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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
|- | -------------------------------------------------------------------------------------------



For the quarterly period ended June 30, 2005



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



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CERADYNE, INC.

(Exact name of Registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 33-0055414                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|3169 Red Hill 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)



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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 as of July 18, 2005
|Common Stock, $.01 par value |  | 24,556,499 Shares              



Exhibit Index on Page
24



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##### Table of Contents

CERADYNE, INC.



INDEX



|          |  |                                                                                                 |  |         
|--------- |  | ----------------------------------------------------------------------------------------------- |  | --------
|          |  |                                                                                                 |  | PAGE NO.
|          |  |                                                                                                
|PART I.   |  | FINANCIAL INFORMATION                                                                           |  |         
|          |  |                                                                                                
|Item 1.   |  | Unaudited Condensed Consolidated Financial Statements                                           |  |         
|          |  |                                                                                                
|          |  | Condensed Consolidated Balance Sheets  June 30, 2005 and December 31, 2004                     |  | 3-4     
|          |  |                                                                                                
|          |  | Condensed Consolidated Statements of Income  Three and Six Months Ended June 30, 2005 and 2004 |  | 5       
|          |  |                                                                                                
|          |  | Condensed Consolidated Statements of Cash Flows  Six Months Ended June 30, 2005 and 2004       |  | 6       
|          |  |                                                                                                
|          |  | Condensed Notes to Consolidated Financial Statements                                            |  | 7-15    
|          |  |                                                                                                
|Item 2.   |  | Managements Discussion and Analysis of Financial Condition and Results of Operations           |  | 16-22   
|          |  |                                                                                                
|Item 3.   |  | Quantitative and Qualitative Disclosures About Market Risk                                      |  | 22-23   
|          |  |                                                                                                
|Item 4.   |  | Controls and Procedures                                                                         |  | 23      
|          |  |                                                                                                
|PART II.  |  | OTHER INFORMATION                                                                               |  |         
|          |  |                                                                                                
|Item 1.   |  | Legal Proceedings                                                                               |  | 23      
|          |  |                                                                                                
|Item 2.   |  | N/A                                                                                             |  | 23      
|          |  |                                                                                                
|Item 3.   |  | N/A                                                                                             |  | 23      
|          |  |                                                                                                
|Item 4.   |  | Submission of Matters to a Vote of Security Holders                                             |  | 23-24   
|          |  |                                                                                                
|Item 5.   |  | N/A                                                                                             |  | 24      
|          |  |                                                                                                
|Item 6.   |  | Exhibits                                                                                        |  | 24      
|          | 
|SIGNATURE |  | 25                                                                                             



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##### Table of Contents

CERADYNE, INC.



FORM 10-Q

FOR THE QUARTER ENDED



June 30, 2005



PART I. FINANCIAL INFORMATION



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



CERADYNE, INC.

CONSOLIDATED BALANCE SHEETS

ASSETS

(Amounts in thousands)



|                                                                                                                                                 |  |              |         |   |                  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                 |  | June 30,2005 |         |   | December 31,2004 |  
|                                                                                                                                                 |  | (Unaudited)  |        
|CURRENT ASSETS                                                                                                                                   |  |              |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                                                        |  | $            | 2,628   |   |                  | $ | 4,521   |  
|Short-term investments                                                                                                                           |  |              | 7,944   |   |                  |   | 10,041  |  
|Accounts receivable, net of allowances for doubtful accounts of approximately $406 and $456 at June 30, 2005 and December 31, 2004,
respectively |  |              | 46,362  |   |                  |   | 48,649  |  
|Other receivables                                                                                                                                |  |              | 2,176   |   |                  |   | 3,175   |  
|Inventories, net                                                                                                                                 |  |              | 61,800  |   |                  |   | 47,673  |  
|Production tooling, net                                                                                                                          |  |              | 11,473  |   |                  |   | 7,868   |  
|Prepaid expenses and other                                                                                                                       |  |              | 8,506   |   |                  |   | 8,510   |  
|Deferred tax asset                                                                                                                               |  |              | 3,698   |   |                  |   | 4,210   |  
|                                                                                                                                                 |  |              |         |   |                  |   |         |  
|TOTAL CURRENT ASSETS                                                                                                                             |  |              | 144,587 |   |                  |   | 134,647 |  
|                                                                                                                                                 |  |              |         |   |                  |   |         |  
|PROPERTY, PLANT & EQUIPMENT, at cost                                                                                                             |  |              |         |   |                  |   |         |  
|Land                                                                                                                                             |  |              | 9,216   |   |                  |   | 10,017  |  
|Buildings and improvements                                                                                                                       |  |              | 49,460  |   |                  |   | 54,483  |  
|Machinery and equipment                                                                                                                          |  |              | 108,852 |   |                  |   | 112,130 |  
|Leasehold improvements                                                                                                                           |  |              | 11,921  |   |                  |   | 11,134  |  
|Office equipment                                                                                                                                 |  |              | 9,636   |   |                  |   | 9,302   |  
|Construction in progress                                                                                                                         |  |              | 6,558   |   |                  |   | 1,763   |  
|                                                                                                                                                 |  |              |         |   |                  |   |         |  
|                                                                                                                                                 |  |              | 195,643 |   |                  |   | 198,829 |  
|Less accumulated depreciation and amortization                                                                                                   |  |              | (43,261 | ) |                  |   | (36,551 | )
|                                                                                                                                                 |  |              |         |   |                  |   |         |  
|                                                                                                                                                 |  |              | 152,382 |   |                  |   | 162,278 |  
|                                                                                                                                                 |  |              |         |   |                  |   |         |  
|INTANGIBLE ASSETS, net                                                                                                                           |  |              | 6,305   |   |                  |   | 7,235   |  
|GOODWILL                                                                                                                                         |  |              | 7,247   |   |                  |   | 6,079   |  
|OTHER ASSETS                                                                                                                                     |  |              | 5,646   |   |                  |   | 6,115   |  
|                                                                                                                                                 |  |              |         |   |                  |   |         |  
|TOTAL ASSETS                                                                                                                                     |  | $            | 316,167 |   |                  | $ | 316,354 |  
|                                                                                                                                                 |  |              |         |   |                  |   |         |  



See accompanying
condensed notes to Consolidated Financial Statements



3



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##### Table of Contents

CERADYNE, INC.

CONSOLIDATED BALANCE SHEETS

LIABILITIES AND SHAREHOLDERS EQUITY

(Amounts in thousands, except share data)



|                                                                                                                                                                         |  |              |         |   |                  |   |        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | ------- | - | ---------------- | - | -------
|                                                                                                                                                                         |  | June 30,2005 |         |   | December 31,2004
|                                                                                                                                                                         |  | (Unaudited) 
|CURRENT LIABILITIES                                                                                                                                                      |  |              |         |   |                  |   |        
|Bank line of credit                                                                                                                                                      |  | $            | 7,036   |   |                  | $ | 9,708  
|Current portion of long-term debt                                                                                                                                        |  |              | 1,100   |   |                  |   | 1,100  
|Accounts payable                                                                                                                                                         |  |              | 32,093  |   |                  |   | 32,830 
|Accrued expenses                                                                                                                                                         |  |              | 10,862  |   |                  |   | 7,981  
|Income taxes payable                                                                                                                                                     |  |              | 4,107   |   |                  |   | 4,639  
|                                                                                                                                                                         |  |              |         |   |                  |   |        
|TOTAL CURRENT LIABILITIES                                                                                                                                                |  |              | 55,198  |   |                  |   | 56,258 
|LONG-TERM DEBT, NET OF CURRENT PORTION                                                                                                                                   |  |              | 108,075 |   |                  |   | 108,625
|EMPLOYEE BENEFITS                                                                                                                                                        |  |              | 9,933   |   |                  |   | 10,735 
|DEFERRED TAX LIABILITY                                                                                                                                                   |  |              | 6,987   |   |                  |   | 5,695  
|                                                                                                                                                                         |  |              |         |   |                  |   |        
|TOTAL LIABILITIES                                                                                                                                                        |  |              | 180,193 |   |                  |   | 181,313
|COMMITMENTS AND CONTINGENCIES                                                                                                                                            |  |              |         |   |                  |   |        
|SHAREHOLDERS EQUITY                                                                                                                                                     |  |              |         |   |                  |   |        
|Common stock, $.01 par value, Authorized - 40,000,000 shares, Outstanding - 24,523,429 shares and 24,479,813 shares at June 30, 2005 and
December 31, 2004, respectively |  |              | 245     |   |                  |   | 244    
|Additional paid in capital                                                                                                                                               |  |              | 81,857  |   |                  |   | 79,720 
|Retained earnings                                                                                                                                                        |  |              | 59,239  |   |                  |   | 41,854 
|Deferred compensation                                                                                                                                                    |  |              | (1,691  | ) |                  |   |       
|Accumulated other comprehensive income                                                                                                                                   |  |              | (3,676  | ) |                  |   | 13,223 
|                                                                                                                                                                         |  |              |         |   |                  |   |        
|TOTAL SHAREHOLDERS EQUITY                                                                                                                                               |  |              | 135,974 |   |                  |   | 135,041
|                                                                                                                                                                         |  |              |         |   |                  |   |        
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                               |  | $            | 316,167 |   |                  | $ | 316,354
|                                                                                                                                                                         |  |              |         |   |                  |   |        



See accompanying
condensed notes to Consolidated Financial Statements



4



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##### Table of Contents

CERADYNE, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Amounts in thousands, except per share data)



|                                         |  |                            |        |                          |      |   |        |  |   |         |   |  |   |       
|---------------------------------------- |  | -------------------------- | ------ | ------------------------ | ---- | - | ------ |  | - | ------- | - |  | - | ------
|                                         |  | THREE MONTHSENDED June 30, |        | SIX MONTHSENDED June 30,
|                                         |  | 2005                       |        |                          | 2004 |   | 2005   |  |   | 2004   
|                                         |  | (Unaudited)                |        | (Unaudited)             
|NET SALES                                |  | $                          | 89,903 |                          |      | $ | 39,225 |  | $ | 159,694 |   |  | $ | 75,911
|COST OF PRODUCT SALES                    |  |                            | 57,353 |                          |      |   | 25,831 |  |   | 105,247 |   |  |   | 50,865
|                                         |  |                            |        |                          |      |   |        |  |   |         |   |  |   |       
|Gross profit                             |  |                            | 32,550 |                          |      |   | 13,394 |  |   | 54,447  |   |  |   | 25,046
|                                         |  |                            |        |                          |      |   |        |  |   |         |   |  |   |       
|OPERATING EXPENSES                       |  |                            |        |                          |      |   |        |  |   |         |   |  |   |       
|Selling                                  |  |                            | 5,495  |                          |      |   | 797    |  |   | 10,294  |   |  |   | 1,508 
|General and administrative               |  |                            | 5,192  |                          |      |   | 2,723  |  |   | 9,737   |   |  |   | 5,330 
|Research and development                 |  |                            | 1,743  |                          |      |   | 582    |  |   | 3,604   |   |  |   | 1,023 
|                                         |  |                            |        |                          |      |   |        |  |   |         |   |  |   |       
|                                         |  |                            | 12,430 |                          |      |   | 4,102  |  |   | 23,635  |   |  |   | 7,861 
|                                         |  |                            |        |                          |      |   |        |  |   |         |   |  |   |       
|Income from operations                   |  |                            | 20,120 |                          |      |   | 9,292  |  |   | 30,812  |   |  |   | 17,185
|                                         |  |                            |        |                          |      |   |        |  |   |         |   |  |   |       
|OTHER INCOME (EXPENSE):                  |  |                            |        |                          |      |   |        |  |   |         |   |  |   |       
|Royalty income                           |  |                            | 30     |                          |      |   | 30     |  |   | 60      |   |  |   | 60    
|Interest income                          |  |                            | 64     |                          |      |   | 171    |  |   | 172     |   |  |   | 335   
|Interest expense                         |  |                            | (1,744 | )                        |      |   |       |  |   | (3,115  | ) |  |   |      
|Miscellaneous                            |  |                            | (59    | )                        |      |   | 1,013  |  |   | 167     |   |  |   | 1,048 
|                                         |  |                            |        |                          |      |   |        |  |   |         |   |  |   |       
|                                         |  |                            | (1,709 | )                        |      |   | 1,214  |  |   | (2,716  | ) |  |   | 1,443 
|Income before provision for income taxes |  |                            | 18,411 |                          |      |   | 10,506 |  |   | 28,096  |   |  |   | 18,628
|PROVISION FOR INCOME TAXES               |  |                            | 7,011  |                          |      |   | 4,024  |  |   | 10,711  |   |  |   | 7,134 
|                                         |  |                            |        |                          |      |   |        |  |   |         |   |  |   |       
|NET INCOME                               |  | $                          | 11,400 |                          |      | $ | 6,482  |  | $ | 17,385  |   |  | $ | 11,494
|                                         |  |                            |        |                          |      |   |        |  |   |         |   |  |   |       
|BASIC INCOME PER SHARE                   |  | $                          | 0.47   |                          |      | $ | 0.27   |  | $ | 0.71    |   |  | $ | 0.48  
|                                         |  |                            |        |                          |      |   |        |  |   |         |   |  |   |       
|DILUTED INCOME PER SHARE                 |  | $                          | 0.46   |                          |      | $ | 0.26   |  | $ | 0.70    |   |  | $ | 0.47  
|                                         |  |                            |        |                          |      |   |        |  |   |         |   |  |   |       
|WEIGHTED AVERAGE SHARES OUTSTANDING:     |  |                            |        |                          |      |   |        |  |   |         |   |  |   |       
|BASIC                                    |  |                            | 24,500 |                          |      |   | 24,068 |  |   | 24,497  |   |  |   | 23,990
|DILUTED                                  |  |                            | 24,926 |                          |      |   | 24,462 |  |   | 24,960  |   |  |   | 24,383



See accompanying
condensed notes to Consolidated Financial Statements



5



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##### Table of Contents

CERADYNE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)



|                                                                                            |  |                          |         |   |                 |   |         |  
|------------------------------------------------------------------------------------------- |  | ------------------------ | ------- | - | --------------- | - | ------- | -
|                                                                                            |  | SIX MONTHS ENDEDJune 30, |        
|                                                                                            |  | 2005(Unaudited)          |         |   | 2004(Unaudited) |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                       |  |                          |         |   |                 |   |         |  
|Net income                                                                                  |  | $                        | 17,385  |   |                 | $ | 11,494  |  
|ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES: |  |                          |         |   |                 |   |         |  
|Depreciation and amortization                                                               |  |                          | 7,379   |   |                 |   | 1,946   |  
|Deferred income taxes                                                                       |  |                          | 2,145   |   |                 |   |        |  
|Stock compensation                                                                          |  |                          | 147     |   |                 |   |        |  
|Change in operating assets and liabilities, net of acquisitions:                            |  |                          |         |   |                 |   |         |  
|Accounts receivable, net                                                                    |  |                          | 440     |   |                 |   | (4,657  | )
|Other receivables                                                                           |  |                          | 1,028   |   |                 |   | (1,096  | )
|Inventories, net                                                                            |  |                          | (17,369 | ) |                 |   | (5,626  | )
|Production tooling                                                                          |  |                          | (3,259  | ) |                 |   | (187    | )
|Prepaid expenses                                                                            |  |                          | 11      |   |                 |   | (2,620  | )
|Other assets                                                                                |  |                          | (439    | ) |                 |   |        |  
|Accounts payable                                                                            |  |                          | 2,038   |   |                 |   | 7,027   |  
|Accrued expenses                                                                            |  |                          | 1,276   |   |                 |   | 1,991   |  
|Income taxes payable                                                                        |  |                          | (652    | ) |                 |   | 2,025   |  
|Tax benefit due to exercise of stock options                                                |  |                          | 163     |   |                 |   | 1,437   |  
|Employee benefits                                                                           |  |                          | 474     |   |                 |   |        |  
|                                                                                            |  |                          |         |   |                 |   |         |  
|NET CASH PROVIDED BY OPERATING ACTIVITIES                                                   |  |                          | 10,767  |   |                 |   | 11,734  |  
|                                                                                            |  |                          |         |   |                 |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                       |  |                          |         |   |                 |   |         |  
|Purchases of property, plant and equipment                                                  |  |                          | (9,667  | ) |                 |   | (11,953 | )
|Redemptions (purchases) of short-term investments                                           |  |                          | 2,097   |   |                 |   | (8,688  | )
|Additional costs of acquisition                                                             |  |                          | (1,541  | ) |                 |   | (100    | )
|                                                                                            |  |                          |         |   |                 |   |         |  
|NET CASH USED IN INVESTING ACTIVITIES                                                       |  |                          | (9,111  | ) |                 |   | (20,741 | )
|                                                                                            |  |                          |         |   |                 |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                       |  |                          |         |   |                 |   |         |  
|Proceeds from issuance of stock due to exercise of options                                  |  |                          | 136     |   |                 |   | 442     |  
|Proceeds from issuance of stock for stock plans                                             |  |                          |        |   |                 |   | 362     |  
|Payments on long-term debt                                                                  |  |                          | (550    | ) |                 |   |        |  
|Reduction in bank line of credit                                                            |  |                          | (2,372  | ) |                 |   |        |  
|Other                                                                                       |  |                          | (30     | ) |                 |   |        |  
|                                                                                            |  |                          |         |   |                 |   |         |  
|NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES                                            |  |                          | (2,816  | ) |                 |   | 804     |  
|                                                                                            |  |                          |         |   |                 |   |         |  
|EFFECT OF EXCHANGE RATES ON CASH AND EQUIVALENTS                                            |  |                          | (733    | ) |                 |   |        |  
|                                                                                            |  |                          |         |   |                 |   |         |  
|(DECREASE) IN CASH AND CASH EQUIVALENTS                                                     |  |                          | (1,893  | ) |                 |   | (8,203  | )
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                              |  |                          | 4,521   |   |                 |   | 11,462  |  
|                                                                                            |  |                          |         |   |                 |   |         |  
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                                    |  | $                        | 2,628   |   |                 | $ | 3,259   |  
|                                                                                            |  |                          |         |   |                 |   |         |  
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES:                                           |  |                          |         |   |                 |   |         |  
|Interest paid                                                                               |  | $                        | 2,772   |   |                 | $ |        |  
|Income taxes paid                                                                           |  | $                        | 9,925   |   |                 | $ | 3,673   |  
|                                                                                            |  |                          |         |   |                 |   |         |  



See accompanying
condensed notes to Consolidated Financial Statements



6



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##### Table of Contents

CERADYNE, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2005

(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 statement have been included. Operating results for the six months ended June 30, 2005 are not necessarily
indicative of the results that may be expected for the year ended December 31, 2005.



The balance sheet at December 31, 2004 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, 2004.



|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 (in thousands, except per share amounts):



|                                                                                                                                                |  |                             |        |                           |   |       |  |      |        |  |   |       
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------ | ------------------------- | - | ----- |  | ---- | ------ |  | - | ------
|                                                                                                                                                |  | Three Months Ended June 30, |        | Six Months Ended June 30,
|                                                                                                                                                |  | 2005                        |        | 2004                      |   | 2005  |  | 2004
|Net income, as reported                                                                                                                         |  | $                           | 11,400 |                           | $ | 6,482 |  | $    | 17,385 |  | $ | 11,494
|Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax
effects |  |                             | 139    |                           |   | 61    |  |      | 503    |  |   | 250   
|                                                                                                                                                |  |                             |        |                           |   |       |  |      |        |  |   |       
|Pro forma net income                                                                                                                            |  | $                           | 11,227 |                           | $ | 6,421 |  | $    | 16,848 |  | $ | 11,244
|                                                                                                                                                |  |                             |        |                           |   |       |  |      |        |  |   |       
|Net income per share:                                                                                                                           |  |                             |        |                           |   |       |  |      |        |  |   |       
|Basic - as reported                                                                                                                             |  | $                           | 0.47   |                           | $ | 0.27  |  | $    | 0.71   |  | $ | 0.48  
|                                                                                                                                                |  |                             |        |                           |   |       |  |      |        |  |   |       
|Basic - pro forma                                                                                                                               |  | $                           | 0.46   |                           | $ | 0.27  |  | $    | 0.69   |  | $ | 0.47  
|                                                                                                                                                |  |                             |        |                           |   |       |  |      |        |  |   |       
|Diluted - as reported                                                                                                                           |  | $                           | 0.46   |                           | $ | 0.27  |  | $    | 0.70   |  | $ | 0.47  
|                                                                                                                                                |  |                             |        |                           |   |       |  |      |        |  |   |       
|Diluted - pro forma                                                                                                                             |  | $                           | 0.45   |                           | $ | 0.26  |  | $    | 0.68   |  | $ | 0.46  
|                                                                                                                                                |  |                             |        |                           |   |       |  |      |        |  |   |       



There were 37,500
options granted during the second quarter ended June 30, 2005.



7



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The fair value of options granted in 2005 was estimated using the Black-Scholes option-pricing model with
the following assumptions:



|                                               |  |                                 |       |  
|---------------------------------------------- |  | ------------------------------- | ----- | -
|                                               |  | Six Months Ending June 30, 2005 |      
|Expected term (years)                          |  |                                 | 7.0   |  
|Volatility                                     |  |                                 | 55.65 | %
|Annual dividend per share                      |  | $                               | 00.00 |  
|Risk-free interest rate                        |  |                                 | 3.98  | %
|Weighted-average fair value of options granted |  | $                               | 12.14 |  



The Black-Scholes
option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions,
including the expected stock price volatility. The Companys options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimate.



During the second quarter ended June 30, 2005, the Company
issued 77,000 Restricted Stock Units (the Units) to certain directors, officers and employees with a grant date fair value of $22.68 per share for 62,000 and a grant date fair value of $21.46 for the remaining 15,000. Each Unit
represents the right to receive one share of the Companys Common Stock when the Unit vests. For directors, the Units vest annually over three years on the anniversary date of their issuance. For officers and employees, the Units vest annually
over five years on the anniversary date of their issuance. Pursuant to APB 25, the Company records compensation expense for the amount of the grant date fair value on a straight line basis over the vesting period.



|3. | Acquisitions
|-- | ------------



On August 23, 2004, the Company completed the acquisition of ESK Ceramics GmbH and Co. KG (ESK Ceramics) from Wacker-Chemie GmbH, pursuant to
a Sale and Purchase Agreement dated June 30, 2004. The Company began to consolidate and report the operations of ESK as of September 1, 2004. Strategic reasons for our acquisition of ESK Ceramics were to a) broaden product line offerings to
customers located outside the United States and b) reduce costs of boron carbide, a key raw material used in the production of our largest product line, body armor.



The purchase price was approximately $142.2 million, which included $4.7 million of transaction costs. The purchase price
was financed with $110 million of long-term debt borrowed under a new credit facility of $160 million provided by a syndicate of banks and institutional lenders led by Wachovia Bank, pursuant to a Credit Agreement dated August 18, 2004. The balance
of the purchase price and transaction costs was paid with a portion of the Companys existing cash.



ESK Ceramics, based in Kempten, Germany, is a manufacturer of industrial technical ceramic powders and advanced technical ceramic products.



In accordance with Statement of Financial Accounting Standards
(SFAS) No. 141, Business Combinations, the acquisition has been accounted for under the purchase method of accounting. The estimates of fair value of the assets acquired and liabilities assumed are based on managements
estimates. The following table summarizes the components of the purchase price (in thousands):



|                                                       |  |   |         |  
|------------------------------------------------------ |  | - | ------- | -
|Cash and debt incurred                                 |  | $ | 137,488 |  
|Transaction costs                                      |  |   | 4,677   |  
|                                                       |  |   |         |  
|Total purchase price                                   |  | $ | 142,165 |  
|                                                       |  |   |         |  
|Fair value of assets acquired and liabilities assumed: |  |   |         |  
|Cash                                                   |  |   | 610     |  
|Accounts receivable                                    |  |   | 14,263  |  
|Inventory                                              |  |   | 24,916  |  
|Property, plant and equipment                          |  |   | 104,234 |  
|Other assets                                           |  |   | 9,295   |  
|Backlog                                                |  |   | 500     |  
|Developed technology                                   |  |   | 4,600   |  
|Tradename                                              |  |   | 2,100   |  
|Goodwill                                               |  |   | 3,060   |  
|Assumed liabilities                                    |  |   | (21,413 | )
|                                                       |  |   |         |  
|                                                       |  | $ | 142,165 |  
|                                                       |  |   |         |  



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Unaudited pro-forma combined results of operations of the Company, assuming the acquisition had occurred
as of January 1, 2004, are presented below. The pro-forma combined results of operations for the six months ended June 30, 2004, include the acquisition described above and adjustments to inter-company sales, depreciation, amortization, pension
costs, and interest. The pro-forma combined results of operations for the six months ended June 30, 2004 contain the use of certain estimates and adjustments to reflect six months of results of operations for the acquisition discussed above. These
combined results have been prepared for comparison purposes only and do not purport to be indicative of what operating results would have been, and may not be indicative of future operating results (in thousands):



|                    |  |                                 |        |                               |   |        
|------------------- |  | ------------------------------- | ------ | ----------------------------- | - | -------
|                    |  | Three Months EndedJune 30, 2004 |        | Six Months EndedJune 30, 2004
|                    |  | (unaudited)                     |        | (unaudited)                  
|Net sales           |  | $                               | 64,404 |                               | $ | 125,159
|Net income          |  |                                 | 6,117  |                               |   | 10,168 
|Earnings per share: |  |                                 |        |                               |   |        
|Basic               |  |                                 | 0.25   |                               |   | 0.42   
|Diluted             |  |                                 | 0.25   |                               |   | 0.41   



The pro forma
adjustments are based upon available information and certain assumptions that the Company believes are reasonable under the circumstances. The purchase price allocation is based on managements estimates of fair value of the assets acquired,
primarily the long-term tangible and intangible assets and liabilities assumed.



On May 15, 2004, the Company completed the purchase of the assets and business of Quest Technology, LP, a privately held firm focusing exclusively on the injection molding of technical ceramics. The purchase price for
the acquisition was approximately $2.7 million consisting of 107,095 newly issued shares of Ceradyne common stock, cash of $100,000 paid at closing and $200,000 payable in 2005 and 2006 and the assumption of certain liabilities. The Company
considers this to be an immaterial acquisition.



The purchase
price allocation was allocated as follows (in thousands):



|                     |  |   |      
|-------------------- |  | - | -----
|Quest Technology, LP |  |  
|Tangible assets      |  | $ | 714  
|Goodwill             |  |   | 1,979
|                     |  |   |      
|Total purchase price |  | $ | 2,693
|                     |  |   |      



In accordance with
Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations, the new intangible asset balance was allocated between identifiable intangible assets and remaining goodwill. Goodwill will not be amortized but is
subject to an ongoing assessment for impairment.



|4. | Composition of Certain Financial Statement Captions
|-- | ---------------------------------------------------



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 June 30, 2005 and December 31, 2004 (in thousands):



|                  |  |              |        |                  |   |       
|----------------- |  | ------------ | ------ | ---------------- | - | ------
|                  |  | June 30,2005 |        | December 31,2004
|Raw materials     |  | $            | 15,850 |                  | $ | 11,697
|Work-in-process   |  |              | 31,145 |                  |   | 22,344
|Finished goods    |  |              | 14,805 |                  |   | 13,632
|                  |  |              |        |                  |   |       
|Total inventories |  | $            | 61,800 |                  | $ | 47,673
|                  |  |              |        |                  |   |       



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The components of amortizable intangibles and goodwill were as follows (in thousands):



|                         |  |               |       |                         |   |           |  |   |      
|------------------------ |  | ------------- | ----- | ----------------------- | - | --------- |  | - | -----
|                         |  | June 30, 2005
|                         |  | GrossAmount   |       | AccumulatedAmortization |   | NetAmount
|Intangible assets:       |  |               |       |                         |   |           |  |   |      
|Backlog                  |  | $             | 525   |                         | $ | 525       |  | $ |     
|Developed technology     |  |               | 4,465 |                         |   | 214       |  |   | 4,251
|                         |  |               |       |                         |   |           |  |   |      
|                         |  |               | 4,990 |                         |   | 739       |  |   | 4,251
|Non-amortizing tradename |  |               | 2,054 |                         |   |          |  |   | 2,054
|                         |  |               |       |                         |   |           |  |   |      
|Total                    |  | $             | 7,044 |                         | $ | 739       |  | $ | 6,305
|                         |  |               |       |                         |   |           |  |   |      



Amortization of
definite-lived intangible assets will be $504,000 in each of the fiscal years 2005 through 2009.



The rollforward of the goodwill balance is as follows (in thousands):



|                   |  |              |       |             |   |      |     |  |       |       |                  |   |    |  |   |      
|------------------ |  | ------------ | ----- | ----------- | - | ---- | --- |  | ----- | ----- | ---------------- | - | -- |  | - | -----
|                   |  | June 30,2005 |       | Translation |   |      | ESK |  | Quest |       | December 31,2004
|Goodwill:          |  |              |       |             |   |      |     |  |       |       |                  |   |    |  |   |      
|ACO                |  | $            | 2,608 |             | $ |     |     |  | $     |      |                  | $ | 33 |  | $ | 2,575
|Semicon Associates |  |              | 603   |             |   |     |     |  |       |      |                  |   |   |  |   | 603  
|Thermo Materials   |  |              | 279   |             |   |     |     |  |       |      |                  |   |   |  |   | 279  
|ESK Ceramics       |  |              | 3,757 |             |   | (337 | )   |  |       | 1,472 |                  |   |   |  |   | 2,622
|                   |  |              |       |             |   |      |     |  |       |       |                  |   |    |  |   |      
|Total              |  | $            | 7,247 |             | $ | (337 | )   |  | $     | 1,472 |                  | $ | 33 |  | $ | 6,079
|                   |  |              |       |             |   |      |     |  |       |       |                  |   |    |  |   |      



|5. | Recent Accounting Pronouncements
|-- | --------------------------------



In May 2005 the FASB issued Statement of Financial Accounting Standards (SFAS) No. 154, Accounting Changes and Error Corrections, a replacement of
APB Opinion No. 20 and FASB Statement No. 3. SFAS 154 requires retrospective application to prior periods financial statements for changes in accounting principle, unless it is impracticable to determine either the period-specific
effects or the cumulative effect of the change. SFAS 154 also requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting principle, such as a
change in non-discretionary profit-sharing payments resulting from an accounting change, should be recognized in the period of the accounting change. SFAS 154 also requires that a change in depreciation, amortization, or depletion method for
long-lived, non-financial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December
15, 2005. Early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after the date this Statement is issued. The Company is required to adopt the provisions of SFAS 154, as applicable, beginning in
fiscal 2007. We do not expect the adoption of this standard to have a material impact on our consolidated financial position, results of operations or cash flows.



In November 2004, Statement of Financial Accounting Standards No. 151, Inventory Costs-an amendment of ARB No. 43,
Chapter 4 (SFAS No. 151), was issued. This Statement amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted
material (spoilage). SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not expect adoption of this standard to have a material impact on our consolidated financial position, results of
operations or cash flows.



In December 2004, the Financial
Accounting Standards Board (FASB) issued a revision of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123R). SFAS No. 123R supersedes APB Opinion No. 25, Accounting for Stock
Issued to Employees, and its related implementation guidance and eliminates the alternative to use Opinion 25s intrinsic value method of accounting that was provided in Statement 123 as originally issued. Under Opinion 25, issuing stock
options to employees generally resulted in recognition of no compensation cost. SFAS No. 123R requires entities to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of
those awards (with limited exceptions). SFAS No. 123R is effective for the first annual reporting period that begins after June 15, 2005. We have not quantified the potential effect of adoption of SFAS No. 123R. However, we believe adoption of SFAS
No. 123R will result in a decrease to our reported earnings.



In December 2004, the FASB issued SFAS No. 153 (FAS 153), Exchange of Nonmonetary Assets-an amendment of APB Opinion No. 29, which amends Opinion 29 to eliminate the exception for nonmonetary exchanges of similar



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productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do
not have commercial substance. FAS 153 defines a nonmonetary exchange as having commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. This Statement is effective for nonmonetary
asset exchanges occurring in fiscal periods beginning after June 15, 2005 and shall be applied prospectively. The Company will adopt FAS 153 in fiscal 2005 and its adoption is not expected to have a material effect on the Companys financial
position, results of operations or cash flows.



In December
2004, the FASB issued FASB Staff Position No. FAS 109-2 (FAS 109-2), Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creations Act of 2004. FAS 109-2 provides
guidance under FASB Statement No. 109, Accounting for Income Taxes, with respect to recording the potential impact of the repatriation provisions of the American Jobs Creation Act of 2004 (the Jobs Act) on enterprises
income tax expense and deferred tax liability. The Jobs Act was enacted on October 22, 2004. FAS 109-2 states that an enterprise is allowed time beyond the financial reporting period of enactment to evaluate the effect of the Jobs Act on its plan
for reinvestment or repatriation of foreign earnings for purposes of applying FASB Statement No. 109. The Company has not yet completed evaluating the impact of the repatriation provisions, however it does not anticipate the adoption will have a
material impact on its consolidated financial statements. Accordingly, as provided for in FAS 109-2, we have not adjusted our tax expense or deferred tax liability to reflect the repatriation provisions of the Jobs Act.



|6. | 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 (in thousands):



|                                              |  |                         |  |                       |  |        |  |       
|--------------------------------------------- |  | ----------------------- |  | --------------------- |  | ------ |  | ------
|                                              |  | Three Months Ended June |  | Six Months Ended June
|                                              |  | 2005                    |  | 2004                  |  | 2005   |  | 2004  
|Weighted average number of shares outstanding |  | 24,500                  |  | 24,068                |  | 24,497 |  | 23,990
|Dilutive stock options and restricted stock   |  | 426                     |  | 394                   |  | 463    |  | 393   
|                                              |  |                         |  |                       |  |        |  |       
|Number of shares used in diluted computations |  | 24,926                  |  | 24,462                |  | 24,960 |  | 24,383



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 distributed on January 18, 2005.



|7. | Credit Facility
|-- | ---------------



On August 18, 2004, the Company entered into a $160 million Credit Facility Agreement with Wachovia Bank, National Association, and a syndicate of banks
and other institutional lenders. The obligations under the Credit Agreement are collateralized by substantially all of the assets of the Company and ESK Ceramics, other than real property. The Credit Agreement provided for a term loan in the amount
of $110 million and a revolving line of credit in the amount of $50 million. The Company borrowed the entire $110 million under the term loan on August 18, 2004. Principal under the term loan is payable in installments of $275,000 on the last day of
each calendar quarter commencing December 31, 2004, with a balloon payment of $102.6 million payable on August 18, 2011. Additional payments of principal are required annually in an amount equal to 50 percent of the Companys excess cash
flow, as defined in the Credit Agreement. Principal may be prepaid at any time, in whole or in part, without premium or penalty at the election of the Company. Accrued interest is payable with each installment of principal.



Borrowings under the Credit Agreement bear interest at a rate per annum equal
to the base rate chosen by the Company plus a margin determined pursuant to the Credit Agreement. The Company may choose a base rate, which is equal to approximately the London interbank offered rate, commonly known as the LIBOR rate, for deposits
in dollars for the interest period selected by the Company. The Company may also choose an alternate base rate, as defined in the Credit Agreement, which is a fluctuating interest rate per annum equal to the higher of either (a) the
prime rate established by Wachovia Bank from time to time, or (b) one-half of one percent above the Federal Funds Rate. The applicable margin is, in respect to the term loan, 2.00 percent per annum if the LIBOR rate is used and 1.00 percent per



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annum if an alternate base rate is used. With respect to borrowings under the revolving line of credit,
the applicable margin is 1.75 percent per annum through December 31, 2005, and thereafter, the margin is a percentage determined pursuant to the Credit Agreement ranging from 0.25 percent to 1.00 percent if an alternate base rate is chosen, and
ranging from 1.50 percent to 2.25 percent if the LIBOR rate is chosen.



The interest rate on the $109.2 million term loan is currently based on the LIBOR rate for a fixed period of three months, at an effective interest rate equal to 5.37 percent per annum.



As of June 30, 2005, the Company borrowed a total of $7.0 million under the
revolving line of credit based on the prime rate plus a spread of 1.75 percent, resulting in a current effective interest rate on the revolving line of credit loan equal to 6.50 percent per annum. Additionally, approximately $2.3 million of the
revolving line of credit has been reserved to support the issuance of outstanding letters of credit.



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 June 30, 2005, the Company was in compliance with these covenants.



|8. | Disclosure About Segments of an Enterprise and Related Information
|-- | ------------------------------------------------------------------



The Company serves its markets and manages its business through four operating segments, each of which has its own manufacturing facilities and
administrative and selling functions. The Companys Advanced Ceramic Operations, located in Costa Mesa, Irvine, and San Diego, California, Lexington, Kentucky and Wixom, Michigan, 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. The Companys ESK Ceramics operation
is located in Kempten, Germany and Bazet, France. This subsidiary produces ceramic powders, including boron carbide powder for ceramic body armor, evaporation boats for metallization, functional and frictional coatings utilized in the automotive and
textile industries, high performance pump seals, bearings for fluid handling, and refractory products.



Ceradynes four segment facilities and products are summarized in the following table:



|                                     |  |                                                               
|------------------------------------ |  | --------------------------------------------------------------
|FACILITY LOCATION                    |  | PRODUCTS                                                      
|Ceradyne Advanced Ceramic Operations |  | Defense Applications:                                         
|                                     | 
|Costa Mesa, Irvine and San Diego,    |  |         Lightweight ceramic armor                            
|California                           |  |                                                               
|                                     |  | Industrial Applications:                                      
|Approximately 166,000 square feet    |  |                                                               
|                                     |  |         Ceralloy® 147 SRBSN wear parts                       
|Lexington, Kentucky                  |  |                                                               
|                                     |  |         Semiconductor equipment components                   
|Approximately 115,000 square feet    |  |                                                               
|                                     |  |         Precision ceramics                                   
|Wixom, Michigan                      |  |                                                               
|                                     |  | Automotive/Diesel Applications:                               
|Approximately 29,000 square feet     |  |                                                               
|                                     |  |         Ceralloy® 147 SRBSN automotive/diesel engine parts   
|                                     | 
|                                     |  |         Ceramic armor system components for civilian vehicles
|                                     | 
|                                     |  | Commercial Applications:                                      
|                                     | 
|                                     |  |         Orthodontic ceramic brackets                         
|                                     | 
|ESK Ceramics                         |  | Defense Applications:                                         
|                                     | 
|Kempten, Germany                     |  |         Boron carbide powders for body armor                 
|                                     | 
|Approximately 532,000 square feet    |  | Industrial Applications:                                      



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|                                  |  |                                                                                                      
|--------------------------------- |  | -----------------------------------------------------------------------------------------------------
|FACILITY LOCATION                 |  | PRODUCTS                                                                                             
|Bazet, France                     |  |         Ceramic powders; boron carbide, boron nitride, silicon nitride, silicon
carbide             
|Approximately 90,000 square feet  |  |                                                                                                      
|                                  |  |         Silicon carbide parts                                                                       
|                                  | 
|                                  |  |         Evaporation Boats for the packaging industry                                                
|                                  | 
|                                  |  |         High performance pump seals                                                                 
|                                  | 
|                                  |  | Automotive/Diesel Applications:                                                                      
|                                  | 
|                                  |  |         EKagrip® functional and frictional coatings; electroless nickel layer/hard particle coatings
|                                  | 
|Ceradyne Semicon Associates       |  | Industrial Applications:                                                                             
|                                  | 
|Lexington, Kentucky               |  |         Ceramic-impregnated dispenser cathodes for microwave tubes, lasers and cathode ray
tubes    
|Approximately 35,000 square feet  |  |         Samarium cobalt magnets                                                                     
|                                  | 
|Ceradyne Thermo Materials         |  | Defense Applications:                                                                                
|                                  | 
|Scottdale and Clarkson, Georgia   |  |         Missile radomes (nose cones)                                                                
|                                  | 
|Approximately 132,000 square feet |  | Industrial Applications:                                                                             
|                                  | 
|                                  |  |         Glass tempering rolls                                                                       
|                                  | 
|                                  |  |         Metallurgical tooling                                                                       
|                                  | 
|                                  |  |         Castable and other fused silica products                                                    
|                                  | 
|                                  |  |         Crucibles for photovoltaic solar cell applications                                          



The financial
information for all segments is presented below (in thousands):



|                                                 |  |                           |        |                         |      |   |        |  |   |         |   |  |   |       
|------------------------------------------------ |  | ------------------------- | ------ | ----------------------- | ---- | - | ------ |  | - | ------- | - |  | - | ------
|                                                 |  | Three Months EndedJune 30 |        | Six Months EndedJune 30
|                                                 |  | 2005                      |        |                         | 2004 |   | 2005   |  |   | 2004   
|Revenue from External Customers                  |  |                           |        |                         |      |   |        |  |   |         |   |  |   |       
|ACO                                              |  | $                         | 56,884 |                         |      | $ | 34,070 |  | $ | 95,208  |   |  | $ | 65,033
|ESK Ceramics                                     |  |                           | 28,054 |                         |      |   |       |  |   | 54,540  |   |  |   |      
|Semicon Associates                               |  |                           | 1,801  |                         |      |   | 2,074  |  |   | 3,742   |   |  |   | 3,916 
|Thermo Materials                                 |  |                           | 3,164  |                         |      |   | 3,081  |  |   | 6,204   |   |  |   | 6,962 
|                                                 |  |                           |        |                         |      |   |        |  |   |         |   |  |   |       
|Total                                            |  | $                         | 89,903 |                         |      | $ | 39,225 |  | $ | 159,694 |   |  | $ | 75,911
|                                                 |  |                           |        |                         |      |   |        |  |   |         |   |  |   |       
|Depreciation and Amortization                    |  |                           |        |                         |      |   |        |  |   |         |   |  |   |       
|ACO                                              |  | $                         | 1,333  |                         |      | $ | 762    |  | $ | 2,650   |   |  | $ | 1,487 
|ESK Ceramics                                     |  |                           | 2,003  |                         |      |   |       |  |   | 4,068   |   |  |   |      
|Semicon Associates                               |  |                           | 95     |                         |      |   | 99     |  |   | 195     |   |  |   | 196   
|Thermo Materials                                 |  |                           | 256    |                         |      |   | 132    |  |   | 466     |   |  |   | 263   
|                                                 |  |                           |        |                         |      |   |        |  |   |         |   |  |   |       
|Total                                            |  | $                         | 3,687  |                         |      | $ | 993    |  | $ | 7,379   |   |  | $ | 1,946 
|                                                 |  |                           |        |                         |      |   |        |  |   |         |   |  |   |       
|Segment Income before Provision for Income Taxes |  |                           |        |                         |      |   |        |  |   |         |   |  |   |       
|ACO                                              |  | $                         | 15,355 |                         |      | $ | 10,184 |  | $ | 23,477  |   |  | $ | 17,994
|ESK Ceramics                                     |  |                           | 3,120  |                         |      |   |       |  |   | 4,530   |   |  |   |      
|Semicon Associates                               |  |                           | 173    |                         |      |   | 171    |  |   | 395     |   |  |   | 315   
|Thermo Materials                                 |  |                           | (237   | )                       |      |   | 151    |  |   | (306    | ) |  |   | 319   
|                                                 |  |                           |        |                         |      |   |        |  |   |         |   |  |   |       
|Total                                            |  | $                         | 18,411 |                         |      | $ | 10,506 |  | $ | 28,096  |   |  | $ | 18,628
|                                                 |  |                           |        |                         |      |   |        |  |   |         |   |  |   |       



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|                      |  |   |         |  |   |         |  |   |         |  |   |        
|--------------------- |  | - | ------- |  | - | ------- |  | - | ------- |  | - | -------
|Segment Assets        |  |   |         |  |   |         |  |   |         |  |   |        
|ACO                   |  | $ | 134,431 |  | $ | 114,803 |  | $ | 134,431 |  | $ | 114,803
|ESK Ceramics          |  |   | 162,986 |  |   |        |  |   | 162,986 |  |   |       
|Semicon Associates    |  |   | 5,849   |  |   | 5,570   |  |   | 5,849   |  |   | 5,570  
|Thermo Materials      |  |   | 12,901  |  |   | 10,837  |  |   | 12,901  |  |   | 10,837 
|                      |  |   |         |  |   |         |  |   |         |  |   |        
|Total                 |  | $ | 316,167 |  | $ | 131,210 |  | $ | 316,167 |  | $ | 131,210
|                      |  |   |         |  |   |         |  |   |         |  |   |        
|Expenditures for PP&E |  |   |         |  |   |         |  |   |         |  |   |        
|ACO                   |  | $ | 2,136   |  | $ | 5,106   |  | $ | 5,235   |  | $ | 9,928  
|ESK Ceramics          |  |   | 2,240   |  |   |        |  |   | 2,926   |  |   |       
|Semicon Associates    |  |   | 82      |  |   | 190     |  |   | 162     |  |   | 285    
|Thermo Materials      |  |   | 441     |  |   | 1,423   |  |   | 1,344   |  |   | 1,740  
|                      |  |   |         |  |   |         |  |   |         |  |   |        
|Total                 |  | $ | 4,899   |  | $ | 6,719   |  | $ | 9,667   |  | $ | 11,953 
|                      |  |   |         |  |   |         |  |   |         |  |   |        



The following is
revenue by product line for ACO:



|             |  |                           |        |                         |   |        |  |      |        |  |   |       
|------------ |  | ------------------------- | ------ | ----------------------- | - | ------ |  | ---- | ------ |  | - | ------
|             |  | Three Months EndedJune 30 |        | Six Months EndedJune 30
|             |  | 2005                      |        | 2004                    |   | 2005   |  | 2004
|Armor        |  | $                         | 47,678 |                         | $ | 26,030 |  | $    | 76,891 |  | $ | 49,053
|Automotive   |  |                           | 4,349  |                         |   | 2,414  |  |      | 7,985  |  |   | 4,887 
|Orthodontics |  |                           | 2,481  |                         |   | 2,371  |  |      | 5,146  |  |   | 5,280 
|Industrial   |  |                           | 2,376  |                         |   | 3,255  |  |      | 5,186  |  |   | 5,813 
|             |  |                           |        |                         |   |        |  |      |        |  |   |       
|             |  | $                         | 56,884 |                         | $ | 34,070 |  | $    | 95,208 |  | $ | 65,033
|             |  |                           |        |                         |   |        |  |      |        |  |   |       



|                   |  |                           |   |  |                         |   |  |      |   |  |      |  
|------------------ |  | ------------------------- | - |  | ----------------------- | - |  | ---- | - |  | ---- | -
|                   |  | Three Months EndedJune 30 |   |  | Six Months EndedJune 30 |  
|                   |  | 2005                      |   |  | 2004                    |   |  | 2005 |   |  | 2004 |  
|U.S. Net Sales     |  |                           |   |  |                         |   |  |      |   |  |      |  
|ACO                |  | 58                        | % |  | 81                      | % |  | 55   | % |  | 80   | %
|ESK Ceramics       |  | 11                        | % |  | 0                       | % |  | 11   | % |  | 0    | %
|Semicon Associates |  | 2                         | % |  | 4                       | % |  | 1    | % |  | 4    | %
|Thermo Materials   |  | 2                         | % |  | 5                       | % |  | 2    | % |  | 6    | %
|                   |  |                           |   |  |                         |   |  |      |   |  |      |  
|Total              |  | 73                        | % |  | 90                      | % |  | 69   | % |  | 90   | %
|                   |  |                           |   |  |                         |   |  |      |   |  |      |  
|Foreign Net Sales  |  |                           |   |  |                         |   |  |      |   |  |      |  
|ACO                |  | 3                         | % |  | 6                       | % |  | 3    | % |  | 6    | %
|ESK Ceramics       |  | 22                        | % |  | 0                       | % |  | 26   | % |  | 0    | %
|Semicon Associates |  | 0                         | % |  | 1                       | % |  | 0    | % |  | 1    | %
|Thermo Materials   |  | 2                         | % |  | 3                       | % |  | 2    | % |  | 3    | %
|                   |  |                           |   |  |                         |   |  |      |   |  |      |  
|Total              |  | 27                        | % |  | 10                      | % |  | 31   | % |  | 10   | %
|                   |  |                           |   |  |                         |   |  |      |   |  |      |  
|Total Net Sales    |  |                           |   |  |                         |   |  |      |   |  |      |  
|ACO                |  | 61                        | % |  | 87                      | % |  | 58   | % |  | 86   | %
|ESK Ceramics       |  | 33                        | % |  | 0                       | % |  | 37   | % |  | 0    | %
|Semicon Associates |  | 2                         | % |  | 5                       | % |  | 1    | % |  | 5    | %
|Thermo Materials   |  | 4                         | % |  | 8                       | % |  | 4    | % |  | 9    | %
|                   |  |                           |   |  |                         |   |  |      |   |  |      |  
|Total              |  | 100                       | % |  | 100                     | % |  | 100  | % |  | 100  | %
|                   |  |                           |   |  |                         |   |  |      |   |  |      |  



Note: Foreign sales for ESK
Ceramics are sales to non-U.S. countries including the principal countries of Germany, France, Denmark and Italy.



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##### Table of Contents

|9. | Pension and Postretirement Benefit Plans
|-- | ----------------------------------------



In connection with the acquisition of ESK Ceramics in August 2004, the Company sponsors a defined benefit pension plan in Germany related to its ESK
Ceramics employees. Components of net periodic benefit cost under this plan were (in thousands):



|                                  |  |                                |      |   |                             |   |      |  
|--------------------------------- |  | ------------------------------ | ---- | - | --------------------------- | - | ---- | -
|                                  |  | Three MonthsEnded June 30 2005 |      |   | Six MonthsEnded June 302005 |  
|Service cost                      |  | $                              | 346  |   |                             | $ | 693  |  
|Interest cost                     |  |                                | 402  |   |                             |   | 809  |  
|Expected return on plan assets    |  |                                | (398 | ) |                             |   | (813 | )
|Amortization of unrecognized gain |  |                                | 4    |   |                             |   | 8    |  
|                                  |  |                                |      |   |                             |   |      |  
|Net periodic benefit cost         |  | $                              | 354  |   |                             | $ | 697  |  
|                                  |  |                                |      |   |                             |   |      |  



Contributions made by
the Company were $140,000 for the three months ended June 30, 2005 and $312,000 for the six months ended June 30, 2005.



|10. | 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 $501,000 and $253,000 for the six months ended 2005 and 2004, respectively. The approximate minimum rental commitments required under existing noncancelable leases as of June 30, 2005 are as
follows (in thousands):



|           |  |   |      
|---------- |  | - | -----
|2005       |  | $ | 838  
|2006       |  |   | 1,510
|2007       |  |   | 1,546
|2008       |  |   | 1,548
|2009       |  |   | 1,470
|Thereafter |  |   | 2,540
|           |  |   |      
|           |  | $ | 9,452
|           |  |   |      



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.



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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 10, Commitments and Contingencies, of Condensed Notes to Consolidated Financial Statements of this report, and in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2004, 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; missile
radomes; ceramic-impregnated dispenser cathodes for microwave tubes, lasers and cathode ray tubes; and ceramic industrial components for erosion and corrosion resistant applications. With our acquisition of ESK Ceramics in August 2004, we now also
produce ceramic powders, including boron carbide powder for ceramic body armor, evaporation boats for metallization, functional and frictional coatings utilized in the automotive and textile industries, high performance pump seals, bearings for
fluid handling, and refractory products. Our customers include the U.S. government, prime government contractors and large industrial, automotive 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.



|                  |  |                         |   |  |       |  
|----------------- |  | ----------------------- | - |  | ----- | -
|                  |  | Six Months EndedJune 30 |  
|                  |  | 2005                    |   |  | 2004  |  
|Defense           |  | 52.9                    | % |  | 64.7  | %
|Industrial        |  | 31.4                    |   |  | 21.5  |  
|Automotive/Diesel |  | 9.6                     |   |  | 6.8   |  
|Commercial        |  | 6.1                     |   |  | 7.0   |  
|                  |  |                         |   |  |       |  
|Total             |  | 100.0                   | % |  | 100.0 | %



The principal factors
contributing to our growth in sales in recent years, as well as during the first six months of the current year, are increased demand by the U.S. military for ceramic body armor that protects soldiers and our acquisition of ESK Ceramics in August
2004. ESK Ceramics contributed $28.1 million to our net sales during the three months ended June 30, 2005 and $54.5 million to our net sales during the six months ended June 30, 2005.



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 sales of our ceramic body armor in each year since 2001, as well as in the six months ended June 30, 2005. In June 2005, we announced the receipt of a $75.5 million delivery order for our
lightweight ceramic body armor. We expect to ship this order beginning in September 2005 through the end of January 2006. This is the third delivery order issued under the Indefinite Delivery/Indefinite Quantity (ID/IQ) $461 million maximum value
contract awarded to us in August 2004. The first two delivery orders totaled approximately $104 million. Based on our current backlog for ceramic body armor, we expect our shipments of ceramic body armor to be higher in fiscal year 2005 than in
2004. However, unless we receive additional orders under existing contracts or are successful in obtaining new contracts for ceramic body armor, our shipments of ceramic body armor will decline materially in 2006 from levels we expect to achieve in
2005. 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.



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##### Table of Contents

During the quarter ended March 31, 2005, the U.S. military directed us to modify the specifications of
the lightweight ceramic body armor that we had been manufacturing, from the version commonly referred to as SAPI (small arms protective insert), to a revised requirement. The revised requirement is more difficult to manufacture than the SAPI
version. We have developed four new designs to meet the revised requirement, all of which have been approved by the government, and we intend to continue to develop additional, improved armor designs. During the quarter ended June 30, 2005, nearly
all of the body armor we shipped consisted of our new designs that meet the revised requirement.



ESK Ceramics produces boron carbide powder, which serves as a starter ceramic powder in the manufacture of our lightweight ceramic body armor. Owning this
source of a principal raw material, together with the recent and ongoing expansion of our manufacturing capacity for ceramic armor in our new Lexington, Kentucky plant and in our Irvine, California facility, should allow us to fulfill current and
anticipated requirements for our ceramic body armor.



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, ceramic radomes for the PAC-3
(Patriot Advanced Capability) and Arrow missile programs, sales to the oil exploration industry, and sales of orthodontic brackets.



In recent years, a substantial portion of our revenue in future periods has been derived from our order backlog as of the beginning of the period. Our
order backlog was approximately $215.6 million as of June 30, 2005, compared to approximately $95.9 million as of June 30, 2004. Orders for ceramic armor as of June 30, 2005 represented approximately $156.3 million, or 72.5% of the total backlog.
This compares with orders for ceramic armor as of June 30, 2004 of approximately $73.8 million, or 77.0% of the total backlog at that time. We expect that substantially all of the orders as of June 30, 2005 will be shipped during the next 12 months.



Results of Operations for the Three and Six Months Ended
June 30, 2005



Net Sales. Our net sales for the
three months ended June 30, 2005 were $89.9 million, an increase of $50.7 million, or 129.2%, from $39.2 million of net sales in the corresponding quarter of the prior year. Net sales for the six months ended June 30, 2005 were $159.7 million, an
increase of $83.8 million, or 110.4%, from $75.9 million of net sales in the corresponding prior year period.



Net sales for our Advanced Ceramic Operations division for the three months ended June 30, 2005 were $56.9 million, an increase of $22.8 million, or 67.0%
from the $34.1 million in the corresponding quarter of the prior year. The primary reason for this improvement was the shipment of $47.7 million of ceramic body and other armor components for defense customers, an increase of $21.7 million, or
83.2%, from the $26.0 million of net sales in the second quarter of 2004. This increase in net sales of lightweight body armor for military personnel was caused by delivery of orders that were received in the third and fourth quarters of 2004 from
the U.S. Department of Defense. Net sales for our automotive/diesel component product line were $4.3 million, an increase of $1.9 million, or 78.3%, from the $2.4 million in the corresponding quarter of the prior year. The primary reason for this
increase is that our customers are producing more heavy-duty diesel truck engines due to an increase in orders for diesel trucks. Net sales of our orthodontic brackets product line were $2.5 million, an increase of $109,000, or 4.6%, from net sales
of $2.4 million in the corresponding quarter of the prior year.



For the six month period ended June 30, 2005, net sales for the Advanced Ceramic Operations division were $95.2 million, an increase of $30.2 million, or 46.4% from the $65.0 million in the corresponding prior year period. The primary
reason for this improvement was the shipment of $76.9 million of ceramic body and other armor components for defense customers, an increase of $27.8 million, or 56.8%, from the $49.1 million of net sales in the corresponding prior year period. This
increase in net sales of lightweight body armor for military personnel was caused by delivery of orders that were received in the third and fourth quarters of 2004 from the U.S. Department of Defense. Net sales for our automotive/diesel component
product line were $7.9 million, an increase of $3.0 million, or 60.8%, from the $4.9 million in the corresponding prior year period. The primary reason for this increase is that our customers are producing more heavy-duty diesel truck engines due to
an increase in orders. Net sales of our orthodontic brackets product line were $5.1 million, a decrease of $135,000, or 2.6%, from net sales of $5.3 million in the corresponding prior year period.



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Our ESK Ceramics subsidiary had net sales for the three months ended June 30, 2005 of $28.1 million. For
purposes of comparison, ESK Ceramics sales in the second quarter of 2004 were $25.2 million, but its operations were not consolidated with ours during that quarter.



For the six months ended June 30, 2005, net sales for ESK Ceramics were $54.5 million. For purposes of comparison, ESK
Ceramics sales for the six months ended June 2004 were $49.2 million, but its operations were not consolidated with ours during that period. The increase in sales reflects higher shipments of functional coating products and boron carbide
powder for use in armor applications.



Our Semicon Associates
division had net sales for the three months ended June 30, 2005 of $1.8 million, a decrease of $274,000, or 13.2%, from the $2.1 million in the corresponding quarter of the prior year. The decrease in sales reflects lower shipments of microwave
cathodes during the current quarter versus the same quarter last year.



For the six months ended June 30, 2005, net sales for Semicon Associates were $3.7 million, a decrease of $175,000, or 4.5%, from the $3.9 million in the corresponding prior year period. The decrease in sales reflects lower shipments of
microwave and laser cathodes.



Our Thermo Materials division
posted net sales for the three months ended June 30, 2005 of $3.2 million, an increase of $82,000, or 2.7%, from the $3.1 million in the corresponding quarter of the prior year. This increase was due to an increase in sales of crucibles used in the
manufacture of photovoltaic cells for the solar energy markets, which offset lower sales of fused silica rollers.



For the six months ended June 30, 2005, net sales for the Thermo Materials division were $6.2 million, a decrease of $0.7 million, or 10.9%, from the $6.9
million in the corresponding prior year period. This decrease was due to several factors. Defense revenues decreased $1.5 million, and sales of fused silica rollers decreased $1.3 million, which were offset by an increase of $1.1 million of
crucibles sales. The decrease in sales of fused silica rollers was caused by severe price competition from Chinese manufacturers who continued to reduce prices resulting in decreasing sales prices for our fused silica roller products.



Gross Profit. Our gross profit was $32.6 million for the three months
ended June 30, 2005, an increase of $19.2 million, or 143.0%, from $13.4 million in the corresponding prior year quarter. As a percentage of net sales, gross profit was 36.2% for the three months ended June 30, 2005, compared to 34.1% for the
corresponding prior year period. The increase in gross profit and gross profit as a percentage of sales was a result of increased sales, improved sales mix, higher operating leverage and a reduction in the cost of boron carbide, a key raw material
used in the production of body armor.



For the six months ended
June 30, 2005, our gross profit amounted to $54.4 million, an increase of $29.4 million, or 117.4%, from $25.0 million in the corresponding prior year period. As a percentage of net sales, gross profit was 34.1% for the six months ended June 30,
2005, compared to 33.0% for the corresponding prior year period. Gross profit for the six months ended June 30, 2005 included $0.7 million of charges related to the write off of inventory for designs of body armor products that were made obsolete by
a change in product specifications by the U.S. military. Gross profit during this period also included $0.7 million of charges related to the startup of the Lexington hot press facility that began to produce ceramic plates in January 2005. These
charges reduced gross profit as a percentage of net sales by 80 basis points for the six months ended June 30, 2005.



Our Advanced Ceramic Operations division posted gross profits of $21.8 million for the three months ended June 30, 2005, an increase of $9.4 million, or
75.5%, from $12.4 million in the corresponding prior year quarter. As a percentage of net sales, gross profit was 38.3% for the three months ended June 30, 2005, compared to 36.3% for the corresponding prior year quarter. The increase in gross
profit and gross profit as a percentage of sales was a result of increased sales, improved sales mix, higher operating leverage and a reduction in the cost of boron carbide, a key raw material used in the production of body armor.



For the six months ended June 30, 2005, gross profit for the Advanced Ceramic
Operations division was $35.1 million, an increase of $12.0 million, or 52.0%, from $23.1 million in the corresponding prior year period. As a percentage of net sales, gross profit was 36.8% for the six months ended June 30, 2005, compared to 35.5%
for the corresponding prior year period.



Our ESK Ceramics
subsidiary had gross profit and gross profit as a percentage of sales of $10.2 million and 36.2%, respectively, for the three months ended June 30, 2005. For comparative purposes, gross profit as a percentage of sales



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##### Table of Contents

was 29.2% for the three months ended June 30, 2004, but its operations were not consolidated with ours during that quarter. The increase in gross profit as a
percentage of sales was a result of increased sales, improved sales mix and higher operating leverage. For the remainder of the year, we anticipate that gross profits as a percentage of sales will approximate 30-32% of sales; the result of a change
in sales mix.



For the six months ended June 30, 2005, gross
profits for ESK Ceramics were $18.0 million and 33.0% as a percentage of sales. For comparative purposes, gross profit as a percentage of sales was 27.7% for the six months ended June 30, 2004, but its operations were not consolidated with ours
during that period.



Our Semicon Associates division had gross
profit of $376,000 for the three months ended June 30, 2005, a decrease of $45,000, or 10.7%, compared to $421,000 in the prior year quarter. As a percentage of net sales, gross profit was 20.9% for the three months ended June 30, 2005, compared to
20.3% for the corresponding prior year quarter.



For the six
months ended June 30, 2005, gross profit for the Semicon Associates division was $0.8 million, an increase of $42,000, or 5.6%, from $0.7 million in the corresponding prior year period. As a percentage of net sales, gross profit was 21.1% for the
six months ended June 30, 2005, compared to 19.1% for the corresponding prior year period.



Our Thermo Materials division had gross profit of $220,000, a decrease of $399,000, or 64.5%, from $0.6 million in the corresponding prior year quarter. As a percentage of net sales, gross profit was 7.0% for the
three months ended June 30, 2005, compared to 20.1% for the corresponding prior year quarter. Reduced gross profits in the fused silica and casting product lines contributed to the decrease in gross profits for the three months ended June 30, 2005.



For the six months ended June 30, 2005, gross profit for the
Thermo Materials division was $606,000, a decrease of $621,000 or 50.6%, compared to $1.2 million in the prior year period. As a percentage of net sales, gross profit was 9.8% for the six months ended June 30, 2005, compared to 17.6% for the
corresponding prior year period. This decrease was due to reduced gross profit in our fused silica roller product line caused by severe price competition from Chinese manufacturers who continued to reduce prices. This competitive pressure caused our
gross profits to be reduced by $0.5 million during the six months ended June 30, 2005.



Selling Expenses. Our selling expenses were $5.5 million for the three months ended June 30, 2005, an increase of $4.7 million, or 589.5%, from $0.8 million in the corresponding prior year quarter. Selling
expenses, as a percentage of net sales, increased from 2.0% for the three months ended June 30, 2004 to 6.1% of net sales for the three months ended June 30, 2005, primarily due to the inclusion into our results of the operations of our acquisition
of ESK Ceramics. Of the $4.7 million increase, ESK contributed $4.3 million, or 91.5% of the increase.



For the six months ended June 30, 2005, selling expenses were $10.3 million, an increase of $8.8 million, or 582.6%, from $1.5 million in the
corresponding prior year period. Selling expenses, as a percentage of net sales, increased from 2.0% for the six months ended June 30, 2004 to 6.4% of net sales for the six months ended June 30, 2005. Of the $8.8 million increase, ESK contributed
$8.1 million. ESKs selling expenses are higher as a percentage of net sales than the other three divisions because ESK sells in more foreign countries and has more customers. We expect this trend to continue. We also operated two other sales
offices during the three and six months ended June 30, 2005, a Washington, D.C. office and facilities for our vehicle armor operations that were not in operation during the same period last year. Offsetting this increase to selling expenses as a
percentage of net sales, were increases in net sales and better operating leverage.



General and Administrative Expenses. General and administrative expenses for the three months ended June 30, 2005 were $5.2 million, an increase of $2.5 million, or 90.7%, from $2.7 million in the corresponding
prior year quarter. General and administrative expenses, as a percentage of net sales, decreased from 6.9% for the three months ended June 30, 2004 to 5.8% of net sales for the three months ended June 30, 2005. For the three months ended June 30,
2005, ESK Ceramics contributed $1.0 million to the increased amount of general and administrative expenses. Increases in the number of employees and related personnel expenses primarily accounted for the remaining increase in general and
administrative expenses.



For the six months ended June 30,
2005, general and administrative expenses were $9.7 million, an increase of $4.4 million, or 82.7%, from $5.3 million in the six months ended June 30, 2004. General and administrative expenses, as a percentage of net sales, decreased from 7.0% for
the six months ended June 30, 2004 to 6.1% of net sales for the six months ended June 30, 2005. For the six month period ended June 30, 2005, ESK contributed $1.9 million to the increase, while increases in the number of employees and related
personnel expenses primarily accounted for the remaining rise in general and administrative expenses.



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Research and Development. Research and development expenses for the three months ended June 30,
2005 were $1.7 million, an increase of $1.2 million, or 199.5%, from $0.6 million in the corresponding prior year quarter. Research and development expenses, as a percentage of net sales, increased from 1.5% for the three months ended June 30, 2004
to 1.9% of net sales for the three months ended June 30, 2005. Including the results of ESK for the three months ended June 30, 2005 contributed $0.7 million of the increase. The remaining $1.0 million of the increase was a result of funds spent to
develop hot pressing and silicon nitride manufacturing technologies for our new facility in Lexington, Kentucky.



For the six months ended June 30, 2005, research and development expenses were $3.6 million, an increase of $2.6 million, or 252.3%, from $1.0 million in
the corresponding prior year period. Research and development expenses, as a percentage of net sales, increased from 1.3% for the six months ended June 30, 2004 to 2.3% of net sales for the six months ended June 30, 2005. Including the results of
ESK contributed $1.4 million of the increase.



Other
Income. Other income for the three months ended June 30, 2005 was $35,000, a decrease of $1.2 million, or 97.1%, compared to $1.2 million in the corresponding quarter of 2004. The decrease was due to gains on currency transactions of $1.0
million recognized in the three months ended June 30, 2004 compared to losses from currency transactions of $59,000 in the three months ended June 30, 2005. Also contributing to the decrease was a reduction in interest income due to lower cash
balances during the three months ended June 30, 2005 when compared to the corresponding prior year quarter. Other income for the six months ended June 30, 2005 was $399,000, a decrease of $1.0 million, or 72.3%, compared to $1.4 million in the
corresponding prior year period. The decrease was due to gains on currency transactions of $1.0 million recognized in the six months ended June 30, 2004 compared to gains from currency transactions of $167,000 in the six months ended June 30, 2005.
Also contributing to the decrease was a reduction in interest income due to lower cash balances during the six months ended June 30, 2005 when compared to the corresponding prior year period.



Interest Expense. Our interest expense for the three months ended June
30, 2005 was $1.7 million, while for the year earlier period we did not have any interest because we did not have any outstanding debt. Interest expense for the six months ended June 30, 2005 was $3.1 million, while for the year earlier period we
did not have any interest because we did not have any outstanding debt.



Income before Provision for Income Taxes. Our income before provision for income taxes for the three months ended June 30, 2005 was $18.4 million, an increase of $7.9 million, or 75.2%, from $10.5 million in the corresponding prior
year quarter. For the six months ended June 30, 2005, income before provision for income taxes was $28.1 million, an increase of $9.5 million, or 50.8%, from the $18.6 million in the corresponding prior year period.



Our Advanced Ceramic Operations divisions income before provision for
income taxes for the three months ended June 30, 2005 was $15.4 million, an increase of $5.2 million, or 50.8%, from $10.2 million in the corresponding prior year quarter. For the six months ended June 30, 2005, the Advanced Ceramic Operations
divisions income before provision for income taxes was $23.5 million, an increase of $5.5 million, or 30.5%, from $18.0 million in the corresponding prior year period. The increase in income before provision for income taxes for both the three
and six months ended June 30, 2005 was a result of higher sales of armor offset in part by higher general and administrative expenses to support these sales levels.



Our ESK Ceramics subsidiarys income before provision for income taxes for the three months ended June 30, 2005 was
$3.1 million after including interest expense of $1.5 million and gains from currency of $0.6 million. For the six months ended June 30, 2005, ESK Ceramics income before provision for income taxes was $4.5 million after including interest
expense of $2.9 million and gains from currency of $0.9 million. ESK was not included in our financial results during the six months ended June 30, 2004.



Semicon Associates income before provision for income taxes for the three months ended June 30, 2005 was $173,000, an increase of $1,000, or 0.6%, from
$172,000 in the corresponding prior year quarter. For the six months ended June 30, 2005, Semicon Associates income before provision for income taxes was $395,000, an increase of $79,000, or 25.0%, from $316,000 in the corresponding prior year
period. The increase in income before provision for income taxes for the six months ended June 30, 2005 was a result of higher sales of microwave cathodes and an increase in gross profit due to increased levels of production while other operating
expenses remained relatively constant.



Thermo Materials
loss before provision for income taxes for the three months ended June 30, 2005 was $237,000, a decrease of $386,000, or 259.1% from $149,000 of income before provision for income taxes in the corresponding prior year quarter. For the six months
ended June 30, 2005, Thermo Materials loss before provision for income taxes



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for the six months ended June 30, 2005 was $306,000, a decrease of $0.6 million, or 196.8% from $316,000
of income before provision for income taxes in the corresponding prior year period. The decrease in income before provision for income taxes for the three and the six months ended June 30, 2005 was primarily due to reduced amounts of sales and gross
margin of rolls and defense products while offset slightly by the sales and gross margins of crucibles.



Income Taxes. We had a combined federal and state tax rate of 38.1% for the three months ended June 30, 2005, resulting in a provision for taxes of
$7.0 million, an increase of $3.0 million, or 74.2%, from $4.0 million in the corresponding prior year quarter. The effective income tax rate for the three months ended June 30, 2004 was 38.3%. Our provision for income taxes for the six months ended
June 30, 2005 was $10.7 million, an increase of $3.6 million, or 50.1%, from the $7.1 million in the corresponding prior year period. The effective income tax rate for the six months ended June 30, 2005 was 38.1% compared to 38.3% in the
corresponding prior year period.



Liquidity and Capital
Resources



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



Our net cash position decreased by $1.9 million during the six months ended June 30, 2005, compared to an $8.2 million decrease during the six months
ended June 30, 2004. For the six months ended June 30, 2005, cash flow provided by operating activities amounted to $10.7 million. The primary factors contributing to cash flow from operating activities in the quarter ended June 30, 2005, were net
income of $17.4 million, depreciation and amortization of $7.4 million, a decrease in accounts receivables of $440,000 and a decrease in other receivables of $1.0 million. Also, contributing to the increase in cash flow from operating activities
were increases in accounts payable, accrued expenses and accruals for employee benefits that added an aggregate of $3.8 million. These contributions were offset in part by increases in inventories of $17.4 million, increased levels of production
tooling of $3.3 million and increases in other assets of $439,000. The increase in inventory and tooling were due to the increase in sales and production to support the growth of the ACO segment.



We used $9.1 million of our cash for investing activities, including $9.7
million used for capital expenditures and $1.5 million for additional acquisition costs for the purchase of ESK Ceramics. To offset cash used for investing activities, we also liquidated short term investments by $2.1 million. A majority of our
capital expenditures was for equipment to gain additional armor manufacturing capacity primarily at our Lexington, Kentucky hot press facility and improve operations.



Financing activities used cash of $2.7 million. Reductions in our bank line of credit of $2.4 million and a reduction of
long-term debt of $550,000 were the primary uses of the cash used in financing activities. The effect of exchange rates on cash and equivalents due to our investment in ESK Ceramics was a negative $0.7 million.



On August 18, 2004, we established a $160 million credit facility with
Wachovia Bank, National Association, and a syndicate of banks and other institutional lenders. The Credit Agreement provides for a term loan in the amount of $110 million and a revolving line of credit in the amount of $50 million. All the proceeds
from the term loan were borrowed on August 18, 2004 and were used to partially fund the acquisition of ESK Ceramics GmbH and Co. KG (ESK Ceramics) from Wacker-Chemie GmbH, pursuant to a Sale and Purchase Agreement dated June 30, 2004.
The balance of the purchase price and transaction costs was paid with a portion of the Companys existing cash.



Principal under the term loan is payable in installments of $275,000 on the last day of each calendar quarter commencing December 31, 2004, with a balloon
payment of $102.6 million payable on August 18, 2011. Additional payments of principal are required annually in an amount equal to 50 percent of our excess cash flow, as defined in the Credit Agreement. Principal may be prepaid at any
time, in whole or in part, without premium or penalty at our election. Accrued interest is payable with each installment of principal.



Borrowings under the Credit Agreement bear interest at a rate per annum equal to the base rate chosen by the Company plus a margin determined pursuant to
the Credit Agreement. The Company may choose a base rate, which is equal to approximately the London interbank offered rate, commonly known as the LIBOR rate, for deposits in dollars for the interest period selected by the Company. The Company may
also choose an alternate base rate, as defined in the Credit Agreement, which is a fluctuating interest rate per annum equal to the higher of either (a) the prime rate established by Wachovia Bank from time to time, or (b) one-half of
one percent above the Federal Funds Rate. The applicable margin is, in respect to the term loan, 2.00 percent per annum if the LIBOR rate is used and 1.00 percent per annum if an alternate base rate is used. With respect to borrowings under the
revolving line of credit, the applicable



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margin is 1.75 percent per annum through December 31, 2005, and thereafter, the margin is a percentage
determined pursuant to the Credit Agreement ranging from 0.25 percent to 1.00 percent if an alternate base rate is chosen, and ranging from 1.50 percent to 2.25 percent if the LIBOR rate is chosen.



The interest rate on the outstanding $109.2 million term loan is currently
based on the LIBOR rate for a fixed period of three months, at an effective interest rate equal to 5.37 percent per annum.



As of June 30, 2005, the Company borrowed a total of $7.0 million under the revolving line of credit based on the prime rate plus a spread of 1.75
percent, resulting in a current effective interest rate on the revolving line of credit loan equal to 6.50 percent per annum. Additionally, approximately $2.3 million of the revolving line of credit has been reserved to support the issuance of
outstanding letters of credit.



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 June 30, 2005, the Company was in compliance
with these covenants.



Our cash, cash equivalents and
short-term investments totaled $10.6 million at June 30, 2005, compared to $14.6 million at December 31, 2004. At June 30, 2005, we had working capital of $90.2 million, compared to $78.4 million at December 31, 2004. Our cash position includes
amounts denominated in foreign currencies, and the repatriation of those cash balances from our ESK Ceramics subsidiary does not result in additional tax costs. We believe that our current cash and cash equivalents on hand, cash available from the
sale of short-term investments, cash available from additional borrowings under our revolving line of credit 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 from time to time 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
|------- | ----------------------------------------------------------



We are exposed to market risks related to fluctuations in interest rates on our debt. We routinely monitor our risks associated with fluctuations in
currency exchange rates and interest rates. We address these risks through controlled risk management that may, in the future, include the use of derivative financial instruments to economically hedge or reduce these exposures. We do not enter into
foreign exchange contracts for speculative or trading purposes. Currently, we do not utilize interest rate swaps.



Given the inherent limitations of forecasting and the anticipatory nature of the exposures intended to be hedged, there can be no assurance that such
programs will offset more than a portion of the adverse financial impact resulting from unfavorable movements in either interest or foreign exchange rates. In addition, the timing of the accounting for recognition of gains and losses related to
mark-to-market instruments for any given period may not coincide with the timing of gains and losses related to the underlying economic exposures and, therefore, may adversely affect our operating results and financial position and cash flows.



We enter into foreign exchange forward contracts to reduce
earnings and cash flow volatility associated with foreign exchange rate changes to allow our management team to focus its attention on its core business operations. Accordingly, we enter into contracts which change in value as foreign exchange rates
change to economically offset the effect of changes in value of foreign currency assets and liabilities, commitments and anticipated foreign currency denominated sales and operating expenses. We enter into foreign exchange forward contracts in
amounts between minimum and maximum anticipated foreign exchange exposures, generally for periods not to exceed one year. These derivative instruments are not designated as accounting hedges.



We measure the financial statements of our foreign subsidiaries using the
local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the exchange rate on the balance sheet date. Revenues, costs and expenses are translated at the rates of exchange prevailing during the year.
Translation adjustments resulting from this process are included in stockholders equity. Gains and losses from foreign currency transactions are included in other income, miscellaneous.



Our debt is primarily comprised of $109.2 million of term loan borrowings and
$7.0 million borrowed under our line of credit, consisting of $4.5 million of domestic borrowings and $2.5 million of foreign debt converted from euros.



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If interest rates were to increase or decrease by 1.0% for the year, annual interest expense would
increase or decrease by approximately $1.1 million.



Overall,
we are a net recipient of currencies other than the U.S. dollar and, as such, we benefit from a weaker dollar and are adversely affected by a stronger dollar relative to major currencies worldwide. Accordingly, changes in exchange rates, and in
particular a strengthening of the U.S. dollar, may negatively affect net sales, gross profit, and net income from our subsidiary, ESK Ceramics, as expressed in U.S. dollars. This would also negatively impact our consolidated reported results.



Approximately 31% of our revenues for the six months ended
June 30, 2005 were derived from operations outside the United States. Our acquisition of ESK Ceramics provided additional revenues that were derived outside the United States. Therefore, we are subject to fluctuations in sales and earnings reported
in U.S. dollars as a result of changing currency exchange rates.



Item 4.    Controls and Procedures



We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of
Ceradynes disclosure controls and procedures as of June 30, 2005, pursuant to Rule 13a-15 under the Securities Exchange Act of 1934. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in
the Commissions rules and forms, and to ensure that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.



We did not make any changes in our internal control over financial reporting during the quarter ended June 30, 2005 that materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.



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.    Submission of Matters to a Vote of Security Holders



The following matters were voted upon at the Annual Meeting of Stockholders held on May 23, 2005:



| | 1. | The following six persons were elected to the Board of Directors of the Company to serve until the next annual meeting of stockholders or until their successors are elected and have
qualified:
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                    |  |                      |  |                   
|------------------- |  | -------------------- |  | ------------------
|                    |  | Number of Votes Cast
|                    |  | For                  |  | Authority Withheld
|Joel P. Moskowitz   |  | 22,029,014           |  | 898,174           
|Richard A. Alliegro |  | 21,971,352           |  | 955,836           
|Eduard Bagdasarian  |  | 21,980,426           |  | 946,762           
|Frank Edelstein     |  | 21,971,563           |  | 955,625           
|Richard A. Kertson  |  | 22,055,671           |  | 871,517           
|Milton L. Lohr      |  | 21,960,406           |  | 966,782           



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| | 2. | An amendment to the Ceradyne, Inc. 2003 Stock Incentive Plan was approved by the following vote:
| | -- | ------------------------------------------------------------------------------------------------



|                     |  |           
|-------------------- |  | ----------
|Number of Votes Cast |  |           
|For                  |  | 13,251,755
|Against              |  | 1,207,951 
|Abstain              |  | 61,570    
|Broker non-votes     |  | 8,405,912 



Item 5.    N/A



Item 6.    Exhibits



(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.



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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: July 29, 2005



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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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