement for the
Annual Meeting of Stockholders to be held March 9, 2004 (the "Proxy Statement").
In addition, for information with respect to the executive officers of Cabot
Microelectronics, see "Executive Officers" at the end of Part I of this Form
10-K and the section captioned "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement.

We have adopted a code of business conduct for all of our employees and
directors, including our principal executive officer, other executive officers,
principal financial officer and senior financial personnel. A copy of our code
of business conduct is available free of charge on our company web site at

54

www.cabotcmp.com. We intend to post on our web site any material changes to, or
waiver from our code of business conduct, if any, within two days of any such
event.

ITEM 11. EXECUTIVE COMPENSATION

The information required by Item 11 of Form 10-K is incorporated by
reference from the information contained in the section captioned "Executive
Compensation" in the Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

EQUITY COMPENSATION PLAN INFORMATION

Shown below is information as of September 30, 2003 with respect to the
shares of common stock that may be issued under Cabot Microelectronics' existing
equity compensation plans.

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

(1) Includes 336,830 shares available for future issuance under our Employee
Stock Purchase Plan.

On November 3, 2003, William P. Noglows was elected Chairman, President and
Chief Executive Officer of our Company. On that date our Compensation Committee
of the Board of Directors approved Mr. Noglows' participation in the Cabot
Microelectronics Corporation Amended and Restated 2000 Equity Incentive Plan.
The Board further approved the grant of 250,000 non-qualified stock options at
an exercise price of $55.37 per share. The options carry a ten year term and
vest equally over a four year period, with the first vesting on the one year
anniversary of the date of the grant.

On December 1, 2003, Clifford L. Spiro was appointed Vice President,
Research and Development of our Company. On that date our Compensation Committee
of the Board of Directors approved Dr. Spiro's participation in the Cabot
Microelectronics Corporation Amended and Restated 2000 Equity Incentive Plan.
The Board further approved the grant of 50,000 non-qualified stock options at an
exercise price of $54.28 per share. The options carry a ten year term and vest
equally over a four year period, with the first vesting on the one year
anniversary of the date of the grant.

The other information required by Item 12 of Form 10-K is incorporated by
reference from the information contained in the section captioned "Stock
Ownership" in the Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 13 of Form 10-K is incorporated by
reference from the information contained in the section captioned "Certain
Relationships and Related Transactions" in the Proxy Statement.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by Item 14 of Form 10-K is incorporated by
reference from the information contained in the section captioned "Fees of
Independent Auditors and Audit Committee Report" in the Proxy Statement.

55

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K

(a) The following Financial Statements and Financial Statement Schedule are
included in Item 8 herein:

1. Financial Statements:

Report of Independent Auditors
Consolidated Statements of Income for the years ended September 30,
2003, 2002 and 2001
Consolidated Balance Sheets at September 30, 2003 and 2002
Consolidated Statements of Cash Flows for the years ended September
30, 2003, 2002 and 2001
Consolidated Statements of Changes in Stockholders' Equity for the
years ended September 30, 2003, 2002 and 2001
Notes to the Consolidated Financial Statements

2. Financial Statement Schedule: Schedule II -- Valuation and Qualifying
Accounts

3. Exhibits -- The following exhibits are filed as part of, or
incorporated by reference into, this Report on Form 10-K:

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

(1) Filed as an exhibit to, and incorporated by reference from the Registrant's
Registration Statement on Form S-1 (No. 333-95093) filed with the Commission
on April 4, 2000, as amended.

(2) Filed as Exhibit 4.1 to, and incorporated by reference from the Registrant's
Current Report on Form 8-K filed with the Commission on October 6, 2000.

(3) Filed as an exhibit to, and incorporated by reference from the Registrant's
Annual Report on Form 10-K filed with the Commission on December 28, 2000.

(4) Filed as an exhibit to, and incorporated by reference from the Registrant's
Quarterly Report on Form 10-Q filed with the Commission on August 10, 2001.

(5) Filed as an exhibit to, and incorporated by reference from the Registrant's
Quarterly Report on Form 10-Q filed with the Commission on February 12,
2002.

(6) Filed as an exhibit to, and incorporated by reference from the Registrant's
Quarterly Report on Form 10-Q filed with the Commission on May 13, 2002.

(7) Filed as an exhibit to, and incorporated by reference from the Registrant's
Annual Report on Form 10-K filed with the Commission on December 10, 2002.

(8) Filed as an exhibit to, and incorporated by reference from the Registrant's
Quarterly Report on Form 10-Q filed with the Commission on February 12,
2003.

(9) Filed as an exhibit to, and incorporated by reference from the Registrant's
Quarterly Report on Form 10-Q filed with the Commission on August 11, 2003.

* Management contract, or compensatory plan or arrangement.

** Substantially similar change in control severance protection agreements have
been entered into with William P. Noglows, Matthew Neville, H. Carol
Bernstein, J. Michael Jenkins, William S. Johnson, Jeremy K. Jones, Hiroyuki
Nishiya, Daniel J. Pike, Stephen R. Smith, Clifford L. Spiro and Daniel S.
Wobby, with differences only in the amount of payments and benefits to be
received by such persons.

*** Substantially similar deposit share agreements have been entered into with
Matthew Neville and J. Michael Jenkins with differences only in the amount
of initial deposit and deposit shares earned by such persons.

+ This Exhibit has been filed separately with the Commission pursuant to the
grant of a confidential treatment request. The confidential portions of this
Exhibit have been omitted and are marked by an asterisk.

(b) Reports on Form 8-K

In a report dated July 24, 2003, Cabot Microelectronics reported under
Item 7. "Financial Statements and Exhibits" and Item 9. "Regulation FD
Disclosure" (Item 12. "Results of Operations and Financial Condition") that
on July 24, 2003 Cabot Microelectronics reported financial results for its
third fiscal quarter ended June 30, 2003.

57

In a report dated November 3, 2003, Cabot Microelectronics reported
under Item 5. "Other Events" and Item 7. "Financial Statements and
Exhibits" that on November 3, 2003 Cabot Microelectronics announced the
election of William P. Noglows as Chairman, President and Chief Executive
Officer.

58

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:

CABOT MICROELECTRONICS CORPORATION

Date: December 10, 2003 /s/ WILLIAM P. NOGLOWS
--------------------------------------------------------
William P. Noglows
Chairman of the Board, President and Chief Executive
Officer
[Principal Executive Officer]

Date: December 10, 2003 /s/ WILLIAM S. JOHNSON
--------------------------------------------------------
William S. Johnson
Vice President, Chief Financial Officer and Treasurer
[Principal Financial Officer]

Date: December 10, 2003 /s/ DANIEL S. WOBBY
--------------------------------------------------------
Daniel S. Wobby
Corporate Controller
[Principal Accounting Officer]

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:

Date: December 10, 2003 /s/ WILLIAM P. NOGLOWS
--------------------------------------------------------
William P. Noglows
Chairman of the Board, President and Chief Executive
Officer
[Director]

Date: December 10, 2003 /s/ JUAN ENRIQUEZ-CABOT*
--------------------------------------------------------
Juan Enriquez-Cabot
[Director]

Date: December 10, 2003 /s/ JOHN P. FRAZEE, JR.*
--------------------------------------------------------
John P. Frazee, Jr.
[Director]

Date: December 10, 2003 /s/ H. LAURANCE FULLER*
--------------------------------------------------------
H. Laurance Fuller
[Director]

59

Date: December 10, 2003 /s/ J. JOSEPH KING*
--------------------------------------------------------
J. Joseph King
[Director]

Date: December 10, 2003 /s/ RONALD L. SKATES*
--------------------------------------------------------
Ronald L. Skates
[Director]

Date: December 10, 2003 /s/ STEVEN V. WILKINSON*
--------------------------------------------------------
Steven V. Wilkinson
[Director]

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

* by H. Carol Bernstein as Attorney-in-fact pursuant to the requirements of
section 13 or 15(d) of the Securities Exchange Act of 1934.

60