<PAGE>

                                  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 September 30, 2001

     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             (I.R.S. Employer Identification No.)
incorporation or organization)

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

        Class                                  Outstanding at September 30, 2001
----------------------------------          ------------------------------------

Common Stock, $.01 par value                          8,367,805 Shares

                               Page 1 of 21 Pages

<PAGE>

                                 CERADYNE, INC.

<TABLE>
<CAPTION>
               INDEX                                                            PAGE NO.
               -----                                                            --------
<S>                                                                             <C>
PART I.        FINANCIAL INFORMATION

Item 1.        Financial Statements

               Statement Regarding Financial Information ......................         3

               Consolidated Balance Sheets-September 30, 2001
               and December 31, 2000 ..........................................       4-5

               Consolidated Statements of Income -
               Three and Nine Months Ended September 30, 2001 and 2000 ........         6

               Consolidated Statements of Cash Flow -
               Nine Months Ended September 30, 2001 and 2000 ..................         7

               Condensed Notes to Consolidated Financial Statements ...........      8-13

Item 2.        Management's Discussion and Analysis of Financial Condition
               and Results of Operations ......................................     14-18

Item 3.        Quantitative and Qualitative Disclosures
               About Market Risk ..............................................     18-19

PART II.       OTHER INFORMATION

Item 1.        Legal Proceedings ..............................................        20

Items 2, 3,    N/A ............................................................        21
  4 and 5.

Item 6.        Exhibits and Reports on Form 8-K ...............................        21

SIGNATURE .....................................................................        21
</TABLE>

                                        2

<PAGE>

                                 CERADYNE, INC.

                                    FORM 10-Q
                              FOR THE QUARTER ENDED

                               September 30, 2001


PART I.   FINANCIAL INFORMATION

Item 1.   Financial Statements
          --------------------

          The Financial Statements included herein have been prepared by
          Ceradyne, Inc. (the "Company"), without audit, pursuant to the rules
          and regulations of the Securities and Exchange Commission. Certain
          information normally included in the Financial Statements prepared in
          accordance with accounting principles generally accepted in the United
          States has been omitted pursuant to such rules and regulations.
          However, the Company believes the disclosures are adequate to make the
          information presented not misleading. All adjustments have been made
          which are, in the opinion of management, necessary to a fair statement
          of the results of the interim periods presented. The Financial
          Statements should be read in conjunction with the Financial Statements
          and notes thereto included in the Company's Annual Report pursuant to
          Section 13 or 15(d) of the Securities Exchange Act of 1934 on Form
          10-K for the fiscal year ended December 31, 2000, as filed with the
          Securities and Exchange Commission on March 28, 2001.

                                        3

<PAGE>

<TABLE>
<CAPTION>
===================================================================================================================
                                                CERADYNE, INC.
                                          CONSOLIDATED BALANCE SHEETS
                                                    ASSETS
                                            (Amounts in thousands)
-------------------------------------------------------------------------------------------------------------------
                                                                           September 30, 2001   December 31, 2000
                                                                              (Unaudited)
===================================================================================================================
<S>                                                                        <C>                  <C>
CURRENT ASSETS
-------------------------------------------------------------------------------------------------------------------

     Cash and cash equivalents                                                 $  2,012             $  6,656
-------------------------------------------------------------------------------------------------------------------
     Accounts receivable, net of allowances for doubtful                          8,305                6,290
      accounts of approximately $91 and $84 at September
      30, 2001 and December 31, 2000, respectively
-------------------------------------------------------------------------------------------------------------------

     Other receivables                                                              257                   63
-------------------------------------------------------------------------------------------------------------------

     Inventories                                                                 11,888                8,193
-------------------------------------------------------------------------------------------------------------------

     Production tooling                                                           2,319                1,655
-------------------------------------------------------------------------------------------------------------------

     Prepaid expenses and other                                                   1,261                  795
                                                                               --------             --------
-------------------------------------------------------------------------------------------------------------------
     TOTAL CURRENT ASSETS                                                        26,042               23,652
                                                                               --------             --------
-------------------------------------------------------------------------------------------------------------------

PROPERTY, PLANT & EQUIPMENT, at cost
-------------------------------------------------------------------------------------------------------------------

     Land                                                                           422                  422
-------------------------------------------------------------------------------------------------------------------
     Buildings and improvements                                                   1,839                1,825
-------------------------------------------------------------------------------------------------------------------
     Machinery and equipment                                                     29,260               25,450
-------------------------------------------------------------------------------------------------------------------
     Leasehold improvements                                                       3,068                2,280
-------------------------------------------------------------------------------------------------------------------
     Office equipment                                                             3,177                2,975
-------------------------------------------------------------------------------------------------------------------
     Construction in progress                                                       368                  197
                                                                               --------             --------
-------------------------------------------------------------------------------------------------------------------
                                                                                 38,134               33,149
-------------------------------------------------------------------------------------------------------------------
     Less accumulated depreciation                                              (23,376)             (21,751)
                                                                               --------             --------
-------------------------------------------------------------------------------------------------------------------
                                                                                 14,758               11,398
                                                                               --------             --------
-------------------------------------------------------------------------------------------------------------------
COSTS IN EXCESS OF NET ASSETS ACQUIRED,                                           1,554                1,678
     net of accumulated amortization of $2,363 and $2,239 at
     September 30, 2001 and December 31, 2000, respectively
-------------------------------------------------------------------------------------------------------------------

OTHER ASSETS, net of accumulated amortization                                       899                1,735
     of $699 and $671 at September 30, 2001 and December 31,                   --------             --------
     2000, respectively
-------------------------------------------------------------------------------------------------------------------

TOTAL ASSETS                                                                   $ 43,253             $ 38,463
                                                                               ========             ========
===================================================================================================================
</TABLE>

                       See accompanying condensed notes to
                       Consolidated Financial Statements.

                                        4

<PAGE>

<TABLE>
<CAPTION>
==================================================================================================================
                                                CERADYNE, INC.
                                          CONSOLIDATED BALANCE SHEETS
                                     LIABILITIES AND SHAREHOLDERS' EQUITY
                                   (Amounts in thousands, except share data)
------------------------------------------------------------------------------------------------------------------

                                                                   September 30, 2001        December 31, 2000
                                                                       (Unaudited)
==================================================================================================================
<S>                                                                <C>                       <C>
CURRENT LIABILITIES
------------------------------------------------------------------------------------------------------------------
     Current portion of long-term debt                               $     100                $     100
------------------------------------------------------------------------------------------------------------------
     Accounts payable                                                    2,751                    1,953
------------------------------------------------------------------------------------------------------------------
     Accrued expenses:
------------------------------------------------------------------------------------------------------------------
          Payroll and payroll related                                    1,211                      914
------------------------------------------------------------------------------------------------------------------
          Other                                                            366                      249
                                                                     ---------                ---------
------------------------------------------------------------------------------------------------------------------
     TOTAL CURRENT LIABILITIES                                           4,428                    3,216
                                                                     ---------                ---------
------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT, NET OF CURRENT PORTION                                     183                      258
                                                                     ---------                ---------
------------------------------------------------------------------------------------------------------------------
DEFERRED REVENUE                                                            67                      ---
                                                                     ---------                ---------
------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY

------------------------------------------------------------------------------------------------------------------
     Common stock, $.01 par value,
     Authorized - 12,000,000 shares,
     Outstanding - 8,367,805 shares
     and 8,288,142 shares at September 30, 2001
     and December 31, 2000, respectively.                               39,141                   38,659
------------------------------------------------------------------------------------------------------------------
     Accumulated deficit                                                (  566)                 ( 3,670)
                                                                     ---------                ---------
------------------------------------------------------------------------------------------------------------------
     TOTAL SHAREHOLDERS' EQUITY                                         38,575                   34,989
                                                                     ---------                ---------
------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                           $  43,253                $  38,463
                                                                     =========                =========
==================================================================================================================
</TABLE>

                       See accompanying condensed notes to
                       Consolidated Financial Statements.

                                        5

<PAGE>

===============================================================================
                                 CERADYNE, INC.
                        CONSOLIDATED STATEMENTS OF INCOME
                  (Amounts in thousands, except per share data)

===============================================================================
                                      THREE MONTHS             NINE MONTHS
                                          ENDED                   ENDED
                                      SEPTEMBER 30,           SEPTEMBER 30,
-------------------------------------------------------------------------------
                                     2001       2000         2001        2000
-------------------------------------------------------------------------------
                                      (Unaudited)             (Unaudited)
-------------------------------------------------------------------------------
NET SALES                          $ 10,178   $ 11,493     $ 33,264    $ 34,340
-------------------------------------------------------------------------------
COST OF PRODUCT SALES                 7,377      8,263       23,375      25,061
                                   --------   --------     --------    --------
-------------------------------------------------------------------------------
     Gross profit                     2,801      3,230        9,889       9,279
                                   --------   --------     --------    --------
-------------------------------------------------------------------------------
OPERATING EXPENSES
-------------------------------------------------------------------------------
     General and administrative       1,200      1,142        3,667       3,371
-------------------------------------------------------------------------------
     Selling                            497        444        1,554       1,197
-------------------------------------------------------------------------------
     Research and development           302        330          838         949
                                   --------   --------     --------    --------
-------------------------------------------------------------------------------
                                      1,999      1,916        6,059       5,517
                                   --------   --------     --------    --------
-------------------------------------------------------------------------------
     Income from operations             802      1,314        3,830       3,762
                                   --------   --------     --------    --------
-------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
-------------------------------------------------------------------------------
     Royalty income                      45         30          125         118
     Interest income                     35         62          172         129
     Interest expense                    (6)        (8)         (20)        (26)
     Miscellaneous                        1         40           31          --
                                   --------   --------     --------    --------
-------------------------------------------------------------------------------
                                         75        124          308         221
-------------------------------------------------------------------------------
     Income before provision
     for income taxes                   877      1,438        4,138       3,983
-------------------------------------------------------------------------------
PROVISION FOR INCOME TAXES              219         29        1,034          80
                                   --------   --------     --------    --------
-------------------------------------------------------------------------------
NET INCOME                         $    658   $  1,409     $  3,104    $  3,903
                                   ========   ========     ========    ========
-------------------------------------------------------------------------------
BASIC NET INCOME PER SHARE         $   0.08   $   0.17     $   0.37    $   0.48
                                   ========   ========     ========    ========
-------------------------------------------------------------------------------
DILUTED NET INCOME PER SHARE       $   0.08   $   0.17     $   0.36    $   0.47
                                   ========   ========     ========    ========
===============================================================================

                       See accompanying condensed notes to
                       consolidated financial statements.

                                        6

<PAGE>

<TABLE>
<CAPTION>
==========================================================================================================
                                  CERADYNE, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                              (Amounts in thousands)                                 NINE MONTHS ENDED
                                                                                        SEPTEMBER 30,
----------------------------------------------------------------------------------------------------------
                                                                                      2001          2000
                                                                                  (Unaudited)   (Unaudited)
==========================================================================================================
<S>                                                                               <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
----------------------------------------------------------------------------------------------------------
     Net Income                                                                       $ 3,104      $ 3,903
----------------------------------------------------------------------------------------------------------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES:
----------------------------------------------------------------------------------------------------------
     Depreciation and amortization                                                      1,853        1,617
----------------------------------------------------------------------------------------------------------
     Gain on equipment disposal                                                           (12)          --
----------------------------------------------------------------------------------------------------------
     Change in operating assets and liabilities:
----------------------------------------------------------------------------------------------------------
          Accounts receivable, net                                                     (2,015)      (1,818)
----------------------------------------------------------------------------------------------------------
          Other receivables                                                              (194)          22
----------------------------------------------------------------------------------------------------------
          Inventories                                                                  (3,695)        (100)
----------------------------------------------------------------------------------------------------------
          Production tooling                                                             (664)        (311)
----------------------------------------------------------------------------------------------------------
          Prepaid expenses and other                                                      343          379
----------------------------------------------------------------------------------------------------------
          Accounts payable                                                                798          (75)
----------------------------------------------------------------------------------------------------------
          Accrued expenses                                                                414          443
----------------------------------------------------------------------------------------------------------
          Deferred revenue                                                                 67         (203)
                                                                                      -------      -------
----------------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES                                        (1)       3,857
                                                                                      -------      -------
----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
----------------------------------------------------------------------------------------------------------
     Purchases of property, plant and equipment                                        (5,118)      (1,706)
                                                                                      -------      -------
----------------------------------------------------------------------------------------------------------
     Proceeds from sale of equipment                                                       68           --
                                                                                      -------      -------
----------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES                                                  (5,050)      (1,706)
                                                                                      -------      -------
----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
----------------------------------------------------------------------------------------------------------
     Proceeds from issuance of common stock                                               482          755
----------------------------------------------------------------------------------------------------------
     Principal Payments on long-term debt                                                 (75)         (75)
                                                                                      -------      -------
----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities                                                 407          680
                                                                                      -------      -------
----------------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents                                       (4,644)       2,831
                                                                                      -------      -------
----------------------------------------------------------------------------------------------------------
Cash and cash equivalents, beginning of period                                          6,656        1,407
                                                                                      -------      -------
----------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period                                              $ 2,012      $ 4,238
                                                                                      =======      =======
----------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
----------------------------------------------------------------------------------------------------------
Interest paid                                                                         $    20      $    26
----------------------------------------------------------------------------------------------------------
Income taxes paid                                                                     $   253      $    51
==========================================================================================================
</TABLE>

                       See accompanying condensed notes to
                       Consolidated Financial Statements.

                                        7

<PAGE>

                                 CERADYNE, INC.
              CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2001
                                   (Unaudited)

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

     The consolidated financial statements include the financial statements of
     Ceradyne, Inc. (the Company) and its subsidiaries. All adjustments have
     been made which are, in the opinion of management, necessary to a fair
     statement of the results of the interim periods presented. All material
     intercompany accounts and transactions have been eliminated.

2.   Inventories
     -----------

     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 September 30, 2001 and December 31, 2000 (in thousands):

     ============================================================
                                 SEPTEMBER 30,    DECEMBER 31,
                                     2001            2000
     ============================================================
     Raw Materials                  $ 5,409          $4,815
     ------------------------------------------------------------
     Work-in-Process                  4,314           2,800
     ------------------------------------------------------------
     Finished Goods                   2,165             578
     ------------------------------------------------------------
     Total Inventories              $11,888          $8,193
                                    =======          ======
     ============================================================

3.   Net Income Per Share
     --------------------

     Basic net income per share is computed by dividing net income by the
     weighted average number of common shares outstanding. Diluted net income
     per share is computed by dividing net income by the weighted average number
     of common shares outstanding plus the effect of any dilutive stock options
     and common stock warrants using the treasury stock method. The table below
     reconciles the weighted shares outstanding in the computation of basic net
     income per share to diluted net income per share.

                                        8

<PAGE>

<TABLE>
<CAPTION>
     ==========================================================================================
                                                 THREE MONTHS ENDED       NINE MONTHS ENDED
                                                    SEPTEMBER 30             SEPTEMBER 30
     ------------------------------------------------------------------------------------------
                                                  2001        2000        2001          2000
     ==========================================================================================
     <S>                                        <C>          <C>         <C>          <C>
     Weighted average number of shares
     outstanding                                8,363,611    8,260,110   8,331,458    8,187,258
     Dilutive stock options and common stock
     warrants                                     358,083      208,390     344,731      189,072
                                                ---------    ---------   ---------    ---------
     Number of shares used in diluted net
     income per share computations              8,721,694    8,468,500   8,676,189    8,376,330
                                                =========    =========   =========    =========
     ------------------------------------------------------------------------------------------
</TABLE>

4.   Long-Term Debt
     --------------

     ====================================================================
     Capital Equipment loan bearing interest at 8.18%            $283,000
     fixed interest rate.  Payable in monthly
     installments of $8,333, expiring July 2004.
     --------------------------------------------------------------------
     Less:  Current Portion                                      (100,000)
                                                                 --------
     --------------------------------------------------------------------
     Long-Term Debt                                              $183,000
                                                                 ========
     ====================================================================


5.   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, California, primarily produces advanced
     technical ceramic components and houses the Company's sintering and
     reaction bonding of 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, Georgia.
     Ceradyne's manufacturing structure is summarized in the following table:


                                       9

<PAGE>

<TABLE>
<CAPTION>
         =========================================================================================================
                       FACILITY LOCATION                                    PRODUCTS
         ---------------------------------------------------------------------------------------------------------
         <S>                                             <C>
          Advanced Ceramic Operations                    . Semiconductor Equipment Components
          Costa Mesa, California                         . Lightweight ceramic armor
          Approximately 85,000 square feet               . Orthodontic ceramic brackets
                                                         . Ceralloy(R) 147 SRBSN wear parts
                                                         . Precision ceramics
                                                         . Ceralloy(R) 147 SRBSN diesel/automotive engine parts

         ---------------------------------------------------------------------------------------------------------
          Semicon Associates                             . Microwave ceramic-impregnated dispenser cathodes
          Lexington, Kentucky                            . Ion laser ceramic-impregnated dispenser cathodes
          Approximately 35,000 square feet               . Samarium cobalt magnets

         ---------------------------------------------------------------------------------------------------------
          Thermo Materials                               . Glass tempering rolls (fused silica ceramics)
          Scottdale, Georgia                             . Metallurgical tooling (fused silica ceramics)
          Approximately 85,000 square feet               . Missile radomes (fused silica ceramics)
                                                         . Castable and other fused silica product
         =========================================================================================================
</TABLE>

                                       10

<PAGE>

                                 Ceradyne, Inc.
                               Segment Disclosures
                             (Amounts in thousands)

                        Three Months Ended September 30,

<TABLE>
<CAPTION>
                  Advanced Ceramic Ops     Semicon Associates      Thermo Materials               TOTAL
--------------------------------------------------------------------------------------------------------------------------
                    2001        2000         2001      2000         2001       2000          2001       2000
--------------------------------------------------------------------------------------------------------------------------
<S>              <C>          <C>          <C>        <C>         <C>         <C>          <C>         <C>
Revenue from     $  6,555     $  7,991     $ 1,684   $  1,741     $  1,939    $ 1,761      $ 10,178   $  11,493
External         --------     --------     -------   --------     --------    -------      --------   ---------
Customers


Depreciation     $    385     $    388    $    115   $    104     $    121    $    85      $    621   $     577
and Amortization --------    ---------    --------   --------     --------    -------      --------   ---------


Segment          $    767     $    962    $    376   $    222     $   (266)   $   254      $    877   $   1,438
Income before    --------    ---------    --------   --------     --------    -------      --------   ---------
provision for
Income Taxes


Segment Assets   $ 30,879     $ 27,107    $  6,378   $  6,057     $  5,996    $ 4,477      $ 43,253     $37,641
                 --------     --------    --------   --------     --------    -------      --------     -------

Expenditures     $  1,903     $    359    $     86   $    157     $    158    $   193      $  2,147   $     709
for PP&E         --------     --------    --------   --------     --------    -------      --------   ---------

                 ---------------------------------------------------------------------------------------------------------

<CAPTION>

REVENUE BREAKOUT FOR Advanced Ceramic Operations:
<S>              <C>          <C>
Semiconductor    $    187     $   377
Armor               2,313       4,032
Orthodontic         1,902       1,636
Other               2,153       1,946
                 --------     --------
                 $  6,555     $ 7,991
                 ========     ========
</TABLE>

                             Nine Months Ended September 30,

<TABLE>
<CAPTION>
                  Advanced Ceramic Ops     Semicon  Associates     Thermo Materials               TOTAL
--------------------------------------------------------------------------------------------------------------------------
                    2001         2000        2001       2000       2001          2000        2001        2000
--------------------------------------------------------------------------------------------------------------------------
<S>              <C>          <C>          <C>        <C>        <C>          <C>          <C>         <C>
Revenue from     $ 22,711     $ 23,541     $ 5,656    $ 5,481    $  4,897     $  5,318     $ 33,264    $ 34,340
External         --------     --------     -------    -------    --------     --------     --------    --------
Customers


Depreciation     $  1,195     $  1,157     $   334    $   247    $    324     $    213     $  1,853    $  1,617
and Amortization --------     --------     -------    -------    --------     --------     --------    --------


Segment          $  3,301     $  2,539     $ 1,181    $   841    $   (344)    $    603     $  4,138    $  3,983
Income before    --------     --------     -------    -------    --------     --------     --------    --------
provision for
Income Taxes



Expenditures     $  4,002     $    946     $   348    $   313    $    768     $    447     $  5,118    $  1,706
for PP&E         --------     --------     -------    -------    --------     --------     --------    --------

--------------------------------------------------------------------------------------------------------------------------
<CAPTION>
REVENUE BREAKOUT FOR Advanced Ceramic Operations:
<S>              <C>          <C>
Semiconductor    $  1,499     $  1,441
Armor               8,309       11,326
Orthodontic         6,015        4,955
Other               6,888        5,819
                 --------     --------
                 $ 22,711     $ 23,541
                 ========     ========
</TABLE>

                                       11

<PAGE>

                    Segment Disclosures for Net Sales by Area

                        Three Months Ended September 30,

<TABLE>
<CAPTION>
                Advanced Ceramic Ops      Semicon Associates         Thermo Materials            TOTAL
---------------------------------------------------------------------------------------------------------------
                   2001        2000         2001         2000       2001        2000          2001       2000
---------------------------------------------------------------------------------------------------------------
<S>                <C>         <C>          <C>          <C>        <C>         <C>           <C>         <C>
U.S. Net Sales     57%         67%          14%          12%        11%         10%           82%         89%

Western             6%          2%           2%           3%         2%        ---            10%          5%
Europe Net
Sales

Asia Net Sales    ---           1%           1%           1%         5%          2%            6%          4%

Israel Net          1%        ---          ---          ---        ---         ---             1%        ---
Sales

Canada Net

Sales             ---         ---          ---          ---          1%          2%            1%          2%

Other             ---         ---          ---          ---        ---         ---           ---         ---
                -----       -----       ------       ------      -----       -----       -------     -------

Total Net
Sales              64%         70%          17%          16%        19%         14%          100%        100%
                =====       =====       ======       ======      =====       =====       =======     =======

                -----------------------------------------------------------------------------------------------

<CAPTION>
                                         Nine Months Ended September 30,

                Advanced Ceramic Ops      Semicon Associates         Thermo Materials            TOTAL
---------------------------------------------------------------------------------------------------------------
                   2001        2000         2001         2000       2001        2000          2001       2000
---------------------------------------------------------------------------------------------------------------
<S>                <C>         <C>          <C>          <C>        <C>         <C>          <C>          <C>
U.S. Net Sales     58%         64%          13%          13%        10%         12%          81%          89%

Western             5%          3%           3%           2%         1%          1%           9%           6%
Europe Net
Sales

Asia Net Sales      1%          1%           1%           1%         3%          2%           5%           4%

Israel Net          3%        ---          ---          ---        ---          ---            3%        ---
Sales

Canada Net
Sales               1%        ---          ---          ---          1%          1%           2%           1%


Other             ---         ---          ---          ---        ---         ---           ---         ---
                -----       -----      -------      -------     ------      ------       -------     -------

Total Net
Sales              68%         68%          17%          16%        15%         16%          100%        100%
                =====       =====      =======      =======     ======      ======       =======     =======

                -----------------------------------------------------------------------------------------------
</TABLE>

                                       12

<PAGE>

6.   Legal Proceedings
     -----------------

     The Company is, from time to time, involved in various legal and other
     proceedings that relate to the ordinary course of operating its business,
     including, but not limited to, employment-related actions and workers'
     compensation claims.

     From October 1995 through November 2000, the Company, along with other
     companies, was served with eight different complaints that were filed by
     eleven former employees of one of the Company's customers, and eight
     spouses. The complaints, all filed in the United States District Court,
     Eastern District of Tennessee, allege that the customers' employees
     contracted chronic beryllium disease as a result of their exposure to
     beryllium-containing products sold by Ceradyne and other companies. As of
     October 19, 2001 there is one case remaining. This open case seeks
     compensatory damages in the total amount of $6 million and punitive damages
     in the total amount of $20 million.

     An update on the eight cases is as follows:

     Case 1:   Summary Judgment was granted in favor of the Company in October
     2001. The plaintiffs have filed a notice of appeal.

     Cases 2, 3, 4, 5, 6, and 7: The plaintiffs in these cases filed a motion to
     dismiss with prejudice and the Court has entered an order in October 2001
     dismissing the cases with full prejudice. There will be no appeal in these
     cases, and these cases are concluded.

     Case 8: This is the most recent case filed. The plaintiff has filed a
     motion to dismiss without prejudice. If granted, the plaintiff's attorney
     has advised that they do not intend to refile the case, but rather seek
     compensation under the Federal Compensation Program. This program provides
     that it is an exclusive remedy, thereby barring any further action against
     the Company. The Court has not ruled as to whether it will allow the
     plaintiff to take a dismissal without prejudice.

     The Company believes that the resolution of these claims will not have a
     material adverse effect on the financial condition or operations of the
     Company. Defense of these cases has been tendered to the Company's
     insurance carriers, which are providing a defense subject to a reservation
     of rights. There can be no assurance, however, that these claims will be
     covered by insurance or that, if covered, the amount of insurance will be
     sufficient to cover any potential judgments.

                                       13

<PAGE>

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. 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.
         These risks and uncertainties are described in the Company's Annual
         Report on Form 10-K for the fiscal year ended December 31, 2000, 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
         Result of Operations".

         Results of Operations for the Three and Nine Months Ended September 30,
         -----------------------------------------------------------------------
         2001
         ----

         Reference is made to the Company's Annual Report on Form 10-K for the
         fiscal year ended December 31, 2000, 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. Net sales for the three months ended September 30, 2001 were
         ---------
         $10.2 million. This represents a decrease of 11%, or $1.3 million, from
         the corresponding quarter of the prior year. For the nine months ended
         September 30, 2001, net sales were $33.3 million, a decrease of 3%, or
         $1.1 million from the prior year's nine months.

         Advanced Ceramics Operations in Costa Mesa, California had a decrease
         in sales for the third quarter ended September 30, 2001 of $1.4 million
         as compared to the year ago period. The sales decrease was mainly in
         ceramic armor for defense customers. For the nine months period, sales
         decreased by $.8 million over the prior year nine months. The sales
         decrease was also in armor products. Orders for armor products that the
         Company expected to be received in the third quarter are expected to be
         received in the fourth quarter.

         The Company's Semicon Associates division in Lexington, Kentucky,
         posted a sales decrease of $.1 million for the third quarter, and a
         nine month increase of $.2 million as compared to the prior year
         periods. The small decrease for the quarter and small increase for the
         nine months period reflect timing of incoming orders and contracts from
         the customers.

         The Company's Thermo Materials division in Scottdale, Georgia, posted a
         sales increase for the quarter of $.2 million, and a nine months
         decrease of $.4 million as compared to the prior year periods. The
         increase for the quarter reflects shipments of defense products
         (radomes); however, the decrease in sales for the nine months was
         mainly caused by less demand for fused silica products due to
         downsizing

                                       14

<PAGE>

     domestically by the glass, steel and aluminum making industries.

     International sales have been, and are expected to continue to be an
     important part of the Company's business. International sales were 18% of
     total sales for the quarter and 19% for the nine months of 2001 as compared
     to 11% in each of the prior year periods. The reasons for the increase were
     due to the Company's relatively new sales efforts in England and China and
     increases in armor components for Israel.

     Gross Profit. The Company's gross profit was $2.8 million, or 28% of sales,
     ------------
     for the third quarter ended September 30, 2001, compared to $3.2 million,
     or 28% of sales, for the prior year's third quarter. For the nine months
     ended September 30, 2001, gross profit was $9.9 million, or 30% of sales,
     compared to $9.3 million, or 27% of sales, in the first nine months of
     2000.

     The Company's Advanced Ceramic Operations in Costa Mesa, California, posted
     gross profit of $2.1 million for the quarter ended September 30, 2001,
     compared to $2.3 million, or a 7% decrease over the year ago quarter. For
     the nine months ended September 30, 2001, gross profit was $7.4 million
     compared to $6.4 million, or a 17% increase over the year ago period. Gross
     profits at the Company's Advanced Ceramic Operations segment, as a
     percentage of the Company's total sales, continued to improve due to higher
     capacity utilization. The Company expects this trend to continue depending
     on increasing volume of similar parts or components being produced.

     Semicon Associates in Lexington, Kentucky, posted gross profit of $.6
     million compared to $.4 million, or a 43% increase over the year ago
     quarter. For the nine months period, gross profit was $1.9 million compared
     to $1.5 million, or a 24% increase over the year ago period. The increases
     in the gross profit for both periods are attributed to better quality and
     process control and greater capacity utilization, and are being partially
     funded by a contract award from the Department of Defense. The mission of
     this Department of Defense Production Act Title III Program is to create
     assured, affordable and commercially viable production capabilities for
     items essential for national defense. Additionally, modest price increases
     were contributing factors. The Company expects the trend of gross profit as
     a percent of sales to stabilize, depending on volume of similar contracts,
     parts or components remaining steady.

     Thermo Materials in Scottdale, Georgia, posted gross profit of $.1 million
     compared to $.5 million, or an 86% decrease from the year ago quarter. For
     the nine month period, gross profit was $.6 million compared to $1.4
     million, or a 58% decrease from the year ago period. The decreases in both
     periods were caused by a decrease in volume and a process control problem
     in fused silica products. The process control concern has subsequently been
     corrected by diligent testing of raw materials.

                                       15

<PAGE>

     General and Administrative Expenses. General and Administrative expenses
     -----------------------------------
     were $1.2 million for the quarter, and $3.7 million for the nine months
     ended September 30, 2001. The above compares with prior year amounts of
     $1.1 million for the quarter and $3.4 million for the nine months period.
     Salary increases, increases in personnel at Thermo Materials and Advanced
     Ceramic Operations, and increases in outside engineering consulting
     expenses for Advanced Ceramic Operations accounted primarily for the
     increased expenses over both year ago periods.

     Selling Expenses. Selling expenses were $.5 million for the quarter, and
     ----------------
     $1.6 million for the nine months ending September 30, 2001. The above
     compares to prior year amounts of $.4 million for the quarter, and $1.2
     million for the nine months period. Salary and personnel increases,
     commissions and travel account for the increased selling expenses in both
     the quarter and nine month periods of the current year.

     Research and Development. The Company's research and development efforts
     ------------------------
     consist primarily of ongoing application engineering in response to
     customer requirements, and the research and development of new materials
     technology and products. These efforts are directed to the creation of new
     products, the modification of existing products to fit specific customer
     needs, and the development of enhanced ceramic process technology.

     Expenses for the third quarter ended September 30, 2001 and 2000 for
     Research and Development were $.3 million, and for the nine months period
     ended September 30, 2001 and 2000 were $.8 million and $.9 million,
     respectively. A reclassification in the amount of $.5 million was made in
     the second quarter of the current year to Cost of Product Sales due to
     Small Business Innovation Research (SBIR) awards. The SBIR awards are
     recorded as a sale; therefore, the reclassification properly records cost
     to Cost of Product Sales instead of Research and Development expense. These
     awards have allowed the Company to pursue much of its research and
     development efforts on government funded grants in the current year
     periods. The amounts billed in the quarter and nine months ended September
     30, 2001 was $.2 million and $.8 million, respectively. SBIR grants from
     the Department of Defense are recognized as a booking and added to the
     Company's order backlog when they are first received. Revenue recognition
     comes on a quarterly basis as costs are incurred, and pursuant with the
     government contract are progress invoiced with a government Form 1034 to
     the Department of Defense. The cost was marked up with the Company's
     general and administrative factor and profit. The SBIR grants are cost plus
     fixed fee contracts.

     In addition, the Company historically has and continues to engage in
     application engineering to improve and reduce the cost of production and to
     develop new products. These costs are expensed as incurred and are included
     in cost of product sales by the engineering department.

                                       16

<PAGE>

     Income Taxes. In 2000, the Company had sufficient net operating loss
     ------------
     carryforwards to offset all of its federal income tax liability except for
     the alternative minimum income tax. The Company expects to use its
     remaining net operating loss carryforwards in 2001. Based on the Company's
     projected pre-tax income for all of 2001 and the amount of the remaining
     net operating loss carryforwards, the Company used a combined federal and
     state tax rate of 25% for the third quarter and nine months ended September
     30, 2001, resulting in a provision for taxes of $.2 million for the third
     quarter and $1.0 million for the nine months period. In future periods,
     when there are no more net loss carryforwards available to offset the
     Company's tax liability, the combined federal and state tax rate is
     expected to be approximately 38%. As a result, even if future pre-tax
     income increases or remains constant with historical levels, reported net
     income may be lower due to the higher effective tax rate.

     Net Income. Reflecting all of the matters discussed above, net income was
     ----------
     $.7 million (or $0.08 per share basic and diluted) for the quarter ended
     September 30, 2001, and $3.1 million (or $0.37 basic and $0.36 diluted) for
     the nine months ended September 30, 2001.

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

     The Company generally meets its operating and capital requirements for cash
     flow from operating activities and borrowings under its credit facilities.

     The Company has a $4,000,000 revolving credit agreement with Comerica Bank.
     As of September 30, 2001, there had been no borrowings under this credit
     facility. Under a separate credit facility with Comerica Bank, the Company
     entered into a $500,000 capital equipment loan agreement during the third
     quarter of 1999. The term of the loan is for 60 months with no prepayment
     penalty and as of September 30, 2000, this loan balance is $283,000.

     The Company's net cash balance decreased by $4.6 million during the nine
     months ended September 30, 2001, compared to a net increase of $2.8 million
     in the nine months ended September 30, 2000. The largest component of this
     change was the Company's investment of $5.1 million in machinery, equipment
     and leasehold improvements in the current year, compared to $1.7 million in
     2000, to expand production capacity, primarily at the Company's Advanced
     Ceramic Operations in Costa Mesa, California. Another major use of cash was
     a $3.6 million greater increase in inventories in the current year,
     compared to the prior year period, as the Company manufactured products and
     has work-in-process in anticipation of orders expected to be received in
     the fourth quarter of 2001.

     Management believes that its current cash and cash equivalents on hand, as
     well as cash generated from operations and the ability to borrow under the
     existing credit facilities, will be sufficient to finance anticipated
     capital and operating requirements for at least the next 12 months.

                                       17

<PAGE>

          Recent Accounting Pronouncements
          --------------------------------

          We adopted Statement of Financial Accounting Standards No. 133,
          "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
          133") effective January 1, 2001. Under the provisions of SFAS 133, we
          are required to recognize all derivatives as either assets or
          liabilities in the consolidated balance sheets and measure these
          instruments at fair value. The adoption of SFAS 133 did not have a
          material effect on the Company's consolidated financial statements.

          In June 2001, the Financial Accounting Standards Board ("FASB") issued
          Statement of Financial Accounting Standards No. 141, "Business
          Combinations" ("SFAS 141"). This Statement addresses financial
          accounting and reporting for business combinations and supersedes APB
          Opinion No. 16, "Business Combinations," and FASB Statement No. 38,
          "Accounting for Preacquisition Contingencies of Purchased
          Enterprises". All business combinations in the scope of this Statement
          are to be accounted for using one method, the purchase method. We will
          adopt SFAS 141 for all business combinations initiated after June 30,
          2001.

          Also in June 2001, the FASB issued Statement of Financial Accounting
          Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS
          142"). SFAS 142 addresses financial accounting and reporting for
          acquired goodwill and other intangible assets and supersedes APB
          Opinion No. 17, "Intangible Assets". This pronouncement addresses,
          among other things, how goodwill and other intangible assets should be
          accounted for after they have been initially recognized in the
          financial statements. Goodwill would no longer be amortized but would
          be assessed at least annually for impairment using a fair value
          methodology. We will adopt this statement for all goodwill and other
          intangible assets acquired after June 30, 2001 and for all existing
          goodwill and other intangible assets beginning January 1, 2002. Upon
          adoption of this standard on January 1, 2002 we will cease recording
          amortization of goodwill, which would increase net income in 2002 by
          approximately $.1 million, net of income taxes, or approximately $0.01
          per diluted share. Other than ceasing the amortization of goodwill, we
          do not anticipate that the adoption of SFAS 142 will have a
          significant effect on our financial position or the results of our
          operations, as we do not currently anticipate any impairment charges
          for existing goodwill.

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.
          The purpose of the following analysis is to provide a framework to
          understand the Company's sensitivity to hypothetical changes in
          interest rates as of September 30, 2001.

                                       18

<PAGE>

     The Company utilized fixed rate debt financing during 1999 primarily for
     the purpose of acquiring manufacturing equipment. For fixed rate debt,
     changes in interest rates generally affect the fair market value of the
     debt instrument, but not the Company's earnings or cash flows. The Company
     does not have an obligation to prepay fixed rate debt prior to maturity,
     and as a result, interest rate risk and changes in fair market value should
     not have a significant impact on the fixed rate debt until the Company
     would be required to refinance such debt. The fair market value estimates
     for debt securities are based on discounting future cash flows utilizing
     current rates offered to the Company for debt of the same type and
     remaining maturity.

     As of September 30, 2001, the Company's debt consisted of a $283,000
     capital equipment loan at a fixed interest rate of 8.18% due July 28, 2004.
     The carrying amount is a reasonable estimate of fair value as the rate of
     interest paid on the note approximates the current rate available for
     financing with similar terms and maturities.

                                       19

<PAGE>

PART II.  OTHER INFORMATION

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

          The Company is, from time to time, involved in various legal and other
          proceedings that relate to the ordinary course of operating its
          business, including, but not limited to, employment-related actions
          and workers' compensation claims.

          From October 1995 through November 2000, the Company, along with other
          companies, was served with eight different complaints that were filed
          by eleven former employees of one of the Company's customers, and
          eight spouses. The complaints, all filed in the United States District
          Court, Eastern District of Tennessee, allege that the customers'
          employees contracted chronic beryllium disease as a result of their
          exposure to beryllium-containing products sold by Ceradyne and other
          companies. As of October 19, 2001 there is one case remaining. This
          open case seeks compensatory damages in the total amount of $6 million
          and punitive damages in the total amount of $20 million.

          An update on the eight cases is as follows:

          Case 1:   Summary Judgment was granted in favor of the Company in
          October 2001. The plaintiffs have filed a notice of appeal.

          Cases 2, 3, 4, 5, 6, and 7: The plaintiffs in these cases filed a
          motion to dismiss with prejudice and the Court has entered an order in
          October 2001 dismissing the cases with full prejudice. There will be
          no appeal in these cases, and these cases are concluded.

          Case 8:   This is the most recent case filed. The plaintiff's attorney
          has filed a motion to dismiss without prejudice. If granted, the
          plaintiff's attorney has advised that they do not intend to refile the
          case, but rather seek compensation under the Federal Compensation
          Program. This program provides that it is an exclusive remedy, thereby
          barring any further action against the Company. The Court has not
          ruled as to whether it will allow the plaintiff to take a dismissal
          without prejudice.

          The Company believes that the resolution of these claims will not have
          a material adverse effect on the financial condition or operations of
          the Company. Defense of these cases has been tendered to the Company's
          insurance carriers, which are providing a defense subject to a
          reservation of rights. There can be no assurance, however, that these
          claims will be covered by insurance or that, if covered, the amount of
          insurance will be sufficient to cover any potential judgments.

                                       20

<PAGE>

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:

         None

(b)      Reports on Form 8-K:

         None

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/ Howard F. George
         --------------------
         Howard F. George
         Vice President
         Chief Financial Officer
         (Principal Financial and Accounting Officer)



Dated: November 7, 2001

                                       21