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

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

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

IC DEVICE MANUFACTURING

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

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

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

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

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

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

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

CHEMICAL MECHANICAL PLANARIZATION

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

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

BENEFITS OF CMP

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

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

CMP SLURRIES AND PADS

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

- high polishing rates, which increase productivity and throughput;

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

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

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

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

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

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

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

INDUSTRY TRENDS

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

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

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

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

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

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

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

STRATEGY

We intend to pursue the following strategies:

REMAIN THE TECHNOLOGY LEADER IN CMP SLURRIES

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

ACHIEVE OPERATIONS EXCELLENCE

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

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

BUILD AND MAINTAIN CUSTOMER INTIMACY

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

EXPAND INTO NEW APPLICATIONS AND PRODUCTS

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

EXPAND GLOBAL PRESENCE

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

ATTRACT AND RETAIN WORLD-CLASS PERSONNEL

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

PRODUCTS

CMP SLURRIES FOR IC DEVICES

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

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

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

CMP SLURRIES FOR THE DATA STORAGE INDUSTRY

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

CMP POLISHING PADS

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

CUSTOMERS, SALES AND MARKETING

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

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

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

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

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

CABOT CORPORATION AS OUR MAJOR SUPPLIER OF RAW MATERIALS

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

FUMED METAL OXIDE AGREEMENT

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

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

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

FUMED ALUMINA SUPPLY AGREEMENT

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

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

DISPERSION SERVICES AGREEMENT WITH DAVIES

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

RESEARCH AND DEVELOPMENT

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

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

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

COMPETITION

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

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

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

INTELLECTUAL PROPERTY

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

ENVIRONMENTAL MATTERS

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

EMPLOYEES

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

FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS

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

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

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

AVAILABLE INFORMATION

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