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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                             ---------------------
                                   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, 2004
 

 
                                   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
                             ---------------------
 
                       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. [ ]
 
    Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2 ).  Yes [X]    No [ ]
 
    The aggregate market value of the registrant's Common Stock held
beneficially or of record by stockholders who are not affiliates of the
registrant, based upon the closing price of the Common Stock on March 31, 2004
as reported by the NASDAQ National Market, was approximately $1,045,000,000. For
the purposes hereof, "affiliates" include all executive officers and directors
of the registrant.
 
    As of November 30, 2004, the Company had 24,649,518 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 8, 2005 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, 2004
 
                                     INDEX
 


                                                                       PAGE
                                                                       ----
                                                                 
                                  PART I.
Item 1.  Business....................................................    2
Item 2.  Properties..................................................   10
Item 3.  Legal Proceedings...........................................   11
Item 4.  Submission of Matters to a Vote of Security Holders.........   12
         Executive Officers of the Registrant........................   12
 
                                 PART II.
Item 5.  Market for Registrant's Common Equity, Related Stockholder
         Matters and Issuer Purchases of Equity Securities...........   14
Item 6.  Selected Financial Data.....................................   14
Item 7.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations...................................   16
Item
  7A.    Quantitative and Qualitative Disclosures about Market
         Risk........................................................   30
Item 8.  Consolidated Financial Statements and Supplementary Data....   31
Item 9.  Changes in and Disagreements with Accountants on Accounting
         and Financial Disclosure....................................   56
Item
  9A.    Controls and Procedures.....................................   56
Item
  9B.    Other Information...........................................   56
 
                                 PART III.
Item
  10.    Directors and Executive Officers of the Registrant..........   56
Item
  11.    Executive Compensation......................................   57
Item
  12.    Security Ownership of Certain Beneficial Owners and
         Management..................................................   57
Item
  13.    Certain Relationships and Related Transactions..............   57
Item
  14.    Principal Accounting Fees and Services......................   57
 
                                 PART IV.
Item
  15.    Exhibits, Financial Statement Schedules.....................   58
         Exhibit Index...............................................   58
         Signatures..................................................   61

 
                                        1

 
                                     PART I
 
ITEM 1.  BUSINESS
 
OUR COMPANY
 
     Cabot Microelectronics Corporation ("Cabot Microelectronics," "the
Company," "us," "we," or "our") is the leading supplier of high-performance
polishing slurries used in the manufacture of the most advanced integrated
circuit ("IC") devices within the semiconductor industry, in a process called
chemical mechanical planarization ("CMP"). CMP is a polishing process used by IC
device manufacturers to planarize or flatten many of the multiple layers of
material that are built upon silicon wafers 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, while
leaving minimal residue or defects on the surface. 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 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 oxide layers, the tungsten plugs
that connect the multiple wiring layers of IC devices through these insulating
layers, 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 new and improved products
for these applications as well as improving existing products on an ongoing
basis. In addition, we are developing 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"). In September 2000 we became
a wholly independent entity upon Cabot Corporation's spin-off of its ownership
in us that remained after the initial public offering.
 
  IC DEVICE MANUFACTURING
 
     Advanced IC devices are composed of millions of transistors and other
electronic components connected by miles of wiring. The wiring, composed
primarily of either aluminum or copper, 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 and 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. In addition, we expect that in the future, other more
advanced materials will be used in IC devices, and will need to be polished with
CMP.
 
     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. 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 using either aluminum or copper in a particular sequence to
produce a functional IC device with particular characteristics; copper wiring
currently is used in the most advanced devices. At the end of the process, the
wafer is cut into the individual dies, which are then packaged to form
individual chips.
 
     The two major segments in the IC industry that use CMP are logic and
memory. Logic devices include chips such as microprocessors, digital signal
processors (DSP), microcomponents and microcontrollers. These are normally
computing intensive devices that need to perform large numbers of processing
steps every second.
                                        2

 
As a result, these chips, particularly the leading microprocessors and DSPs,
usually require use of the latest technology that increases speed of signal
processing. The leading logic chips use copper wiring to provide that speed
since copper wiring has lower resistance than aluminum wiring, which is used in
older logic devices and in chips that do not require this speed. Memory devices,
which include flash, DRAM and SRAM chips, function by reading, storing and
writing data. Traditionally this segment has been highly cost sensitive and
processing speed is not as critical. Therefore, memory devices tend to use
aluminum wiring, which represents a lower cost approach than copper.
 
     CMP is used to planarize the various 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 uses copper wiring, the excess
metal is removed by a CMP process step.
 
     When the wiring on a particular layer of the IC device 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
for aluminum wiring or copper for copper wiring. After these holes have been
filled with metal, either an etching process for aluminum wiring or CMP for
copper wiring, 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, generally following what is referred to as
"Moore's Law", in which the number of transistors on an integrated circuit
historically has doubled 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. To date, 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 has
increased, the amount of wiring needed to connect the transistors and other
electronic components to each other also has increased. As IC devices have
become smaller, this increase in wiring has required tighter and more precise
spacing of the wiring, and an increased number of wiring layers in IC devices.
The industry uses the term "node" to define advancement of technology from one
generation to the next. For example, in the present 130 nanometer node, the size
of the smallest wire on the chip is 130 nanometers. Historically the industry
has moved from one node to the next in a time frame of roughly two years. Today,
the leading participants in the industry are migrating from the 130 nanometer to
the 90 nanometer node. Although we expect technology to continue to advance in
the future, we have recently observed that the time between adoption of one
technology node to adoption of the next technology node appears to be
increasing.
 
     Most IC devices today are manufactured on 200 mm silicon wafers. However, a
significant development for the IC industry is the transition to manufacturing
IC devices 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 2002 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.
 
  CHEMICAL MECHANICAL PLANARIZATION
 
     The CMP process utilizes a combination of 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 CMP 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
 
                                        3

 
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 distribute and transport the slurry to the surface of the
wafer 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 IC devices that are smaller and of
greater density of transistors and other electronic components, 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 increase in
the number of IC devices that fit on a wafer in turn increases the throughput,
or the number of IC devices that can be manufactured in a given time period, and
reduces the cost per chip. 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 have the opportunity to 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
 
     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;
 
     - low defectivity, which means that the devices have fewer imperfections
       and therefore produce higher yield; and
 
     - cost, which is important for users to minimize their cost of
       manufacturing.
 
     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 the result of 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 new or different CMP slurries 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 or the CMP slurry.
 
                                        4

 
While this qualification process varies depending on numerous factors, it is not
unusual for it to be very costly and to take six or more months 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 three
decades, but it has also been highly cyclical and prone to downturns on a
relatively regular two to three year basis. Over the past one to two years, the
industry was in an expansion phase, as it had been recovering from one of the
most severe downturns in its history, following the end of the technology boom
of the late 1990's. While 2004 has been a strong growth year for the industry,
there are indications that 2005 will be a year of moderating revenue growth for
the broad semiconductor industry, and possibly even a contraction.
 
     Over the next several years, we believe that growth in emerging consumer
connectivity and wireless technologies such as digital mobile phones, digital
still and video cameras, digital television and portable media will represent
the next wave in the semiconductor industry. We believe that the increased
emphasis on memory technology and the incorporation of advanced memory products
into digital consumer devices will drive additional growth in the industry over
the long term, in parallel with the industry's traditional emphasis on
microprocessors for personal computers.
 
     We anticipate the worldwide market for 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 that
require CMP and the number of CMP polishing steps used to produce these devices.
In addition, we believe that technology advances will require the use of new
materials in IC device manufacture that will require new CMP solutions. We
expect this anticipated growth will be somewhat mitigated by efficiencies in CMP
slurry usage, driven by pressure on IC manufacturers to reduce their CMP costs.
Some examples of these potential efficiencies include the transition by IC
manufacturers from 200 mm to 300 mm wafers, as well as the development of
technologies intended to reduce slurry usage. In addition, we have recently
observed that the time between adoption of one technology node to the adoption
of the next technology node appears to be increasing.
 
     As CMP technology has become more advanced, we believe that CMP technical
solutions have become more complex, and leading edge technologies now often
require some customization by customer, tool set and process integration
approach. Further, as CMP technology has matured, we believe that semiconductor
manufacturers' processes have become highly sensitive to CMP slurries, and
customers now demand a very high level of consistency and quality in CMP slurry
products.
 
     Another trend that we have observed is the continued transition of IC
manufacturing to the Asia Pacific region.
 
STRATEGY
 
     In an effort to maintain our leadership in IC CMP slurries as well as grow
our business profitably, we intend to continue to pursue the following
strategies:
 
  ADVANCE OUR TECHNOLOGY LEADERSHIP
 
     We believe that technology is vital to success in the CMP slurry business
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 or
exceed our customers' evolving needs. Our technology efforts are focused on
three main areas: development of new products for specific applications; process
development to support rapid and effective commercialization of new products;
and, development of fundamental enabling technology to provide new platforms for
future generation products. Additionally, we plan to expand our technology
infrastructure by constructing an Asia Pacific technology center in Geino, Japan
which will add polishing, metrology and product development capability to
support our customers in the Asia Pacific region.
 
                                        5

 
  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 believe
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 and timely manner. We intend
to advance our strict quality controls in order to improve the uniformity and
consistency of performance of our CMP products. To support our operations
excellence initiative, we have broadly introduced the concepts of Six Sigma,
which is a systematic, data-driven approach and methodology for improving
quality by reducing variability in processes, across our company. We believe
there may be significant opportunities to improve product quality and to capture
productivity and efficiency gains through this process.
 
  BECOME CLOSER TO OUR CUSTOMERS
 
     We believe that building close relationships with our customers is another
cornerstone for 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. As more of our business shifts to the Asia Pacific
region, we are reinforcing our customer commitment by constructing an Asia
Pacific technology center in Geino, Japan, which we believe will enhance our
ability to provide optimized CMP solutions to our customers in this region.
 
  EXPAND INTO NEW APPLICATIONS AND PRODUCTS
 
     We intend to leverage our CMP experience and technology to explore new
applications and products to diversify and grow our business, such as we have
accomplished with our slurries for data storage polishing applications. We
believe that we have unique capabilities to modify surfaces of materials using
chemistry in conjunction with mechanical abrasion, at an atomic level, which may
provide enhanced or previously unseen performance that can be applied to a range
of fine finish polishing applications.
 
  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 operations in North America, Asia Pacific
and Europe, including production facilities in the United States, Barry, Wales
and Geino, Japan. We also have assembled a team of business professionals,
account managers and technical support personnel strategically located in the
United States, Europe, Taiwan, Singapore, Japan, China and South Korea. Further,
we are expanding our technology infrastructure through our planned Asia Pacific
technology center which we believe will enhance our ability to provide optimized
CMP solutions to our customers in the Asia Pacific region. We intend to continue
to expand our production capacity and technical and sales support in locations
around the world where our customers are concentrated.
 
  ATTRACT AND RETAIN WORLD-CLASS PERSONNEL
 
     We have assembled a highly skilled and dedicated workforce that includes a
wide range of scientists, applications specialists and business professionals,
many of whom have significant experience in the semiconductor industry. We plan
to continue to attract, motivate, develop and retain 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 improving our existing tungsten and oxide
slurries, we focus on developing new slurries to keep pace with our
                                        6

 
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 improve flatness, reduce defects in IC devices and reduce 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 have also developed a slurry for an application known as
direct STI which helps 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 employing personnel 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 similar to that used for our other slurry products.
 
  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 discussions with our customers, as well as our own
examination of the CMP polishing pad market, we have determined that demand
exists for higher quality, more reliable and consistent polishing pads. We
previously had participated in the polishing pad business as a value added
reseller of pads supplied to us by a third party. However, due to what we
believe was a less than acceptable level of profitability under this value-added
reseller model, the distribution agreement was terminated by mutual agreement in
June 2004. We continue to believe that there is value in co-developing slurries
and pads to achieve technically optimized CMP solutions. We continue our
development of pads utilizing our own and licensed technology.
 
CUSTOMERS, SALES AND MARKETING
 
     Our sales process 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 primarily in
Taiwan and China. Over the last few years we have reduced the number of
resellers that distribute our products, employing more of a direct sales model.
 
     In response to significant growth in the IC device manufacturing industry
in Asia, we have increased our focus in Asia over the last several years by
increasing the number of sales and marketing, technical and customer support
personnel present in this region. In addition, during the fourth fiscal quarter
of 2004 we commenced design work on an Asia Pacific technology center. The
technology center, which will be located adjacent to our existing manufacturing
facility in Geino, Japan, is expected to become operational during the second
half of 2005, and will include polishing, metrology and product development
capability to support our customers in this region.
 
     In fiscal 2004, our five largest customers, of which one is a distributor,
accounted for approximately 55% of our revenue, with Marketech (our distributor
in Taiwan and China), and Intel accounting for approximately
                                        7

 
32% and 9% of our revenue, respectively. In fiscal year 2003, our five largest
customers, of which two were distributors, accounted for approximately 61% of
our revenue, with Marketech and Intel accounting for approximately 28% and 15%
of our revenue, respectively. In June 2003, we completed our transition to
selling directly to customers in Europe, Singapore and Malaysia who previously
had been serviced through one of these distributors.
 
CABOT CORPORATION AS OUR MAJOR SUPPLIER OF RAW MATERIALS
 
     The base ingredients for most of our CMP slurries are ultra-fine, high
purity fumed metal oxides -- fumed silica and fumed alumina -- that are both
produced by a flame process. From the time of our initial public offering in
April 2000 to January 2004, we purchased fumed silica and fumed alumina under a
fumed metal oxide agreement with Cabot Corporation that was due to expire in
June 2005. In January 2004 we entered into a fumed silica supply agreement with
Cabot Corporation, which replaced the original fumed metal oxide agreement with
respect to fumed silica, and accordingly amended our fumed metal oxide agreement
with respect to its fumed silica terms such that the agreement now only applies
to fumed alumina and runs through June 2005. This fumed silica supply agreement
provides for improved supply assurance, reduces our risk to rising raw material
costs and implements improved quality performance measures and requirements that
support our initiative to increase product quality and consistency. The contract
provides for the cost of fumed silica to increase approximately 4% over the
initial six-year term of the fumed silica supply agreement, and in some
circumstances is subject to certain inflation adjustments and certain shared
cost savings adjustments resulting from our joint efforts. Under the fumed
silica supply agreement, Cabot Corporation continues to be our primary supplier,
subject to certain terms and conditions, of fumed silica for our slurry products
produced as of the effective date of the fumed silica supply agreement. Subject
to those terms and for products introduced since that time, we have the
flexibility to purchase from other parties. The agreement prohibits Cabot
Corporation from selling fumed silica to third parties for, or engaging itself
in its use in, CMP applications. This agreement expires in December 2009 and
will automatically renew unless either party gives certain notice of
non-renewal.
 
     In addition, since December 2001, we have operated under a fumed alumina
supply agreement with Cabot Corporation under which Cabot Corporation expanded
its capacity for the manufacture of fumed alumina, and we have the first right
to all of this expanded capacity. The agreement provides that the price we pay
to Cabot Corporation 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 of fumed alumina per year
that meets our specifications. Under this agreement, Cabot Corporation is the
exclusive supplier of certain quantities of fumed alumina for products we
produced as of the effective date of the agreement, subject to certain terms and
conditions. For amounts over these quantities, and for products we introduce
after the effective date, we have the flexibility to purchase from other
parties. The agreement prohibits Cabot Corporation from selling fumed alumina to
third parties for, 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.
 
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 chemical reactions on the surfaces of wafers. 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
 
                                        8

 
and manufacturing challenges and to translate these challenges into viable CMP
process solutions. We have dedicated substantial resources in research &
development in each of the copper, tungsten and oxide application areas to
support our customers' requirements.
 
     We expanded our existing research and development capabilities in fiscal
2002 with the opening of a 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 product development. We have also
invested in 300 mm polishing and metrology capabilities to remain aligned with
our technology leading customers and provide us with the ability to replicate
their CMP activities in our clean room. In addition, in the fourth fiscal
quarter of 2004 we commenced design work on a new Asia Pacific technology center
that will be constructed adjacent to our existing manufacturing facility in
Geino, Japan. The new 18,000 square foot facility will provide polishing,
metrology and product development capabilities. The technology center will
include a clean room, development and applications laboratories, a pilot plant
and office space. We expect the facility to become operational during the second
half of 2005. We believe the technology center will enhance our ability to
provide optimized CMP solutions to our customers in the Asia Pacific region. We
believe competitive advantage lies in technology and that our existing and
planned investments in research and development 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 $44.0 million, $41.5 million and $33.7 million
for research and development in fiscal years 2004, 2003 and 2002, 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 of CMP consumables with
significant commercial sales of CMP slurries for IC devices and, due to our
success to date and the attractive outlook for the CMP industry, we expect
competition will continue to increase as other companies attempt to enter this
market. Competitive activity has also increased due to customer desires to gain
purchasing leverage and lower their cost of ownership. 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 we are the only CMP
slurry supplier today that offers and supports a full line of CMP slurry
products for all major applications, serves a broad range of customers and has a
proven track record of supplying these products globally in high volumes. In the
data storage area we believe there are only two other manufacturers with
significant commercial sales of CMP slurries for polishing the nickel coating on
hard disk drives, and two other manufacturers with significant commercial sales
of CMP slurries for polishing magnetic heads.
 
     We may also face competition in the future 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 electrochemical mechanical
planarization ("eCMP").
 
INTELLECTUAL PROPERTY
 
     Our intellectual property is important to our success and ability to
compete. We currently have 65 active U.S. patents and 93 pending U.S. patent
applications. 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.
 
                                        9

 
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. We 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, 2004, we employed 585 individuals, including 279 in
operations, 180 in research and development, 65 in sales and marketing and 61 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 $78.1 million,
$79.9 million and $81.0 million, and total revenue in other geographic locations
totaled $231.3 million, $171.8 million and $154.2 million for fiscal years 2004,
2003 and 2002, respectively. Revenue from Taiwan and Japan each accounted for
more than ten percent of our total revenue. Our revenue from customers in Taiwan
totaled $86.3 million, $63.8 million and $54.9 million for fiscal years 2004,
2003 and 2002, respectively. Our revenue from customers in Japan totaled $44.9,
$40.3 million and $34.2 million for fiscal years 2004, 2003 and 2002,
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 $94.8
million, $102.8 million and $100.9 million and net property, plant and equipment
in other geographic locations totaled $33.0 million, $30.9 million and $31.4
million at September 30, 2004, 2003 and 2002, respectively. More than ten
percent of our net property, plant and equipment is located in Japan, having a
net book value of $30.2 million, $28.1 million and $27.1 million at September
30, 2004, 2003 and 2002, respectively.
 
     For more financial information about geographic areas, see Note 19 of Notes
to the Consolidated Financial Statements included in "Item 8 -- Financial
Statements and Supplementary Data."
 
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 website 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 website by the end of the business
day following the submission to the SEC of such filings. In addition, the SEC's
website, www.sec.gov, contains reports, proxy statements, and other information
regarding reports that we file electronically with the SEC.
 
ITEM 2.  PROPERTIES
 
     Our principal U.S. facilities that we own consist of:
 
     - a global headquarters and research and development facility in Aurora,
       Illinois, comprising approximately 200,000 square feet;
 
     - a commercial dispersion plant and distribution center in Aurora,
       Illinois, comprising approximately 175,000 square feet;
 
                                        10

 
     - a commercial dispersion plant in Aurora, Illinois, comprising
       approximately 48,000 square feet; and
 
     - an additional 13.2 acres of vacant land in Aurora, Illinois to
       accommodate the possibility of future growth.
 
     Our principal foreign facilities that we own consist of:
 
     - a commercial dispersion plant in Geino, Japan, consisting of
       approximately 113,000 square feet.
 
     - an additional 6.2 acres of vacant land adjacent to our Geino, Japan
       facility to accommodate the construction of our Asia Pacific technology
       center and possible future expansion.
 
     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 laboratory space in Hsin-Chu, Taiwan consisting of
approximately 8,000 square feet and office space in Tokyo, Japan of
approximately 3,000 square feet.
 
     In the fourth fiscal quarter of 2004 we commenced design work on a new
18,000 square foot Asia Pacific technology center that will be constructed
adjacent to our existing manufacturing facility in Geino, Japan. We expect the
facility to become operational during the second half of 2005.
 
     We believe that our current facilities are suitable and adequate for their
intended purpose and provide us with sufficient capacity and capacity expansion
opportunities and technological capability to meet our current and expected
demand in the foreseeable future.
 
ITEM 3.  LEGAL PROCEEDINGS
 
     We are not currently involved in any material legal proceedings.
 
                                        11

 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     None.
 
EXECUTIVE OFFICERS OF THE REGISTRANT
 
     Set forth below is information concerning our executive officers and their
ages as of December 1, 2004.
 


NAME                                        AGE                        POSITION
----                                        ---   ---------------------------------------------------
                                            
William P. Noglows........................  46    Chairman of the Board, President and Chief
                                                  Executive Officer
H. Carol Bernstein........................  44    Vice President, Secretary and General Counsel
Victoria J. Brush.........................  52    Vice President of Human Resources
Jean Pol Delrue...........................  57    Vice President of European Business Region
William S. Johnson........................  47    Vice President, Chief Financial Officer and
                                                  Treasurer
Hiroyuki Nishiya..........................  46    Vice President of Northeast Asia
Daniel J. Pike............................  41    Vice President of Corporate Development
Stephen R. Smith..........................  45    Vice President of Marketing and Sales
Clifford L. Spiro.........................  50    Vice President, Research and Development
Adam F. Weisman...........................  42    Vice President of Operations
Daniel S. Wobby...........................  41    Vice President of Greater China and Southeast Asia
Thomas S. Roman...........................  43    Principal Accounting Officer and Corporate
                                                  Controller

 
     William P. Noglows has served as our Chairman, President and Chief
Executive Officer since November 2003. Mr. Noglows had previously served as a
director of our company from January 2000 until April 2002. Prior to joining us,
Mr. Noglows served as an Executive Vice President of Cabot Corporation from 1998
to June 2003. Prior to that, Mr. Noglows held various management positions at
Cabot Corporation including General Manager of Cabot Corporation's Cab-O-Sil
Division, where he was one of the primary founders of Cabot Microelectronics and
was responsible for identifying and encouraging the development of the CMP
application. Mr. Noglows received his B.S. in Chemical Engineering from the
Georgia Institute of Technology.
 
     H. Carol Bernstein has served as our Vice President, Secretary and General
Counsel since August 2000. From January 1998 until joining us, Ms. Bernstein
served as the General Counsel and Director of Industrial Technology Development
of Argonne National Laboratory, which is operated by the University of Chicago
for the United States Department of Energy. From May 1985 until December 1997,
she served in various positions with the IBM Corporation, culminating in serving
as an Associate General Counsel, and was the Vice President, Secretary and
General Counsel of Advantis Corporation, a joint venture between IBM and Sears
Roebuck and Co. Ms. Bernstein received her B.A. from Colgate University and her
J.D. from Northwestern University; she is a member of the Bar of the States of
Illinois and New York.
 
     Victoria J. Brush has served as our Vice President of Human Resources since
August 2004. Prior to joining us, Ms. Brush served as the Vice President of
Human Resources for DuPont Photomasks, Inc. from 2001 through August 2004, and
as Vice President of Human Resources, Organizational Development and Marketing
Communications at W.R. Grace from 1999 to 2001. Prior to that, she served in
human resources leadership positions at AT&T Corporation and Lucent
Technologies, Inc. Ms. Brush holds an M.S. and B.S. in Human Resource Management
from Upsala College.
 
     Jean Pol Delrue has served as our Vice President of European Business
Region since July 2004 and previously served as our European Business Manager
from June 2001 to July 2004. Prior to joining us, Dr. Delrue worked for Ebara
Precision Machinery Europe from January 1995 to June 2001, culminating in
serving as the Vice President of CMP Europe. Prior to that, he served as the
Business and Technical Development Director and Member of the Management Board
at Riber SA. Dr. Delrue holds an Executive
 
                                        12

 
MBA from the Centre de Perfectionnement des Affaires in Paris, France; a Ph.D.
in Physical Chemistry from Belgium's University of Mons and has performed post
doctorate work in chemical engineering at Stanford University.
 
     William S. Johnson has served as our Vice President, Chief Financial
Officer and Treasurer since April 2003. Prior to joining us, Mr. Johnson served
as Executive Vice President and Chief Financial Officer for Budget Group, Inc.
from August 2000 to March 2003. Before that, Mr. Johnson spent 16 years at BP
Amoco in various senior finance and management positions. Mr. Johnson received
his B.S. in Mechanical Engineering from the University of Oklahoma and his
M.B.A. from the Harvard Business School.
 
     Hiroyuki Nishiya has served as our Vice President of Northeast Asia since
January 2004 and previously was our Vice President, Asia Pacific Business Region
from January 2001 to such time. Mr. Nishiya also served as Japan Business
Manager upon joining our company in April 1997. Prior to joining us, Mr. Nishiya
held various positions at OKIDATA and Materials Research Corporation. Mr.
Nishiya received a B.B.A. from George Washington University.
 
     Daniel J. Pike has served as our Vice President of Corporate Development
since January 2004 and previously was our Vice President of Operations from
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. Mr. Pike received his B.S. in Chemical Engineering from the University
of Buffalo and his M.B.A. from the Wharton School of Business of the University
of Pennsylvania.
 
     Stephen R. Smith has served as our Vice President of Marketing and Sales
since October 2001. Prior to joining us, Mr. Smith served as Vice President,
Sales & Business Development for Buildpoint Corporation from 2000 to October
2001. Prior to that, Mr. Smith spent 17 years at Tyco Electronics Group,
formerly known as AMP Incorporated, in various management positions. Mr. Smith
earned a B.S. in Industrial Engineering from Grove City College and a M.B.A.
from Wake Forest University.
 
     Clifford L. Spiro has served as Vice President, Research and Development
since December 2003. Prior to joining us, Dr. Spiro served as Vice President of
Research and Development at Ondeo-Nalco from 2001 through November 2003. Prior
to that, Dr. Spiro held research and development management and senior
technology positions at the General Electric Company from 1980 through 2001, the
most recent of which was Global Manager -- Technology for Business Development.
Dr. Spiro received his B.S. in Chemistry from Stanford University and holds a
Ph.D in Chemistry from the California Institute of Technology.
 
     Adam F. Weisman has served as our Vice President of Operations since May
2004. Prior to joining us, Mr. Weisman held various engineering and senior
operations management positions with the General Electric Company from 1988
through 2004, including having served as the General Manager of Manufacturing
for GE Plastics - Superabrasives, and culminating in serving as the Executive
Vice President of Operations for GE Railcar Services. Prior to joining GE, he
worked as an engineering team leader and pilot plant manager for E.I. Du Pont de
Nemours & Company. Mr. Weisman holds a B.S. degree in ceramic engineering from
Alfred University.
 
     Daniel S. Wobby has served as our Vice President of Greater China and
Southeast Asia since February 2004. Mr. Wobby previously served as Corporate
Controller and Principal Accounting Officer from 2000 to 2004. Prior to that,
Mr. Wobby had served as our Director of Finance, and had held various accounting
and operations positions with Cabot Corporation since 1989. Before that, Mr.
Wobby worked for Arthur Andersen LLP. Mr. Wobby earned a B.S. in Accounting from
St. Michael's College and a M.B.A. from the University of Chicago's Graduate
School of Business.
 
     Thomas S. Roman has served as our Corporate Controller and Principal
Accounting Officer since February 2004 and previously served as our North
American Controller. Prior to joining us in April 2000, Mr. Roman was employed
by FMC Corporation in various financial reporting, tax and audit positions.
Before that, Mr. Roman worked for Gould Electronics and Arthur Andersen LLP. Mr.
Roman is a C.P.A. and earned a B.S. in Accounting from the University of
Illinois and a M.B.A. from DePaul University's Kellstadt Graduate School of
Business.
 
                                        13

 
                                    PART II
 
ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
         ISSUER PURCHASES OF EQUITY SECURITIES
 
     Our common stock has traded publicly on the NASDAQ National Market under
the symbol "CCMP" since our initial public offering in April 2000. The following
table sets forth the range of quarterly high and low closing sales prices for
our common stock on the NASDAQ National Market.
 


                                                              HIGH     LOW
                                                              -----   -----
                                                                
Fiscal 2003
  First Quarter.............................................  61.02   33.25
  Second Quarter............................................  55.38   38.34
  Third Quarter.............................................  52.60   41.55
  Fourth Quarter............................................  67.00   51.86
Fiscal 2004
  First Quarter.............................................  61.61   48.00
  Second Quarter............................................  57.54   40.50
  Third Quarter.............................................  44.19   26.88
  Fourth Quarter............................................  38.29   26.86
Fiscal 2005 First Quarter (through November 30, 2004).......  40.80   30.58

 
     As of November 30, 2004, there were approximately 1,173 holders of record
of our common stock. No dividends were declared or paid in either fiscal 2004 or
fiscal 2003 and we have no current plans to pay cash dividends in the future.
 
  ISSUER PURCHASES OF EQUITY SECURITIES
 


                                                   TOTAL NUMBER OF SHARES    APPROXIMATE DOLLAR VALUE
                       TOTAL NUMBER    AVERAGE      PURCHASED AS PART OF    OF SHARES THAT MAY YET BE
                        OF SHARES     PRICE PAID     PUBLICLY ANNOUNCED     PURCHASED UNDER THE PLANS
PERIOD                  PURCHASED     PER SHARE      PLANS OR PROGRAMS      OR PROGRAMS (IN THOUSANDS)
------                 ------------   ----------   ----------------------   --------------------------
                                                                
July 1 through July
  31, 2004...........     52,000        $33.66             52,000                    $23,250
Aug. 1 through Aug.
  31, 2004...........    189,865        $32.92            189,865                    $17,000
Sept. 1 through Sept.
  30, 2004...........         --            --                 --                    $17,000
                         -------        ------            -------                    -------
Total................    241,865        $33.08            241,865                    $17,000
                         =======        ======            =======                    =======

 
     In July 2004 we announced that our Board of Directors had authorized a
share repurchase program for up to $25.0 million of our outstanding common
stock. Shares are repurchased from time to time, depending on market conditions,
in open market transactions, at management's discretion. We fund share
repurchases from our existing cash balance. The program is primarily intended to
diminish earnings dilution from the issuance of stock from the exercise of stock
options under our equity incentive plan and purchases under our employee stock
purchase plan. The program, which was effective on the announcement date, may be
suspended or terminated at any time, at the Company's discretion.
 
ITEM 6.  SELECTED FINANCIAL DATA
 
     The following selected financial data for each of the five-years ended
September 30, 2004 has been derived from the audited consolidated financial
statements.
 
                                        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
 


                                                         YEAR ENDED SEPTEMBER 30,
                                           ----------------------------------------------------
                                             2004       2003       2002       2001       2000
                                           --------   --------   --------   --------   --------
                                             (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                                                        
CONSOLIDATED STATEMENT OF INCOME DATA:
  Revenue................................  $309,433   $251,665   $235,165   $227,192   $181,156
  Cost of goods sold.....................   156,805    124,269    113,067    108,419     86,290
                                           --------   --------   --------   --------   --------
       Gross profit......................   152,628    127,396    122,098    118,773     94,866
  Operating expenses:
     Research and development............    44,003     41,516     33,668     25,805     19,762
     Selling and marketing...............    16,225     11,221      9,667      8,757      7,594
     General and administrative..........    22,351     18,225     17,458     21,054     19,974
     Litigation settlement...............        --         --      1,000         --         --
     Amortization of intangibles.........       340        340        345        718        718
                                           --------   --------   --------   --------   --------
       Total operating expenses..........    82,919     71,302     62,138     56,334     48,048
                                           --------   --------   --------   --------   --------
  Operating income.......................    69,709     56,094     59,960     62,439     46,818
  Other income (expense), net............       139        (27)       763      1,049        130
                                           --------   --------   --------   --------   --------
  Income before income taxes.............    69,848     56,067     60,723     63,488     46,948
  Provision for income taxes.............    23,120     18,334     20,038     21,586     16,446
                                           --------   --------   --------   --------   --------
       Net income........................  $ 46,728   $ 37,733   $ 40,685   $ 41,902   $ 30,502
                                           ========   ========   ========   ========   ========
Basic earnings per share.................  $   1.89   $   1.55   $   1.68   $   1.76   $   1.44
                                           ========   ========   ========   ========   ========
Weighted average basic shares
  outstanding............................    24,750     24,401     24,160     23,824     21,214
                                           ========   ========   ========   ========   ========
Diluted earnings per share...............  $   1.88   $   1.53   $   1.66   $   1.72   $   1.39
                                           ========   ========   ========   ========   ========
Weighted average diluted shares
  outstanding............................    24,882     24,665     24,565     24,327     21,888
                                           ========   ========   ========   ========   ========
Cash dividends per share.................  $     --   $     --   $     --   $     --   $   3.71
                                           ========   ========   ========   ========   ========

 


                                                           AS OF SEPTEMBER 30,
                                           ----------------------------------------------------
                                             2004       2003       2002       2001       2000
                                           --------   --------   --------   --------   --------

                                                                        
CONSOLIDATED BALANCE SHEET DATA:
  Current assets.........................  $229,681   $179,112   $123,283   $ 96,454   $ 59,053
  Property, plant and equipment, net.....   127,794    133,695    132,264     97,426     71,873
  Other assets...........................     5,816      2,810      2,838      2,801      5,180
                                           --------   --------   --------   --------   --------
     Total assets........................  $363,291   $315,617   $258,385   $196,681   $136,106
                                           ========   ========   ========   ========   ========
  Current liabilities....................  $ 32,375   $ 28,916   $ 30,571   $ 26,366   $ 24,200
  Long-term debt.........................        --         --      3,500      3,500      3,500
  Other long-term liabilities............    15,294     14,928     10,808        528        844
                                           --------   --------   --------   --------   --------
     Total liabilities...................    47,669     43,844     44,879     30,394     28,544
  Stockholders' equity...................   315,622    271,773    213,506    166,287    107,562
                                           --------   --------   --------   --------   --------
     Total liabilities and stockholders'
       equity............................  $363,291   $315,617   $258,385   $196,681   $136,106
                                           ========   ========   ========   ========   ========

 
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 future sales and operating results, company and industry growth and
trends, growth of the markets in which the company participates, international
events, product performance, new product introductions, development of new
products and technologies, the construction of new 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
"Factors Affecting Future Operating Results" describes some, but not all, of the
factors that could cause these differences.
 
     The following discussion and analysis should be read in conjunction with
our historical financial statements and the notes to those financial statements
which are included in Item 8 of Part II of this Form 10-K.
 
OVERVIEW
 
     Cabot Microelectronics Corporation ("Cabot Microelectronics," "the
Company," "us," "we," or "our") is the leading supplier of high-performance
polishing slurries used in the manufacture of the most advanced integrated
circuit ("IC") devices within the semiconductor industry, in a process called
chemical mechanical planarization ("CMP"). CMP is a polishing process used by IC
device manufacturers to planarize or flatten many of the multiple layers of
material that are built upon silicon wafers 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, while
leaving minimal residue or defects on the surface. 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 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 oxide layers, the tungsten plugs
that connect the multiple wiring layers of IC devices through these insulating
layers, and copper wiring. We also develop slurries for direct shallow trench
isolation, used to electrically isolate adjoining transistors. 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 new and improved products for these applications as well as improving
existing products on an ongoing basis. In addition, we are developing 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"). In September 2000 we became
a wholly independent entity upon Cabot Corporation's spin-off of its ownership
in us that remained after the initial public offering.
 
     We have continued to focus on three key strategies; remaining the
technology leader in CMP slurries, achieving operations excellence through
improved product quality and consistency, and building and maintaining close
customer relationships. We believe that this, coupled with an expansionary
period for the semiconductor industry, resulted in profitable growth for our
company in fiscal 2004. Revenue for fiscal 2004 was $309.4 million, up 23.0%
from the $251.7 million reported for fiscal 2003, and net income increased by
23.8% from the prior year. In addition, diluted earnings per share in fiscal
2004 were $1.88, which represents an
 
                                        16

 
increase of 22.9% from the $1.53 reported in fiscal 2003. The following
represents what we believe were important events for our business in fiscal
2004:
 
     - We realigned and refreshed our executive leadership team in order to
       drive broad organizational development and increase overall leadership
       capability. In addition, we transitioned to a Global Business Team
       structure to provide a single point of accountability for each major
       application area.
 
     - We entered into a strategic alliance with NanoProducts Corporation under
       which we acquired a minority equity ownership interest in the company in
       exchange for a $3.8 million investment. Under this alliance we are
       collaborating to develop nanoscale particles for use in next generation
       CMP slurries, as well as other fine finish polishing applications.
 
     - We executed a silica supply agreement with Cabot Corporation, which
       provides better supply assurance, reduced cost risk and additional
       benefits related to quality that support our operations excellence
       initiative.
 
     - We established a multi-year supply arrangement with a top 5 semiconductor
       manufacturer to supply the majority of its CMP needs for polishing copper
       interconnects at 130 nanometer technology.
 
     - We renewed our revolving credit facility in the amount of $50.0 million,
       with an option to increase the facility by up to $30.0 million.
 
     - We initiated a share repurchase program for up to $25.0 million of our
       common stock, primarily intended to diminish earnings dilution from the
       issuance of stock from the exercise of stock options under our equity
       incentive plan and purchases under our employee stock purchase plan.
 
     - We commenced design work on a new Asia Pacific technology center that
       will be constructed adjacent to our existing manufacturing facility in
       Geino, Japan, which will provide polishing, metrology and product
       development capabilities.
 
     - We terminated our distribution agreement with a polishing pad
       manufacturer due to what we believe was a less than acceptable level of
       profitability.
 
     - We experienced increased competition and pricing pressure, and one large
       customer notified us of its decision to transition to another supplier of
       CMP slurry for polishing 130 nanometer copper interconnects.
 
     - We launched a company-wide Six-Sigma initiative to reduce product
       variation, increase efficiency and productivity and reduce costs.
 
     We believe that the Asia Pacific region continues to be the fastest growing
region in the world for the semiconductor industry, and we believe that demand
for our products will continue to shift to this region. We have increased our
focus in Asia over the last few years by increasing the number of sales and
marketing, technical and customer support personnel present in this region. In
the fourth fiscal quarter of 2004 we commenced design work on a new Asia Pacific
technology center that will be constructed adjacent to our existing
manufacturing facility in Geino, Japan. This facility represents our first
research and development facility to be located outside of the United States.
This investment reflects the importance of the Asia Pacific market to our
business and underscores our commitment both to continuing to invest in our
technology infrastructure to maintain our technology leadership, and to becoming
even more responsive to the needs of our customers.
 
     We believe there are three CMP industry trends that are currently impacting
our business. First, we believe that rapid incorporation of CMP technology and
growth of the CMP industry, combined with our customers' desires to gain
purchasing leverage and lower their cost of ownership, have led to much greater
competitive activity. Second, as CMP technology has become more advanced, we
believe that CMP technical solutions have become more complex, and leading edge
technologies often require customization by customer, tool set and process
integration approach. Third, as CMP technology has matured, we believe that
semiconductor manufacturers' processes have become highly sensitive to CMP
slurries, and customers now demand a very high level of consistency and quality
in CMP slurry products, which increases our costs. As a result of these
 
                                        17

 
trends, we expect our gross margin as a percentage of revenue to be 48%, plus or
minus 2%, for fiscal 2005. There are indications that 2005 will be a year of
moderating revenue growth for the broad semiconductor industry, and possibly
even a contraction. The continued uncertainty makes it difficult for us to
predict future revenue trends for the industry or our business.
 
     Over the next several years, we believe that growth in emerging consumer
connectivity and wireless technologies such as digital mobile phones, digital
still and video cameras, digital television and portable media will represent
the next wave in the semiconductor industry. We believe that the increased
emphasis on memory technology and the incorporation of advanced memory products
into digital consumer devices will drive additional growth in the industry over
the long term, in parallel with the industry's traditional emphasis on
microprocessors for personal computers.
 
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 ongoing basis, we evaluate the estimates used, including those related to
product returns, bad debt expense, inventory valuation, warranty obligations,
other accruals, contingencies and litigation. We base our estimates on
historical experience, current conditions and on various other assumptions that
we believe 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 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. Our allowance for doubtful accounts includes both a general reserve
based on historical experience and an additional reserve for individual accounts
when we become aware of a customer's inability to meet its financial
obligations, such as in the case of bankruptcy filings or deterioration in the
customer's operating results or financial condition. While historical experience
may provide a reasonable estimate of uncollectible accounts, actual results may
differ from what was recorded. As of September 30, 2004 our allowance for
doubtful accounts represented 1.4% of gross accounts receivable. If we had
increased our estimate of bad debts by 1.0%, to 2.4% of gross accounts
receivable, our general and administrative expense would have increased by $0.4
million.
 
     We maintain a warranty reserve that reflects management's best estimate of
the cost to replace product that does not meet customers' specifications and
performance requirements, and related costs. The warranty reserve is based upon
a historical product return rate applied against sales made in the current
quarterly period, plus an additional amount related to any specific known
conditions or circumstances. Should actual warranty costs differ substantially
from our estimates, revisions to the estimated warranty liability may be
required. As of September 30, 2004 our warranty reserve represented 1.2% of the
current quarter revenue. If we had increased our estimate of general warranty
reserve by 1.0%, to 2.2% of the current quarter revenue, our cost of goods sold
would have increased by $0.8 million.
 
     We value inventory at the lower of cost or market and write down the value
of inventory for estimated obsolescence or if inventory is deemed unmarketable.
An inventory reserve is maintained based upon a historical percentage of actual
inventory written off applied against inventory at the end of the period, plus
an additional amount for known conditions and circumstances. We exercise
judgment in estimating the amount of inventory that is obsolete. Should actual
product marketability and raw material fitness for use be affected by conditions
that are different from those projected by management, revisions to the
estimated inventory reserve may be required. Also, the purchase cost of one of
our key raw materials from one supplier changes significantly based upon the
total quantity of in-specification product that we purchase in a given fiscal
year. During interim
                                        18

 
periods we determine inventory valuation and the amount charged to cost of goods
sold for this raw material from this supplier based on the expected average cost
over the entire fiscal year using our current full year forecast of purchases of
this raw material from this supplier.
 
     We have entered into unconditional purchase obligations, which include
noncancelable purchase commitments and take-or-pay arrangements with suppliers.
We review our agreements and make an assessment of the likelihood of a shortfall
in purchases and determine if it is necessary to record a liability.
 
     In accordance with the provisions of Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation -- Transition and
Disclosure" ("SFAS 148") and No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"), we have elected to account for stock-based compensation plans in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"), and related interpretations. We disclose
the summary of pro forma effects to reported net income as if we had elected to
recognize compensation cost based on the fair value of stock-based awards to
employees of Cabot Microelectronics as prescribed by SFAS 123.
 
     We have entered into a strategic alliance with NanoProducts Corporation and
acquired a minority interest in the company of 13.1% in exchange for an
investment of $3.8 million. Although we do not own 20% or more of NanoProducts,
we have concluded that we have the ability to significantly influence
NanoProducts' operating and financial policies. Therefore, in accordance with
Accounting Principles Board Option No. 18 "The Equity Method of Accounting for
Investments in Common Stock", we account for our investment using the equity
method of accounting, which requires us to record earnings and losses of
NanoProducts in proportion to our share of ownership.
 
     We maintain an intercompany loan agreement with our wholly-owned
subsidiary, Nihon Cabot Microelectronics K.K. ("the K.K."), under which we
provided funds to the K.K. to finance the purchase of certain assets from our
former Japanese branch at the time of the establishment of this subsidiary, as
well as for the purchase of land adjacent to our Geino, Japan facility, which is
part of the K.K. Since settlement of the note is expected in the foreseeable
future, and our subsidiary has been consistently making timely payments on the
loan, the loan is considered a foreign-currency transaction under FASB Statement
No. 52, "Foreign Currency Translation". Therefore the associated foreign
exchange gains and losses are recognized in earnings rather than being deferred
in the cumulative translation account in other comprehensive income.
 
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,
                                                           ---------------------------
                                                            2004      2003      2002
                                                           -------   -------   -------
                                                                      
Revenue..................................................    100.0%    100.0%    100.0%
Cost of goods sold.......................................     50.7      49.4      48.1
                                                           -------   -------   -------
Gross profit.............................................     49.3      50.6      51.9
Research and development.................................     14.2      16.5      14.3
Selling and marketing....................................      5.2       4.5       4.1
General and administrative...............................      7.2       7.2       7.4
Litigation settlement....................................       --        --       0.4
Amortization of intangibles..............................      0.1       0.1       0.1
                                                           -------   -------   -------
Operating income.........................................     22.6      22.3      25.5
Other income, net........................................       --        --       0.3
                                                           -------   -------   -------
Income before income taxes...............................     22.6      22.3      25.8
Provision for income taxes...............................      7.5       7.3       8.5
                                                           -------   -------   -------
Net income...............................................     15.1%     15.0%     17.3%
                                                           =======   =======   =======

 
                                        19

 
YEAR ENDED SEPTEMBER 30, 2004 VERSUS YEAR ENDED SEPTEMBER 30, 2003
 
REVENUE
 
     Revenue was $309.4 million in 2004, which represented a 23.0%, or $57.8
million, increase from 2003. Of this increase, $56.7 million was due to an
increase in sales volume and $1.1 million was due to an increase in weighted
average selling price resulting from both a higher valued product mix and
favorable foreign exchange rate changes, which more than offset selective price
reductions that were granted to certain customers. Revenue for fiscal year 2004
would have been $4.7 million lower had the average exchange rates for the
Japanese Yen and Euro during the period held constant with the prior year's
average rates. Also, in June 2003, we began selling directly to customers in
Europe, Singapore and Malaysia. These customers previously had been serviced
through Metron, a third party distributor. During this transition period we
discontinued sales to Metron while they drew down their inventory of our
products, which we believe resulted in an adverse revenue impact of $3.7 million
during our third quarter of fiscal 2003.
 
     While 2004 has been a growth year for the semiconductor industry, there are
indications that 2005 will be a year of moderating revenue growth and possibly
even a contraction, which we would expect to have an impact on our business. We
expect continued competition as other companies attempt to enter the CMP
business. We also expect pricing pressure to continue due to customer desires to
gain purchasing leverage and lower their cost of ownership. The cyclical nature
of and continued uncertainty in the semiconductor industry makes it difficult
for us to predict future revenue trends.
 
COST OF GOODS SOLD
 
     Total cost of goods sold was $156.8 million in 2004, which represented an
increase of 26.2%, or $32.5 million, from 2003. Of this increase, $27.3 million
was due to higher sales volume and $8.1 million was due to higher average costs
per gallon resulting from increased fixed manufacturing costs and higher costs
from lower yields associated with meeting our customers' more stringent product
quality requirements, as well as from transition costs associated with the
termination of a polishing pad distribution agreement. These increases were
partially offset by the absence of $2.9 million of expense incurred in fiscal
2003 related to a raw material supply agreement for a polishing pad technology
that was previously under development but is no longer being pursued.
 
     Fumed metal oxides, both fumed silica and fumed alumina, are significant
raw materials we use in many of our CMP slurries. From the time of our initial
public offering in April 2000 to January 2004, we purchased fumed silica and
fumed alumina under a fumed metal oxide agreement with Cabot Corporation that
was due to expire in June 2005. In January 2004 we entered into a fumed silica
supply agreement with Cabot Corporation, which replaces the original fumed metal
oxide agreement with respect to fumed silica, and accordingly amended our fumed
metal oxide agreement with respect to its fumed silica terms such that the
agreement now only applies to fumed alumina and runs through its original term
of June 2005. This fumed silica supply agreement provides for improved supply
assurance, reduces our risk to rising raw material costs and incorporates
increased quality performance measures and requirements that support our
initiative to increase product quality and consistency. This agreement has an
initial six-year term, which expires in December 2009 and will automatically
renew unless either party gives certain notice of non-renewal. The contract
provides for the cost of fumed silica to increase approximately 4% over the
initial six-year term of the fumed silica supply agreement, and in some
circumstances is subject to certain inflation adjustments and certain shared
cost savings adjustments resulting from our joint efforts.
 
     In addition, since December 2001, we have operated under a fumed alumina
supply agreement with Cabot Corporation under which Cabot Corporation expanded
its capacity for the manufacture of fumed alumina and we have the first right to
all of this expanded 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, its capital costs for expanding
its capacity, an agreed upon rate of return on investment and incentive payments
if they produce more than a certain amount of fumed alumina per year that meets
our specifications.
 
     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
                                        20

 
may result in costs which are different from those in the existing agreements.
We also expect to continue to invest in our operations excellence initiative to
improve our manufacturing capabilities to meet our customers' increasing product
performance requirements.
 
GROSS PROFIT
 
     Our gross profit as a percentage of revenue was 49.3% in 2004 as compared
to 50.6% in 2003. The 1.3% decrease in gross profit expressed as a percentage of
revenue resulted primarily from increased costs from lower yields associated
with meeting customer requirements for higher product quality. We continue to
experience increasing competition and pricing pressure, along with increasing
costs to support the higher product quality and advanced technology requirements
of our customers. For these reasons, we expect our gross profit as a percentage
of revenue for fiscal 2005 to be in the range of 48%, plus or minus 2%.
 
RESEARCH AND DEVELOPMENT
 
     Total research and development expenses were $44.0 million in 2004, which
represented an increase of 6.0% or $2.5 million, from 2003. Research and
development expense increased primarily due to $2.4 million in higher staffing
costs, $1.2 million due to higher depreciation related to the purchase of
equipment for our CMP polishing and metrology clean room in Aurora, Illinois,
and $0.5 million due to higher technical service fees. These increases were
partially offset by a decrease in laboratory supplies of $2.1 million. Research
and development efforts were mainly related to formulation and evaluation of new
and enhanced CMP slurry products for copper and other applications,
commercialization and transfer of new products to our customers and research
related to fundamental technology such as advanced chemistry and particle
technology.
 
SELLING AND MARKETING
 
     Selling and marketing expenses were $16.2 million in 2004, which
represented an increase of 44.6%, or $5.0 million, over 2003. The increase
resulted primarily from higher staffing costs of $2.7 million, increased office
expenses of $0.6 million, higher travel costs of $0.6 million, increased
consulting fees of $0.5 million and $0.3 million in separation costs for certain
employees. The higher selling and marketing expenses resulted from our increased
customer support initiatives including our transition to selling direct to
customers in Europe, Singapore and Malaysia, rather than through a distributor;
although we still use a distributor for a relatively small amount of business in
Japan, we have greatly reduced our percentage of business through this
distributor and sell more of our product direct to customers. Increases in
selling and marketing expenses also resulted from the transition to a Global
Business Team structure to provide a single point of accountability for each
major application.
 
GENERAL AND ADMINISTRATIVE
 
     General and administrative expenses were $22.4 million in 2004, which
represented an increase of 22.6%, or $4.1 million, from 2003. The increase
resulted primarily from $2.5 million in higher staffing costs, $0.5 million of
increased professional fees, $0.3 million due to higher insurance premiums and
$0.2 million in separation costs for an employee.
 
AMORTIZATION OF INTANGIBLES
 
     Amortization of intangibles was $0.3 million in 2004 and 2003.
 
OTHER INCOME, NET
 
     Other income was $0.1 million in 2004, compared to being negligible in
2003. The increase in other income is primarily due to higher interest income
and lower interest expense, offset by increased foreign exchange losses.
 
                                        21

 
PROVISION FOR INCOME TAXES
 
     Our effective income tax rate was 33.1% in 2004 and 32.7% in 2003. The
increase in the effective tax rate was primarily due to the decreased effect of
tax credits from research and experimentation activities. We expect our income
tax rate for fiscal year 2005 to be 32.8%.
 
NET INCOME
 
     Net income was $46.7 million in 2004, which represented an increase of
23.8%, or $9.0 million, from 2003 as a result of the factors discussed above.
 
YEAR ENDED SEPTEMBER 30, 2003 VERSUS YEAR ENDED SEPTEMBER 30, 2002
 
REVENUE
 
     Revenue was $251.7 million in 2003, which represented a 7.0%, or $16.5
million, increase from 2002. Of this increase, $9.7 million was due to a 4.1%
increase in sales volume and $6.8 million was due to increased weighted average
selling prices driven by improved sales mix. Fiscal 2003 revenue would have been
$1.7 million lower had the Japanese Yen average exchange rate for the year held
constant with the prior year average. Also, in June 2003, we began selling
directly to customers in Europe, Singapore and Malaysia. These customers
previously had been serviced through Metron, a third party distributor. During
this transition period we discontinued sales to Metron while they drew down
their inventory of our products, which we believe resulted in an adverse revenue
impact of $3.7 million during our third quarter of fiscal 2003.
 
COST OF GOODS SOLD
 
     Total cost of goods sold was $124.3 million in 2003, which represented an
increase of 9.9% or $11.2 million from 2002. Of this increase, $4.6 million was
due to higher sales volume, $4.6 million was due to higher average costs per
gallon associated with meeting our customers' more stringent product quality
requirements and $2.0 million was due to a charge related to the remaining
minimum purchase obligation under a raw material supply agreement for a
polishing pad technology that was previously under development but is no longer
being pursued. Our total cost of this supply agreement was $2.9 million in
fiscal 2003, compared to $0.8 million in the prior fiscal year.
 
     The increase in cost of goods sold was partially offset by the absence of
royalty payments that ended in August 2002, following the expiration of a
contingent payment arrangement with Rippey Corporation resulting from our 1995
acquisition of selected assets used or created in connection with the
development and sale of polishing slurries. We had made payments under this
agreement of 2.5% of applicable slurry revenue from July 1995 through our last
payment in August 2002.
 
GROSS PROFIT
 
     Our gross profit as a percentage of revenue was 50.6% in 2003 as compared
to 51.9% in 2002. The decrease in gross profit resulted primarily from an
increase in manufacturing costs to support our customers' increasing quality
requirements, pricing pressure from certain key customers and our recognition of
the minimum purchase obligation referred to above.
 
RESEARCH AND DEVELOPMENT
 
     Total research and development expenses were $41.5 million in 2003, which
represented an increase of 23.3% or $7.8 million, from 2002. Research and
development expense increased $1.6 million due to increased staffing, $1.7
million due to higher wafer purchases and $2.7 million due to depreciation and
operating costs of our Aurora, Illinois research and development facility and
other new equipment. Since our new research and development facility was opened
during fiscal 2002, 2002 does not represent a full year of depreciation and
operating costs related to the facility. An additional $1.0 million increase
resulted from allocating certain common facility operating costs to research and
development. These costs had previously been treated as general and
administrative expense prior to construction of the facility. Additional costs
were incurred in
 
                                        22

 
technical service support and other areas to support the overall increase in
research and development activities. Research and development efforts were
mainly related to new and enhanced CMP products, including slurry products for
copper applications, new CMP polishing pad technology and advanced chemistry and
particle technology.
 
SELLING AND MARKETING
 
     Selling and marketing expenses were $11.2 million in 2003, which
represented an increase of 16.1%, or $1.6 million, over 2002. The increase
resulted primarily from higher staffing costs associated with our increased
customer support initiatives including our transition to selling direct to
customers in Europe, Singapore and Malaysia, rather than through a distributor.
 
GENERAL AND ADMINISTRATIVE
 
     General and administrative expenses were $18.2 million in 2003, which
represented an increase of 4.4%, or $0.8 million, from 2002. Increases include
depreciation of our business information systems, higher directors' and
officers' liability insurance premiums of $1.2 million and increased staffing
costs of $0.6 million. These increases were partially offset by a $0.8 million
reduction in legal and professional expenses, primarily due to the absence of
legal fees associated with the Rodel litigation, discussed further below, a
decrease in facilities charges due to the change in allocation of certain common
facility operating costs described under Research and Development and the
absence of a $0.2 million non-cash charge related to the modification of a
former director's stock option agreement in fiscal 2002.
 
LITIGATION SETTLEMENT
 
     During the second fiscal quarter of 2002, we settled all pending patent
infringement litigation with Rodel, which resulted in a one-time payment of $1.0
million. Under the settlement agreement, we received a fully paid-up, worldwide
royalty-free license to all technology that was the subject of the litigation
and their foreign equivalents, and there is no further financial obligation with
respect to this matter.
 
AMORTIZATION OF INTANGIBLES
 
     Amortization of intangibles was $0.3 million in 2003 and 2002.
 
OTHER INCOME, NET
 
     Other expense was negligible in 2003 compared to $0.8 million of other
income in 2002. The decrease in other income in 2003 is due to the absence of
foreign exchange gains recorded in the prior year resulting from the
strengthening of the Japanese Yen, which were partially offset by a payment made
to Cabot Corporation in 2002 as reimbursement for certain capital improvements
made to equipment used to supply us with raw materials, that is no longer in
service.
 
PROVISION FOR INCOME TAXES
 
     The effective income tax rate was 32.7% in 2003 and 33.0% in 2002. The
decrease in the effective tax rate was due to an increase in tax credits from
expanded research and experimentation activities.
 
NET INCOME
 
     Net income was $37.7 million in 2003, which represented a decrease of 7.3%,
or $3.0 million, from 2002 as a result of the factors discussed above.
 
INFLATION
 
     We believe that inflation has not had a material effect on our revenues and
net income for the last three fiscal years.
 
                                        23

 
LIQUIDITY AND CAPITAL RESOURCES
 
     We had cash flows from operating activities of $64.2 million in 2004, $47.6
million in 2003 and $53.5 million in 2002. Our cash provided by operating
activities in 2004 originated from net income from operations of $46.7 million
and non-cash items of $20.4 million, which were partially offset by a net
increase in working capital of $2.9 million.
 
     In 2004 cash flows used in investing activities were $12.8 million, of
which $11.0 million was used for purchases of land in Geino, Japan,
production-related equipment and research and development equipment. In
addition, we acquired a minority equity ownership interest in NanoProducts
Corporation in exchange for a $3.8 million investment of which we have paid
approximately $1.8 million to NanoProducts Corporation and intend to pay an
additional $1.9 million. In 2003 cash flows used in investing activities were
$14.5 million, primarily due to $16.4 million in purchases of additional
production-related equipment, a 300 mm polishing tool and metrology tools to
support increased polishing capacity in our Class 1 clean room. These capital
expenditures were partially offset by $1.9 million in cash received from the
sale of assets, of which $1.8 million related to the January 2003 sale of our
distribution center and land in Ansung, South Korea. In 2002, cash flows used in
investing activities were $35.3 million, primarily due to completion of the
construction of our new research and development facility in Aurora, Illinois,
and equipping the facility with additional research and development equipment.
We also purchased additional production-related equipment to be used in Aurora,
Illinois and invested in the development and implementation of our business
information system.
 
     In 2004 cash flows used in financing activities of $5.4 million resulted
primarily from the repurchase of $8.0 million of common stock and principal
payments of $0.8 million made under capital lease obligations. These outflows
were partially offset by the issuance of common stock of $3.4 million from the
exercise of stock options under our equity incentive plan and purchases under
our employee stock purchase plan. We had cash flows from financing activities of
$8.5 million in 2003 that resulted from the issuance of common stock of $12.8
million for the exercise of stock options under our equity incentive plan and to
a much lesser extent, purchases under our employee stock purchase plan, offset
by a $3.5 million loan repayment, which is described below, and principal
payments of $0.7 million made under capital lease obligations. We had cash flows
from financing activities of $3.6 million in 2002 which resulted from the
issuance of common stock of $4.5 million for both the exercise of stock options
under our equity incentive plan and purchases under our employee stock purchase
plan, offset partially by principal payments of $0.9 million made under capital
lease obligations.
 
     In July 2004 we announced that our Board of Directors had authorized a
share repurchase program for up to $25.0 million of our outstanding common
stock. Shares are repurchased from time to time, depending on market conditions,
in open market transactions, at management's discretion. We fund share
repurchases from our existing cash balance. The plan is primarily intended to
diminish earnings dilution from the issuance of stock from the exercise of stock
options under our equity incentive plan and purchases under our employee stock
purchase plan. The program, which became effective on the announcement date, may
be suspended or terminated at any time, at the Company's discretion.
 
     In February 2003, we prepaid the entire $3.5 million unsecured term loan
that had been funded on the basis of the Illinois State Treasurer's Economic
Program which had been due in April 2005 and had incurred interest at an annual
rate of 4.68%. No gain or loss was recognized with respect to the prepayment. As
a result of this prepayment, we have no outstanding long term debt.
 
     In July 2001 we entered into a $75.0 million unsecured revolving credit and
term loan facility with a group of commercial banks, and in February 2002 and
August 2003, this agreement was amended with no material changes in terms. On
November 24, 2003, the then existing agreement was terminated and replaced with
an amended and restated unsecured revolving credit facility of $50.0 million
with an option to increase the facility by up to $30.0 million. Under this
agreement, which terminates in November 2006, but can be renewed for two
one-year terms, interest accrues on any outstanding balance at either the
institution's base rate or the eurodollar rate plus an applicable margin. A
non-use fee also accrues. Loans under this facility are anticipated to be used
primarily for general corporate purposes, including working capital and capital
expenditures. The credit agreement also contains various covenants. No amounts
are currently outstanding under this credit facility and we believe we are
currently in compliance with the covenants.
 
                                        24

 
     We estimate that our total capital expenditures in fiscal year 2005 will be
approximately $33.0 million, approximately $0.4 million of which we have already
spent as of October 31, 2004. We expect our major capital expenditures in 2005
to include the construction of our Asia Pacific technology center in Geino,
Japan and equipment for new product introductions and product capacity
expansions.
 
     We believe that cash generated by our operations and available borrowings
under our revolving credit facility will be sufficient to fund our operations,
expected capital expenditures and share repurchases for the foreseeable future.
However, we plan to expand our business and continue to improve our technology
and, to do so, we may be required to raise additional funds in the future
through public or private equity or debt financing, strategic relationships or
other arrangements.
 
OFF-BALANCE SHEET ARRANGEMENTS
 
     At September 30, 2004 and 2003, we did not have any unconsolidated entities
or financial partnerships, such as entities often referred to as structured
finance or special purpose entities, which might have been established for the
purpose of facilitating off-balance sheet arrangements.
 
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
 
     The following summarizes our contractual obligations at September 30, 2004
and the effect such obligations are expected to have on our liquidity and cash
flow in future periods.
 
                            CONTRACTUAL OBLIGATIONS
 


                                                        LESS THAN    1-3     4-5     AFTER
                                                TOTAL    1 YEAR     YEARS   YEARS   5 YEARS
                                                -----   ---------   -----   -----   -------
                                                               (IN MILLIONS)
                                                                     
Capital lease obligations.....................  $ 7.7     $ 1.3     $ 3.0   $2.4     $1.0
Operating leases..............................    1.0       0.5       0.4    0.1      0.0
Purchase obligations..........................   46.5      29.3      11.8    3.3      2.1
Other long-term liabilities...................    1.5       0.0       0.0    0.0      1.5
                                                -----     -----     -----   ----     ----
Total contractual obligations.................  $56.7     $31.1     $15.2   $5.8     $4.6
                                                =====     =====     =====   ====     ====

 
  CAPITAL LEASE OBLIGATIONS
 
     Since December 2001 we have operated under a fumed alumina supply agreement
with Cabot Corporation, under which Cabot Corporation expanded its capacity in
Tuscola, Illinois for the manufacture of fumed alumina. Payments made by us with
respect to capital costs for the facility have been treated as a capital lease
for accounting purposes and the present value of the minimum quarterly payments
of approximately $0.3 million resulted in a $9.8 million lease obligation and
$9.8 million related leased asset. The agreement has an initial five-year term,
which expires in 2006, but we can choose to renew the agreement for another
five-year term, which would expire in 2011. We also can choose to not renew the
agreement subject to certain terms and conditions and the payment of certain
costs, after the initial five-year term.
 
     In January 2002 we entered into a CMP tool and polishing consumables
transfer agreement with a third party under which we agreed to transfer
polishing consumables to this entity in return for a CMP polishing tool. The
polishing tool has been treated as a capital lease and the aggregate fair market
value of the polishing consumables resulted in a $2.0 million lease obligation.
The term of the agreement is approximately three years.
 
  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.
 
                                        25

 
  PURCHASE OBLIGATIONS
 
     Purchase obligations include our take-or-pay arrangements with suppliers,
and purchase orders and other obligations entered into in the normal course of
business regarding the purchase of goods and services. In the fourth quarter of
fiscal 2003, we recorded a $2.0 million liability for a raw material supply
agreement for a polishing pad technology that was previously under development,
but is no longer being pursued. Our remaining obligation with respect to this
agreement is $1.2 million which is recorded in current liabilities and shown in
the preceding table under purchase obligations.
 
     In January 2004 we entered into a fumed silica supply agreement with Cabot
Corporation, which replaces our original fumed metal oxide agreement with
respect to fumed silica, and accordingly amended our fumed metal oxide agreement
with Cabot Corporation with respect to its fumed silica terms such that the
agreement now only applies to fumed alumina through its original term of June
2005. Under the fumed silica supply agreement, we continue to be obligated to
purchase at least 90% of our six-month volume forecast and to pay for the
shortfall if we purchase less than that amount. This agreement has an initial
six-year term, which expires in December 2009 and will automatically renew
unless either party gives certain notice of non-renewal. We currently anticipate
meeting minimum forecasted purchase volume requirements. Also, under our fumed
alumina supply agreement with Cabot Corporation we are obligated to pay certain
fixed, capital and variable costs through December 2006. This agreement has an
initial five-year term, but we can choose to renew the agreement for another
five-year term, which would expire in December 2011. If we do not renew the
agreement, we will become subject to certain terms and conditions and the
payment of certain costs. Purchase obligations include $24.3 million of
contractual commitments for fumed silica and fumed alumina under these contracts
based upon our anticipated renewal of the fumed alumina agreement through
December 2011.
 
     We have an agreement with a toll manufacturer pursuant to which the
manufacturer performs certain agreed-upon dispersion services. We have agreed to
purchase minimum amounts of services per year and to invest approximately $0.2
million per year in capital improvements or other expenditures to maintain
capacity at the manufacturer's dispersion facility. The initial term of the
agreement expired in October 2004. In November 2004 the agreement was renewed
for another year under similar terms and conditions. The contract continues to
have automatic one-year renewals and contains a 90-day cancellation clause
executable by either party. Purchase obligations related to this agreement are
$8.8 million, which include a termination payment if the agreement is not
renewed.
 
     In June 2003 we entered into a technology licensing and co-marketing
agreement with a semiconductor equipment manufacturer under which we may
develop, manufacture and sell polishing pads utilizing endpoint detection window
technology licensed from the manufacturer for use on the manufacturer's
equipment. Under this agreement, we are obligated to supply this manufacturer
with certain free commercially available polishing pads, up to an agreed upon
dollar amount, for particular uses over a seven-year period. The table above
includes estimated total costs associated with these products of $1.2 million
over the remaining period. We are also obligated to supply the equipment
manufacturer with certain commercially available polishing pads, up to an agreed
upon dollar amount over the seven-year period, which the manufacturer will
purchase from us at our cost. We will also pay a royalty to the equipment
manufacturer and, in certain circumstances, to another party to whom we are a
sub-licensee under our agreement, based upon net revenue earned with respect to
commercial sales of polishing pads covered under the agreement. The term of the
agreement lasts as long as the patents on the technology subject to the license
agreement remain valid and enforceable.
 
     We had been operating under a distribution agreement with an existing
supplier of polishing pads to the semiconductor industry pursuant to which the
supplier sold pads to us for our resale to end users. However, due to what we
believe was a less than acceptable level of profitability under this value-added
reseller model, the distribution agreement was terminated by mutual agreement in
June 2004. Pursuant to our June 2004 termination agreement, we were obligated to
pay a non-material transition fee which is included in the table above and was
paid in December 2004.
 
     In July 2004 we formed a strategic alliance with NanoProducts Corporation
under which we acquired a minority equity ownership interest in the company in
exchange for a $3.8 million investment. Under this arrangement, we are
collaborating with NanoProducts to develop nanoscale particles for use in future
 
                                        26

 
generation CMP slurries, and other fine finish polishing applications. As of
September 30, 2004 we have paid $1.8 million to NanoProducts and intend to pay
an additional $1.9 million.
 
  OTHER LONG-TERM LIABILITIES
 
     Other long-term liabilities include $0.8 million for pension liabilities
and $0.7 for deferred compensation obligations.
 
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
 
     In March 2004, the Emerging Issues Task Force (EITF) reached a consensus on
Issue No. 03-06, "Participating Securities and the Two-Class Method under FASB
Statement No. 128, Earning per Share" ("EITF Issue No. 03-06"), which provides
guidance on the calculation and disclosure of earnings per share (EPS),
including the use of the two-class method for determining EPS when a company has
participating securities. We have adopted EITF Issue No. 03-06 effective
September 2004, which had no impact on our fiscal 2004 EPS.
 
                   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,
improve and customize our products for the most advanced IC applications 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 our customers continually pursue lower cost of ownership of materials
consumed in their manufacturing processes, including CMP slurries. We expect
these technological changes and advances, and this drive toward lower costs, to
continue in the future. Emerging technologies in the semiconductor industry,
such as polishing pads containing abrasives and electrochemical mechanical
planarization ("eCMP"), as well as our customers' efforts to reduce consumption
of CMP slurries, could render our products 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, as we saw in the third fiscal quarter of 2004 with respect to one large
customer that notified us of its decision to transition to another supplier of
CMP slurries for polishing 130 nanometer copper interconnects. Our principal
customers also hold considerable purchasing power, which can impact the pricing,
and terms of sale of our products. Any cancellation, deferral or significant
reduction in CMP slurries sold to these principal customers, or a significant
number of smaller customers, could seriously harm our business, financial
condition and results of operations. In fiscal 2004, our five largest customers,
of which one is a distributor, accounted for approximately 55% of our revenue,
with Marketech (our distributor in Taiwan and China), and Intel accounting for
approximately 32% and 9% of our revenue, respectively. In fiscal year 2003, our
five largest customers, of which two were distributors, accounted for
approximately 61% of our revenue, with Marketech and Intel accounting for
approximately 28% and 15% of our revenue, respectively. In June 2003, we
completed our transition to selling directly to customers in Europe, Singapore
and Malaysia who previously had been serviced through Metron, one of these
distributors.
 
                                        27

 
  ANY PROBLEM OR INTERRUPTION IN SUPPLY OF OUR MOST IMPORTANT RAW MATERIALS,
  INCLUDING FUMED METAL OXIDES, COULD DELAY OUR SLURRY PRODUCTION AND ADVERSELY
  AFFECT OUR SALES
 
     Fumed metal oxides, such as fumed silica and fumed alumina, are significant
raw materials we use in many of our CMP slurries. Our business would suffer from
any problem or interruption in our supply of fumed metal oxides or other key raw
materials. We operate under three raw material supply agreements with Cabot
Corporation, one of which is for the supply of fumed silica and two of which are
for the supply of fumed alumina. Under these agreements, Cabot Corporation
continues to be our primary supplier of particular amounts and types of fumed
alumina and fumed silica. We believe it would be difficult to secure alternative
sources of fumed metal oxides in the event Cabot Corporation or another supplier
becomes unable to supply us with sufficient quantities of fumed metal oxides
that meet the quality and technical specifications required by our customers. In
addition, contractual amendments to the existing agreements with, or
non-performance by, Cabot Corporation or another supplier, could adversely
affect us as well.
 
     Also, if we change the supplier or type of key raw materials such as fumed
metal oxides we use to make our existing CMP slurries or are required to
purchase them from a different manufacturer or manufacturing facility, whether
Cabot Corporation or another party, or otherwise modify our products, in certain
circumstances our customers might have to requalify our CMP slurries for their
manufacturing processes and products. The requalification process could take a
significant amount of time to complete, possibly interrupting or reducing our
sales of CMP slurries to these customers.
 
  OUR BUSINESS COULD BE SERIOUSLY HARMED IF OUR EXISTING OR FUTURE COMPETITORS
  DEVELOP SUPERIOR SLURRY PRODUCTS, OFFER BETTER PRICING TERMS OR SERVICE,
  OBTAIN CERTAIN INTELLECTUAL PROPERTY RIGHTS OR IF ANY OF OUR MAJOR CUSTOMERS
  DEVELOP OR INCREASE IN-HOUSE SLURRY MANUFACTURING CAPABILITY
 
     Competition from current CMP slurry manufacturers, new entrants to the CMP
slurry market or a decision by any of our major customers to produce, or
increase the production of slurry products in-house could seriously harm our
business and results of operations. Competition has increased from other
existing providers of CMP slurries and opportunities exist for other companies
with sufficient financial or technological resources to emerge as potential
competitors by developing their own CMP slurry products. Increased competition
and additional in-house production has and may continue to impact the prices we
are able to charge for our slurry products as well as our overall business. In
addition, our competitors could have or obtain intellectual property rights
which could restrict our ability to market our existing products and/or to
innovate and develop new products.
 
  BECAUSE WE HAVE LIMITED EXPERIENCE IN BUSINESS AREAS OUTSIDE OF CMP SLURRIES,
  EXPANSION OF OUR BUSINESS INTO NEW PRODUCTS AND APPLICATIONS MAY NOT BE
  SUCCESSFUL
 
     An element of our strategy has been to leverage our current customer
relationships and technological expertise to expand our business into new
product areas and applications, including CMP polishing pads. Expanding our
business into new product areas involves technologies and production processes,
in which we have limited experience, and we may not be able to develop and
produce products that satisfy our customers' needs or we may be unable to keep
pace with technological or other developments. Also, our competitors may have or
obtain intellectual property rights which could restrict our ability to market
our existing products and/or to innovate and develop new products.
 
  WE ARE SUBJECT TO SOME RISKS ASSOCIATED WITH OUR FOREIGN OPERATIONS
 
     We currently have operations and a large customer base outside of the
United States. For fiscal 2004, approximately 75% of our revenue was generated
by sales to customers outside of the United States. For fiscal 2003,
approximately 68% of our revenue was generated by sales to customers outside of
the United States. We encounter risks in doing business in certain foreign
countries, including but not limited to, adverse changes in economic and
political conditions, as well as difficulty in enforcing business and customer
contracts and agreements, including protection of intellectual property rights.
In June 2003 we completed our transition to selling directly to customers in
Europe, Singapore and Malaysia who previously had been serviced through a third
party distributor. Selling directly may increase our risk of conducting business
in foreign countries.
                                        28

 
  BECAUSE WE RELY HEAVILY ON OUR INTELLECTUAL PROPERTY, OUR FAILURE TO
  ADEQUATELY OBTAIN OR PROTECT IT COULD SERIOUSLY HARM OUR BUSINESS
 
     Protection of intellectual property is particularly important in our
industry because CMP slurry and pad manufacturers develop complex technical
formulas for CMP products which are proprietary in nature and differentiate
their products from those of competitors. Our intellectual property is important
to our success and ability to compete. We attempt to protect our intellectual
property rights through a combination of patent, trademark, copyright and trade
secret laws, as well as employee and third-party nondisclosure and assignment
agreements. Our failure to obtain or maintain adequate protection of our
intellectual property rights for any reason could seriously harm our business.
 
  DEMAND FOR OUR PRODUCTS AND OUR BUSINESS MAY BE ADVERSELY AFFECTED BY
  WORLDWIDE ECONOMIC AND INDUSTRY CONDITIONS
 
     Our business is affected by current economic and industry conditions and it
is extremely difficult to predict sales of our products given uncertainties in
these factors. For example, our quarterly revenue in fiscal years 2001 through
2003 were affected by the global economic slowdown and weakening in demand for
electronic systems, coupled with higher than normal chip inventories. While the
semiconductor industry recovered from this prolonged downturn in fiscal 2004, we
believe the outlook for 2005 is for moderating revenue growth for the broad
semiconductor industry and possibly even a contraction. Further, the
semiconductor industry has been cyclical, and the advent of the next downturn
could adversely affect our business.
 
  OUR INABILITY TO ATTRACT AND RETAIN KEY PERSONNEL COULD CAUSE OUR BUSINESS TO
  SUFFER
 
     If we fail to attract and retain the necessary managerial, technical and
customer support personnel, our business and our ability to maintain existing
and obtain new customers, develop new products and provide acceptable levels of
customer service could suffer. Competition for qualified personnel, particularly
those with significant experience in the CMP and IC device industries, is
intense. The loss of services of key employees could harm our business and
results of operations.
 
RISKS RELATING TO THE MARKET FOR OUR COMMON STOCK
 
  THE MARKET PRICE MAY FLUCTUATE SIGNIFICANTLY AND RAPIDLY
 
     The market price of our common stock has and could continue to fluctuate
significantly as a result of factors such as: economic and stock market
conditions generally and specifically as they may impact participants in the
semiconductor industries; changes in financial estimates and recommendations by
securities analysts who follow our stock; earnings and other announcements by,
and changes in market evaluations of, us or participants in the semiconductor
and related industries; changes in business or regulatory conditions affecting
us or participants in the semiconductor and related industries; announcements or
implementation by us, our competitors, or our customers of technological
innovations, new products or different business strategies; and trading volume
of our common stock.
 
  ANTI-TAKEOVER PROVISIONS UNDER OUR CERTIFICATE OF INCORPORATION AND BYLAWS AND
  OUR RIGHTS PLAN MAY DISCOURAGE THIRD PARTIES FROM MAKING AN UNSOLICITED BID
  FOR OUR COMPANY
 
     Our certificate of incorporation, our bylaws, our rights plan and various
provisions of the Delaware General Corporation Law may make it more difficult to
effect a change in control of our company. For example, our amended certificate
of incorporation authorizes our board of directors to issue up to 20 million
shares of blank check preferred stock and to attach special rights and
preferences to this preferred stock. Also our amended certificate of
incorporation provides for the division of our board of directors into three
classes as nearly equal in size as possible with staggered three-year terms. In
addition, the rights issued to our stockholders under our rights plan may make
it more difficult or expensive for another person or entity to acquire control
of us without the consent of our board of directors.
 
                                        29

 
ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
  EFFECT OF CURRENCY EXCHANGE RATES AND EXCHANGE RATE RISK MANAGEMENT
 
     We conduct business operations outside of the United States through our
foreign operations. Our foreign operations maintain their accounting records in
their local currencies. Consequently, period to period comparability of results
of operations is affected by fluctuations in exchange rates. The primary
currencies to which we have exposure are the Japanese Yen and, to a lesser
extent, the British Pound and the Euro. From time to time we enter into forward
contracts in an effort to manage foreign currency exchange exposure. However, we
may be unable to hedge these exposures completely. Approximately 16% of our
revenue is transacted in currencies other than the U.S. dollar. We do not
currently enter into forward exchange contracts or other derivative instruments
for speculative or trading purposes.
 
  MARKET RISK AND SENSITIVITY ANALYSIS FOREIGN EXCHANGE RATE RISK
 
     We have performed a sensitivity analysis assuming a hypothetical 10%
adverse movement in foreign exchange rates. As of September 30, 2004, the
analysis demonstrated that such market movements would not have a material
adverse effect on our consolidated financial position, results of operations or
cash flows over a one-year period. Actual gains and losses in the future may
differ materially from this analysis based on changes in the timing and amount
of foreign currency rate movements and our actual exposures.
 
                                        30

 
ITEM 8.  CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
  CABOT MICROELECTRONICS CORPORATION
  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
 


                                                              PAGE
                                                              ----
                                                           
Consolidated Financial Statements:
  Report of Independent Registered Public Accounting Firm...   32
  Consolidated Statements of Income for the years ended
     September 30, 2004, 2003 and 2002......................   33
  Consolidated Balance Sheets at September 30, 2004 and
     2003...................................................   34
  Consolidated Statements of Cash Flows for the years ended
     September 30, 2004, 2003 and 2002......................   35
  Consolidated Statements of Changes in Stockholders' Equity
     for the years ended September 30, 2004, 2003 and
     2002...................................................   36
  Notes to the Consolidated Financial Statements............   37
  Selected Quarterly Operating Results......................   54
Financial Statement Schedule:
  Schedule II -- Valuation and Qualifying Accounts..........   55

 
     All other schedules are omitted, because they are not required, are not
applicable, or the information is included in the financial statements and notes
thereto.
 
                                        31

 
            REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     To the Board of Directors and Stockholders of Cabot Microelectronics
Corporation
 
     In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Cabot Microelectronics Corporation and its subsidiaries at September
30, 2004 and 2003, and the results of their operations and their cash flows for
each of the three years in the period ended September 30, 2004 in conformity
with accounting principles generally accepted in the United States of America.
In addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
 
                                         /s/ PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
December 8, 2004
 
                                        32

 
                       CABOT MICROELECTRONICS CORPORATION
 
                       CONSOLIDATED STATEMENTS OF INCOME
 


                                                                  YEAR ENDED SEPTEMBER 30,
                                                              ---------------------------------
                                                                2004        2003        2002
                                                              ---------   ---------   ---------
                                                               (IN THOUSANDS, EXCEPT PER SHARE
                                                                          AMOUNTS)
                                                                             
Revenue.....................................................  $309,433    $251,665    $235,165
Cost of goods sold..........................................   156,805     124,269     113,067
                                                              --------    --------    --------
       Gross profit.........................................   152,628     127,396     122,098
Operating expenses:
  Research and development..................................    44,003      41,516      33,668
  Selling and marketing.....................................    16,225      11,221       9,667
  General and administrative................................    22,351      18,225      17,458
  Litigation settlement.....................................        --          --       1,000
  Amortization of intangibles...............................       340         340         345
                                                              --------    --------    --------
     Total operating expenses...............................    82,919      71,302      62,138
                                                              --------    --------    --------
Operating income............................................    69,709      56,094      59,960
Other income (expense), net.................................       139         (27)        763
                                                              --------    --------    --------
Income before income taxes..................................    69,848      56,067      60,723
Provision for income taxes..................................    23,120      18,334      20,038
                                                              --------    --------    --------
     Net income.............................................  $ 46,728    $ 37,733    $ 40,685
                                                              ========    ========    ========
Basic earnings per share....................................  $   1.89    $   1.55    $   1.68
                                                              ========    ========    ========
Weighted average basic shares outstanding...................    24,750      24,401      24,160
                                                              ========    ========    ========
Diluted earnings per share..................................  $   1.88    $   1.53    $   1.66
                                                              ========    ========    ========
Weighted average diluted shares outstanding.................    24,882      24,665      24,565
                                                              ========    ========    ========

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

 
                       CABOT MICROELECTRONICS CORPORATION
 
                          CONSOLIDATED BALANCE SHEETS
 


                                                                  SEPTEMBER 30,
                                                              ---------------------
                                                                2004        2003
                                                              ---------   ---------
                                                              (IN THOUSANDS, EXCEPT
                                                                 SHARE AMOUNTS)
                                                                    
                                      ASSETS
Current assets:
  Cash and cash equivalents.................................  $157,318    $111,318
  Accounts receivable, less allowance for doubtful accounts
     of $598 at September 30, 2004 and $585 at September 30,
     2003...................................................    41,347      37,564
  Inventories...............................................    24,474      23,814
  Prepaid expenses and other current assets.................     3,264       4,010
  Deferred income taxes.....................................     3,278       2,406
                                                              --------    --------
       Total current assets.................................   229,681     179,112
Property, plant and equipment, net..........................   127,794     133,695
Goodwill....................................................     1,373       1,373
Other intangible assets, net................................       350         595
Other long-term assets......................................     4,093         842
                                                              --------    --------
       Total assets.........................................  $363,291    $315,617
                                                              ========    ========

                       LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................  $ 13,080    $ 12,521
  Capital lease obligations.................................     1,272       1,716
  Accrued expenses, income taxes payable and other current
     liabilities............................................    18,023      14,679
                                                              --------    --------
       Total current liabilities............................    32,375      28,916
Capital lease obligations...................................     6,385       7,452
Deferred income taxes.......................................     7,374       5,384
Deferred compensation and other long-term liabilities.......     1,535       2,092
                                                              --------    --------
       Total liabilities....................................    47,669      43,844
Commitments and contingencies (Note 17)
Stockholders' equity:
  Common stock:
     Authorized: 200,000,000 shares, $0.001 par value
     Issued: 24,855,495 shares at September 30, 2004 and
      24,712,740 shares at September 30, 2003...............        25          25
  Capital in excess of par value of common stock............   136,259     131,913
  Retained earnings.........................................   185,586     138,858
  Accumulated other comprehensive income....................     1,905       1,187
  Unearned compensation.....................................      (153)       (210)
  Treasury stock at cost, 241,865 shares at September 30,
     2004 and no shares at September 30, 2003...............    (8,000)         --
                                                              --------    --------
       Total stockholders' equity...........................   315,622     271,773
                                                              --------    --------
       Total liabilities and stockholders' equity...........  $363,291    $315,617
                                                              ========    ========

 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                        34

 
                       CABOT MICROELECTRONICS CORPORATION
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 


                                                                YEAR ENDED SEPTEMBER 30,
                                                              -----------------------------
                                                                2004       2003      2002
                                                              --------   --------   -------
                                                                     (IN THOUSANDS)
                                                                           
Cash flows from operating activities:
  Net income................................................  $ 46,728   $ 37,733   $40,685
  Adjustments to reconcile net income to net cash provided
     by operating activities:
     Depreciation and amortization..........................    17,611     15,732    12,009
     Equity in loss of equity method investee...............        73         --        --
     Noncash compensation expense and non-employee stock
       options..............................................        67        (13)      475
     Provision for inventory writedown......................       930      1,352       517
     Provision for doubtful accounts........................        44        121      (154)
     Stock option income tax benefits.......................       967      4,822     2,059
     Deferred income taxes..................................     1,119      4,447     1,756
     Unrealized foreign exchange gain.......................        (3)    (1,535)   (1,504)
     Raw material supply obligation.........................        --      1,959        --
     Loss on disposal of property, plant and equipment......        58         50        98
     Other noncash items, net...............................      (471)       198      (109)
  Changes in operating assets and liabilities:
     Accounts receivable....................................    (3,210)   (10,855)      713
     Inventories............................................    (1,256)    (2,045)   (4,429)
     Prepaid expenses and other assets......................      (308)      (378)   (1,255)
     Accounts payable, accrued liabilities and other current
       liabilities..........................................       567       (324)      158
     Income taxes payable, deferred compensation and other
       noncurrent liabilities...............................     1,294     (3,680)    2,481
                                                              --------   --------   -------
Net cash provided by operating activities...................    64,210     47,584    53,500
                                                              --------   --------   -------
Cash flows from investing activities:
  Additions to property, plant and equipment................   (10,968)   (16,396)  (35,259)
  Purchases of investments..................................    (1,820)        --        --
  Proceeds from the sale of property, plant and equipment...        15      1,861        --
                                                              --------   --------   -------
Net cash used in investing activities.......................   (12,773)   (14,535)  (35,259)
                                                              --------   --------   -------
Cash flows from financing activities:
  Prepayments of long-term debt.............................        --     (3,500)       --
  Repurchase of common stock................................    (8,000)        --        --
  Net proceeds from issuance of stock.......................     3,385     12,761     4,500
  Principal payments under capital lease obligations........      (815)      (742)     (857)
                                                              --------   --------   -------
Net cash provided (used) by financing activities............    (5,430)     8,519     3,643
                                                              --------   --------   -------
Effect of exchange rate changes on cash.....................        (7)       145        44
                                                              --------   --------   -------
Increase in cash............................................    46,000     41,713    21,928
Cash and cash equivalents at beginning of year..............   111,318     69,605    47,677
                                                              --------   --------   -------
Cash and cash equivalents at end of year....................  $157,318   $111,318   $69,605
                                                              ========   ========   =======
Supplemental disclosure of cash flow information:
  Cash paid for income taxes................................  $ 19,554   $ 14,420   $14,028
  Cash paid for interest....................................  $    688   $    882   $   869
Supplemental disclosure of noncash investing and financing
  activities:
  Issuance of restricted stock..............................  $     25   $    275   $    10
  Assets acquired under capital leases (Note 9).............  $     --   $    114   $11,770

 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                        35

 
                       CABOT MICROELECTRONICS CORPORATION
 
           CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY


                                                                                             ACCUMULATED
                                                        COMMON        CAPITAL                   OTHER
                                                     STOCK, $0.001   IN EXCESS   RETAINED   COMPREHENSIVE   COMPREHENSIVE
                                                       PAR VALUE      OF PAR     EARNINGS      INCOME          INCOME
                                                     -------------   ---------   --------   -------------   -------------
                                                                                (IN THOUSANDS)
                                                                                             
BALANCE AT SEPTEMBER 30, 2001......................       $24        $107,335    $ 60,440      $(1,191)
Exercise of stock options..........................                     3,169
Tax benefit on stock options exercised.............                     2,059
Amortization of unearned compensation on restricted
 stock.............................................
Issuance of Cabot Microelectronics restricted stock
 under deposit share plan..........................                        30
Issuance of stock options to non-Cabot
 Microelectronics employees........................                        37
Issuance of Cabot Microelectronics stock under
 Employee Stock Purchase Plan......................                     1,308
Modification of stock award grants.................                       178
Net income.........................................                                40,685                      $40,685
Net unrealized gain on derivative instruments......                                                 32              32
Foreign currency translation adjustment............                                               (529)           (529)
                                                                                                               -------
Total comprehensive income.........................                                                            $40,188
                                                                                                               =======
                                                          ---        --------    --------      -------
BALANCE AT SEPTEMBER 30, 2002......................        24         114,116     101,125       (1,688)
Exercise of stock options..........................         1          11,556
Tax benefit on stock options exercised.............                     4,822
Amortization of unearned compensation on restricted
 stock.............................................
Issuance of Cabot Microelectronics restricted stock
 under employee compensation plans.................                       265
Issuance of Cabot Microelectronics restricted stock
 under deposit share plan..........................                        30
Forfeiture of Cabot Microelectronics restricted
 stock.............................................                       (89)
Reverse amortization related to restricted stock
 forfeited.........................................
Issuance of stock options to non-Cabot
 Microelectronics employees........................                         6
Issuance of Cabot Microelectronics stock under
 Employee Stock Purchase Plan......................                     1,207
Net income.........................................                                37,733                      $37,733
Net unrealized gain on derivative instruments......                                                 34              34
Foreign currency translation adjustment............                                              2,841           2,841
                                                                                                               -------
Total comprehensive income.........................                                                            $40,608
                                                                                                               =======
                                                          ---        --------    --------      -------
BALANCE AT SEPTEMBER 30, 2003......................        25         131,913     138,858        1,187
                                                          ===        ========    ========      =======
Exercise of stock options..........................                     2,232
Tax benefit on stock options exercised.............                       967
Amortization of unearned compensation on restricted
 stock.............................................
Issuance of Cabot Microelectronics restricted stock
 under deposit share plan..........................                        75
Forfeiture of Cabot Microelectronics restricted
 stock.............................................                       (15)
Reverse amortization related to restricted stock
 forfeited.........................................
Issuance of Cabot Microelectronics stock under
 Employee Stock Purchase Plan......................                     1,087
Purchase of treasury stock, at cost................
Net income.........................................                                46,728                      $46,728
Net unrealized loss on derivative instruments......                                                (10)            (10)
Foreign currency translation adjustment............                                                728             728
                                                                                                               -------
Total comprehensive income.........................                                                            $47,446
                                                                                                               =======
                                                          ---        --------    --------      -------
BALANCE AT SEPTEMBER 30, 2004......................       $25        $136,259    $185,586      $ 1,905
                                                          ===        ========    ========      =======
 

 
                                                       UNEARNED     TREASURY
                                                     COMPENSATION    STOCK      TOTAL
                                                     ------------   --------   --------
                                                               (IN THOUSANDS)
                                                                      
BALANCE AT SEPTEMBER 30, 2001......................     $(321)      $    --    $166,287
Exercise of stock options..........................                               3,169
Tax benefit on stock options exercised.............                               2,059
Amortization of unearned compensation on restricted
 stock.............................................       260                       260
Issuance of Cabot Microelectronics restricted stock
 under deposit share plan..........................       (10)                       20
Issuance of stock options to non-Cabot
 Microelectronics employees........................                                  37
Issuance of Cabot Microelectronics stock under
 Employee Stock Purchase Plan......................                               1,308
Modification of stock award grants.................                                 178
Net income.........................................
Net unrealized gain on derivative instruments......
Foreign currency translation adjustment............
Total comprehensive income.........................                              40,188
                                                        -----       -------    --------
BALANCE AT SEPTEMBER 30, 2002......................       (71)           --     213,506
Exercise of stock options..........................                              11,557
Tax benefit on stock options exercised.............                               4,822
Amortization of unearned compensation on restricted
 stock.............................................        18                        18
Issuance of Cabot Microelectronics restricted stock
 under employee compensation plans.................      (199)                       66
Issuance of Cabot Microelectronics restricted stock
 under deposit share plan..........................       (10)                       20
Forfeiture of Cabot Microelectronics restricted
 stock.............................................        89                        --
Reverse amortization related to restricted stock
 forfeited.........................................       (37)                      (37)
Issuance of stock options to non-Cabot
 Microelectronics employees........................                                   6
Issuance of Cabot Microelectronics stock under
 Employee Stock Purchase Plan......................                               1,207
Net income.........................................
Net unrealized gain on derivative instruments......
Foreign currency translation adjustment............
Total comprehensive income.........................                              40,608
                                                        -----       -------    --------
BALANCE AT SEPTEMBER 30, 2003......................      (210)           --     271,773
                                                        =====       =======    ========
Exercise of stock options..........................                               2,232
Tax benefit on stock options exercised.............                                 967
Amortization of unearned compensation on restricted
 stock.............................................        76                        76
Issuance of Cabot Microelectronics restricted stock
 under deposit share plan..........................       (25)                       50
Forfeiture of Cabot Microelectronics restricted
 stock.............................................        15                        --
Reverse amortization related to restricted stock
 forfeited.........................................        (9)                       (9)
Issuance of Cabot Microelectronics stock under
 Employee Stock Purchase Plan......................                               1,087
Purchase of treasury stock, at cost................                  (8,000)     (8,000)
Net income.........................................
Net unrealized loss on derivative instruments......
Foreign currency translation adjustment............
Total comprehensive income.........................                              47,446
                                                        -----       -------    --------
BALANCE AT SEPTEMBER 30, 2004......................     $(153)      $(8,000)   $315,622
                                                        =====       =======    ========

 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                        36

 
                       CABOT MICROELECTRONICS CORPORATION
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
 
1.  BACKGROUND AND BASIS OF PRESENTATION
 
     We believe we are the leading supplier of high performance polishing
slurries used in the manufacture of the most advanced integrated circuit ("IC")
devices, within a process called chemical mechanical planarization ("CMP"). CMP
is a polishing process used by IC device manufacturers to planarize many of the
multiple layers of material that are built upon silicon wafers to produce
advanced devices.
 
     The consolidated financial statements have been prepared by Cabot
Microelectronics Corporation ("Cabot Microelectronics", "the Company", "us",
"we", or "our"), pursuant to the rules of the Securities and Exchange Commission
("SEC") and accounting principles generally accepted in the United States of
America. We operate predominantly in one industry segment -- the development,
manufacture, and sale of CMP polishing slurries.
 
2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  PRINCIPLES OF CONSOLIDATION
 
     The consolidated financial statements include the accounts of Cabot
Microelectronics and its subsidiaries. All significant intercompany transactions
and balances are eliminated in consolidation.
 
  USE OF ESTIMATES
 
     The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States of
America requires management to make judgments, assumption and estimates that
affect the amounts reported in the consolidated financial statements and
accompanying notes. The accounting estimates that require management's most
difficult and subjective judgments include, but are not limited to, the
assessment of the adequacy of our allowance for doubtful accounts and our
product warranty reserves; the valuation of inventory; and the recognition of
certain 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. However, future events
are subject to change and the best estimates and judgments routinely require
adjustment. Actual results may differ from these estimates under different
assumptions or conditions.
 
  CASH AND CASH EQUIVALENTS
 
     We consider investments in all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
 
  ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
 
     Trade accounts receivable are recorded at the invoiced amount and do not
bear interest. We maintain an allowance for doubtful accounts for estimated
losses resulting from the potential inability of our customers to make required
payments. Our allowance for doubtful accounts includes both a general reserve
based on historical experience and an additional reserve for individual accounts
when we become aware of a customer's inability to meet its financial
obligations, such as in the case of bankruptcy filings or deterioration in the
customer's operating results or financial condition. Account balances are
charged off against the allowance when we believe that it is probable that the
receivable will not be recovered.
 
  INVENTORIES
 
     Inventories are stated at the lower of cost, determined on the first-in,
first-out (FIFO) basis, or market. Finished goods and work in process
inventories include material, labor and manufacturing overhead costs. We
regularly review and write-down the value of inventory for estimated
obsolescence or unmarketable inventory.
 
                                        37

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
An inventory reserve is maintained based upon a historical percentage of actual
inventory written off applied against inventory at the end of the period, plus
an additional amount for known conditions and circumstances.
 
     Also, the purchase cost of one of our key raw materials from one supplier
changes significantly based upon the total quantity of in-specification product
that we purchase 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.
 
  PROPERTY, PLANT AND EQUIPMENT
 
     Property, plant and equipment are recorded at cost. Depreciation is based
on the following estimated useful lives of the assets using the straight-line
method:
 

                                                 
Buildings........................................   15-25 years
Machinery and equipment..........................   3-10 years
Furniture and fixtures...........................   5-10 years
Information systems..............................   3-5 years
Assets under capital leases......................   Term of lease or estimated useful life

 
     Expenditures for repairs and maintenance are charged to expense as
incurred. Expenditures for major renewals and betterments are capitalized and
depreciated over the remaining useful lives. As assets are retired or sold, the
related cost and accumulated depreciation are removed from the accounts and any
resulting gain or loss is included in the results of operations. Costs related
to internal use software are capitalized in accordance with AICPA Statement of
Position No. 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use".
 
  GOODWILL AND OTHER INTANGIBLE ASSETS
 
     Effective October 1, 2001 we adopted FASB Statement No. 141, "Business
Combinations" and FASB Statement No. 142, "Goodwill and Other Intangible
Assets", and goodwill and other intangible assets with indefinite useful lives
are no longer amortized. Purchased intangible assets with finite lives continue
to be amortized over their estimated useful lives. Goodwill and other intangible
assets are tested on an annual basis and between annual tests if indicators of
potential impairment exist, using a fair-value-based approach. We determined
that goodwill and other intangible assets were not impaired as of September 30,
2004.
 
  IMPAIRMENT OF LONG-LIVED ASSETS
 
     Reviews are regularly performed to determine whether facts and
circumstances exist which indicate that the carrying amount of assets may not be
recoverable or that the useful life is shorter than originally estimated. Asset
recoverability is assessed by comparing the projected undiscounted cash flows
associated with the related asset or group of assets over their remaining lives
against their respective carrying amounts. Impairment, if any, is based on the
excess of the carrying amount over the fair value of those assets. If assets are
determined to be recoverable, but their useful lives are shorter than originally
estimated, the net book value of the asset is depreciated over the newly
determined remaining useful life. We believe that no material impairment exists
at September 30, 2004.
 
  EQUITY INVESTMENT IN NANOPRODUCTS CORPORATION
 
     In July 2004 we entered into a strategic alliance with NanoProducts
Corporation and acquired a minority interest in the company of 13.1% in exchange
for an investment of $3,750. Although we do not own 20% or more of NanoProducts,
we have concluded that we have the ability to significantly influence
NanoProducts' operating and financial policies. Therefore, in accordance with
Accounting Principles Board Option No. 18 "The Equity Method of Accounting for
Investments in Common Stock", we account for our investment using
 
                                        38

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
the equity method of accounting, which requires us to record earnings and losses
of NanoProducts in proportion to our share of ownership.
 
  WARRANTY RESERVE
 
     We maintain a warranty reserve that reflects management's best estimate of
the cost to replace product that does not meet customers' specifications and
performance requirements, and related costs. The warranty reserve is based upon
a historical product return rate applied against sales made in the current
quarterly period, plus an additional amount related to any specific known
conditions or circumstances. Adjustments to the warranty reserve are recorded in
cost of goods sold.
 
  FOREIGN CURRENCY TRANSLATION
 
     Our operations in Europe and Asia operate primarily in local currency.
Accordingly, all assets and liabilities of these operations are translated using
exchange rates in effect at the end of the year, and revenue and costs are
translated using weighted average exchange rates for the year. The related
translation adjustments are reported in comprehensive income in stockholders'
equity. Gains and losses resulting from foreign currency transactions are
recorded in the statements of income for all periods presented. Foreign exchange
gains and losses were a loss of $377 and gains of $146 and $1,356 for fiscal
years 2004, 2003 and 2002, respectively.
 
  FOREIGN EXCHANGE MANAGEMENT
 
     We transact business in various foreign currencies, primarily the Japanese
Yen, British Pound and the Euro. Our exposure to foreign currency exchange risks
has not been significant because most of our sales are denominated in U.S.
dollars. Periodically we enter into forward foreign exchange contracts in an
effort to mitigate the risks associated with currency fluctuations on certain
foreign currency balance sheet exposures. These foreign exchange contracts do
not qualify for hedge accounting under FASB Statement No. 133, "Accounting for
Derivatives Instruments and Hedging Activities", as amended by FASB Statement
No. 149, "Amendment of Statement 133 on Instruments and Hedging Activities".
Gains and losses resulting from the impact of currency exchange rate movements
on forward foreign exchange contracts designated to offset certain foreign
currency balance sheet exposures are recognized as other income or expense in
the accompanying consolidated income statements in the period in which the
exchange rates change. These gains and losses are intended to partially offset
the foreign currency exchange gains and losses on the underlying exposures being
hedged. We do not currently use derivative financial instruments for trading or
speculative purposes.
 
  FAIR VALUES OF FINANCIAL INSTRUMENTS
 
     The recorded amounts of cash, accounts receivable and accounts payable
approximate their fair values.
 
  INTERCOMPANY LOAN ACCOUNTING
 
     We maintain an intercompany loan agreement with our wholly-owned
subsidiary, Nihon Cabot Microelectronics K.K. ("the K.K."), under which we
provided funds to the K.K. to finance the purchase of certain assets from our
former Japanese branch at the time of the establishment of this subsidiary, as
well as for the purchase of land adjacent to our Geino, Japan facility, which is
part of the K.K. Since settlement of the note is expected in the foreseeable
future, and our subsidiary has been consistently making timely payments on the
loan, the loan is considered a foreign-currency transaction under FASB Statement
No. 52, "Foreign Currency Translation". Therefore the associated foreign
exchange gains and losses are recognized in earnings rather than being deferred
in the cumulative translation account in other comprehensive income. For
additional information regarding our accounting for derivatives, see Note 10 to
consolidated financial statements.
 
                                        39

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
  CONCENTRATION OF CREDIT RISK
 
     Financial instruments that subject us to concentrations of credit risk
consist principally of accounts receivable. We perform ongoing credit
evaluations of our customers' financial condition and generally do not require
collateral to secure accounts receivable. Our exposure to credit risk associated
with nonpayment is affected principally by conditions or occurrences within the
semiconductor industry and global economy. We historically have not experienced
material losses relating to accounts receivables from individual customers or
groups of customers and maintain an allowance for doubtful accounts based on an
assessment of the collectibility of such accounts.
 
     The portion of revenue from customers who represented more than 10% of
revenue were as follows:
 


                                                                 YEAR ENDED SEPTEMBER 30,
                                                                 -------------------------
                                                                 2004      2003      2002
                                                                 -----     -----     -----
                                                                            
Marketech...................................................      32%       28%       24%
Intel.......................................................       9%       15%       16%

 
     Marketech is our distributor in Taiwan and China.
 
     The two customers above accounted for 30.6% and 30.3% of net accounts
receivable at September 30, 2004 and 2003, respectively.
 
  PURCHASE COMMITMENTS
 
     We have entered into unconditional purchase obligations, which include
noncancelable purchase commitments and take-or-pay arrangements with suppliers.
We review our agreements and make an assessment of the likelihood of a shortfall
in purchases and determine if it is necessary to record a liability.
 
  REVENUE RECOGNITION
 
     Revenue is recognized upon completion of delivery obligations, provided
acceptance and collectibility are reasonably assured. A provision for the
estimated warranty cost is recorded at the time revenue is recognized based on
our historical experience.
 
  SHIPPING AND HANDLING
 
     Costs related to shipping and handling are included in cost of goods sold.
 
  RESEARCH AND DEVELOPMENT
 
     Research and development costs are expensed as incurred and consist
primarily of staffing costs, materials and supplies, depreciation, utilities and
other facilities costs.
 
  INCOME TAXES
 
     Deferred income taxes are determined based on the estimated future tax
effects of differences between financial statement carrying amounts and the tax
bases of existing assets and liabilities. Provisions are made for the U.S. and
any non-U.S. deferred income tax liability or benefit.
 
  STOCK-BASED COMPENSATION
 
     We apply the intrinsic value method prescribed by Accounting Principles
Board Opinion Number 25, "Accounting for Stock Issued to Employees" ("APB 25"),
and related interpretations, with regard to the measurement of compensation cost
for options granted under the Second Amended and Restated Cabot Microelectronics
Corporation 2000 Equity Incentive Plan and shares issued under our Employee
Stock Purchase Plan. All options granted had an exercise price equal to the
market value of the underlying common
 
                                        40

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
stock on the date of grant and no employee compensation expense has been
recorded. Had expense been recognized using the fair value method described in
FASB Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"),
using the Black-Scholes option-pricing model, we would have reported the
following results of operations:
 


                                                           YEAR ENDED SEPTEMBER 30,
                                                        ------------------------------
                                                          2004       2003       2002
                                                        --------   --------   --------
                                                                     
Net income, as reported...............................  $ 46,728   $ 37,733   $ 40,685
Deduct: total stock-based compensation expense
  determined under the fair value method, net of
  tax.................................................   (21,899)   (18,177)   (12,494)
                                                        --------   --------   --------
Pro forma net income..................................  $ 24,829   $ 19,556   $ 28,191
                                                        ========   ========   ========
Earnings per share:
  Basic -- as reported................................  $   1.89   $   1.55   $   1.68
                                                        ========   ========   ========
  Basic -- pro forma..................................  $   1.00   $   0.80   $   1.17
                                                        ========   ========   ========
  Diluted -- as reported..............................  $   1.88   $   1.53   $   1.66
                                                        ========   ========   ========
  Diluted -- pro forma................................  $   1.00   $   0.79   $   1.15
                                                        ========   ========   ========

 
     In the figures presented above, we have revised certain assumptions used in
the current year's Black-Scholes option-pricing model and adjusted previously
reported 2003 data to conform to the current year presentation. The previously
reported data for 2003 were as follows: total stock-based compensation expense
determined under the fair value method, net of tax was $16,531, pro forma net
income was $21,202, pro forma basic net income per share was $0.87, and pro
forma diluted net income per share was $0.86. Adjustment of periods prior to
2003 was not meaningful.
 
     For additional information regarding our stock-based compensation plans,
see Note 14 to the consolidated financial statements.
 
  EARNINGS PER SHARE
 
     Basic earnings per share is calculated based on the weighted average shares
of common stock outstanding during the period, and diluted earnings per share is
calculated based on the weighted average of common stock outstanding, plus the
dilutive effect of stock options, calculated using the treasury stock method.
 
  COMPREHENSIVE INCOME
 
     Comprehensive income differs from net income due to foreign currency
translation adjustments and net unrealized gains and losses on derivative
instruments.
 
  EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
 
     In March 2004, the Emerging Issues task Force (EITF) reached a consensus on
Issue No. 03-06, "Participating Securities and the Two -- Class Method under
FASB Statement No. 128, Earning per Share" ("EITF Issue No. 03-06") which
provides guidance on the calculation and disclosure of earnings per share (EPS),
including the use of the two-class method for determining EPS when a company has
participating securities. We have adopted EITF Issue No. 03-06 effective
September 2004, which had no impact on our EPS.
 
                                        41

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
3.  INVENTORIES
 
     Inventories consisted of the following:
 


                                                                SEPTEMBER 30,
                                                              -----------------
                                                               2004      2003
                                                              -------   -------
                                                                  
Raw materials...............................................  $14,639   $13,327
Work in process.............................................    1,048     1,110
Finished goods..............................................    8,787     9,377
                                                              -------   -------
Total.......................................................  $24,474   $23,814
                                                              =======   =======

 
4.  PROPERTY, PLANT AND EQUIPMENT
 
     Property, plant and equipment consisted of the following:
 


                                                                 SEPTEMBER 30,
                                                              -------------------
                                                                2004       2003
                                                              --------   --------
                                                                   
Land........................................................  $ 16,858   $ 13,511
Buildings...................................................    56,361     55,571
Machinery and equipment.....................................    81,115     72,237
Furniture and fixtures......................................     4,805      4,623
Information systems.........................................    10,927      9,926
Capital leases..............................................    11,884     11,884
Construction in progress....................................     4,647      8,622
                                                              --------   --------
Total property, plant and equipment.........................   186,597    176,374
Less: accumulated depreciation and amortization of assets
  under capital leases......................................   (58,803)   (42,679)
                                                              --------   --------
Net property, plant and equipment...........................  $127,794   $133,695
                                                              ========   ========

 
     Depreciation expense, including amortization of assets recorded under
capital leases, was $17,271, $15,392 and $11,667 for the years ended September
30, 2004, 2003 and 2002, respectively.
 
5.  GOODWILL AND OTHER INTANGIBLE ASSETS
 
     Goodwill of $1,373, as of September 30, 2004, was unchanged from September
30, 2003.
 
     The components of intangible assets are as follows:
 


                                          SEPTEMBER 30, 2004              SEPTEMBER 30, 2003
                                     -----------------------------   -----------------------------
                                     GROSS CARRYING   ACCUMULATED    GROSS CARRYING   ACCUMULATED
                                         AMOUNT       AMORTIZATION       AMOUNT       AMORTIZATION
                                     --------------   ------------   --------------   ------------
                                                                          
Trade secrets and know-how.........      $2,550          $2,360          $2,550          $2,105
Distribution rights, customer lists
  and other........................       1,095             935           1,000             850
                                         ------          ------          ------          ------
  Total intangible assets..........      $3,645          $3,295          $3,550          $2,955
                                         ======          ======          ======          ======

 
     Amortization expense of intangible assets was $340 for both fiscal 2004 and
fiscal 2003. Estimated future amortization expense for fiscal 2005 is $255.
 
                                        42

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
6.  OTHER LONG-TERM ASSETS
 
     Other long-term assets consisted of the following:
 


                                                              SEPTEMBER 30,
                                                              -------------
                                                               2004    2003
                                                              ------   ----
                                                                 
Investment in equity method investee........................  $3,677   $ --
Other long-term assets......................................     416    842
                                                              ------   ----
Total.......................................................  $4,093   $842
                                                              ======   ====

 
     On July 1, 2004 we entered into a strategic alliance with NanoProducts
Corporation, a privately-held company specializing in the development and
manufacture of nanoscale particles and related nanotechnology products. Under
this arrangement, we are collaborating with NanoProducts to develop nanoscale
particles for use in future generation CMP slurries, and other fine finish
polishing applications. As of September 30, 2004 we have paid $1,820 to
NanoProducts and we currently intend to pay an additional $1,930, representing a
total initial investment of $3,750. We have received 1,630,435 shares of common
stock of NanoProducts Corporation, which represents an ownership interest of
13.1%. We have concluded that we have the ability to significantly influence
NanoProducts' operating and financial policies and account for our investment
using the equity method of accounting, which requires us to record earnings and
losses of NanoProducts in proportion to our share of ownership. Our investment
in NanoProducts as of September 30, 2004 of $3,677 has been reduced by $73,
representing our share of net losses incurred by NanoProducts from July 1, 2004
through September 30, 2004.
 
7.  ACCRUED EXPENSES, INCOME TAXES PAYABLE AND OTHER CURRENT LIABILITIES
 
     Accrued expenses, income taxes and other current liabilities consisted of
the following:
 


                                                                SEPTEMBER 30,
                                                              -----------------
                                                               2004      2003
                                                              -------   -------
                                                                  
Accrued compensation........................................  $10,254   $ 7,743
Raw materials accrual.......................................    1,726     2,305
Warranty accrual............................................      952       836
Due to equity method investee...............................    1,930        --
Income taxes payable........................................      522        --
Other.......................................................    2,639     3,795
                                                              -------   -------
Total.......................................................  $18,023   $14,679
                                                              =======   =======

 
8.  LONG-TERM DEBT AND REVOLVING CREDIT FACILITY
 
     In February 2003, we prepaid the entire $3,500 unsecured term loan that had
been funded on the basis of the Illinois State Treasurer's Economic Program
which had been due in April 2005 and had incurred interest at an annual rate of
4.68%. No gain or loss was recognized with respect to the prepayment. As a
result of this prepayment, we have no outstanding long-term debt.
 
     In July 2001 we entered into a $75,000 unsecured revolving credit and term
loan facility with a group of commercial banks and in February 2002 and August
2003, this agreement was amended with no material changes in terms. On November
24, 2003, the existing agreement was terminated and replaced with an amended and
restated unsecured revolving credit facility of $50,000 with an option to
increase the facility by up to $30,000. Under this agreement, which terminates
in November 2006, but can be renewed for two one-year terms, interest accrues on
any outstanding balance at either the institution's base rate or the eurodollar
rate plus an applicable margin. A non-use fee also accrues. Loans under this
facility are anticipated to be used primarily for general corporate purposes,
including working capital and capital expenditures. The credit agreement also
 
                                        43

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
contains various covenants. No amounts are currently outstanding under this
credit facility and we believe we are currently in compliance with the
covenants.
 
9.  CAPITAL LEASE OBLIGATIONS
 
     In December 2001 we entered into a fumed alumina supply agreement with
Cabot Corporation under which we agreed to pay Cabot Corporation for the
expansion of a fumed alumina manufacturing facility in Tuscola, Illinois. The
payments for the facility have been treated as a capital lease for accounting
purposes and the present value of the minimum quarterly payments resulted in a
$9,776 lease obligation and related leased asset. The agreement has an initial
five-year term, which expires in 2006, but we can choose to renew the agreement
for another five-year term, which expires in 2011. We also can choose not to
renew the agreement subject to certain terms and conditions and the payment of
certain costs, after the initial five-year term.
 
     In January 2002 we entered into a CMP tool and polishing consumables
transfer agreement with a third party under which we agreed to transfer
polishing consumables to them in return for a CMP polishing tool. The polishing
tool has been treated as a capital lease for accounting purposes and is valued
based on the aggregate fair market value of the polishing consumables, which
resulted in a $1,994 lease obligation. The agreement has approximately a
three-year term.
 
     In July 2003 we entered into a leasing arrangement for forklift trucks. The
lease has a five-year term with a bargain purchase option at the end of the
term. The forklift truck leasing arrangement has been treated as a capital lease
for accounting purposes, resulting in a $114 lease obligation and related leased
asset.
 
10.  DERIVATIVES
 
     All derivatives, whether designated in hedging relationships or not, are
required to be recorded on the balance sheet at fair value. If the derivative is
designated as a fair value hedge, the changes in the fair value of the
derivative and of the hedged item attributable to the hedged risk are recognized
in earnings. If the derivative is designated as a cash flow hedge, the effective
portions of changes in the fair value of the derivative are recorded in other
comprehensive income and are recognized in the income statement when the hedged
item affects earnings. Ineffective portions of changes in the fair value of cash
flow hedges are recognized in earnings.
 
     During fiscal 2004 we entered into a cash flow hedge to cover commitments
involving the purchase of land in Geino, Japan, which resulted in a reduction to
comprehensive income of $45. Since the related asset designated under this cash
flow hedge was land, which is not depreciated, we will reclassify losses
associated with this cash flow hedge into earnings if and when the land is
eventually sold.
 
     At September 30, 2004 we had one forward foreign exchange contract selling
Japanese Yen related to an intercompany note with one of our subsidiaries in
Japan and for the purpose of hedging the risk associated with a net
transactional exposure in Japanese Yen.
 
11.  DEFERRED COMPENSATION
 
     The Directors' Deferred Compensation Plan became effective in March 2001
and applies only to our non-employee directors. All of our non-employee
directors have elected to defer their compensation to future periods. In June
2003, this plan was amended to require that payment of deferred amounts be made
only in the form of Cabot Microelectronics common shares. Amounts deferred under
the plan were $750 and $481 as of September 30, 2004 and 2003, respectively. We
do not currently maintain a deferred compensation plan for employees other than
our standard Cabot Microelectronics Corporation 401(k) Plan, which is a
qualified plan, and our Supplemental Employee Retirement Plan discussed in
Footnote 12 to the consolidated financial statements.
 
                                        44

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
12.  SAVINGS PLANS
 
     Effective in May 2000, we adopted the Cabot Microelectronics Corporation
401(k) Plan (the "401(k) Plan") covering substantially all eligible employees
meeting certain minimum age and eligibility requirements, as defined by the
401(k) Plan. Participants may make elective contributions up to 60% of their
eligible compensation. All amounts contributed by participants and earnings on
these contributions are fully vested at all times. The 401(k) Plan provides for
matching and fixed nonelective contributions by the Company. Under the 401(k)
Plan, the Company will match 100% of the first four percent of the participant's
eligible compensation and 50% of the next two percent of the participant's
eligible compensation that is contributed, subject to limitations required by
government laws or regulations. Under the 401(k) Plan, all employees, even
non-participants, will receive a contribution by the Company in an amount equal
to 4% of eligible compensation. Participants and employees are 100% vested in
all Company contributions. The Company's expense for the defined contribution
plan totaled $2,696, $2,924 and $2,043 for the periods ending September 30,
2004, 2003 and 2002, respectively.
 
     Effective in May 2000, we adopted the Cabot Microelectronics Corporation
Supplemental Employee Retirement Plan ("SERP") covering all eligible employees
as defined by the SERP. Under the SERP, the Company contributes up to 4% of
these individuals' eligible compensation. The purpose of the SERP is to provide
for the deferral of the Company contribution to certain highly compensated
employees as defined under the provision of the Employee Retirement Income
Security Act ("ERISA") of 1974. All amounts contributed by the Company and
earnings on these contributions are fully vested at all times. The Company's
expense for the SERP was de minimis for periods ending September 30, 2004, 2003
and 2002, respectively.
 
13.  EMPLOYEE STOCK PURCHASE PLAN
 
     In March 2000, Cabot Microelectronics adopted an Employee Stock Purchase
Plan ("ESPP") and authorized up to 475,000 shares of common stock to be
purchased under the plan. The ESPP allows all full and certain part-time
employees of Cabot Microelectronics and its subsidiaries to purchase shares of
our common stock through payroll deductions. Employees can elect to have up to
10% of their annual earnings, up to a maximum of $12,500 per each six-month
offering period, withheld to purchase our stock, subject to certain other
criteria. The shares are purchased at a price equal to the lower of 85% of the
closing price at the beginning or end of each semi-annual stock purchase period.
A total of 32,740, 32,132 and 30,248 shares were issued under the ESPP during
fiscal 2004, 2003 and 2002, respectively.
 
14.  EQUITY INCENTIVE PLAN
 
     In March 2004, our stockholders approved our Second Amended and Restated
Cabot Microelectronics Corporation 2000 Equity Incentive Plan (individually, or
together, the "Plan"), which amended our Amended and Restated Cabot
Microelectronics Corporation 2000 Equity Incentive Plan, for the primary purpose
of increasing the number of our common shares reserved for issuance under the
Plan from 6,500,000 shares to 9,500,000 shares. The approved increase is
intended to provide enough shares to give the company ongoing flexibility to
attract, retain and reward our employees, directors, consultants and advisors.
The amended Plan includes certain other material changes, such as the allowance
of restricted stock unit awards under the Plan and an increase in the number of
shares of restricted stock available for issuance from 875,000 shares to
1,900,000 shares of restricted stock or restricted stock units in aggregate. The
Plan allows for the granting of four types of equity incentive awards:
restricted stock, restricted stock units, stock options, and substitute awards.
According to the Plan, all employees, directors, consultants and advisors of the
Company and its subsidiaries are eligible for awards under the Plan, which
awards will be awarded subject to applicable Award Agreements. The Plan is
administered by the Compensation Committee of the Board of Directors.
 
  RESTRICTED STOCK
 
     Under the Plan, employees and non-employees may be granted shares of
restricted stock or restricted stock units at the discretion of the Compensation
Committee. In general, shares of restricted stock and restricted
                                        45

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
stock units may not be sold, assigned, transferred, pledged, disposed of or
otherwise encumbered. Generally, under our Award Agreements to date for
restricted stock, of which there have been few, restrictions have lapsed over a
two-year period with one-third becoming unrestricted immediately at the date of
grant and the remaining restrictions lapsing over a two-year period. Holders of
restricted stock have all the rights of stockholders, including voting and
dividend rights, subject to the above restrictions. In no event shall the
Company issue more than 1,900,000 shares of restricted stock or restricted stock
units, in aggregate, under the Plan. Restricted shares under the Plan may also
be purchased and placed "on deposit" by executive level employees pursuant to
the 2001 Deposit Share Plan. Shares purchased under this Deposit Share Plan
receive a 50% match in restricted shares, which vest at the end of a three-year
period, and are subject to forfeiture upon early withdrawal of the deposit
shares. Compensation expense related to our restricted stock grants and deposit
share purchases was $76, $18, and $260 for fiscal years 2004, 2003 and 2002,
respectively.
 
  STOCK OPTIONS
 
     Under the Plan, employees and non-employees may be granted incentive stock
options ("ISO") to purchase common stock at not less than the fair value on the
date of grant, and non-qualified stock options ("NQSO"), as determined by the
Compensation Committee and set forth in an applicable Award Agreement. The Plan
provides that the term of the option may be as long as ten years. Options
granted during fiscal years 2004, 2003 and 2002 generally provided for a
ten-year term, with options generally vesting equally over a four-year period,
with first vesting on the anniversary date of the grant. No more than 1,750,000
ISO shares may be issued under the Plan, and none have been granted to date.
 
     In fiscal 2004 and 2003, no compensation expense was recorded with respect
to stock options. In fiscal 2002 we recorded compensation expense of $178
associated with revised stock option agreements involving a former director.
 
     The following tables relate to stock options outstanding as of September
30, 2004:
 


                                                                          WEIGHTED
                                                                          AVERAGE
                                                                STOCK     EXERCISE
                                                               OPTIONS     PRICE
                                                              ---------   --------
                                                                    
Outstanding at September 30, 2001...........................  2,026,988    $45.97
  Granted...................................................  1,018,425     50.33
  Exercised.................................................   (144,203)    21.98
  Canceled..................................................    (82,446)    50.40
                                                              ---------    ------
Outstanding at September 30, 2002...........................  2,818,764     48.64
  Granted...................................................    918,500     50.38
  Exercised.................................................   (426,488)    27.09
  Canceled..................................................   (168,570)    59.28
                                                              ---------    ------
Outstanding at September 30, 2003...........................  3,142,206     51.50
  Granted...................................................  1,165,200     48.75
  Exercised.................................................   (104,307)    21.40
  Canceled..................................................   (583,704)    56.67
                                                              ---------    ------
Outstanding at September 30, 2004...........................  3,619,395    $50.66
                                                              =========    ======

 
                                        46

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 


                                          OPTIONS OUTSTANDING             OPTIONS EXERCISABLE
                                 --------------------------------------   --------------------
                                                WEIGHTED       WEIGHTED               WEIGHTED
                                                 AVERAGE       AVERAGE                AVERAGE
RANGE OF                         NUMBER OF     CONTRACTUAL     EXERCISE   NUMBER OF   EXERCISE
EXERCISE PRICE                    SHARES     LIFE (IN YEARS)    PRICE      SHARES      PRICE
--------------                   ---------   ---------------   --------   ---------   --------
                                                                       
$20.00.........................    287,685         0.5          $20.00      287,685    $20.00
$27.95-$39.19..................    167,500         9.2           34.61       26,250     37.81
$40.90-$49.80..................  1,455,115         8.2           48.75      378,530     48.91
$51.37-$58.94..................    945,895         8.4           52.59      163,611     51.40
$62.00-$69.69..................    763,200         3.7           66.97      571,056     66.98
                                 ---------                      ------    ---------    ------
                                 3,619,395                      $50.66    1,427,132    $50.39
                                 =========                      ======    =========    ======

 
     On September 27, 2004, as allowed under the Plan, the Compensation
Committee accelerated to September 1, 2005, the vesting of those stock options
granted to employees, officers and directors under the Plan, prior to September
27, 2004 that had an option price equal to or greater than the fair market value
of the shares of the Company on September 27, 2004 ($34.65), through amendment
made and effective as of September 27, 2004 to the grant agreements for such
stock options. Approximately 1.3 million options, with varying remaining vesting
schedules of fewer than three years as of September 1, 2005, had option prices
of greater than $34.65, and therefore are subject to the acceleration provision,
and as a result will become exercisable as of September 1, 2005.
 
     We have adopted the disclosure requirements of FASB Statement No. 148,
"Accounting for Stock-Based Compensation -- Transition and Disclosure" ("SFAS
148") effective December 2002. SFAS 148 amends SFAS 123, to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based compensation and also amends the disclosure
requirements of SFAS 123 to require prominent disclosures in both annual and
interim financial statements about the methods of accounting for stock-based
employee compensation and the effect of the method used on reported results. As
permitted by SFAS 148 and SFAS 123, we continue to apply the accounting
provisions of APB 25, with regard to the measurement of compensation cost for
options granted under the Plan and shares issued under our Employee Stock
Purchase Plan. All options granted had an exercise price equal to the market
value of the underlying common stock on the date of grant and no employee
compensation expense has been recorded. Had expense been recognized using the
fair value method described in SFAS 123, using the Black-Scholes option-pricing
model, we would have reported the following results of operations:
 


                                                            YEAR ENDED SEPTEMBER 30,
                                                           ---------------------------
                                                            2004      2003      2002
                                                           -------   -------   -------
                                                                      
Pro forma net income.....................................  $24,829   $19,556   $28,191
Pro forma basic net income per share.....................  $  1.00   $  0.80   $  1.17
Pro forma diluted net income per share...................  $  1.00   $  0.79   $  1.15

 
     These costs may not be representative of the total effects on pro forma
reported income for future years. Factors that may also impact disclosures in
future years include the attribution of the awards to the service period, the
vesting period of stock options, timing of additional grants of stock option
awards and number of shares granted for future awards. We have revised certain
assumptions used in the current year's Black-Scholes option-pricing model and
adjusted previously reported 2003 data to conform to the current year
presentation. The previously reported data for 2003 were as follows: pro forma
net income was $21,202, pro forma basic net income per share was $0.87, and pro
forma diluted net income per share was $0.86. Adjustment of periods prior to
2003 was not meaningful.
 
                                        47

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The fair value of our stock-based awards to employees under SFAS 123 was
estimated assuming no expected dividends and the following weighted-average
assumptions:
 


                                                        OPTIONS                ESPP
                                                   ------------------   ------------------
                                                   2004   2003   2002   2004   2003   2002
                                                   ----   ----   ----   ----   ----   ----
                                                                    
Expected term (in years).........................    5      5      5     .5     .5     .5
Expected volatility..............................   71%    76%    85%    58%    45%    57%
Risk-free rate of return.........................  3.3%   3.0%   2.8%   2.0%   1.0%   1.6%

 
15.  STOCKHOLDERS' EQUITY
 
  COMMON STOCK
 
     Each share of common stock entitles the holder to one vote on all matters
submitted to a vote of Cabot Microelectronics' stockholders. Common stockholders
are entitled to receive ratably the dividends, if any, as may be declared by the
Board of Directors. Upon liquidation, dissolution or winding up of Cabot
Microelectronics, the common stockholders will be entitled to share, pro
ratably, in the distribution of assets available after satisfaction of all
liabilities and liquidation preferences of preferred stockholders, if any. The
number of authorized shares of common stock is 200,000,000 shares.
 
  STOCKHOLDER RIGHTS PLAN
 
     In March 2000 the Board of Directors of Cabot Microelectronics approved a
stock rights agreement and declared a dividend distribution of one right to
purchase one one-thousandth of a share of Series A Junior Participating
Preferred Stock for each outstanding share of common stock to stockholders of
record on April 7, 2000. The rights become exercisable based upon certain
limited conditions related to acquisitions of stock, tender offers and certain
business combination transactions.
 
  STOCK REPURCHASES
 
     In July 2004 we announced that our Board of Directors had authorized a
share repurchase program for up to $25,000 of our outstanding common stock which
is primarily intended to diminish earnings dilution from the issuance of stock
from the exercise of stock options under our equity incentive plan and purchases
under our employee stock purchase plan. Under this program, shares are
repurchased from time to time, depending on market conditions, in open market
transactions, at management's discretion. This program may be suspended or
terminated at any time, at the Company's discretion. During the fourth fiscal
quarter of 2004, the Company repurchased 241,865 shares of common stock at a
cost of $8,000. For additional information on share repurchases, see "Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities".
 
16.  INCOME TAXES
 
     Income before income taxes was as follows:
 


                                                            YEAR ENDED SEPTEMBER 30,
                                                           ---------------------------
                                                            2004      2003      2002
                                                           -------   -------   -------
                                                                      
Domestic.................................................  $63,707   $50,969   $51,772
Foreign..................................................    6,141     5,098     8,951
                                                           -------   -------   -------
  Total..................................................  $69,848   $56,067   $60,723
                                                           =======   =======   =======

 
                                        48

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Taxes on income consisted of the following:
 


                                                            YEAR ENDED SEPTEMBER 30,
                                                           ---------------------------
                                                            2004      2003      2002
                                                           -------   -------   -------
                                                                      
U.S. federal and state:
  Current................................................  $19,564   $12,106   $13,946
  Deferred...............................................      649     3,810     2,460
                                                           -------   -------   -------
     Total...............................................  $20,213   $15,916   $16,406
                                                           =======   =======   =======
Foreign:
  Current................................................  $ 2,790   $ 2,821   $ 4,198
  Deferred...............................................      117      (403)     (566)
                                                           -------   -------   -------
     Total...............................................    2,907     2,418     3,632
                                                           -------   -------   -------
       Total U.S. and foreign............................  $23,120   $18,334   $20,038
                                                           =======   =======   =======

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


                                                                  YEAR ENDED
                                                                SEPTEMBER 30,
                                                              ------------------
                                                              2004   2003   2002
                                                              ----   ----   ----
                                                                   
Federal statutory rate......................................  35.0%  35.0%  35.0%
U.S. benefits from research and experimentation
  activities................................................  (1.2)  (2.9)  (2.0)
State taxes, net of federal effect..........................   1.1    1.1    1.2
U.S. benefits from foreign sales............................  (1.4)  (0.7)  (0.7)
Other, net..................................................  (0.4)   0.2   (0.5)
                                                              ----   ----   ----
  Provision for income taxes................................  33.1%  32.7%  33.0%
                                                              ====   ====   ====

 
     Significant components of deferred income taxes were as follows:
 


                                                               SEPTEMBER 30,
                                                              ---------------
                                                               2004     2003
                                                              ------   ------
                                                                 
Deferred tax assets:
  Employee benefits.........................................  $1,678   $1,565
  Inventory.................................................   1,717    1,026
  Depreciation and amortization.............................     248      374
  Product warranty..........................................     377      337
  Bad debt reserve..........................................     209      205
  State and local taxes.....................................     130      112
  Other, net................................................     128      128
                                                              ------   ------
     Total deferred tax assets..............................  $4,487   $3,747
                                                              ======   ======
Deferred tax liabilities:
  Depreciation and amortization.............................  $6,913   $6,001
  Translation adjustment....................................   1,065      323
  State and local taxes.....................................     235      199
  Other, net................................................     370      202
                                                              ------   ------
     Total deferred tax liabilities.........................  $8,583   $6,725
                                                              ======   ======

 
                                        49

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
17.  COMMITMENTS AND CONTINGENCIES
 
  LEGAL PROCEEDINGS
 
     We periodically become subject to legal proceedings in the ordinary course
of business. We are not currently involved in any legal proceedings that we
believe will have a material impact on our consolidated financial position,
results of operations, or cash flows.
 
  PRODUCT WARRANTIES
 
     We maintain a warranty reserve that reflects management's best estimate of
the cost to replace product that does not meet customers' specifications and
performance requirements, and related costs. The warranty reserve is based upon
a historical product return rate applied against sales made in the current
quarterly period, plus an additional amount related to any specific known
conditions or circumstances. Adjustments to the warranty reserve are recorded in
cost of goods sold. Our warranty reserve requirements increased during fiscal
2004 as follows:
 

                                                            
Balance as of September 30, 2003............................   $836
Net change..................................................    116
                                                               ----
Balance as of September 30, 2004............................   $952
                                                               ====

 
  INDEMNIFICATION DISCLOSURE
 
     In the normal course of business, we are a party to a variety of agreements
pursuant to which we may be obligated to indemnify the other party with respect
to certain matters. Generally, these obligations arise in the context of
agreements entered into by us, under which we customarily agree to hold the
other party harmless against losses arising from items such as a breach of
certain representations and covenants including title to assets sold, certain
intellectual property rights and certain environmental matters. These terms are
common in the industry in which we conduct business. In each of these
circumstances, payment by us is subject to certain monetary and other
limitations and is conditioned on the other party making an adverse claim
pursuant to the procedures specified in the particular agreement, which
typically allow us to challenge the other party's claims.
 
     We evaluate estimated losses for such indemnifications under SFAS No. 5,
"Accounting for Contingencies" as interpreted by FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" ("FIN 45"). We consider such
factors as the degree of probability of an unfavorable outcome and the ability
to make a reasonable estimate of the amount of loss. To date, we have not
experienced material costs as a result of such obligations and as of September
30, 2004, have not recorded any liabilities related to such indemnifications in
our financial statements as we do not believe the likelihood of a material
obligation is probable.
 
  LEASE COMMITMENTS
 
     We lease certain vehicles, warehouse facilities, office space, machinery
and equipment under cancelable and noncancelable leases, most of which expire
within ten years and may be renewed by us. Rent expense under such arrangements
during fiscal 2004, 2003 and 2002 totaled $624, $579 and $482, respectively.
 
                                        50

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Future minimum rental commitments under noncancelable leases as of
September 30, 2004 are as follows:
 


FISCAL YEAR                                                   OPERATING   CAPITAL
-----------                                                   ---------   -------
                                                                    
2005........................................................   $  509     $ 1,886
2006........................................................      270       1,369
2007........................................................       90       1,369
2008........................................................       75       1,365
2009........................................................       70       1,344
Thereafter..................................................       34       2,353
                                                               ------     -------
                                                               $1,048       9,686
                                                               ======
  Amount related to interest................................               (2,029)
                                                                          -------
  Capital lease obligation..................................              $ 7,657
                                                                          =======

 
  PURCHASE OBLIGATIONS
 
     Purchase obligations include our take-or-pay arrangements with suppliers,
and purchase orders and other obligations entered into in the normal course of
business regarding the purchase of goods and services. In the fourth quarter of
fiscal 2003, we recorded a $2.0 million liability for a raw material supply
agreement for a polishing pad technology that was previously under development,
but is no longer being pursued. Our remaining obligation with respect to this
agreement is $1.2 million which is recorded in current liabilities.
 
     In January 2004 we entered into a fumed silica supply agreement with Cabot
Corporation, which replaces the original fumed metal oxide agreement with
respect to fumed silica, and accordingly amended our fumed metal oxide agreement
with Cabot Corporation with respect to its fumed silica terms such that the
agreement now only applies to fumed alumina through its original term of June
2005. Under the fumed silica supply agreement, we continue to be obligated to
purchase at least 90% of our six-month volume forecast and to pay for the
shortfall if we purchase less than that amount. This agreement has an initial
six-year term, which expires in December 2009 and will automatically renew
unless either party gives certain notice of non-renewal. We currently anticipate
meeting minimum forecasted purchase volume requirements. Also, under our fumed
alumina supply agreement with Cabot Corporation we are obligated to pay certain
fixed, capital and variable costs through December 2006. This agreement has an
initial five-year term, but we can choose to renew the agreement for another
five-year term, which would expire in December 2011. If we do not renew the
agreement, we will become subject to certain terms and conditions and the
payment of certain costs.
 
     We have an agreement with a toll manufacturer pursuant to which the
manufacturer performs certain agreed-upon dispersion services. We have agreed to
purchase minimum amounts of services per year and to invest approximately $150
per year in capital improvements or other expenditures to maintain capacity at
the manufacturer's dispersion facility. The initial term of the agreement
expired in October 2004, and was renewed for another year. The contract
continues to have automatic one-year renewals, and contains a 90-day
cancellation clause executable by either party.
 
     In June 2003 we entered into a technology licensing and co-marketing
agreement with a semiconductor equipment manufacturer under which we may
develop, manufacture and sell polishing pads utilizing endpoint detection window
technology licensed from the manufacturer for use on the manufacturer's
equipment. Under this agreement, we are obligated to supply this manufacturer
with certain free commercially available polishing pads, up to an agreed upon
dollar amount, for particular uses over a seven-year period. We are also
obligated to supply the equipment manufacturer with certain commercially
available polishing pads, up to an agreed upon dollar amount over the seven-year
period, which the manufacturer will purchase from us at our cost. We will also
pay a royalty to the equipment manufacturer and, in certain circumstances, to
another party to whom we are a sub-licensee under our agreement, based upon net
revenue earned with respect to commercial sales of
 
                                        51

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
polishing pads covered under the agreement. The term of the agreement lasts as
long as the patents on the technology subject to the license agreement remain
valid and enforceable.
 
     We had been operating under a distribution agreement with an existing
supplier of polishing pads to the semiconductor industry pursuant to which the
supplier sold pads to us for our resale to end users. However, due to what we
believe was a less than acceptable level of profitability under this value-added
reseller model, the distribution agreement was terminated by mutual agreement in
June 2004. Pursuant to our June 2004 termination agreement, we are obligated to
pay a non-material transition fee which is recorded in current liabilities and
was paid in December 2004.
 
     In July 2004 we formed a strategic alliance with NanoProducts Corporation.
Under this arrangement, we are collaborating with NanoProducts to develop
nanoscale particles for use in future generation CMP slurries, and other fine
finish polishing applications. In addition, we obtained a minority equity
ownership interest in NanoProducts Corporation. As of September 30, 2004 we have
invested $1,820 in NanoProducts and intend to pay an additional $1,930.
 
18.  EARNINGS PER SHARE
 
     Statement of Financial Accounting Standards No. 128 "Earnings per Shares",
requires companies to provide a reconciliation of the numerator and denominator
of the basic and diluted earnings per share computations. Basic and diluted
earnings per share were calculated as follows:
 


                                                        YEAR ENDED SEPTEMBER 30,
                                                 ---------------------------------------
                                                    2004          2003          2002
                                                 -----------   -----------   -----------
                                                   (IN THOUSANDS, EXCEPT FOR SHARE AND
                                                           PER SHARE AMOUNTS)
                                                                    
Numerator:
  Income available to common shares............  $    46,728   $    37,733   $    40,685
                                                 ===========   ===========   ===========
Denominator:
  Weighted average common shares
     (Denominator for basic calculation).......   24,749,531    24,400,533    24,160,361
  Weighted average effect of dilutive
     securities:
     Stock-based compensation..................      132,909       264,071       404,713
                                                 -----------   -----------   -----------
  Diluted weighted average common shares
     (Denominator for diluted calculation).....   24,882,440    24,664,604    24,565,074
                                                 ===========   ===========   ===========
Earnings per share:
  Basic........................................  $      1.89   $      1.55   $      1.68
                                                 ===========   ===========   ===========
  Diluted......................................  $      1.88   $      1.53   $      1.66
                                                 ===========   ===========   ===========

 
19.  FINANCIAL INFORMATION BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA
 
     We operate predominantly in one industry segment -- the development,
manufacture, and sale of CMP slurries.
 
                                        52

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Revenues are attributed to the United States and foreign regions based upon
the customer location and not the geographic location from which our products
were shipped. Financial information by geographic area was as follows:
 


                                                                SEPTEMBER 30,
                                                        ------------------------------
                                                          2004       2003       2002
                                                        --------   --------   --------
                                                                     
Revenue:
  United States.......................................  $ 78,093   $ 79,845   $ 81,015
  Europe..............................................    30,984     24,592     29,734
  Asia................................................   200,356    147,228    124,416
                                                        --------   --------   --------
     Total............................................  $309,433   $251,665   $235,165
                                                        ========   ========   ========
Property, plant and equipment, net:
  United States.......................................  $ 94,802   $102,771   $100,900
  Europe..............................................     2,308      2,248      2,032
  Asia................................................    30,684     28,676     29,332
                                                        --------   --------   --------
     Total............................................  $127,794   $133,695   $132,264
                                                        ========   ========   ========

 
     Revenue from Taiwan and Japan each accounted for more than ten percent of
our total revenue. Our revenue from customers in Taiwan totaled $86,283, $63,812
and $54,942 for fiscal years 2004, 2003 and 2002, respectively. Our revenue from
customers in Japan totaled $44,872, $40,295 and $34,175 for fiscal years 2004,
2003 and 2002, respectively.
 
     More than ten percent of our net property, plant and equipment is located
in Japan, having a net book value of $30,243, $28,091 and $27,064 at September
30, 2004, 2003 and 2002, respectively.
 
                                        53

 
SELECTED QUARTERLY OPERATING RESULTS
 
     The following table presents our unaudited financial information for the
eight quarters ended September 30, 2004. This unaudited financial information
has been prepared in accordance with accounting principles generally accepted in
the United States of America, applied on a basis consistent with the annual
audited financial statements and in the opinion of management, include all
necessary adjustments, which consist only of normal recurring adjustments
necessary to present fairly the financial results for the periods. The results
for any quarter are not necessarily indicative of results for any future period.
 
                       CABOT MICROELECTRONICS CORPORATION
                      SELECTED QUARTERLY OPERATING RESULTS
 


                             SEPT. 30,   JUNE 30,   MARCH 31,   DEC. 31,   SEPT. 30,   JUNE 30,   MARCH 31,   DEC. 31,
                               2004        2004       2004        2003       2003        2003       2003        2002
                             ---------   --------   ---------   --------   ---------   --------   ---------   --------
                                              (UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                                                                      
Revenue....................   $82,714    $76,925     $73,515    $76,279     $67,903    $64,288     $62,201    $57,273
Cost of goods sold.........    42,498     37,915      37,366     39,026      33,458     31,360      31,786     27,665
                              -------    -------     -------    -------     -------    -------     -------    -------
Gross profit...............    40,216     39,010      36,149     37,253      34,445     32,928      30,415     29,608
Operating expenses:
  Research and
    development............    10,979     11,158      11,143     10,723      12,469     10,803       9,609      8,635
  Selling and marketing....     3,844      4,235       4,363      3,783       3,338      2,751       2,554      2,578
  General and
    administrative.........     5,819      5,659       5,749      5,124       4,607      4,655       4,595      4,368
  Amortization of
    intangibles............        85         85          85         85          85         85          85         85
                              -------    -------     -------    -------     -------    -------     -------    -------
Total operating expenses...    20,727     21,137      21,340     19,715      20,499     18,294      16,843     15,666
Operating income...........    19,489     17,873      14,809     17,538      13,946     14,634      13,572     13,942
Other income (expense),
  net......................       117         72         (86)        36        (111)        46          43         (5)
                              -------    -------     -------    -------     -------    -------     -------    -------
Income before income
  taxes....................    19,606     17,945      14,723     17,574      13,835     14,680      13,615     13,937
Provision for income
  taxes....................     6,439      5,699       5,006      5,976       4,186      4,918       4,561      4,669
                              -------    -------     -------    -------     -------    -------     -------    -------
Net income.................   $13,167    $12,246       9,717    $11,598     $ 9,649    $ 9,762     $ 9,054    $ 9,268
                              =======    =======     =======    =======     =======    =======     =======    =======
Basic earnings per share...   $  0.53    $  0.49     $  0.39    $  0.47     $  0.39    $  0.40     $  0.37    $  0.38
                              =======    =======     =======    =======     =======    =======     =======    =======
Weighted average basic
  shares outstanding.......    24,689     24,818      24,785     24,733      24,591     24,389      24,346     24,300
                              =======    =======     =======    =======     =======    =======     =======    =======
Diluted earnings per
  share....................   $  0.53    $  0.49     $  0.39    $  0.46     $  0.39    $  0.40     $  0.37    $  0.38
                              =======    =======     =======    =======     =======    =======     =======    =======
Weighted average diluted
  shares outstanding.......    24,783     24,912      24,926     24,994      25,049     24,639      24,593     24,579
                              =======    =======     =======    =======     =======    =======     =======    =======

 
                                        54

 
                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
 
     The following table sets forth activities in our allowance for doubtful
accounts:
 


                                                          ADDITIONS
                                            BALANCE AT   (DEDUCTIONS)                BALANCE AT
ALLOWANCE FOR                               BEGINNING     CHARGED TO                   END OF
DOUBTFUL ACCOUNTS                            OF YEAR       EXPENSES     DEDUCTIONS      YEAR
-----------------                           ----------   ------------   ----------   ----------
                                                                         
Year ended:
  September 30, 2004......................    $  585        $  44         $ (31)        $598
  September 30, 2003......................       667           50          (132)         585
  September 30, 2002......................     1,014         (154)         (193)         667

 
     We maintain a warranty reserve that reflects management's best estimate of
the cost to replace product that does not meet customers' specifications and
performance requirements, and related costs. The warranty reserve is based upon
a historical product return rate applied against sales made in the current
quarterly period, plus an additional amount related to any specific known
conditions or circumstances. Adjustments to the warranty reserve are recorded in
cost of goods sold. Charges to expenses and deductions, shown below, represent
the net change required to maintain an appropriate reserve.
 


                                                          ADDITIONS
                                            BALANCE AT   (DEDUCTIONS)                BALANCE AT
                                            BEGINNING     CHARGED TO                   END OF
WARRANTY RESERVES                            OF YEAR       EXPENSES     DEDUCTIONS      YEAR
-----------------                           ----------   ------------   ----------   ----------
                                                                         
Year ended:
  September 30, 2004......................    $  836         $116         $  --         $952
  September 30, 2003......................       858           --           (22)         836
  September 30, 2002......................     1,255           --          (397)         858

 
MANAGEMENT RESPONSIBILITY
 
     The accompanying consolidated financial statements were prepared by Cabot
Microelectronics in conformity with accounting principles generally accepted in
the United States of America. Cabot Microelectronics' management is responsible
for the integrity of these statements and of the data, estimates and judgments
that underlie them.
 
     Cabot Microelectronics maintains a system of internal accounting controls
designed to provide reasonable assurance that its assets are safeguarded from
loss or unauthorized use, that transactions are properly authorized and
recorded, and that financial records can be relied upon for the preparation of
the consolidated financial statements. The system is monitored and evaluated on
an ongoing basis by management in conjunction with its internal audit function,
independent accountants, and the Audit Committee of the Board of Directors.
 
     The Audit Committee of the Board of Directors provides general oversight
responsibility for the financial statements. Composed entirely of Directors who
are independent and not employees of Cabot Microelectronics, the Committee meets
periodically with Cabot Microelectronics' management, internal auditors and the
independent auditors to review the quality of the financial reporting and
internal controls, as well as the results
 
                                        55

 
of the auditing efforts. The internal auditors and independent auditors have
full and direct access to the Audit Committee, with and without management
present.
 
                                                /s/ WILLIAM P. NOGLOWS
                                         ---------------------------------------
                                                   William P. Noglows
                                                 Chief Executive Officer
 
                                                /s/ WILLIAM S. JOHNSON
                                         ---------------------------------------
                                                   William S. Johnson
                                                 Chief Financial Officer
 
                                                 /s/ THOMAS S. ROMAN
                                         ---------------------------------------
                                                     Thomas S. Roman
                                              Principal Accounting Officer
 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE
 
     None.
 
ITEM 9A.  CONTROLS AND PROCEDURES
 
     Our management, with the participation of our Chief Executive Officer and
Chief Financial Officer, has conducted an evaluation of the effectiveness of the
design and operation of our disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of
September 30, 2004. Based on that evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls and
procedures were effective as of September 30, 2004.
 
     While we believe the present design of our disclosure controls and
procedures is effective to make known to our senior management in a timely
fashion all material information concerning our business, we intend to continue
to improve the design and effectiveness of our disclosure controls and
procedures to the extent necessary in the future to provide our senior
management with timely access to such material information, and to correct any
deficiencies that we may discover in the future.
 
     There were no changes in our internal controls over financial reporting
that occurred during our most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, our internal controls
over financial reporting.
 
ITEM 9B.  OTHER INFORMATION
 
     None.
 
                                    PART III
 
ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
     The information required by Item 10 of Form 10-K with respect to
identification of directors and identification of an audit committee financial
expert is incorporated by reference from the information contained in the
sections captioned "Election of Directors" and "Board Structure and
Compensation" in Cabot Microelectronics' definitive Proxy Statement for the
Annual Meeting of Stockholders to be held March 8, 2005 (the "Proxy Statement").
In addition, for information with respect to the executive officers of Cabot
Microelectronics, see "Executive Officers" at the end of Part I of this Form
10-K and the section captioned "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement. Information required by
 
                                        56

 
Item 405 of Regulation S-K is incorporated by reference from the information
contained in the section captioned "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement.
 
     We have adopted a code of business conduct for all of our employees and
directors, including our principal executive officer, other executive officers,
principal financial officer and senior financial personnel. A copy of our code
of business conduct is available free of charge on our company website at
www.cabotcmp.com. We intend to post on our website any material changes to, or
waivers from our code of business conduct, if any, within two days of any such
event.
 
ITEM 11.  EXECUTIVE COMPENSATION
 
     The information required by Item 11 of Form 10-K is incorporated by
reference from the information contained in the section captioned "Executive
Compensation" in the Proxy Statement.
 
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
EQUITY COMPENSATION PLAN INFORMATION
 
     Shown below is information as of September 30, 2004 with respect to the
shares of common stock that may be issued under Cabot Microelectronics' existing
equity compensation plans.
 


                                         (A)                     (B)                            (C)
                               NUMBER OF SECURITIES TO     WEIGHTED-AVERAGE        NUMBER OF SECURITIES REMAINING
                               BE ISSUED UPON EXERCISE    EXERCISE PRICE OF     AVAILABLE FOR FUTURE ISSUANCE UNDER
                               OF OUTSTANDING OPTIONS,   OUTSTANDING OPTIONS,   EQUITY COMPENSATION PLANS (EXCLUDING
PLAN CATEGORY                    WARRANTS AND RIGHTS     WARRANTS AND RIGHTS    SECURITIES REFLECTED IN COLUMN (A))
-------------                  -----------------------   --------------------   ------------------------------------
                                                                       
  Equity compensation
     plans approved by
     security holders........         3,623,313                 $50.66                       5,089,855(1)
  Equity compensation
     plans not approved
     by security holders.....                --                     --                              --
                                      ---------                 ------                       ---------
  Total......................         3,623,313                 $50.66                       5,089,855
                                      =========                 ======                       =========

 
---------------
 
(1) Includes 304,090 shares available for future issuance under our Employee
    Stock Purchase Plan.
 
     The other information required by Item 12 of Form 10-K is incorporated by
reference from the information contained in the section captioned "Stock
Ownership" in the Proxy Statement.
 
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     The information required by Item 13 of Form 10-K is incorporated by
reference from the information contained in the section captioned "Certain
Relationships and Related Transactions" in the Proxy Statement.
 
ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
     The information required by Item 14 of Form 10-K is incorporated by
reference from the information contained in the section captioned "Fees of
Independent Auditors and Audit Committee Report" in the Proxy Statement.
 
                                        57

 
                                    PART IV
 
ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES
 
     (a) The following Financial Statements and Financial Statement Schedule are
included in Item 8 herein:
 
       1. Financial Statements:
 
          Report of Independent Registered Public Accounting Firm
           Consolidated Statements of Income for the years ended September 30,
          2004, 2003 and 2002
           Consolidated Balance Sheets at September 30, 2004 and 2003
           Consolidated Statements of Cash Flows for the years ended September
          30, 2004, 2003 and 2002
           Consolidated Statements of Changes in Stockholders' Equity for the
          years ended September 30, 2004, 2003 and 2002
          Notes to the Consolidated Financial Statements
 
       2. Financial Statement Schedule: Schedule II -- Valuation and Qualifying
       Accounts
 
       3. Exhibits -- The following exhibits are filed as part of, or
       incorporated by reference into, this Report on Form 10-K:
 


 EXHIBIT
 NUMBER                             DESCRIPTION
 -------                            -----------
         
 3.2(1)     Amended and Restated By-Laws of Cabot Microelectronics
            Corporation.
 3.3(1)     Form of Amended and Restated Certificate of Incorporation of
            Cabot Microelectronics Corporation.
 3.4(2)     Form of Certificate of Designation, Preferences and Rights
            of Series A Junior Participating Preferred Stock.
 4.1(2)     Form of Cabot Microelectronics Corporation Common Stock
            Certificate.
 4.2(3)     Rights Agreement.
 4.3(4)     Amendment to Rights Agreement.
10.1(12)    Second Amended and Restated Cabot Microelectronics
            Corporation 2000 Equity Incentive Plan.*
10.2        Form of Cabot Microelectronics Corporation Second Amended
            and Restated 2000 Equity Incentive Plan Non-Qualified Stock
            Option Grant Agreement (directors).*
10.3        Form of Cabot Microelectronics Corporation Second Amended
            and Restated 2000 Equity Incentive Plan Non-Qualified Stock
            Option Grant Agreement (employees (including executive
            officers)).*
10.15(7)    Cabot Microelectronics Corporation Employee Stock Purchase
            Plan, as amended.*
10.22(9)    Cabot Microelectronics Corporation 401(k) Plan, as amended.*
10.23(5)    Form of Change in Control Severance Protection Agreement.**
10.28(10)   Directors' Deferred Compensation Plan, as amended.*
10.29(11)   Amended and Restated Credit Agreement dated November 24,
            2003 among Cabot Microelectronics Corporation, Various
            Financial Institutions and LaSalle Bank National
            Association, as Administrative Agent, and National City Bank
            of Michigan/Illinois, as Syndication Agent.
10.30(6)    Deposit Share Agreement.***
10.31(6)    Amendment No. 1 to Fumed Metal Oxide Agreement, between
            Cabot Microelectronics Corporation and Cabot Corporation.+
10.32(6)    Fumed Alumina Supply Agreement.+
10.33(7)    Adoption Agreement, as amended, of Cabot Microelectronics
            Corporation Supplemental Employee Retirement Plan.*
10.34(8)    Code of Business Conduct.
10.36(11)   Directors' Cash Compensation Umbrella Program.*
10.37(13)   Employment and Transition Agreement dated November 3, 2003.*
10.38(13)   Employment Offer Letter dated November 2, 2003.*
10.39(13)   Employment Offer Letter dated November 17, 2003.*
10.40(14)   Amendment No. 2 to Fumed Metal Oxide Agreement, between
            Cabot Microelectronics Corporation and Cabot Corporation.

 
                                        58

 


 EXHIBIT
 NUMBER                             DESCRIPTION
 -------                            -----------
         
10.41(14)   Amendment No. 3 to Fumed Metal Oxide Agreement, between
            Cabot Microelectronics Corporation and Cabot Corporation.
10.42(14)   Fumed Silica Supply Agreement.+
10.43(14)   General Release, Waiver and Covenant Not to Sue.*
21.1        Subsidiaries of Cabot Microelectronics Corporation.
23.1        Consent of Independent Registered Public Accounting Firm.
24.1        Power of Attorney.
31.1        Certification of Chief Executive Officer as adopted pursuant
            to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2        Certification of Chief Financial Officer as adopted pursuant
            to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1        Certification pursuant to 18 U.S.C. Section 1350, as adopted
            pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 
---------------
 
 (1) Filed as an exhibit to, and incorporated by reference from the Registrant's
     Registration Statement on Form S-1 (No. 333-95093) filed with the
     Commission on March 27, 2000.
 
 (2) Filed as an exhibit to, and incorporated by reference from the Registrant's
     Registration Statement on Form S-1 (No. 333-95093) filed with the
     Commission on April 3, 2000.
 
 (3) Filed as an exhibit to, and incorporated by reference from the Registrant's
     Registration Statement on Form S-1 (No. 333-95093) filed with the
     Commission on April 4, 2000.
 
 (4) Filed as an exhibit to, and incorporated by reference from the Registrant's
     Current Report on Form 8-K filed with the Commission on October 6, 2000.
 
(5) Filed as an exhibit to, and incorporated by reference from the Registrant's
    Annual Report on Form 10-K filed with the Commission on December 28, 2000.
 
 (6) Filed as an exhibit to, and incorporated by reference from the Registrant's
     Quarterly Report on Form 10-Q filed with the Commission on February 12,
     2002.
 
 (7) Filed as an exhibit to, and incorporated by reference from the Registrant's
     Quarterly Report on Form 10-Q filed with the Commission on May 13, 2002.
 
 (8) Filed as an exhibit to, and incorporated by reference from the Registrant's
     Annual Report on Form 10-K filed with the Commission on December 10, 2002.
 
 (9) Filed as an exhibit to, and incorporated by reference from the Registrant's
     Quarterly Report on Form 10-Q filed with the Commission on February 12,
     2003.
 
(10) Filed as an exhibit to, and incorporated by reference from the Registrant's
     Quarterly Report on Form 10-Q filed with the Commission on August 11, 2003.
 
(11) Filed as an exhibit to, and incorporated by reference from the Registrant's
     Annual Report on Form 10-K filed with the Commission on December 10, 2003.
 
(12) Filed as Appendix B, and incorporated by reference from the Registrant's
     Definitive Proxy Statement filed with the Commission on January 23, 2004.
 
(13) Filed as an exhibit to, and incorporated by reference from the Registrant's
     Quarterly Report on Form 10-Q filed with the Commission on February 12,
     2004.
 
(14) Filed as an exhibit to, and incorporated by reference from the Registrant's
     Quarterly Report on Form 10-Q filed with the Commission on May 7, 2004.
 
   * Management contract, or compensatory plan or arrangement.
 
  ** Substantially similar change in control severance protection agreements
     have been entered into with William P. Noglows, H. Carol Bernstein,
     Victoria J. Brush, Jean Pol Delrue, William S. Johnson, Hiroyuki Nishiya,
     Daniel J. Pike, Thomas S. Roman, Stephen R. Smith, Clifford L. Spiro, Adam
     F. Weisman and Daniel S. Wobby, with differences only in the amount of
     payments and benefits to be received by such persons.
 
                                        59

 
  *** Substantially similar deposit share agreements have been entered into with
      H. Carol Bernstein, William S. Johnson, Matthew Neville and Daniel S.
      Wobby with differences only in the amount of initial deposit made and
      deposit shares purchased by such persons.
 
  +   This Exhibit has been filed separately with the Commission pursuant to the
      grant of a confidential treatment request. The confidential portions of
      this Exhibit have been omitted and are marked by an asterisk.
 
                                        60

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

                                             
                                                CABOT MICROELECTRONICS CORPORATION
 
Date: December 8, 2004                          /s/ WILLIAM P. NOGLOWS
                                                --------------------------------------------------------
                                                William P. Noglows
                                                Chairman of the Board, President and Chief Executive
                                                Officer
                                                [Principal Executive Officer]
 
Date: December 8, 2004                          /s/ WILLIAM S. JOHNSON
                                                --------------------------------------------------------
                                                William S. Johnson
                                                Vice President, Chief Financial Officer and Treasurer
                                                [Principal Financial Officer]
 
Date: December 8, 2004                          /s/ THOMAS S. ROMAN
                                                --------------------------------------------------------
                                                Thomas S. Roman
                                                Corporate Controller
                                                [Principal Accounting Officer]

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

                                             
Date: December 8, 2004                          /s/ WILLIAM P. NOGLOWS
                                                --------------------------------------------------------
                                                William P. Noglows
                                                Chairman of the Board, President and Chief Executive
                                                Officer
                                                [Director]
 
Date: December 8, 2004                          /s/ JUAN ENRIQUEZ-CABOT*
                                                --------------------------------------------------------
                                                Juan Enriquez-Cabot
                                                [Director]
 
Date: December 8, 2004                          /s/ JOHN P. FRAZEE, JR.*
                                                --------------------------------------------------------
                                                John P. Frazee, Jr.
                                                [Director]
 
Date: December 8, 2004                          /s/ H. LAURANCE FULLER*
                                                --------------------------------------------------------
                                                H. Laurance Fuller*
                                                [Director]

 
                                        61


                                             
 
Date: December 8, 2004                          /s/ J. JOSEPH KING*
                                                --------------------------------------------------------
                                                J. Joseph King
                                                [Director]
 
Date: December 8, 2004                          /s/ RONALD L. SKATES*
                                                --------------------------------------------------------
                                                Ronald L. Skates
                                                [Director]
 
Date: December 8, 2004                          /s/ STEVEN V. WILKINSON*
                                                --------------------------------------------------------
                                                Steven V. Wilkinson
                                                [Director]

 
---------------
 
* by H. Carol Bernstein as Attorney-in-fact pursuant to the requirements of
  section 13 or 15(d) of the Securities Exchange Act of 1934.
 
                                        62