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, 2002

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 November 29,
2002 as reported by the Nasdaq National Market, was approximately
$1,469,000,000. For the purposes hereof, "affiliates" include all executive
officers and directors of the registrant.

As of November 29, 2002, the Company had 24,334,559 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 11, 2003 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, 2002

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 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 it is a necessary step in the production of advanced ICs.
Planarization is a polishing process that levels, smooths and removes 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 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 seek to shrink the size of these devices and to improve their
performance. A majority of our CMP slurries are used to polish insulating layers
and the tungsten plugs that go through the insulating layers and connect the
multiple wiring layers of IC devices. We also have developed specialized
slurries used to polish copper, a metal used in wiring layers of IC device
fabrication, and our products for this application have been well received. In
addition, we have developed CMP slurries for polishing certain components in
hard disk drives, specifically rigid disk substrates and magnetic heads, and we
have become a strong participant in this area. We are continuing to develop
slurries for new applications such as noble metals. In addition, we are
developing our own polishing pads for use in the CMP process. Like slurries,
polishing pads are important consumables used in the CMP process. To broaden our
portfolio of pad products, we recently entered into a distribution agreement
with a third party to sell polishing pads while pursuing additional elements of
our pad strategy.

Prior to our initial public offering on April 4, 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. On September 29, 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 with 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 electric signal travel 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.

The multi-step manufacturing process for IC devices typically begins with a
circular wafer of pure silicon. A large number of identical IC devices are
manufactured on each wafer at the same time, and at the end of the process, the
wafer is cut into the individual devices. The first step in the manufacturing
process is to build transistors and other electronic components on the silicon
wafer. These components are then wired together in a particular sequence to
produce a functional IC device with the desired characteristics. 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.

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:
depositing metal onto the surface of the layer; projecting an image of the
desired wiring

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pattern on the layer using a process known as photolithography; and removing the
excess deposited metal from the surface of the insulating layer using a process
known as etching, which leaves behind the desired wiring pattern.

When the wiring is finished, another layer of insulating material is added
and 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. After these holes have been filled with tungsten,
CMP is used to remove all the excess tungsten 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. Due to the extremely
small dimensions involved, manufacturing IC devices requires precision
processing in ultra-clean, controlled environments.

The semiconductor industry follows generally accepted design rules that
describe current and projected feature size and spacing of electronic components
and wiring in IC devices. The feature 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 of IC devices
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, but also has led to an increase in the layers of IC devices.

The International Technology Roadmap for Semiconductors ("ITRS") is a set
of documents sponsored by the Semiconductor Industry Association along with
other worldwide associations. Those documents provide guidance and targets for
suppliers. According to the 2001 edition of the ITRS, the trends toward
increased density and miniaturization of IC devices are expected to continue.
The ITRS shows that today's leading edge logic microprocessors are scaled to a
1/2 pitch of 130 nanometer and utilize a maximum of 8 levels of metal
interconnect wiring. By 2004, those devices are projected to have a 1/2 pitch of
90 nanometer and a maximum of 9 levels of metal wiring. Similarly, leading edge
memory DRAM chips are projected to move to 4 levels of metal wiring. CMP is
currently used to polish the insulating layers, tungsten plugs, and copper
wiring in IC devices in separate steps. CMP is also utilized in the formation of
the transistors in the processes that precede the formation of interconnects and
that use is also increasing. We believe that the use of CMP in the manufacture
of IC devices will continue to increase as the feature size and spacing of these
devices decreases and the number of layers in the device increases.

CHEMICAL MECHANICAL PLANARIZATION

The CMP process involves both chemical reactions and mechanical abrasion to
planarize the insulating and conductive layers of an IC device that are built
upon a silicon wafer. The wafer is typically held on a rotating carrier, which
is spun at high speeds and pressed against a rotating polishing table. The
portion of the table that comes in contact with the wafer is covered by a
textured polishing pad. A CMP slurry is continuously applied to the polishing
pad to facilitate and enhance the polishing process. CMP slurries are liquid
compounds 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.

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 more dense, 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

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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 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 helps to reduce defect rates
and decrease the amount of time required for the polishing process.

CMP SLURRIES

The characteristics that are important to making an effective CMP slurry
include: high polishing rates, which increase productivity and throughput; high
selectivity, which means the ability to enhance the polishing of specific
materials while inhibiting the polishing of other materials; uniformity of
polishing, which means that different surface materials can be polished to the
same degree at the same time, thereby eliminating the problems of dishing and
erosion; low levels of chemical and physical impurities, which can adversely
affect IC device performance by leaving residues on the polished surface; and
colloidal stability, meaning that the abrasive particles within the slurry do
not settle, which is an important factor in accomplishing uniform polishing with
minimum defects.

These qualities affect and enhance the performance of IC devices, and most
of them have the ability to also positively impact 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 into its manufacturing
process, an IC device manufacturer generally requires the slurry to be qualified
at each of its plants through a series of tests and evaluations intended to
ensure that the slurry will function properly in the manufacturing process, as
well as to optimize the slurry's 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 expensive and to take six months or more to complete. IC
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.

INDUSTRY TRENDS

The semiconductor industry has experienced rapid growth over the past
decade, but it has also been highly cyclical. Since January 2001, companies in
this industry have been challenged by one of the most significant downturns in
its history, as our customers' inventory levels of IC devices were higher than
in the past, and end-market demand for products using IC devices slowed as a
result of the overall weakness in the global economy. While customer inventory
levels appeared to stabilize to some extent in fiscal 2002, the trends of
softness in the global economy and low consumer demand for electronic devices
continued during the fiscal year and appear to be ongoing.

Despite the current weakness in the semiconductor industry, we expect the
CMP slurry 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, telecommunications, the Internet, automobiles and consumer and
industrial electronics.

4

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, such as copper
interconnect, that require CMP, has led to more widespread use of CMP and
consumption of CMP slurries and polishing pads. We anticipate the worldwide
market for CMP slurries used by IC device manufacturers to grow significantly 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 only a small percentage of the total production cost of an IC
device, and is important to the continued improvement of IC device performance
and the reduction of costs of IC device manufacturing.

OTHER APPLICATIONS OF CMP IN THE IC DEVICE MANUFACTURING PROCESS

We have developed and commenced sampling of CMP slurries for use in
connection with an IC device manufacturing process known as direct shallow
trench isolation. Direct shallow trench isolation is a relatively new method of
isolating the electronic components built on silicon wafers of an IC device to
prevent short circuits and other electrical interference. Direct shallow trench
isolation uses CMP before the first insulating layer is put down on the wafer.
Isolation methods used prior to direct shallow trench isolation did not use CMP.
By using CMP in conjunction with direct shallow trench isolation, IC device
manufacturers are expected to be able to achieve greater miniaturization and
density of their IC devices.

We also are developing CMP slurries for polishing noble metals. Noble
metals include iridium, ruthenium, and platinum. These materials are being
evaluated for use in advanced memory IC devices where their properties enable
the continued miniaturization of individual memory cells called capacitors. CMP
is expected to be used to planarize thin layers of these materials.

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 for qualified
products; improve the chemical and mechanical qualities of our CMP products;
and, demonstrate and deliver advanced CMP solutions to the semiconductor
industry.

BUILD AND MAINTAIN CUSTOMER RELATIONSHIPS

We believe that building 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 slurries, to integrate our
slurries 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.

EXPAND GLOBALLY

We believe that having production facilities, personnel and other 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
Barry, Wales and Geino, Japan. We also have assembled a team of business and
account managers and independent distributors strategically located in Europe,
Taiwan, Singapore, Japan and Korea, and technical support and sales personnel
throughout the United States, Europe and Asia. We intend to expand our
production capacity,
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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 and retain experienced personnel who are committed to providing
high-performance products and strong customer and applications support.

MAINTAIN TOP QUALITY PRODUCTS AND SUPPLY

Our customers demand consistent high-quality products and 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. 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.

EXPAND INTO NEW APPLICATIONS AND PRODUCTS

We intend to leverage our CMP experience and technology to explore new
applications and products. We have continued to develop and have increased sales
of slurries for polishing copper used in the wiring layers of some IC devices
and for polishing the magnetic heads and coating on hard disks in hard disk
drives. We also are developing polishing products for other applications such as
direct shallow trench isolation and noble metals. Additionally, we are using our
knowledge of CMP materials 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.

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 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 IC devices and are working on next generation copper 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 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
hard 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 also
established a dedicated research and development team and an applications
support team who employ a process solution approach similar to what we use for
our other slurry products. We have experienced promising results in these areas,
and believe that they offer solid potential. Moreover, we believe that our
slurry products offer improved performance compared with other materials
currently used in the industry.

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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,
Rodel. 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. Based on this, we have
identified an opportunity to provide our customers with technological and
quality improvements through the ability to jointly market our CMP slurries and
polishing pads to them. At the end of fiscal 2002, we broadened our pad strategy
by entering a distribution agreement with a third party to sell polishing pads.
We also intend to continue to develop our proprietary pads while pursuing
additional elements of our pad strategy.

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 slurry
products tailored to their precise needs. Next, our applications teams work with
customers to integrate our slurry 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.

In the past, we also have marketed our products through independent
distributors in certain regions of the world. In fiscal 2002, we altered this
approach by modifying our agreement with one of our independent distributors,
Metron Technology. This modification provides that as of June 2003, we will sell
directly to our customers in Europe, Singapore and Malaysia, while maintaining
Metron as our distributor in Israel. In addition, the IC device manufacturing
industry in Asia has grown significantly over the last five years. As a result,
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. By building this regional infrastructure, we have demonstrated a
commitment to the Asian marketplace.

In fiscal year 2002, our five largest customers, of which two are
distributors, accounted for approximately 63% of our revenue, with Marketech,
who is one of the distributors, and Intel accounting for approximately 24% and
16% of our revenue, respectively. In fiscal year 2001, our five largest
customers accounted for approximately 55% of our revenue, with Marketech and
Intel accounting for approximately 21% and 14% 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
purchased fumed alumina until December, 2001 only 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 our technologies 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.

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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. Cabot Corporation is required
to supply us with fumed silica in volumes specified by us, up to a limit, from
each of its Tuscola, Illinois and Barry, Wales facilities, up to a specific
limit from each facility. 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. We are
limited in the amount we can forecast for any month to an amount no greater than
120% of the forecasted amount for the previous month. We are obligated to
purchase at least 90% of the six-month volume forecast and to pay specified
amounts to Cabot Corporation if we purchase less than that amount. We are also
required to pay all reasonable costs incurred by Cabot Corporation to provide
quality control testing at levels greater than Cabot Corporation provides to its
other customers and are generally prohibited from reselling any fumed silica
purchased from Cabot Corporation.

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, except certain of
the forecast requirements do not apply to fumed alumina. 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 terms related to fumed alumina
now provide us with the first right, subject to certain terms and conditions, to
all fumed alumina produced at the facility. The agreement prohibits Cabot
Corporation from selling fumed metal oxides to third parties for use in CMP
applications. This agreement has an initial term that expires in June 2005.
Thereafter, the agreement may be terminated by either party on June 30 or
December 31 in any year with at least 18 months prior written notice.

FUMED ALUMINA SUPPLY AGREEMENT

Under the fumed alumina supply agreement, Cabot Corporation expanded its
capacity for the manufacture of fumed alumina, to which we have first right to
all capacity from the expansion and, under the amended fumed metal oxide
agreement, we now have first right, subject to certain terms and conditions, to
the capacity from that fumed alumina facility. 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 that meets our specifications per year.
Quarterly capital lease payments of approximately $0.3 million with respect to
capital costs will be made over the ten year period of the agreement. Based upon
these financial terms and those of the amendment to the fumed metal oxide
agreement, our average cost per pound for fumed alumina are and will be higher
in the future than paid under the original fumed metal oxide agreement. We
expect this amount to increase in future years as we anticipate continued strong
sales growth in alumina-based slurry products.

The agreement provides that Cabot Corporation only has to produce fumed
alumina that meets our specifications up to a certain amount and percentage of
overall fumed alumina they produce. We pay for fumed alumina that is produced
subject to our orders, whether conforming or nonconforming to our
specifications. We must give Cabot Corporation the first right to purchase from
us any nonconforming fumed alumina that we wish to resell at an agreed upon
price. 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 also purchase from other parties; the terms
related to these matters replace those that existed under the fumed metal oxide
agreement with respect to fumed alumina. 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. Under certain
limited circumstances, we can permit Cabot Corporation to use the expansion to
produce fumed alumina for itself, with Cabot Corporation paying us an agreed
upon price for such production.

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Under both agreements, Cabot Corporation warrants that its products will
meet our agreed upon product specifications. We have no right to any
consequential, special or incidental damages for breach of that warranty or any
other provision of the agreement. Under the fumed metal oxide agreement, Cabot
Corporation is obligated to replace noncompliant products with products that
meet the agreed upon specifications. Under the fumed alumina supply agreement,
Cabot Corporation is only obligated to replace noncompliant product with those
that meet the agreed upon specifications when the amount of nonconforming
product exceeds a certain percentage. The agreements also provide that any
change to product specifications for fumed metal oxides must be by mutual
agreement. Any increased costs due to product specification changes are paid by
us. 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.

Prior to our initial public offering, we did not provide detailed product
specifications to Cabot Corporation and Cabot Corporation permitted us to return
some products even if they met our specifications. Under these agreements, we
provide detailed specifications to Cabot Corporation and have no contractual
right to return products that meet these specifications.

It may be difficult to secure alternative sources of fumed metal oxides in
the event Cabot Corporation encounters supply or production problems or
terminates, breaches or otherwise fails to perform under these agreements with
us. A significant reduction in the amount of fumed metal oxides supplied by
Cabot Corporation, a problem with the quality of those fumed metal oxides or a
prolonged interruption in their supply by Cabot Corporation could interfere with
our ability to produce our CMP slurries in the quantities and of the quality
required by our customers and in accordance with their delivery schedules.

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, primarily fumed silica, to Davies and it
performs dispersion services. 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. The agreement provides for
renegotiation of the price paid for dispersion services on each two-year
anniversary of the agreement in order to reflect changes in Davies'
manufacturing costs. We have also agreed to invest during each year
approximately $0.2 million in capital improvements, capacity expansions and
other expenditures to maintain capacity at the Davies dispersion facility in
Hammond, Indiana. We own most of the dispersion equipment at the Davies
facility. The agreement has an initial term that expires in October, 2004, and
is automatically renewed for one-year periods thereafter, unless either party
gives written notice to the other of its intention to terminate the agreement at
least 90 days prior to the expiration of the term.

DISPERSION SERVICES AGREEMENT WITH CABOT CORPORATION

We perform dispersion services for Cabot Corporation under a dispersion
services agreement with Cabot Corporation that became effective at the time of
our initial public offering. Dispersions of fumed metal oxides are used in a
variety of applications in addition to CMP and Cabot Corporation develops and
sells fumed metal oxide dispersions for these non-CMP applications. The
agreement has an initial term that expires in June, 2005. Thereafter, the
agreement may be terminated by either party on June 30 or December 31 in any
year with at least 18 months prior written notice.

RESEARCH AND DEVELOPMENT

We believe our competitive position depends in part on our ability to
develop CMP applications tailored to our customers' needs. In our product
development and dispersion technology laboratory, our skilled technical
personnel conduct kinetic studies of the chemical reactions on the surface of
the wafer. These kinetic data allow us to adjust the composition of our slurries
to avoid, among other things, non-uniform polishing

9

patterns. Understanding the chemical processes on the surface of the polished
wafer allows us to compose slurries specifically tailored to interact with one
element and to slow or essentially stop planarization as soon as this particular
element 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 have greatly expanded our existing R&D capabilities this year with the
opening of our new research and development facility in Aurora, Illinois, which
was substantially completed in April 2002. 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 believe this investment will provide us with
leading edge polishing and metrology capabilities to support the most advanced
and challenging customer technology requirements.

We expensed approximately $33.7 million, $25.8 million and $19.8 million
for research and development in fiscal years 2002, 2001 and 2000, respectively.
Investments in research and development 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 many other companies are attempting to
enter this market. During this fiscal year, competition has increased and we
expect it to continue to intensify. 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 the hard disks in hard disk
drives. We believe the CMP polishing pad market is currently led by one
principal supplier, Rodel. We may also face competition from other companies
that develop 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. We compete primarily on the basis of our product innovation,
performance and level of service. We compete secondarily on the basis of our
broad product offering, global supply assurance and, to a lesser extent, price.
We believe that we presently compete favorably with respect to each of these
factors. The CMP marketplace and CMP products are evolving, however, and there
is no assurance that we will compete successfully in the future.

INTELLECTUAL PROPERTY

Our intellectual property is important to our success and ability to
compete. We currently have 39 U.S. patents and 59 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. 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 have a material adverse effect on our business, results of
operations and financial condition.

On February 28, 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 $1.0 million, which we recorded as expense in the second
fiscal quarter, and we have no further financial obligation with respect to this
matter. We 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. For a further discussion of this litigation, see Item 3 -- Legal
Proceedings of this Form 10-K.

10

In addition, we have obtained a patent license from a third party covering
a polishing process used in the manufacturing of non-IC devices. Although we
expect to independently develop a new technology which will eliminate our need
for this licensed technology, there is no assurance that we will be successful
in doing so or that we will be able to continue to license this technology
beyond the eight years currently provided for in our license agreement. This
agreement is effective through 2004 and may be renewed for an additional three
year period.

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, 2002, we employed a total of 494 individuals, including
42 in sales and marketing, 158 in research and development, 51 in administration
and 243 in operations. 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.

ITEM 2. PROPERTIES

Our principal U.S. facilities consist of:

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

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

- a commercial dispersion plant and distribution center in Aurora,
Illinois, comprising approximately 175,000 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 consist of:

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

- a distribution center in Ansung, South Korea consisting of approximately
16,000 square feet.

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 is pending and
estimated final proceeds approximate the net book value of the assets being
sold.

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.

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

11

ITEM 3. LEGAL PROCEEDINGS

On February 28, 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 $1.0 million, 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.

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 November 30, 2002.

Dr. Matthew Neville was elected Chairman of the Board of our company in
March 2001. He has served as our President and Chief Executive Officer since
December 1999 and at that time was elected a director of our company. Dr.
Neville was a Vice President of Cabot Corporation from 1997 to 1999, and was the
General Manager of the Microelectronics Materials Division of Cabot Corporation
from 1996 until the formation of Cabot Microelectronics Corporation in 1999.
From 1983 to 1996, Dr. Neville held various positions at Cabot Corporation,
including Director of Research and Development for the Cab-O-Sil Division. Dr.
Neville received his Ph.D. in Chemical Engineering from the Massachusetts
Institute of Technology.

Martin M. Ellen served as our Vice President and Chief Financial Officer
from March 2001 through October 2002, at which time he resigned to become Chief
Financial Officer of another company. Mr. Ellen joined Cabot Microelectronics
after serving as Senior Vice President and Chief Financial Officer of Whitman
Corporation from October 1998 through the closing of its merger with
PepsiAmericas, Inc. in 2001. From May 1998 through September 1998, Mr. Ellen was
a founding member of Casas, Ellen & White, LLC, a venture management firm. From
October 1996 to May 1998, Mr. Ellen was Executive Vice President and Chief
Financial Officer of PrimeCare International, Inc., a healthcare services
company. Mr. Ellen received a Bachelor of Science degree in accountancy from the
University of Illinois, is a certified public accountant, and received a Masters
of Management degree from the Kellogg Graduate School of Management at
Northwestern University.

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

12

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. Mr. Jenkins previously served as our Director of Human
Resources beginning in May 1999. Prior to joining us, 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.

Jeremy K. Jones has served as our Vice President, New Business Development
since January 2001 and previously was our Director of New Business Development
since 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 earned a M.S. in
Materials Engineering and B.S. in Mechanical Engineering from Worcester
Polytechnic Institute in Worcester Massachusetts and a M.B.A. from Babson
College in Wellesley, Massachusetts.

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

Kathleen A. Perry has served as our Vice President of Research and
Development since October 2000. Prior to joining us, Ms. Perry served as Senior
Director of Strategic Technology at Applied Materials, where she was responsible
for creating the strategic roadmap for CMP products and processes. From April
1997 until October 1999 she served as the Chief Technology Officer at Obsidian.
From April 1993 to April 1997, she led a CMP research team at Motorola as the
Manager of CMP Research. Ms. Perry earned a B.S. in Materials Science and
Engineering from Cornell University and an M.S. in Materials Science and
Engineering from Northwestern University.

Daniel J. Pike has served as our Vice President of Operations since
December 1999. Mr. Pike served as our Director of Global Operations from 1996 to
1999. Prior to joining us, Mr. Pike worked for FMC Corporation as a Marketing
Manager for the Pharmaceutical Division. 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, a start-up company
providing web-based supply chain applications to the construction industry, 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.

Daniel S. Wobby has served as our Acting Principal Financial Officer since
November 2002 and has served as our Corporate Controller since April 2000 and
Principal Accounting Officer since June 2000. Mr. Wobby had served as Director
of Finance since October 1997. Since 1989, Mr. Wobby held various accounting and
operations positions with Cabot Corporation. Prior to joining Cabot Corporation,
Mr. Wobby worked for Arthur Andersen LLP in the Commercial Audit Division. Mr.
Wobby earned a B.S. in Accounting from St. Michael's College.

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 on April 4, 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 29, 2002, there were approximately 1,338 holders of record
of our common stock. No dividends were declared or paid in 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, 2002 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

We believe we are the leading supplier of high-performance polishing
slurries used in the manufacture of the most advanced IC devices within 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 it is a
necessary step in the production of advanced ICs. Planarization is a polishing
process that levels and smooths, removing 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 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 seek to shrink the
size of these devices and to improve their performance.

A majority of our CMP slurries are used to polish insulating layers and the
tungsten plugs that go through the insulating layers and connect the multiple
wiring layers of IC devices. We have developed specialized slurries used to
polish copper, a metal used in wiring layers of IC device fabrication, and our
products for this application have been well received. In addition, we have
developed CMP slurries for polishing several components in hard disk drives,
specifically rigid disk substrates and magnetic heads, and we have become a
strong participant in this market. We are continuing to develop slurries for new
applications such as direct shallow trench isolation and noble metals. In
addition, we are developing our own polishing pads for use in the CMP process.
Like slurries, polishing pads are important consumables used in the CMP process.
To broaden our portfolio of pad products, we recently entered into a
distribution agreement with a third party to sell polishing pads while pursuing
additional elements of our pad strategy.

Prior to our initial public offering on April 4, 2000, we operated as a
division of 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. On September 29,
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 provide 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. Should actual
incidences of product not meeting specifications and performance requirements
differ from our estimates, revisions to the estimated warranty liability may be
required.

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 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 material 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 ("SFAS") 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, 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 is 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. However, we have not yet
seen an improvement in demand driven by end markets, as a lack of corporate
information technology spending appears to have weighed heavily on the PC and
computer-related markets. We also experienced an increase in competition this
fiscal year and expect it to continue to intensify. 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 $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.

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 increases if Cabot Corporation's raw material costs increase.
Also, 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. Under this fumed alumina supply agreement, Cabot Corporation

18

expanded its capacity for the manufacture of fumed alumina and we have the first
right to all this capacity. 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 they produce more than a certain amount that meets our
specifications per year. 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.

Certain costs will decrease in the future due to the expiration on June 30,
2002 of a contingent payment arrangement 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. Cost of goods sold for the quarter ended September 30, 2002 included a
final payment of $0.6 million, which now completely terminates our obligation
under this contract.

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. In July 2002, we entered into an agreement for certain
materials with a supplier in which we are obligated to purchase, subject to the
supplier's ability to deliver, certain minimum quantities based upon certain
forecasted requirements over a one-year period. We do not expect this agreement
to have a material effect on our cost of goods sold. However, we may enter into
arrangements in the future that could result in costs which are higher than
those in the existing agreements

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. 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 slurry 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

19

reductions were partially offset by an increase in depreciation of $1.4 million
associated with administrative areas of the R&D facility addition. We expect
that general and administrative expenses will increase due to higher premiums
and increased coverage with respect to directors and officers liability
insurance.

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 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 the current fiscal
year, a payment of $0.3 million to Cabot Corporation to reimburse them for
certain capital improvements made to equipment used to supply us with material
that was abandoned 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.

YEAR ENDED SEPTEMBER 30, 2001 VERSUS YEAR ENDED SEPTEMBER 30, 2000

REVENUE

Total revenue was $227.2 million in 2001, which represented a 25.4%, or
$46.0 million, increase from 2000. Of this increase, $37.4 million was due to a
20.6% increase in volume and $8.6 million was due to increased weighted average
selling prices. Fiscal 2001 revenue would have been $3.8 million higher had the
Japanese Yen average exchange rate for the year held constant with the prior
fiscal year average. Total revenue in 2000 would have been $0.6 million lower
had our dispersion services agreement with Cabot Corporation been in effect
throughout the entire fiscal year. Most of our revenues are derived from sales
of products used in the manufacture of advanced IC devices. Manufacturing of IC
devices declined throughout calendar year 2001 as a result of the downturn in
the semiconductor industry and weak global economic conditions. As a result, our
fiscal 2001 quarterly revenues were the highest in our first quarter at $68.6
million and were the lowest in our fourth fiscal quarter at $51.4 million, which
was essentially flat with revenues in the third fiscal quarter.

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COST OF GOODS SOLD

Total cost of goods sold was $108.4 million in 2001, which represented an
increase of 25.6% or $22.1 million from 2000. Of this increase, $17.8 million
was due to higher sales volume and $4.3 million was due to higher weighted
average costs per gallon. Cost of goods sold would have been $4.2 million higher
in 2000 had our dispersion services and fumed metal oxide agreements with Cabot
Corporation been in effect throughout the entire fiscal year. Higher costs per
gallon resulted from a shift in product mix and higher raw material costs. Had
the fumed alumina supply agreement with Cabot Corporation, which was entered
into in December 2001, been in effect during the year ended September 30, 2001,
cost of goods sold for that period would have increased by approximately $1.0
million.

GROSS PROFIT

Our gross profit as a percentage of total revenue of 52.3% in 2001 was
essentially flat as compared to 52.4% in 2000. Gross profit as a percentage of
total revenue would have been 49.9% in 2000 had our dispersion services and
fumed metal oxide agreements with Cabot Corporation been in effect throughout
the entire fiscal year. On a comparable basis, the increase in gross profit of
2.4 percentage points resulted primarily from favorable product mix.

RESEARCH AND DEVELOPMENT

Research and development expenses were $25.8 million in 2001, which
represented an increase of 30.6%, or $6.0 million, over 2000. This resulted
primarily from higher staffing levels and operating supplies needed to support
our continued investments in research and development. Key activities during the
twelve months ended September 30, 2001 involved the continued development of new
and enhanced slurry products with a significant focus on slurries for polishing
copper, CMP polishing pad technology and advanced particle technology.

SELLING AND MARKETING

Selling and marketing expenses were $8.8 million in 2001, which represented
an increase of 15.3%, or $1.2 million, over 2000. The increase was due primarily
to the hiring of additional customer support personnel in North America, Japan
and Taiwan.

GENERAL AND ADMINISTRATIVE

General and administrative expenses were $21.1 million in 2001, which
represented an increase of 5.4%, or $1.1 million, from 2000. Fiscal 2000
includes compensation expense of $3.8 million related to options granted to
non-Cabot Microelectronics employees at the time of the initial public offering
and a charge for the accelerated vesting of long term incentives and benefits at
the time of the spin-off from Cabot Corporation. Absent these prior year
charges, general and administrative expenses increased 29.8%, or $4.9 million,
primarily due to increased staffing and other expenses necessary to support the
general growth of the business and the administrative activities of a stand
alone company.

AMORTIZATION OF INTANGIBLES

Amortization of intangibles was $0.7 million in 2001 and 2000 resulting
from goodwill and other intangible assets associated with the acquisition of
selected distributor assets from a third party in 1995.

PROVISION FOR INCOME TAXES

The effective income tax rate was 34.0% in 2001 and 35.0% in 2000. The
decrease in the effective tax rate was mainly driven by an increase in tax
credits from expanded research and experimentation activities.

21

NET INCOME

Net income was $41.9 million in 2001, which represented an increase of
37.4%, or $11.4 million, from 2000 as a result of the factors discussed above.

LIQUIDITY AND CAPITAL RESOURCES

We had cash flows from operating activities of $53.5 million in 2002, $62.5
million in 2001 and $31.9 million in 2000. Our cash provided by operating
activities in 2002 resulted from net income of $40.7 million plus non-cash items
of $15.1 million which was offset partially by a net increase in working capital
of $2.3 million. The increase in working capital resulted primarily from an
increase in inventories and prepaid and other assets which were partially offset
by increases in income taxes payable. Our principal funding requirements have
been for additions to property, plant and equipment that support the expansion
of our business and technological capability.

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 stand-alone 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. In 2000, cash
flows used in investing activities were $37.2 million, primarily related to the
construction of our Aurora, Illinois manufacturing facility, the purchase of
land and construction of a new distribution facility in Korea, the purchase of
research and development equipment and the purchase of additional land in Geino,
Japan.

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 2000, cash flows from financing activities of $15.2 million resulted
primarily from capital contributions from Cabot Corporation of $10.1 million,
net proceeds from our initial public offering of $82.8 million and borrowings of
$17.0 million under a term credit facility. We paid Cabot Corporation dividends
of $17.0 million in March 2000 and $64.3 million in April 2000. Also, during the
third quarter of 2000, we repaid $13.5 million of borrowings under our term
credit facility.

At September 30, 2002 debt was comprised of an unsecured term loan in the
amount of $3.5 million funded on the basis of the Illinois State Treasurer's
Economic Program. This loan is due on April 3, 2005 and incurs interest at an
annual rate of 4.68%. On July 10, 2001, the agreement between Cabot
Microelectronics and LaSalle Bank for this loan was amended and restated.
Although the loan amount of $3.5 million was unchanged, various other terms were
revised and the termination date was amended from June 1, 2005 to April 3, 2005.

On July 10, 2001 we entered into a $75.0 million unsecured revolving credit
and term loan facility with a group of commercial banks which replaced our $25.0
million unsecured revolving credit facility and $8.5 million revolving line of
credit, both of which were terminated. On February 5, 2002, this agreement was
amended with no material changes in terms. Under this agreement, which
terminates July 10, 2004, 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 or were outstanding at September 30, 2001 under this
credit facility and we are currently in compliance with the covenants.

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We estimate that our total capital expenditures in fiscal year 2003 will be
approximately $24.0 million, approximately $0.6 million of which we have already
spent as of October 31, 2002. Our major capital expenditures in 2003 are
currently expected to be:

- approximately $12.0 million for advanced clean room equipment, polishing
and other equipment primarily for use in our new research and development
facility; and

- approximately $12.0 million for general expansion of operations and new
business support.

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 is pending and
estimated final proceeds approximate the net book value of the assets being
sold.

We believe that cash generated by our operations and borrowings under our
revolving credit facility will be sufficient to fund our operations and expected
capital expenditures in 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 or debt financing, strategic relationships or other arrangements.

DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

At September 30, 2002 and 2001, 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.

The following summarizes our contractual obligations at September 30, 2002,
and the effect such obligations are expected to have on our liquidity and cash
flow in future periods.

CONTRACTUAL OBLIGATIONS

LONG-TERM DEBT

At September 30, 2002 debt was comprised of an unsecured term loan in the
amount of $3.5 million funded under the Illinois State Treasurer's Economic
Program. The interest rate is 4.68% and the loan is due April 3, 2005.

CAPITAL LEASE OBLIGATIONS

On December 12, 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 for
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
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 not to renew the agreement
subject to certain terms and conditions and the payment of certain costs, after
the initial five year term. Capital lease payments to Cabot Corporation

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commenced in the second quarter of fiscal 2002 and a total of $0.9 million has
been paid as of September 30, 2002.

On January 11, 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
agreement has approximately a three-year term, which expires 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.

UNCONDITIONAL PURCHASE OBLIGATIONS

Unconditional purchase obligations include our noncancelable purchase
commitments and take-or-pay arrangements with suppliers. 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 and must
pay the difference 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. Unconditional purchase obligations include $21.9
million of contractual commitments based upon our anticipated renewal of the
agreement through December 2011.

Unconditional purchase obligations also includes $0.6 million related to a
purchase agreement entered into with a supplier in July 2002 for certain
materials in which we are obligated to purchase, subject to the supplier's
ability to deliver, certain minimum quantities based upon certain forecasted
requirements over a one-year period. We currently anticipate meeting minimum
forecasted purchase volume requirements.

We also have a long-term agreement with a supplier to purchase materials
for use in one of our product lines that is not currently in commercial
production. As of September 30, 2002, we are obligated to purchase, subject to
the supplier's ability to deliver, $3.2 million of materials over the remaining
term of the agreement, which expires in June, 2005. There exists the possibility
that we will not require the entire amount of material provided for under the
agreement, but we still would be obligated to pay for it. We have not recorded a
liability for this possible loss as we plan to and are evaluating the use of the
production capabilities of this supplier in conjunction with this product line
strategy. In fiscal 2001 and 2002, we made payments to this supplier of $0.5
million and $0.7 million, respectively for purchasing less than the contractual
minimum. We also are required to reimburse the supplier for all approved
research and development costs related to the materials. The supplier will repay
these research and development reimbursements if our material purchases from
them reach certain levels.

In November 2002, we entered into a purchase agreement for certain
materials with a supplier and we are obligated to purchase $0.2 million over the
life of the contract. We also expect to purchase $0.5 million of capital assets
to be placed in service at this supplier.

OTHER LONG-TERM OBLIGATIONS

We have an agreement with Davies Imperial Coatings, Inc. ("Davies")
pursuant to which Davies will perform 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 Davies dispersion facility. The initial
term of the agreement expires in October 2004,

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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.

On July 10, 2001 we entered into a $75.0 million unsecured revolving credit
and term facility with a group of commercial banks. Under this agreement, which
terminates July 10, 2004, we are obligated to pay an administrative fee and a
non-use fee. No amounts are currently outstanding under this agreement and we
are currently in compliance with the covenants.

On September 25, 2002 we entered into a licensing agreement for a product
line under development. Under this agreement we are required to pay an annual
non-refundable minimum annual licensing fee. In addition, we have committed to
rent or purchase equipment to develop and commercialize the licensed product.
This agreement is cancelable at any time and shall remain in effect until
terminated upon the mutual agreement of the parties involved.

EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS

In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143") which is effective for fiscal years
beginning after June 15, 2002. SFAS 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. We do not expect the adoption
of SFAS 143 will have a material impact on our consolidated financial position,
results of operations, or cash flows.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144") which is effective for
fiscal years beginning after December 15, 2001. SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supercedes SFAS 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" while retaining many of the provisions of
that statement. SFAS 144 also supercedes the accounting and reporting provisions
of Accounting Principles Board Opinion No. 30, "Reporting for the Impairment or
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions ("APB No. 30"). We do not expect the adoption
of SFAS 144 will have a material impact on our consolidated financial position,
results of operations, or cash flows.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections"
("SFAS 145") which is effective for fiscal years beginning after May 15, 2002.
SFAS 145 updates, clarifies and simplifies existing accounting pronouncements.
We do not expect the standard will have a significant impact on our consolidated
financial position, results of operations or cash flows.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146") which supercedes
Emerging Issues Task Force Issue No. 94-3, "Liability for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS 146 requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of the commitment to an exit or disposal plan. This statement
is effective for exit or disposal activities that are initiated after December
31, 2002 and its adoption will have no impact on our historical consolidated
financial position, results of operations or cash flows.

In October 2002, the FASB issued SFAS No. 147, "Acquisition of Certain
Financial Institutions," which is not applicable to us.

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

25

preapproved the following non-audit services, which subsequently were or are
being performed by PricewaterhouseCoopers LLP: (1) tax compliance consultations;
(2) tax compliance and advice related to our foreign operations and the creation
of our foreign subsidiaries; and (3) tax consultations with respect to our
Employee Stock Purchase and Equity Incentive Plans.

WEBSITE ACCESS TO REPORTS

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 website at
"www.cabotcmp.com" 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 website by the end of the business
day following the submission to the SEC of such filings.

CODE OF ETHICS

We have adopted a code of business conduct for all of our employees and
directors, including our principal executive officer, other executive officers,
acting principal financial officer and senior financial personnel. A copy of our
code of business conduct is attached hereto as Exhibit 10.34 and also is
available on our company website at "www.cabotcmp.com". We intend to post on our
website any material changes to, or waiver from our code of business conduct, if
any, within two days of any such event.

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 are expected to
continue in the future. One or more developments in the semiconductor or related
industries may 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. 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 2002, our five largest customers, of which two are
distributors, accounted for approximately 63% of our revenue, with Marketech,
one of these distributors, and Intel accounting for approximately 24% and 16% of
our revenue, respectively. In fiscal year 2001, our five largest customers
accounted for approximately 55% of our revenue, with Marketech and Intel
accounting for approximately 21% and 14% of our revenue, respectively.

26

DEMAND FOR OUR PRODUCTS AND OUR BUSINESS MAY BE ADVERSELY AFFECTED BY A FURTHER
DECLINE IN WORLDWIDE ECONOMIC AND INDUSTRY CONDITIONS

Our business is affected by current economic and industry trends and it is
extremely difficult to predict sales of our products given uncertainties in
these factors. During fiscal 2001 and the first and second fiscal quarters of
2002 the global economic slowdown and weakening in demand for electronic
systems, coupled with higher than normal chip inventories, affected our
quarterly revenue trends. Although our third and fourth fiscal quarters of this
year showed improvement over previous quarters, concerns remain regarding the
health of the global economy and semiconductor industry and further declines or
lack of improvement in current economic and industry conditions could adversely
affect our business.

ANY PROBLEM OR INTERRUPTION IN OUR SUPPLY FROM CABOT CORPORATION OR OTHER
SUPPLIERS 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 the primary
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 the initial public offering with respect to fumed
silica and as of the effective date of the new fumed alumina supply agreement
with respect to certain amounts of fumed alumina. Under the fumed alumina supply
agreement, Cabot Corporation expanded its capacity for the manufacture of fumed
alumina to which we have first right to all capacity from the expansion and,
under the amended fumed metal oxide agreement, we now have first right, subject
to certain terms and conditions, to the fumed alumina capacity from that
facility. We face the risk of significant increases in the price of fumed metal
oxides under these agreements if Cabot Corporation's cost of production
increases. It may 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 required
by our customers' supply needs and technical specifications, or encounters
supply problems, including but not limited to any related to quality,
functionality of equipment, natural disasters, work stoppages or raw material
availability. In addition, contractual amendments to the existing agreements
with, or non-performance by, Cabot Corporation or another supplier, may
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, in certain circumstances our customers are
forced to requalify our CMP slurries for their manufacturing processes and
products. The requalification process takes a significant amount of time to
complete, possibly interrupting or reducing our sales of CMP slurries to these
customers.

We have also specifically engineered our slurry chemistries with key raw
materials such as fumed metal oxides. A change in the fumed metal oxides or
other key raw materials we use to make our slurry products could require us to
modify our products. This modification may involve a significant amount of time
and cost to complete and could require our customers to requalify our products,
and therefore could have an adverse effect on our business and sales.

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 IN-HOUSE SLURRY MANUFACTURING CAPABILITY

Competition has intensified in the past year, and increased competition
from current CMP slurry manufacturers, new entrants to the CMP slurry market or
a decision by any of our major customers to produce

27

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. Some of our major customers, and some potential
customers, currently manufacture slurries in-house and others have the financial
and technological capability to do so. The existence or threat of increased
competition and in-house production could limit or reduce the prices we are able
to charge for our slurry products. In addition, our competitors may have or
obtain intellectual property rights which may 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 CMP polishing pads. We
have had limited experience in developing and marketing these products, which
involve technologies and production processes that are relatively new to us. We,
the suppliers of the raw materials that we use to develop our polishing pads, or
the provider of pads for whom we act as distributor, may not be able to solve
any technological or production problems that we or they may encounter. In
addition, if we, our suppliers or pad provider are unable to keep pace with
technological or other developments in the design and production of polishing
pads, we will probably not be competitive in the polishing pad market. In
addition, our competitors may have or obtain intellectual