The following "Management's Discussion and Analysis of Financial Condition and Results of Operations", as well as disclosures included elsewhere in this Form 10-Q, 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-Q are forward-looking. In particular, the statements herein regarding future sales and operating results; Company and industry growth, contraction or trends; growth or contraction of the markets in which the Company participates; international events or various economic factors; product performance; the generation, protection and acquisition of intellectual property, and litigation related to such intellectual property; new product introductions; development of new products, technologies and markets; the acquisition of or investment in other entities; uses and investment of the Company's cash balance; the construction of facilities by the Company; 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 "Risk Factors" describes some, but not all, of the factors that could cause these differences.

This section, "Management's Discussion and Analysis of Financial Condition and Results of Operations", should be read in conjunction with Cabot Microelectronics' annual report on Form 10-K for the fiscal year ended September 30, 2008, including the consolidated financial statements and related notes thereto.

FIRST QUARTER OF FISCAL 2009 OVERVIEW

The global economy is in recession and we first began to see significant adverse effects of this in our fourth quarter of fiscal 2008 as the reduction in end user demand for IC devices caused semiconductor manufacturers to reduce their production, which reduced the demand for our CMP consumable products. We believe our financial results for the first quarter of fiscal 2009 reflect the continuation and acceleration of a softening of demand for our products driven by the global economic downturn. We believe the decline in our revenue generally was consistent with the decrease in overall semiconductor industry demand. Since the primary driver of revenue for our CMP consumable products is wafer starts, the decreased production by our customers has adversely affected us, and we believe will continue to adversely affect us for the foreseeable future. There are many factors that make it difficult for us to predict future revenue trends for our business, including: the duration of the global economic downturn; the cyclical nature of the semiconductor industry; potential future acquisitions by us; the short order to delivery time for our products and the associated lack of visibility to future customer orders; and quarter to quarter changes in customer orders regardless of industry strength.

To address the impact of the economic downturn on our business, we have taken actions intended to improve and optimize our operating effectiveness and reduce our costs. For example, we have shortened work schedules in our global CMP consumables operations to more closely match production of our products with demand from our customers. With this approach, we retain the flexibility to ramp our production up or down to meet customer demand while managing our production costs. In addition, we have instituted certain other cost reduction initiatives. Since we believe the skills and expertise of our employees are key to our Company's success, our initial cost management actions have been directed at minimizing expenses without incurring an extensive workforce reduction, but we are prepared to take more severe actions in the future if appropriate.

Revenue for our first quarter of fiscal 2009 was $63.0 million, which represented a decrease of 32.5%, or $30.4 million, from the first quarter of fiscal 2008 and a decrease of 30.1%, or $27.1 million, from the previous fiscal quarter. The largest reduction in demand came from the foundry segment of the semiconductor industry, which represents a significant portion of our business. We experienced substantial declines in demand from memory and logic device customers as well. We believe the significant decrease in revenue is primarily due to the worldwide economic slowdown and is generally consistent with the overall decrease in demand in the semiconductor industry. Based on continued economic uncertainty, planned plant shutdowns by some of our customers, and normal seasonal softness, we believe that it is likely that our revenue will decline further during our second quarter of fiscal 2009.

Gross profit expressed as a percentage of revenue for our first quarter of fiscal 2009 was 45.6%. Gross profit decreased from both the 47.9% reported in the first quarter of fiscal 2008 and the 46.6% reported in the previous fiscal quarter primarily due to lower utilization of our manufacturing capacity on the significantly lower level of sales, partially offset by higher manufacturing yields for both CMP slurries and pads. Our gross profit percentage guidance remains in the range of 46% to 48% for the full fiscal year 2009. We may experience quarterly gross profit above or below our annual guidance range, as we experienced in our first quarter of fiscal 2009, due to a number of factors, including the extent to which we utilize our manufacturing capacity and fluctuations in our product mix.

Operating expenses were $29.4 million in our first quarter of fiscal 2009, compared to $28.5 million in the first quarter of fiscal 2008 and $31.7 million in the previous fiscal quarter. The increase in operating expenses from the same quarter in the prior year was mainly due to increased costs for clean room materials and higher professional fees, partially offset by lower staffing related costs. The decrease from the previous fiscal quarter was primarily driven by lower staffing related costs. Reflecting our cost reduction efforts, we currently expect operating expenses will be in the range of $110 million to $115 million for full year fiscal 2009, excluding the effects of our pending acquisition of Epoch Material Co., Ltd. (Epoch), which is lower than our prior guidance of $120 million to $125 million.

Diluted earnings per share for our first fiscal quarter was $0.01, a decrease from the $0.51 per share reported in the first quarter of fiscal 2008 and from the $0.36 per share reported in the previous fiscal quarter as a result of the factors discussed above. Although we have instituted cost reduction initiatives, the continued economic uncertainty and potential further decline in our revenue could cause us to operate in a net loss position during our second quarter of fiscal 2009.

In support of our strategy to strengthen and grow our core CMP consumables business, in December 2008, we announced that we had entered into a definitive agreement to acquire the shares of Epoch, a consolidated subsidiary of Eternal Chemical Co., Ltd. (Eternal). Epoch is a Taiwan-based company specializing in the development, manufacture and sale of copper CMP slurries and CMP cleaning solutions to the semiconductor industry, and color filter slurries to the liquid crystal display (LCD) industry. Epoch has a strong presence in Taiwan, which we believe is the largest geographic region for CMP slurry demand. The total purchase price of the acquisition is $66 million, subject to certain adjustments, which we intend to pay in cash from our available cash. Under the share purchase agreement, we expect to initially pay $59.4 million and obtain 90% of Epoch's stock upon closing, with the remaining $6.6 million to be paid to Eternal eighteen months later. During this interim period, Eternal will hold the remaining 10% interest in Epoch. The completion of the transaction is subject to customary closing conditions and regulatory approvals and we expect the transaction will close in our second quarter of fiscal 2009.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES AND EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS

We discuss our critical accounting estimates and effects of recent accounting pronouncements in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Item 7 of Part II of our annual report on Form 10-K for the fiscal year ended September 30, 2008. We believe there have been no material changes in our critical accounting estimates during the first fiscal quarter of 2009 except for the following discussion of goodwill and intangible assets. See Note 2 and Note 13 of the Notes to the Consolidated Financial Statements for a discussion of new accounting pronouncements.

In accordance with Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142), goodwill and indefinite lived intangible assets are tested for impairment annually in the fourth fiscal quarter or more frequently if indicators of potential impairment exist, using a fair-value-based approach. The recoverability of goodwill and indefinite lived intangible assets is measured at the reporting unit level, which is defined as either an operating segment or one level below an operating segment. We have consistently determined the fair value of our reporting units using a discounted cash flow analysis of our projected future results. The use of discounted projected future results is based on assumptions that are consistent with our estimates of future growth and the strategic plan used to manage the underlying business. Factors requiring significant judgment include assumptions related to future growth rates, discount factors and tax rates, among others. Changes in economic and operating conditions that occur after the annual impairment analysis or an interim impairment analysis that impact these assumptions may result in future impairment charges.

We completed our annual impairment test during our fourth quarter of fiscal 2008 and determined that no impairment existed as of that time period. Based upon the continued deterioration of the global economy and acceleration of a softening of demand for our products driven by the global economic downturn, we concluded that sufficient indicators existed to have us perform an interim impairment analysis at December 31, 2008. Our impairment analysis at December 31, 2008 included revised estimates of future revenue and income projections given the current economic environment and revised discount rates given the current instability in the credit markets. We determined our goodwill and indefinite lived intangible assets were not impaired as of December 31, 2008.

Intangible assets with finite lives are reviewed for impairment in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". As a result of the impairment indicators described above, we tested our intangible assets with finite lives for impairment during our fiscal quarter ended December 31, 2008 and determined there was no impairment.

THREE MONTHS ENDED DECEMBER 31, 2008, VERSUS THREE MONTHS ENDED DECEMBER 31,
2007

REVENUE

Revenue was $63.0 million for the three months ended December 31, 2008, which represented a 32.5%, or $30.4 million, decrease from the three months ended December 31, 2007. Of this decrease, $36.5 million was due to decreased sales volume driven by the significant weakening of demand for our products by our customers due to the global economic downturn which has negatively impacted end user demand for IC devices. This decrease in demand was partially offset by $5.0 million due to a higher weighted average selling price for our slurry products primarily resulting from a higher-priced product mix and $1.1 million due to the effect of foreign exchange rate changes. We believe this reduction in demand for our products will continue for some time. Consequently, based on continued economic uncertainty, planned plant shutdowns by some of our customers, and normal seasonal softness, we believe it is likely that our revenue will decline further during the second quarter of fiscal 2009.

COST OF GOODS SOLD

Total cost of goods sold was $34.3 million for the three months ended December 31, 2008, which represented a decrease of 29.4%, or $14.3 million, from the three months ended December 31, 2007. Of this decrease, $19.0 million was due to decreased sales volume due to the global economic downturn and $1.9 million was due to higher manufacturing yields in our CMP slurry and pad production. These cost decreases were partially offset by a $3.8 million cost increase due to lower utilization of our manufacturing capacity on the decreased level of sales and $2.6 million due to a higher-cost product mix.

The significant decrease in demand for our products due to the global economic downturn has caused us to take actions to reduce costs. We have shortened work schedules in our manufacturing operations on a global basis to reduce production costs while maintaining the flexibility to increase or decrease production levels in the future to meet customer demand for our products. We have also reduced annual, merit-based salary increases, restricted travel and taken other steps to reduce or eliminate certain discretionary expenses. These actions are intended to improve our operating effectiveness during the current economic downturn. We are prepared to take additional actions as needed if this soft economic environment continues or worsens.

Fumed metal oxides, such as fumed silica and fumed alumina, are significant raw materials that we use in many of our CMP slurries. In an effort to mitigate our risk to rising raw material costs and to increase supply assurance and quality performance requirements, we have entered into multi-year supply agreements with a number of suppliers. For more financial information about our supply contracts, see "Tabular Disclosure of Contractual Obligations" in this filing as well as in Item 7 of Part II of our annual report on Form 10-K for the fiscal year ended September 30, 2008.

Our need for additional quantities or different kinds of key raw materials in the future has required, and will continue to require, that we enter into new supply arrangements with third parties. Future arrangements may result in costs which are different from those in the existing agreements. In addition, energy costs may also impact the cost of raw materials, packaging, freight and labor costs. We also expect to continue to invest in our operations excellence initiative to improve product quality, reduce variability and improve product yields in our manufacturing process.

GROSS PROFIT

Our gross profit as a percentage of revenue was 45.6% for the three months ended December 31, 2008, as compared to 47.9% for the three months ended December 31, 2007. The decrease was primarily due to lower utilization of our manufacturing capacity on the significantly lower level of sales partially offset by favorable production yields and a favorable product mix. Although current economic conditions make it difficult to predict full year results, we continue to believe that our gross profit as a percentage of revenue will be in the range of 46% to 48% for full fiscal year 2009. Quarterly gross profit may be above or below this range, as it was during the first quarter of fiscal 2009, due to fluctuations in our product mix, the extent to which we utilize our manufacturing capacity or other factors.

RESEARCH, DEVELOPMENT AND TECHNICAL

Total research, development and technical expenses were $12.1 million for the three months ended December 31, 2008, which represented an increase of 6.1%, or $0.7 million, from the three months ended December 31, 2007. The increase was primarily related to higher expenses for clean room materials and laboratory supplies.

Our research, development and technical efforts are focused on the following main areas:

· Research related to fundamental CMP technology;

· Development and formulation of new and enhanced CMP consumable products;

· Process development to support rapid and effective commercialization of new products;

· Technical support of CMP products in our customers' manufacturing facilities; and

· Evaluation of new polishing applications outside of the semiconductor industry.

SELLING AND MARKETING

Selling and marketing expenses were $6.0 million for the three months ended December 31, 2008, which represented a decrease of 4.9%, or $0.3 million, from the three months ended December 31, 2007. The decrease was primarily due to $0.4 million in lower staffing related costs, partially offset by $0.2 million in higher professional fees.

GENERAL AND ADMINISTRATIVE

General and administrative expenses were $11.3 million for the three months ended December 31, 2008, which represented an increase of 4.5%, or $0.5 million, from the three months ended December 31, 2007. The increase resulted primarily from higher professional fees.

OTHER INCOME, NET

Other income was $0.9 million for the three months ended December 31, 2008, compared to $1.6 million in the three months ended December 31, 2007. The decrease in other income was primarily due to $1.2 million lower interest income resulting from lower interest rates on our balances of cash and short-term investments, partially offset by $0.5 million in foreign exchange gains. We monetized the majority of our short-term investments in auction rate securities (ARS) during fiscal 2008 and reinvested these funds into money market investments which earn interest at lower rates. See Note 2 of the Notes to the Consolidated Financial Statements for more information on our ARS.

PROVISION FOR INCOME TAXES

Our effective income tax rate of 31.4% for the three months ended December 31, 2008 was slightly less than the 31.7% for the three months ended December 31, 2007. The decrease in the effective tax rate was primarily due to the reinstatement of the research and experimentation tax credit, partially offset by a decrease in tax-exempt interest income, both in light of an expected decrease in taxable income due to the economic uncertainty and decrease in demand discussed above.

NET INCOME

Net income was $0.1 million for the three months ended December 31, 2008, which represented a decrease of 99.0%, or $12.1 million, from the three months ended December 31, 2007, as a result of the factors discussed above. Although we have instituted cost reduction initiatives, the continued economic uncertainty and potential further decline in our revenue could cause us to operate in a net loss position during our second quarter of fiscal 2009.

LIQUIDITY AND CAPITAL RESOURCES

We used $2.6 million in cash from operating activities in the first quarter of fiscal 2009, compared to generating $16.0 million in cash from operating activities in the first quarter of fiscal 2008. Our cash used in operating activities in the first quarter of fiscal 2009 originated from a $7.6 million decrease in cash flow due to a net increase in working capital, partially offset by $0.1 million in net income and $4.9 million in non-cash items. The decrease in cash from operations compared to the first quarter of fiscal 2008 was primarily due to decreased net income in the quarter, the timing of accrued liability payments, including the payment of our annual bonus related to fiscal 2008, and higher inventory levels, partially offset by decreased accounts receivable balances on the decreased level of sales.

In the first quarter of fiscal 2009, cash flows used in investing activities were $2.3 million representing purchases of property, plant and equipment. In the first quarter of fiscal 2008, cash flows used in investing activities were $2.5 million representing $5.6 million for purchases of property, plant and equipment, primarily for the purchase and installation of a 300-millimeter polishing tool and related metrology equipment at our Asia Pacific technology center, partially offset by $3.1 million provided by net sales of short-term investments. We estimate that our total capital expenditures in fiscal 2009 will be approximately $10 million, which is down from our previous estimate of $13 million.

In the first quarter of fiscal 2009, cash flows used in financing activities were $0.4 million, representing $0.3 million in repurchases of common stock pursuant to the terms of our Second Amended and Restated Cabot Microelectronics Corporation 2000 Equity Incentive Plan as shares withheld to cover payroll taxes on the vesting of shares of restricted stock under the Equity Incentive Plan and $0.3 million in principal payments on our capital leases, partially offset by $0.2 million received from the issuance of common stock under our Equity Incentive Plan. We did not repurchase any shares under our share repurchase program during the fiscal quarter ended December 31, 2008. In the first quarter of fiscal 2008, cash flows used in financing activities were $13.8 million, primarily as a result of $14.0 million in repurchases of common stock under our share repurchase program. In January 2008, the Board of Directors authorized a share repurchase program for up to $75.0 million of our outstanding common stock. Share repurchases are made from time-to time, depending on market conditions, at management's discretion. As of December 31, 2008, we have $50.0 million remaining on this share repurchase program. We fund share purchases under this program from our available cash balance. We view this program as a flexible and effective means to return cash to stockholders.

We have an unsecured revolving credit facility of $50.0 million with an option to increase the facility up to $80.0 million, which pursuant to an amendment we entered into in October 2008, extends the agreement to November 2011, with an option to renew for two additional one-year terms. Under this agreement, interest accrues on any outstanding balance at either the lending institution's base rate or the Eurodollar rate plus an applicable margin. We also pay a non-use fee. This amendment did not include any other material changes to the terms of the credit agreement. Loans under this facility are intended primarily for general corporate purposes, including financing working capital, capital expenditures and acquisitions. The credit agreement also contains various covenants. No amounts are currently outstanding under this credit facility and we believe we are currently in compliance with the covenants.

Despite the ongoing capital and credit market crisis, we believe that our current balance of cash and short-term investments, cash generated by our operations and available borrowings under our revolving credit facility will be sufficient to fund our operations, expected capital expenditures, including merger and acquisition activities, and share repurchases for the foreseeable future. Our pending acquisition of Epoch for $66.0 million, subject to certain adjustments, will be funded through our existing available cash. However, as we plan to further expand our business and continue to improve our technology, we may be required to raise additional funds in the future through equity or debt financing, strategic relationships or other arrangements. The uncertainty in the capital and credit markets may hinder the ability to generate additional financing in the type or amount necessary to pursue such objectives.

OFF-BALANCE SHEET ARRANGEMENTS

At December 31, 2008, and September 30, 2008, we did not have any unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which might have been established for the purpose of facilitating off-balance sheet arrangements.

TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

The following summarizes our contractual obligations at December 31, 2008, and
the effect such obligations are expected to have on our liquidity and cash flow
in future periods.


CONTRACTUAL OBLIGATIONS                       Less Than        1-3        3-5       After 5
(In millions)                     Total          1 Year      Years      Years         Years

Purchase obligations            $  37.5     $      33.8     $  3.7     $    -     $       -
Pending acquisition                66.0            59.4        6.6          -             -
Capital lease obligations           3.4             1.2        2.2          -             -
Operating leases                    2.1             1.1        1.0          -             -
Other long-term liabilities         3.5               -          -          -           3.5
Total contractual obligations   $ 112.5     $      95.5     $ 13.5     $    -     $     3.5

We operate under a fumed silica supply agreement with Cabot Corporation under which we are generally obligated to purchase at least 90% of our six-month volume forecast for certain of our slurry products, to purchase certain non-material minimum quantities every six months, and to pay for the shortfall if we purchase less than these amounts. This agreement was amended in April 2008 to extend the termination date to December 2012 and to change the pricing and some other non-material terms of the agreement. The agreement will automatically renew unless either party gives certain notice of non-renewal. We currently anticipate we will not have to pay any shortfall under this agreement. We also operate under a fumed alumina supply agreement with Cabot Corporation that runs through December 2011, under which we are obligated to pay certain fixed, capital and variable costs. Purchase obligations include an aggregate amount of $18.3 million of contractual commitments for fumed silica and fumed alumina under these contracts.

In December 2008, we announced that we had entered into a definitive agreement to acquire the shares of Epoch, a consolidated subsidiary of Eternal for a total purchase price of $66.0 million, subject to certain adjustments. Under the share purchase agreement, we expect to initially pay $59.4 million and obtain 90% of Epoch's stock upon closing, with the remaining $6.6 million to be transferred into an escrow account in Taiwan at closing and paid to Eternal eighteen months later. During this interim period, Eternal will hold the remaining 10% interest in Epoch. The completion of the transaction is subject to customary closing conditions and regulatory approvals and we expect the transaction will close in our second quarter of fiscal 2009. Consequently, we have included the $66.0 million in the contractual obligations table above.

Refer to Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of Part II of our annual report on Form 10-K for the . . .