##### Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q



|  |  |                                                                                             
|- |  | --------------------------------------------------------------------------------------------
|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 
|  | 
|  |  | For the quarterly period ended March 31, 2004                                               
|  | 
|  |  | or                                                                                          
|  | 
| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
|  | 
|  |  | For the transition period from                      to                                      



Commission File No.
000-13059



CERADYNE, INC.

(Exact name of Registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 33-0055414                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|3169 Redhill Avenue, Costa Mesa, CA                            |  | 92626                               
|(Address of principal executive)                               |  | (Zip Code)                          



Registrants
telephone number, including area code (714) 549-0421



N/A

(Former name, former address and former fiscal year, if changed since last report)



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 whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).



Yes  x    No ̈



Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.



|                             |  |                              
|---------------------------- |  | -----------------------------
|Class                        |  | Outstanding at March 31, 2004
|Common Stock, $.01 par value |  | 15,947,654 Shares            



Page 1 of 27 Pages



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CERADYNE, INC.



|                     |  |                                                                                            |  |         
|-------------------- |  | ------------------------------------------------------------------------------------------ |  | --------
|                     |  | INDEX                                                                                      |  | PAGE NO.
|                     |  |                                                                                           
|PART I.              |  | FINANCIAL INFORMATION                                                                      |  |         
|                     |  |                                                                                           
|Item 1.              |  | Unaudited Condensed Consolidated Financial Statements                                      |  |         
|                     |  |                                                                                           
|                     |  | Condensed Consolidated Balance SheetsMarch 31, 2004 and December 31, 2003                 |  | 3-4     
|                     |  |                                                                                           
|                     |  | Condensed Consolidated Statements of IncomeThree Months Ended March 31, 2004 and 2003     |  | 5       
|                     |  |                                                                                           
|                     |  | Condensed Consolidated Statements of Cash FlowsThree Months Ended March 31, 2004 and 2003 |  | 6       
|                     |  |                                                                                           
|                     |  | Condensed Notes to Consolidated Financial Statements                                       |  | 7-13    
|                     |  |                                                                                           
|Item 2.              |  | Managements Discussion and Analysis of Financial Condition and Results of Operations      |  | 14-19   
|                     |  |                                                                                           
|Item 3.              |  | Quantitative and Qualitative Disclosures About Market Risk                                 |  | 19      
|                     |  |                                                                                           
|Item 4.              |  | Controls and Procedures                                                                    |  | 19      
|                     |  |                                                                                           
|PART II.             |  | OTHER INFORMATION                                                                          |  |         
|                     |  |                                                                                           
|Item 1.              |  | Legal Proceedings                                                                          |  | 20      
|                     |  |                                                                                           
|Items 2, 3, 4 and 5. |  | N/A                                                                                        |  | 20      
|                     |  |                                                                                           
|Item 6.              |  | Exhibits and Reports on Form 8-K                                                           |  | 20      
|                     |  |                                                                                           
|                     |  | SIGNATURE                                                                                  |  | 21      
|                     |  |                                                                                           
|                     |  | Certification of Principal Executive Officer                                               |  | 23 & 25 
|                     |  |                                                                                           
|                     |  | Certification of Principal Financial Officer                                               |  | 24 & 26 



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CERADYNE, INC.



FORM 10-Q

FOR THE QUARTER ENDED



March 31, 2004



|PART  I. | FINANCIAL INFORMATION
|-------- | ---------------------



|Item  1. | Unaudited Condensed Consolidated Financial Statements
|-------- | -----------------------------------------------------



CERADYNE, INC.

CONSOLIDATED BALANCE SHEETS

ASSETS

(Amounts in thousands)



|                                                                                                                                                 |  |                          |         |   |                      |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------ | ------- | - | -------------------- | - | ------- | -
|                                                                                                                                                 |  | March 31,2004(Unaudited) |         |   | December 31,2003 (a) |  
|CURRENT ASSETS                                                                                                                                   |  |                          |         |   |                      |   |         |  
|Cash and cash equivalents                                                                                                                        |  | $                        | 3,287   |   |                      | $ | 11,462  |  
|Short-term investments                                                                                                                           |  |                          | 27,893  |   |                      |   | 19,202  |  
|Accounts receivable, net of allowances for doubtful accounts of approximately $97 and $112 at March 31, 2004 and December 31, 2003,
respectively |  |                          | 23,709  |   |                      |   | 18,694  |  
|Other receivables                                                                                                                                |  |                          | 418     |   |                      |   | 449     |  
|Inventories, net                                                                                                                                 |  |                          | 18,514  |   |                      |   | 16,921  |  
|Production tooling                                                                                                                               |  |                          | 3,670   |   |                      |   | 3,690   |  
|Prepaid expenses and other                                                                                                                       |  |                          | 3,962   |   |                      |   | 3,328   |  
|Deferred tax asset                                                                                                                               |  |                          | 1,325   |   |                      |   | 1,325   |  
|                                                                                                                                                 |  |                          |         |   |                      |   |         |  
|TOTAL CURRENT ASSETS                                                                                                                             |  |                          | 82,778  |   |                      |   | 75,071  |  
|                                                                                                                                                 |  |                          |         |   |                      |   |         |  
|PROPERTY, PLANT & EQUIPMENT, at cost                                                                                                             |  |                          |         |   |                      |   |         |  
|Land                                                                                                                                             |  |                          | 2,586   |   |                      |   | 2,586   |  
|Buildings and improvements                                                                                                                       |  |                          | 5,582   |   |                      |   | 5,581   |  
|Machinery and equipment                                                                                                                          |  |                          | 41,565  |   |                      |   | 38,322  |  
|Leasehold improvements                                                                                                                           |  |                          | 5,763   |   |                      |   | 4,840   |  
|Office equipment                                                                                                                                 |  |                          | 4,171   |   |                      |   | 3,958   |  
|Construction in progress                                                                                                                         |  |                          | 2,674   |   |                      |   | 1,820   |  
|                                                                                                                                                 |  |                          |         |   |                      |   |         |  
|                                                                                                                                                 |  |                          | 62,341  |   |                      |   | 57,107  |  
|Less accumulated depreciation and amortization                                                                                                   |  |                          | (30,435 | ) |                      |   | (29,482 | )
|                                                                                                                                                 |  |                          |         |   |                      |   |         |  
|                                                                                                                                                 |  |                          | 31,906  |   |                      |   | 27,625  |  
|                                                                                                                                                 |  |                          |         |   |                      |   |         |  
|GOODWILL                                                                                                                                         |  |                          | 1,511   |   |                      |   | 1,511   |  
|                                                                                                                                                 |  |                          |         |   |                      |   |         |  
|TOTAL ASSETS                                                                                                                                     |  | $                        | 116,195 |   |                      | $ | 104,207 |  
|                                                                                                                                                 |  |                          |         |   |                      |   |         |  

---

|(a) | Derived from audited financial statements.
|--- | ------------------------------------------



See accompanying condensed notes to Consolidated Financial Statements



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CERADYNE, INC.

CONSOLIDATED BALANCE SHEETS

LIABILITIES AND SHAREHOLDERS EQUITY

(Amounts in thousands, except share data)



|                                                                                                                                                                      |  |                           |         |                      |   |        
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ------- | -------------------- | - | -------
|                                                                                                                                                                      |  | March 31, 2004(Unaudited) |         | December 31, 2003(a)
|CURRENT LIABILITIES                                                                                                                                                   |  |                           |         |                      |   |        
|Accounts payable                                                                                                                                                      |  |                           | 13,917  |                      |   | 10,931 
|Accrued expenses                                                                                                                                                      |  |                           | 7,542   |                      |   | 3,621  
|                                                                                                                                                                      |  |                           |         |                      |   |        
|TOTAL CURRENT LIABILITIES                                                                                                                                             |  |                           | 21,459  |                      |   | 14,552 
|DEFERRED TAX LIABILITY                                                                                                                                                |  |                           | 2,878   |                      |   | 2,878  
|                                                                                                                                                                      |  |                           |         |                      |   |        
|TOTAL LIABILITIES                                                                                                                                                     |  |                           | 24,337  |                      |   | 17,430 
|SHAREHOLDERS EQUITY                                                                                                                                                  |  |                           |         |                      |   |        
|Common stock, $.01 par value, Authorized18,000,000 shares, Outstanding15,947,654 shares and 15,931,110 shares at March 31, 2004
and December 31, 2003, respectively |  |                           | 106     |                      |   | 85     
|Additional paid in capital                                                                                                                                            |  |                           | 72,459  |                      |   | 72,411 
|Retained earnings                                                                                                                                                     |  |                           | 19,293  |                      |   | 14,281 
|                                                                                                                                                                      |  |                           |         |                      |   |        
|TOTAL SHAREHOLDERS EQUITY                                                                                                                                            |  |                           | 91,858  |                      |   | 86,777 
|                                                                                                                                                                      |  |                           |         |                      |   |        
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                            |  | $                         | 116,195 |                      | $ | 104,207
|                                                                                                                                                                      |  |                           |         |                      |   |        

---

|(a) | Derived from audited financial statements.
|--- | ------------------------------------------







See accompanying condensed notes to Consolidated Financial Statements



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CERADYNE, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Amounts in thousands, except share data)



|                                         |  |                            |        |      |   |        |  
|---------------------------------------- |  | -------------------------- | ------ | ---- | - | ------ | -
|                                         |  | THREE MONTHSENDEDMarch 31, |       
|                                         |  | 2004                       |        | 2003 |  
|                                         |  | (Unaudited)                |       
|NET SALES                                |  | $                          | 36,687 |      | $ | 19,182 |  
|COST OF PRODUCT SALES                    |  |                            | 25,034 |      |   | 14,265 |  
|                                         |  |                            |        |      |   |        |  
|Gross profit                             |  |                            | 11,653 |      |   | 4,917  |  
|                                         |  |                            |        |      |   |        |  
|OPERATING EXPENSES                       |  |                            |        |      |   |        |  
|Selling                                  |  |                            | 711    |      |   | 506    |  
|General and administrative               |  |                            | 2,607  |      |   | 1,636  |  
|Research and development                 |  |                            | 441    |      |   | 471    |  
|                                         |  |                            |        |      |   |        |  
|                                         |  |                            | 3,759  |      |   | 2,613  |  
|                                         |  |                            |        |      |   |        |  
|Income from operations                   |  |                            | 7,894  |      |   | 2,304  |  
|                                         |  |                            |        |      |   |        |  
|OTHER INCOME (EXPENSE):                  |  |                            |        |      |   |        |  
|Royalty income                           |  |                            | 30     |      |   | 30     |  
|Interest income                          |  |                            | 165    |      |   | 3      |  
|Interest expense                         |  |                            |       |      |   | (10    | )
|Miscellaneous                            |  |                            | 34     |      |   | (1     | )
|                                         |  |                            |        |      |   |        |  
|                                         |  |                            | 229    |      |   | 22     |  
|                                         |  |                            |        |      |   |        |  
|Income before provision for income taxes |  |                            | 8,123  |      |   | 2,326  |  
|PROVISION FOR INCOME TAXES               |  |                            | 3,111  |      |   | 814    |  
|                                         |  |                            |        |      |   |        |  
|NET INCOME                               |  | $                          | 5,012  |      | $ | 1,512  |  
|                                         |  |                            |        |      |   |        |  
|BASIC INCOME PER SHARE                   |  | $                          | 0.31   |      | $ | 0.12   |  
|                                         |  |                            |        |      |   |        |  
|DILUTED INCOME PER SHARE                 |  | $                          | 0.31   |      | $ | 0.11   |  
|                                         |  |                            |        |      |   |        |  







See accompanying condensed notes to Consolidated Financial Statements



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CERADYNE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)



|                                                                                            |  |                             |         |   |                 |   |        |  
|------------------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | --------------- | - | ------ | -
|                                                                                            |  | THREE MONTHS ENDEDMARCH 31, |        
|                                                                                            |  | 2004(Unaudited)             |         |   | 2003(Unaudited) |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                       |  |                             |         |   |                 |   |        |  
|Net Income                                                                                  |  | $                           | 5,012   |   |                 | $ | 1,512  |  
|ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES: |  |                             |         |   |                 |   |        |  
|Depreciation and amortization                                                               |  |                             | 953     |   |                 |   | 819    |  
|Deferred income taxes                                                                       |  |                             |        |   |                 |   | 809    |  
|Change in operating assets and liabilities:                                                 |  |                             |         |   |                 |   |        |  
|Accounts receivable, net                                                                    |  |                             | (5,015  | ) |                 |   | (3,192 | )
|Other receivables                                                                           |  |                             | 31      |   |                 |   | 4      |  
|Inventories, net                                                                            |  |                             | (1,593  | ) |                 |   | (227   | )
|Production tooling                                                                          |  |                             | 20      |   |                 |   | (94    | )
|Prepaid expenses and other                                                                  |  |                             | (634    | ) |                 |   | 132    |  
|Accounts payable                                                                            |  |                             | 2,986   |   |                 |   | 1,485  |  
|Accrued expenses                                                                            |  |                             | 3,921   |   |                 |   | 723    |  
|Warranty reserve                                                                            |  |                             |        |   |                 |   | (415   | )
|Deferred revenue                                                                            |  |                             |        |   |                 |   | (54    | )
|NET CASH PROVIDED BY OPERATING ACTIVITIES                                                   |  |                             | 5,681   |   |                 |   | 1,502  |  
|                                                                                            |  |                             |         |   |                 |   |        |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                       |  |                             |         |   |                 |   |        |  
|Purchases of property, plant and equipment                                                  |  |                             | (5,234  | ) |                 |   | (720   | )
|Purchases of short-term investments                                                         |  |                             | (8,691  | ) |                 |   |       |  
|                                                                                            |  |                             |         |   |                 |   |        |  
|NET CASH USED IN INVESTING ACTIVITIES                                                       |  |                             | (13,925 | ) |                 |   | (720   | )
|                                                                                            |  |                             |         |   |                 |   |        |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                       |  |                             |         |   |                 |   |        |  
|Proceeds from issuance of stock due to exercise of options                                  |  |                             | 69      |   |                 |   | 245    |  
|Payments on long-term debt                                                                  |  |                             |        |   |                 |   | (25    | )
|Reduction in bank line of credit                                                            |  |                             |        |   |                 |   | (890   | )
|                                                                                            |  |                             |         |   |                 |   |        |  
|NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                                         |  |                             | 69      |   |                 |   | (670   | )
|                                                                                            |  |                             |         |   |                 |   |        |  
|INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                            |  |                             | (8,175  | ) |                 |   | 112    |  
|                                                                                            |  |                             |         |   |                 |   |        |  
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                              |  |                             | 11,462  |   |                 |   | 350    |  
|                                                                                            |  |                             |         |   |                 |   |        |  
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                                    |  | $                           | 3,287   |   |                 | $ | 462    |  
|                                                                                            |  |                             |         |   |                 |   |        |  
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION                                           |  |                             |         |   |                 |   |        |  
|Interest paid                                                                               |  | $                           |        |   |                 | $ | 10     |  
|                                                                                            |  |                             |         |   |                 |   |        |  
|Income taxes paid                                                                           |  | $                           | 36      |   |                 | $ | 12     |  
|                                                                                            |  |                             |         |   |                 |   |        |  





See accompanying condensed notes to Consolidated Financial Statements



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CERADYNE, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2004

(Unaudited)



|1. | Basis of Presentation
|-- | ---------------------



The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2004 are not
necessarily indicative of the results that may be expected for the year ended December 31, 2004.



The balance sheet at December 31, 2003 has been derived from the audited financial statements at that date, but does not include all of the information
and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the Consolidated Financial Statements and Notes to Financial Statements included in Ceradynes Annual Report
on Form 10-K for the year ended December 31, 2003.



|2. | Stock-Based Compensation
|-- | ------------------------



The Company applies the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees,
in accounting for stock-based compensation; therefore, no compensation expense has been recognized for its fixed stock option plans as options are granted at fair market value based upon the closing price on the grant date. The Company has adopted
the disclosure requirements for SFAS No. 123, Accounting for Stock-Based Compensation. On December 31, 2002, the FASB issued SFAS No. 148, Accounting for Stock Based Compensation-Transition and Disclosure, which amends SFAS
No. 123. SFAS No. 148 requires more prominent and frequent disclosures about the effects of stock-based compensation, which the Company adopted in the year ended December 31, 2002. Accordingly, if compensation expense for the Companys stock
options had been recognized, based upon the fair value of awards granted, the Companys net income and earnings per share would have been reduced to the following pro forma amounts:



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|                                                                                                                                                |  |                             |            |   |      |   |            |  
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                                                                                                |  | THREE MONTHS ENDEDMARCH 31, |           
|                                                                                                                                                |  | 2004                        |            |   | 2003 |  
|Net income, as reported                                                                                                                         |  | $                           | 5,012,000  |   |      | $ | 1,512,000  |  
|Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax
effects |  |                             | (189,000   | ) |      |   | (60,000    | )
|                                                                                                                                                |  |                             |            |   |      |   |            |  
|Pro forma net income                                                                                                                            |  | $                           | 4,823,000  |   |      | $ | 1,452,000  |  
|                                                                                                                                                |  |                             |            |   |      |   |            |  
|Net income per share:                                                                                                                           |  |                             |            |   |      |   |            |  
|Basicas reported                                                                                                                               |  | $                           | 0.31       |   |      | $ | 0.12       |  
|                                                                                                                                                |  |                             |            |   |      |   |            |  
|Basicpro forma                                                                                                                                 |  | $                           | 0.30       |   |      | $ | 0.11       |  
|                                                                                                                                                |  |                             |            |   |      |   |            |  
|Dilutedas reported                                                                                                                             |  | $                           | 0.31       |   |      | $ | 0.11       |  
|                                                                                                                                                |  |                             |            |   |      |   |            |  
|Dilutedpro forma                                                                                                                               |  | $                           | 0.30       |   |      | $ | 0.11       |  
|                                                                                                                                                |  |                             |            |   |      |   |            |  
|Weighted average shares outstanding:                                                                                                            |  |                             |            |   |      |   |            |  
|Basic                                                                                                                                           |  |                             | 15,940,478 |   |      |   | 12,830,211 |  
|Diluted                                                                                                                                         |  |                             | 16,294,705 |   |      |   | 13,383,491 |  



There were no options
granted during the first quarter ended March 31, 2004.



|3. | Inventories, net
|-- | ----------------



Inventories are valued at the lower of cost (first in, first out) or market. Inventory costs include the cost of material, labor and manufacturing
overhead. The following is a summary of the inventory components as of March 31, 2004 and December 31, 2003 (in thousands):



|                  |  |               |        |                  |   |       
|----------------- |  | ------------- | ------ | ---------------- | - | ------
|                  |  | MARCH 31,2004 |        | DECEMBER 31,2003
|Raw Materials     |  | $             | 5,998  |                  | $ | 3,781 
|Work-In-Process   |  |               | 9,394  |                  |   | 9,494 
|Finished Goods    |  |               | 3,122  |                  |   | 3,646 
|                  |  |               |        |                  |   |       
|Total Inventories |  | $             | 18,514 |                  | $ | 16,921
|                  |  |               |        |                  |   |       





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|3. | Recent Accounting Pronouncements
|-- | --------------------------------



In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities -an interpretation of ARB No. 51. This
Interpretation, as revised in December 2003, addresses consolidation by business enterprises of variable interest entities, which have one or both of the following characteristics: (i) the equity investment at risk is not sufficient to permit the
entity to finance its activities without additional subordinated financial support from other parties, which is provided through other interests that will absorb some or all of the expected losses of the entity, and (ii) the equity investors lack an
essential characteristic of a controlling financial interest. It applies to all variable interest entities established after January 31, 2003 and was effective July 1, 2003 for any variable interest entity acquired prior to February 1, 2003. The
application of FIN 46 did not have an impact on the Companys consolidated financial statements.



In April 2003, the FASB issued SFAS No. 149, Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities. This statement
is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. It amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. SFAS 149 amends SFAS 133 for decisions made as part of the Derivatives Implementation Group process that effectively required amendments to SFAS 133 in connection with other FASB
projects dealing with financial instruments and in connection with implementation issues raised in relation to the application of the definition of a derivative. The application of this statement did not have an impact on the Companys
consolidated financial statements.



In May 2003, the FASB
issued SFAS No. 150, Certain Financial Instruments with Characteristics of Both Liabilities and Equity. This statement establishes standards for how a company clarifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires a company to classify such instruments as liabilities, whereas they previously may have been classified as equity. SFAS 150 is effective for all financial instruments entered into or modified after May 31,
2003, and otherwise was effective July 1, 2003. The application of this statement did not have an impact on the Companys consolidated financial statements.



|4. | Net Income Per Share
|-- | --------------------



Basic net income per share is computed by dividing net income available to common stockholders by the weighted average number of common shares
outstanding. Diluted net income per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding plus the effect of any dilutive stock options using the treasury stock method.



The following is a summary of the number of shares used for
the computation of net income per common and common equivalent share:



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|                                              |  |                            |  |           
|--------------------------------------------- |  | -------------------------- |  | ----------
|                                              |  | THREE MONTHS ENDEDMARCH 31
|                                              |  | 2004                       |  | 2003      
|Weighted average number of shares outstanding |  | 15,940,478                 |  | 12,830,211
|Dilutive stock options                        |  | 354,227                    |  | 553,280   
|                                              |  |                            |  |           
|Number of shares used in diluted computations |  | 16,294,705                 |  | 13,383,491
|                                              |  |                            |  |           



The number of shares
outstanding and earnings per share have been adjusted to reflect the three-for-two stock split in the form of a 50% stock dividend effective on April 7, 2004. See Note 10.



|5. | Line of Credit
|-- | --------------



The Company entered into a new unsecured bank line of credit during August 2003 which expires in August 2005. The Company may borrow up to $10,000,000
with interest on borrowings charged at 1.75 percentage points in excess of the LIBOR rate for a period selected by the Company. The LIBOR rates for the periods that could be selected ranged from approximately 1.09 percent to 1.35 percent at March
31, 2004. The bank line of credit did not have an outstanding balance at March 31, 2004. Pursuant to the bank line of credit, the Company is subject to certain covenants, which include, among other things, the maintenance of specified minimum
amounts of tangible net worth and quick assets to current liabilities ratio. At March 31, 2004, the Company was in compliance with these covenants.



|6. | Disclosure About Segments of an Enterprise and Related Information
|-- | ------------------------------------------------------------------



The Company serves its markets and manages its business through three divisions, each of which has its own manufacturing facilities and administrative and
selling functions. The Companys Advanced Ceramic Operations, located in Costa Mesa and Irvine, California, primarily produces armor and orthodontic products, diesel engine parts, components for semiconductor equipment, and houses the
Companys sintered reaction bonded silicon nitride (SRBSN) research and development activities. The Companys cathode development and production are handled through its Semicon Associates division located in Lexington, Kentucky. Fused
silica products, including missile radomes, are produced at the Companys Thermo Materials division located in Scottdale and Clarkson, Georgia.





10



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##### Table of Contents

Ceradynes facilities and manufacturing structure is summarized in the following table:



|                                                                                                                                                                                                                             |  |                                                                                                                                                                                                                                                                                                                                                                                                                 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|FACILITY LOCATION                                                                                                                                                                                                            |  | PRODUCTS                                                                                                                                                                                                                                                                                                                                                                                                        
|Ceradyne Advanced Ceramic Operations Costa Mesa and Irvine, California Approximately 126,000 square feet with an
additional 23,500 square feet leased in April 2004 that will be occupied in May 2004 Lexington,
Kentucky(1) |  | Defense Applications:       Lightweight ceramic armor  Industrial Applications:       Ceralloy® 147 SRBSN wear parts       Semiconductor
equipment components       Precision ceramics  Automotive/Diesel Applications:       Ceralloy® 147 SRBSN automotive/diesel engine parts       Ceramic armor system components for civilian vehicles  Commercial Applications:       Orthodontic ceramic brackets
|                                                                                                                                                                                                                             | 
|Ceradyne Semicon Associates Lexington, Kentucky Approximately 35,000 square feet                                                                                                                                             |  | Industrial Applications:       Ceramic-impregnated dispenser cathodes for microwave tubes, lasers and cathode ray tubes       Samarium cobalt magnets                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                             | 
|Ceradyne Thermo Materials Scottdale and Clarkson, Georgia Approximately 135,000 square feet                                                                                                                                  |  | Defense Applications:       Missile radomes (nose cones)  Industrial Applications:       Glass
tempering rolls       Metallurgical tooling       Castable and other fused silica products       Crucibles for photovoltaic solar cell applications                                                                                                                                                         

---

|(1) | We are in the process of renovating and retrofitting a 115,000 square foot building in Lexington, Kentucky that we purchased in October 2003. We anticipate that it will be put into
service by the end of the second quarter 2004.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The financial
information for all segments is presented below:



11



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##### Table of Contents

Ceradyne, Inc.

Segment Disclosures

(Amounts in thousands)



Three Months Ended March 31,



|                                                 |  |                      |         |                   |   |                  |  |       |       |      |   |       |  |      |       |      |   |       |  |   |         |  |   |       
|------------------------------------------------ |  | -------------------- | ------- | ----------------- | - | ---------------- |  | ----- | ----- | ---- | - | ----- |  | ---- | ----- | ---- | - | ----- |  | - | ------- |  | - | ------
|                                                 |  | Advanced Ceramic Ops |         | SemiconAssociates |   | Thermo Materials |  | Total
|                                                 |  | 2004                 |         | 2003              |   | 2004             |  | 2003  |       | 2004 |   | 2003  |  | 2004 |       | 2003
|Revenue from External Customers                  |  | $                    | 30,964  |                   | $ | 14,418           |  | $     | 1,842 |      | $ | 1,736 |  | $    | 3,881 |      | $ | 3,028 |  | $ | 36,687  |  | $ | 19,182
|                                                 |  |                      |         |                   |   |                  |  |       |       |      |   |       |  |      |       |      |   |       |  |   |         |  |   |       
|Depreciation and Amortization                    |  | $                    | 725     |                   | $ | 586              |  | $     | 97    |      | $ | 117   |  | $    | 131   |      | $ | 116   |  | $ | 953     |  | $ | 819   
|                                                 |  |                      |         |                   |   |                  |  |       |       |      |   |       |  |      |       |      |   |       |  |   |         |  |   |       
|Segment Income before Provision for Income Taxes |  | $                    | 7,811   |                   | $ | 2,052            |  | $     | 144   |      | $ | 173   |  | $    | 168   |      | $ | 101   |  | $ | 8,123   |  | $ | 2,326 
|                                                 |  |                      |         |                   |   |                  |  |       |       |      |   |       |  |      |       |      |   |       |  |   |         |  |   |       
|Segment Assets                                   |  | $                    | 100,764 |                   | $ | 44,209           |  | $     | 5,769 |      | $ | 6,181 |  | $    | 9,662 |      | $ | 7,485 |  | $ | 116,195 |  | $ | 57,875
|                                                 |  |                      |         |                   |   |                  |  |       |       |      |   |       |  |      |       |      |   |       |  |   |         |  |   |       
|Expenditures for PP&E                            |  | $                    | 4,826   |                   | $ | 545              |  | $     | 90    |      | $ | 67    |  | $    | 318   |      | $ | 108   |  | $ | 5,234   |  | $ | 720   
|                                                 |  |                      |         |                   |   |                  |  |       |       |      |   |       |  |      |       |      |   |       |  |   |         |  |   |       



The following is revenue by product
line for Advanced Ceramic Operations for the quarter ended March 31:



|             |  |      |        |      |   |       
|------------ |  | ---- | ------ | ---- | - | ------
|             |  | 2004 |        | 2003
|Armor        |  | $    | 23,024 |      | $ | 9,602 
|Automotive   |  |      | 2,579  |      |   | 882   
|Orthodontics |  |      | 2,910  |      |   | 2,044 
|Industrial   |  |      | 2,451  |      |   | 1,890 
|             |  |      |        |      |   |       
|             |  | $    | 30,964 |      | $ | 14,418
|             |  |      |        |      |   |       



Ceradyne, Inc.

Segment Disclosures

for Net
Sales by Area

Three Months Ended March 31,



|                         |  |                      |   |  |                    |   |  |                  |   |  |       |   |  |      |   |  |      |   |  |      |   |  |      |  
|------------------------ |  | -------------------- | - |  | ------------------ | - |  | ---------------- | - |  | ----- | - |  | ---- | - |  | ---- | - |  | ---- | - |  | ---- | -
|                         |  | Advanced Ceramic Ops |   |  | Semicon Associates |   |  | Thermo Materials |   |  | Total |  
|                         |  | 2004                 |   |  | 2003               |   |  | 2004             |   |  | 2003  |   |  | 2004 |   |  | 2003 |   |  | 2004 |   |  | 2003 |  
|U.S. Net Sales (in %)    |  | 79                   | % |  | 73                 | % |  | 4                | % |  | 8     | % |  | 7    | % |  | 11   | % |  | 90   | % |  | 92   | %
|                         |  |                      |   |  |                    |   |  |                  |   |  |       |   |  |      |   |  |      |   |  |      |   |  |      |  
|Foreign Net Sales (in %) |  | 5                    | % |  | 2                  | % |  | 1                | % |  | 1     | % |  | 4    | % |  | 5    | % |  | 10   | % |  | 8    | %
|                         |  |                      |   |  |                    |   |  |                  |   |  |       |   |  |      |   |  |      |   |  |      |   |  |      |  
|Total Net Sales (in %)   |  | 84                   | % |  | 75                 | % |  | 5                | % |  | 9     | % |  | 11   | % |  | 16   | % |  | 100  | % |  | 100  | %
|                         |  |                      |   |  |                    |   |  |                  |   |  |       |   |  |      |   |  |      |   |  |      |   |  |      |  



12



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##### Table of Contents

|8. | Legal Proceedings
|-- | -----------------



From time to time, the Company is involved in legal proceedings incidental to its business. The Company believes that pending actions, individually and in
the aggregate, will not have a material adverse effect on its financial condition, results of operations or cash flows, and that adequate provision has been made for the resolution of such actions and proceedings.



|9. | Commitments and Contingencies
|-- | -----------------------------



The Company leases certain of its manufacturing facilities under noncancelable operating leases expiring at various dates through October 2015. The
Company incurred rental expense under these leases of $225,000 and $236,000 for the three months ended 2004 and 2003, respectively. The approximate minimum rental commitments required under existing noncancelable leases as of March 31, 2004 are as
follows:



|           |  |   |          
|---------- |  | - | ---------
|2004       |  | $ | 679,000  
|2005       |  |   | 822,000  
|2006       |  |   | 227,000  
|2007       |  |   | 234,000  
|2008       |  |   | 240,000  
|Thereafter |  |   | 1,897,000
|           |  |   |          
|           |  | $ | 4,099,000
|           |  |   |          



|10. | Subsequent Event
|--- | ----------------



On March 9, 2004, the Companys Board of Directors approved a 3-for-2 stock split of the Companys common stock in the form of a 50% stock
dividend. The stock dividend was distributed on April 7, 2004 to stockholders of record as of the close of business on March 30, 2004. All share and per share amounts have been restated to give retroactive effect for the stock split.



13



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##### Table of Contents

|        |  |                                                                                      
|------- |  | -------------------------------------------------------------------------------------
|Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations



Preliminary Note
Regarding Forward-Looking Statements



This Quarterly Report
on Form 10-Q contains statements which may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. One generally can identify
forward-looking statements by the use of forward-looking terminology such as believes, may, will, expects, intends, estimates, anticipates, plans,
seeks, or continues, or the negative thereof, or variations thereon, or similar terminology. Forward-looking statements regarding future events and the future performance of the Company involve risks and uncertainties that
could cause actual results to differ materially. Reference is made to the risks and uncertainties which are described in Note 8, Legal Proceedings, and Note 9, Commitments and Contingencies, of Condensed Notes to Consolidated
Financial Statements on page 14 of this report, and in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2003, as filed with the Securities and Exchange Commission, under Item 1-Business, including the
section therein entitled Risk Factors, and Item 7-Managements Discussion and Analysis of Financial Condition and Results of Operations.



Overview



We develop, manufacture and market advanced technical ceramic products and components for defense, industrial, automotive/diesel and commercial
applications. Our primary products include lightweight ceramic armor for soldiers and military helicopters; ceramic orthodontic brackets; ceramic diesel engine components; ceramic-impregnated dispenser cathodes for microwave tubes, lasers and
cathode ray tubes; and ceramic industrial components for erosion and corrosion resistant applications. Our customers include the U.S. government, prime government contractors and large industrial and commercial manufacturers.



We categorize our products into four market applications. The table below
shows the percentage contribution to our total sales of each market application in the different time periods.



|                  |  |                             |   |  |       |  
|----------------- |  | --------------------------- | - |  | ----- | -
|                  |  | Three Months Ended March 31 |  
|                  |  | 2004                        |   |  | 2003  |  
|Defense           |  | 67.1                        | % |  | 57.6  | %
|Industrial        |  | 17.9                        |   |  | 26.7  |  
|Automotive/Diesel |  | 7.0                         |   |  | 5.0   |  
|Commercial        |  | 8.0                         |   |  | 10.7  |  
|                  |  |                             |   |  |       |  
|Total             |  | 100.0                       | % |  | 100.0 | %



The continuing primary
factor contributing to our recent growth in sales has been the increased demand by the U.S. military for ceramic body armor that protects soldiers. Recent military conflicts in Afghanistan and Iraq, as well as an increasingly unstable geopolitical
climate and the heightened risk of international conflicts, have resulted in increased orders for these products. The U.S. military has increasingly demanded that the modern soldier be equipped with ceramic body armor. As a result of this, we have
received a number of surge orders for the manufacture of ceramic body armor.



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##### Table of Contents

In September 2003, we received a four year indefinite quantity contract from the Department of Defense to
supply small arms protective inserts (SAPI) for the U.S. Army. The contract includes a base award for 2004 of approximately $29 million. During October 2003, the Department of Defense exercised an option under this contract for us to supply an
additional $14.3 million of SAPI body armor. In April 2004, we received additional orders of ceramic body armor systems totaling $17.2 million from the Department of Defense. We expect our shipments of ceramic body armor to be higher in the second
quarter of 2004 than in the first quarter of 2004. We expect that the increase in shipments will continue in 2004 due to the surge orders for the conflict in Iraq and as we complete production on current contracts. For the next several quarters, and
perhaps longer, fluctuations in sales of ceramic body armor are likely to be the biggest factor affecting our sales.



Although we expect demand for ceramic body armor to continue for many years, the quantity and timing of government orders depends on a number of factors
outside of our control, such as the amount of U.S. defense budget appropriations and the level of international conflicts. Moreover, ceramic armor contracts generally are awarded in an open competitive bidding process. Therefore, our future level of
sales of ceramic body armor will depend on our ability to successfully compete for this business.



In May 2003, the prime government contractor for the PAC-3 (Patriot Advanced Capability) missile selected Ceradyne to manufacture the technical ceramic
radome blank, diamond grind the radome blank to precise tolerances and assemble and test the radome components for incorporation on the PAC-3 missile. Previously, the prime contractor made the ceramic radome blank and we performed only the diamond
grinding. The prime contractor has provided us with funds to purchase most of the equipment and tooling required for this program. Installation of the equipment and tooling, and the leasehold improvements in the 25,000 square foot facility that we
leased adjacent to our facility in Scottdale, Georgia, were completed in the first quarter of 2004. Depending on the level of government funding for this program, we expect revenues from sales of radomes for the PAC-3 missile to increase from our
historic levels and to continue for several years.



Also in May
2003, we were selected to produce radomes for the Arrow Missile. We will manufacture the technical ceramic radome blank, diamond grind the radome blank to precise tolerances and assemble and test the radome components. We expect revenues from the
sales of the radomes for this system to begin in late 2004 and continue for several years.



Other existing products which we believe could have a significant impact on our growth over the long term include ceramic components for heavy-duty diesel truck engines, crucibles for the photovoltaic cell industry
and sales of orthodontic brackets.



Our largest diesel engine
components customer informed us in May 2003 that it will triple the number of ceramic cam rollers that it uses in each heavy-duty diesel truck engine from six to eighteen. We began to ship these additional components in the fourth quarter of 2003.



15



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##### Table of Contents

Results of Operations for the Three Months Ended March 31, 2004



Reference is made to the Companys Annual Report on Form 10-K for the
fiscal year ended December 31, 2003, for an analysis and detailed discussion of the Companys financial condition and results of operations for the period covered by that report.



Net Sales. Our net sales for the three months ended March 31, 2004 were $36.7 million, an increase of $17.5 million,
or 91.3%, from $19.2 million of net sales in the corresponding quarter of the prior year.



Net sales for our Advanced Ceramic Operations division for the three months ended March 31, 2004 were $31.0 million, an increase of $16.6 million, or 114.8%, from the $14.4 million in the corresponding quarter of the
prior year. The primary reason for this improvement was an increase of $12.1 million, or 126.0%, in net sales of ceramic body armor for defense customers, from the $9.6 million of net sales in the first quarter of 2003. This increase in net sales of
lightweight body armor for military personnel was caused by delivery of orders that were received in the fourth quarter 2003 and the first quarter 2004 from the U.S. Department of Defense. Net sales for our orthodontic bracket product line were $2.9
million, an increase of $0.9 million, or 42.3%, from net sales of $2.0 million in the corresponding quarter of the prior year. Net sales for our automotive/diesel component product line were $2.5 million, an increase of $1.6 million, or 177.8%, from
the $0.9 million in the corresponding quarter of the prior year. The main source of this increase was due to our largest diesel engine components customer tripling the number of ceramic cam rollers that it uses in each heavy-duty diesel truck engine
from six to eighteen. We began to ship these additional components in the fourth quarter of 2003 and that trend continued during the first quarter 2004.



Our Semicon Associates division had net sales for the three months ended March 31, 2004 of $1.8 million, an increase of $100,000, or 6.1%, from the $1.7
million in the corresponding quarter of the prior year. The increase in sales reflects higher shipments of microwave cathodes during the current quarter versus the same quarter last year.



Our Thermo Materials division posted net sales for the three months ended March 31, 2004 of $3.9 million, an increase of
$0.9 million, or 28.2%, from the $3.0 million in the corresponding quarter of the prior year.This improvement was due to increases of $500,000 in shipments of fused silica rolls, $200,000 in shipments of crucibles for photovoltaic cells and
$150,000 in shipments of defense related products.



Gross
Profit. Our gross profit was $11.6 million for the three months ended March 31, 2004, an increase of $6.7 million, or 137.0%, from $4.9 million in the corresponding prior year quarter. As a percentage of net sales, gross profit was 31.8% for the
three months ended March 31, 2004, compared to 25.6% for the corresponding prior year period.



Our Advanced Ceramic Operations division posted gross profit of $10.8 million for the three months ended March 31, 2004, an increase of $6.8 million, or 165.0%,



16



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##### Table of Contents

| | from $4.0 million in the corresponding prior year quarter. As a percentage of net sales, gross profit was 34.6% for the three months ended March 31, 2004, compared to 28.0% for the
corresponding prior year period.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | The improvement in gross profit during the three months ended March 31, 2004 was a result of an increase in armor and orthodontic bracket sales, an improved sales mix when compared
to the same period last year, improved absorption of fixed operating expenses, better manufacturing efficiencies and overall increased productivity.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Other factors contributing to the rise in the gross profit as a percentage of net sales during the first three months of 2004 in our Advanced Ceramic Operations division included
improved labor utilization, increased workflow through the production facilities, changes in the design of products and an improved sales mix. We also continued to implement lean manufacturing techniques, such as Demand Flow® Technology in the production of diesel engine
components, and we will continue to consider implementing this system, as well as other lean manufacturing techniques, into other product lines.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Our Semicon Associates division had gross profit of $328,000 for the three months ended March 31, 2004, a decrease of $49,000, or 13.0%, compared to $377,000 in the prior year
quarter. As a percentage of net sales, gross profit was 17.8% for the three months ended March 31, 2004, compared to 21.7% for the corresponding prior year period. The decrease in gross profit is attributed to charges to cost of product sales for
scrap.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Our Thermo Materials division had gross profit of $0.6 million for the three months ended March 31, 2004, an increase of $0.1 million, or 22.6%, compared to $0.5 million in the
prior year quarter. As a percentage of net sales, gross profit was 15.7% for the three months ended March 31, 2004, compared to 16.4% for the corresponding prior year period. The increase in gross profit in the first quarter of 2004 was due to the
increase in shipments of defense products.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Selling Expenses. Selling expenses were $0.7 million for the three months ended March 31, 2004, an increase of $0.2 million, or 40.0%, from $0.5 million in the corresponding
prior year quarter. Selling expenses, as a percentage of net sales, decreased from 2.6% for the three months ended March 31, 2003 to 1.9% of net sales for the three months ended March 31, 2004, primarily due to the increase in net sales and better
operating leverage.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | General and Administrative Expenses. General and administrative expenses for the three months ended March 31, 2004 were $2.6 million, an increase of $1.0 million, or 59.4%,
from $1.6 million in the corresponding prior year quarter. General and administrative expenses, as a percentage of net sales, decreased from 8.5% for the three months ended March 31, 2003 to 7.1% of net sales for the three months ended March 31,
2004. For the three months ended March 31, 2004, increases in salary, bonus and personnel expenses caused by increasing levels of sales primarily accounted for the rise in general and administrative expenses.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Research and Development. Research and development expenses for the three months ended March 31, 2004 were $441,000, a decrease of $30,000, or 6.4%,
| | ----------------------------------------------------------------------------------------------------------------------------------------------------



17



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##### Table of Contents

| | from $471,000 in the corresponding prior year quarter. The decrease in research and development expenses was primarily caused by research and development personnel charging time to
operational projects to meet current sales demands.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Other Income. Other income for the three months ended March 31, 2004 was $229,000, an increase of $197,000, or 615%, from $32,000 in the corresponding prior year period. The
major causes for the increase were a $162,000 increase in interest income to $165,000 for the three months ended March 31, 2004 because of higher cash balances.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Interest Expense. There was no interest expense for the three months ended March 31, 2004. This resulted in a decrease of $10,000 compared to the corresponding prior year
period. The decrease in interest expense was due to the payoff of all debt from the proceeds of the follow-on offering completed in July 2003.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Income Taxes. We used a combined federal and state tax rate of 38.3% for the three months ended March 31, 2004, resulting in a provision for taxes of $3.1 million, an
increase of $2.3 million, or 282.2%, from $0.8 million in the corresponding prior year period. The effective income tax rate was higher in the three months ending March 31, 2004 than the 35% effective income tax rate for the three months ended March
31, 2003 primarily because the manufacturing investment credit expired in California at the end of 2003.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Liquidity and Capital Resources
| | -------------------------------



| | We generally have met our operating and capital requirements with cash flow from operating activities, borrowings under our bank line of credit, and proceeds from the sale of shares
of our common stock.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Our net cash position decreased by $8.2 million during the three months ended March 31, 2004, compared to an increase of $112,000 during the three months ended March 31, 2003. For
the three months ended March 31, 2004, cash flow provided by operating activities amounted to $5.7 million. The primary factors contributing to the increase in cash flow from operating activities were net income of $5.0 million, depreciation and
amortization of $0.9 million, and increased levels of accounts payable and accrued expenses that added an aggregate of $6.9 million. These contributions were offset in part by increases in accounts receivable of $5.0 million due to higher amounts of
sales over the three months ended March 31, 2004, and increased levels of inventories, and prepaid expenses that totaled $2.2 million. Cash used in investing activities of $13.9 million was for capital expenditures of $5.2 million and was used to
purchase short-term investments of $8.7 million. A majority of our capital expenditures were for equipment to gain additional capacity and improve operations.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Financing activities provided cash of $69,000 generated from the issuance of common stock upon the exercise of employee stock options under the stock option and stock purchase
plans.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



18



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##### Table of Contents

| | We established an unsecured line of credit with a bank in August 2003, which expires in August 2005. The amount available under the terms of the line of credit is $10.0 million and
bears interest at 1.75 percentage points in excess of the LIBOR rate for a period selected by Ceradyne. The LIBOR rates for the periods that could be selected ranged from approximately 1.09 percent to 1.35 percent at March 31, 2004. The bank line of
credit did not have an outstanding balance at March 31, 2004.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Our cash, cash equivalents and short-term investments totaled $31.2 million at March 31, 2004, compared to $0.5 million at March 31, 2003. At March 31, 2004, we had working capital
of $61.3 million, compared to $26.6 million at March 31, 2003. We believe that our current cash and cash equivalents on hand, cash available from the sale of short-term investments, and cash we expect to generate from operations will be sufficient
to finance our anticipated capital and operating requirements for at least the next 12 months. We also may utilize cash, and to the extent necessary, borrowings to acquire other businesses, technologies or product lines that complement our existing
business, although we have no present commitments or agreements to do so.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Item  3. | Quantitative and Qualitative Disclosures About Market Risk
|-------- | ----------------------------------------------------------



| | The Company is exposed to market risks related to fluctuations in interest rates on its debt. Currently, the Company does not utilize interest rate swaps, forward or option
contracts on foreign currencies or commodities, or other types of derivative financial instruments.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | As of March 31, 2004, the Company did not have any debt outstanding. It has an unsecured line of credit with a bank in the amount of $10 million. The bank line of credit interest
rate is charged at 1.75 percentage points in excess of the LIBOR rate for a period selected by the Company. The LIBOR rates for the periods that could be selected ranged from approximately 1.09 percent to 1.35 percent at March 31, 2004.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Item  4. | Controls and Procedures
|-------- | -----------------------



| | The Company carried out an evaluation, under the supervision and with the participation of the Companys management, including its Chief Executive Officer and its Chief
Financial Officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures as of March 31, 2004, pursuant to Rule 13a-15 under the Securities Exchange Act of 1934. Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that those disclosure controls and procedures were adequate to ensure that information required to be disclosed in this report is recorded, processed, summarized and reported in a
timely basis.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

PART II. OTHER INFORMATION



|Item  1. | Legal Proceedings
|-------- | -----------------



| | From time to time, the Company is involved in legal proceedings incidental to its business. The Company believes that pending actions, individually and in the aggregate, will not
have a material adverse effect on its financial condition, results of operations or cash flows, and that adequate provision has been made for the resolution of such actions and proceedings.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Item  2. | N/A
|-------- | ---



|Item  3. | N/A
|-------- | ---



|Item  4. | N/A
|-------- | ---



|Item  5. | N/A
|-------- | ---



|Item  6. | Exhibits and Reports on Form 8-K
|-------- | --------------------------------



(a) Exhibits:



31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.




(b) Reports
on Form 8-K:



| | On January 6, 2004, the Registrant furnished information pursuant to Item 12 of Form 8-K relating to the Registrants unaudited preliminary results for the fourth quarter and
twelve months ended December 31, 2003.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | On February 26, 2004, the Registrant furnished information pursuant to Item 12 of Form 8-K relating to the Registrants results of operations for the fourth quarter and twelve
months ended December 31, 2003.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | On March 11, 2004, the Registrant furnished information pursuant to Item 9 of Form 8-K relating to Registrants announcing a three-for-two stock split.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------



| | On April 22, 2004, the Registrant furnished information pursuant to Item 12 of Form 8-K relating to Registrants results of operations for the first quarter ended March 31,
2004.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



20



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##### Table of Contents

SIGNATURE



Pursuant to the requirements 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.



CERADYNE, INC.



|    |  |                                                                                                         
|--- |  | --------------------------------------------------------------------------------------------------------
|    | 
|By: |  | /s/ Jerrold J. Pellizzon                                                                                
|    |  |                                                                                                         
|    |  | Jerrold J. Pellizzon Vice President Chief Financial Officer (Principal Financial and Accounting
Officer)



Dated: May 10, 2004



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##### Table of Contents

Index to Exhibits



|        |  |                                                                                                    
|------- |  | ---------------------------------------------------------------------------------------------------
|Exhibit |  | Description                                                                                        
|        | 
|31.1    |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|        | 
|31.2    |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|        | 
|32.1    |  | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|        | 
|32.2    |  | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



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