<PAGE>

                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                 FORM 10-K
[X]   ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

      For the Fiscal Year Ending December 31, 2000

[_]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934 (No fee required)
      For the transition period from _____ to _____

                         Commission File No. 000-13059

                                CERADYNE, INC.
                                --------------
            (Exact name of Registrant as specified in its charter)

            Delaware                               33-0055414
 -------------------------------     ---------------------------------------
 (State or other jurisdiction of     (I.R.S. Employer Identification Number)
  incorporation or organization)

              3169 Red Hill Avenue, Costa Mesa, California 92626
              --------------------------------------------------
                   (Address of principal executive offices)

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

       Securities registered pursuant to Section 12(b) of the Act:  None

          Securities registered pursuant to Section 12(g) of the Act:
                         Common Stock, $.01 par value
                               (Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES  X   NO
    ---

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  (X)

The aggregate market value (based on the closing price at which stock was sold)
of the voting shares held by non-affiliates of the registrant as of February 2,
2001 was $63,955,395.

As of February 2, 2001, the number of shares of the registrant's Common Stock
outstanding was 8,295,042.

DOCUMENTS INCORPORATED BY REFERENCE:  None
<PAGE>

                                 PART I

This Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934.  The Company's actual results may differ
materially from the results projected in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in "Item 1 - Business," including the section therein entitled
"Risk Factors," and in "Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations."

Item 1.  Business
         --------

Introduction

Ceradyne, Inc. ("Ceradyne" or the "Company") develops, manufactures and markets
advanced technical ceramic products and components for industrial, defense,
consumer, electronic, and microwave communications applications.  In many high
performance applications, products made of advanced technical ceramics meet
specifications that similar products made of metals or plastics cannot achieve.
Advanced technical ceramics can withstand extremely high temperatures, combine
hardness with light weight, are highly resistant to corrosion and wear, and have
excellent electrical insulation capability and other special electronic
properties.

Ceradyne's technology was originally developed primarily for defense and
aerospace applications which have historically represented a substantial portion
of its business.  However, the Company has diversified its product lines based
on the development of new ceramic materials' applications for domestic and
international markets.  The Company continues to serve its historical customer
base which accounts for a substantial portion of Ceradyne's business.

The Company derives a portion of its revenues from its traditional products,
lightweight ceramic armor for military helicopters and microwave tube products.
However, newer products developed or being developed by the Company for defense,
industrial and consumer applications represent an increasing share of its
business.  Examples of these newer products include (i) large corrosion
resistant ceramic components sold to semiconductor equipment manufacturers; (ii)
lightweight ceramic armor vests for military personnel; (iii) a translucent
ceramic orthodontic bracket, which is sold to Unitek Corporation, a subsidiary
of 3M, under an exclusive marketing agreement and marketed by Unitek under its
brand name "Clarity", (iv) wear resistant components for industrial machinery,
such as paper making equipment, made from the Company's Ceralloy(R) 147 silicon
nitride advanced technical ceramic; (v) missile nose cones or radomes for the
defense industry, and (vi) silicon nitride advanced technical ceramic components
(cam rollers) used on diesel engines.

Industry Background

Developments in industrial processing, military systems, microwave electronics,
consumer electronics, automotive/diesel engine products, and orthodontics have
generated a demand for high performance materials with certain properties not
readily available in metals or plastics.  In certain high performance
applications, this demand has been met by products made of advanced technical
ceramics.

                                       1
<PAGE>

The following table compares certain favorable properties of selected advanced
technical ceramics commonly used by the Company with those of other selected
materials.

<TABLE>
<CAPTION>
                               MELTING
                                POINT           HARDNESS           CHEMICAL                                 DENSITY
                              (DEGREES          (VICKERS          RESISTANCE            ELECTRICAL           (GMS
MATERIALS                    FAHRENHEIT)         SCALE)            TO ACIDS             PROPERTIES          PER CC)
====================================================================================================================
<S>                        <C>               <C>              <C>                  <C>                    <C>
Advanced technical                                                                 From conductors to
ceramics                   2,500 to 6,900    1,600 to 7,000        Excellent       excellent insulators   2.5 to 4.5


High strength alloy
steel                      2,500 to 2,700      250 to 900            Fair          Conductors             7.0 to 9.0

High performance                                               Good to Excellent   Good to excellent
plastics                     275 to 750          5 to 10                           insulators             1.0 to 2.0
====================================================================================================================
</TABLE>

Ceramics such as earthenware, glass, brick and tile have been made for centuries
and are still in common use today.  The inertness and lasting qualities of
ceramics are illustrated by the artifacts uncovered intact in modern times.
Almost all traditional ceramics, including those of ancient times, were based on
clay.  In recent years, significant advances have been made in ceramic
technology through the application of specialized processes to produce man-made
ceramic powders.  In the 1950's and 1960's, developments in aluminum oxide and
other oxides provided ceramics that were excellent electrical insulators and
were capable of withstanding high temperatures.  In the 1970's, these and other
developments resulted in the ability to manufacture advanced technical ceramics
with great strength at elevated temperatures and reduced brittleness,
historically a primary limitation of ceramics.  The products that have emerged
from these advances are known as advanced technical (or structural) ceramics.

The properties of advanced technical ceramics present a compelling case for
their use in a wide array of applications.  However, manufacturing costs
associated with the production of these materials need to be reduced in order to
accelerate the use of advanced technical ceramics as a direct replacement for
metals, plastics or other ceramics.  A portion of these costs is related to the
need for diamond grinding finished components to exacting tolerances.  Industry
cost reduction efforts have included the production of blanks or feed stock to
"near net shape" configurations, thus reducing the need for final finishing.
Manufacturers are also seeking to reduce costs through the use of high volume
automated processing and finishing equipment and techniques, and to achieve
economies of scale in areas such as powder processing, blank fabrication,
firing, finishing and inspection.

The automobile industry is particularly sensitive to initial as well as life
cycle costs.  Although the current state of the art of advanced technical
ceramics suggests potential automotive acceptance, the cost factors currently
will not permit automobile related production.  The industry goal is to reduce
advanced technical ceramics' costs as close as possible to the cost of
equivalent metal parts.

Ceradyne Strategy

The Company's strategy is to capitalize on its existing technologies, developed
originally for defense and aerospace applications, and to broaden its product
and customer base through increased marketing efforts, both domestically and
internationally.  The Company is focusing on additional customer requirements
for existing products, and on emerging markets and products which require

                                       2
<PAGE>

or can benefit from the physical, chemical or electronic properties of advanced
technical ceramics.  To support this strategy, the Company's Advanced Ceramic
Operations in Costa Mesa, California created a new Research & Development
Department in early 1998 to focus on new materials' technology.

Ceradyne seeks to increase sales of its traditional products primarily through
expanded domestic and global marketing efforts.  In 2000, Ceradyne established a
European Sales Office in England and in early 2001 an Asian Sales Office in
Beijing, China.  The European office will concentrate its sales efforts in the
area of industrial applications and lightweight ceramic armor for military
applications.  The China office will concentrate its sales efforts in the area
of industrial ceramics, utilizing fused silica ceramics for the glass tempering
and metal forming markets.

In addition to the Company's strategy to leverage its existing technologies, the
Company expects much of its future growth to come from products which are
currently in early production or still in development. There can be no
assurances, however, that products still under development will be successfully
completed, or that any of these newer products, including those already in
production, will achieve wide market acceptance.  See "Risk Factors".  The
following table illustrates these newer and planned products and the markets for
which they are intended.

                                       3
<PAGE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------

         MARKET OPPORTUNITY                    TECHNICAL DEMANDS OF MARKET                       CERADYNE'S STRATEGIC RESPONSE
------------------------------------------------------------------------------------------------------------------------------------

<S>                                   <C>                                                   <C>
                                                       INDUSTRIAL
------------------------------------------------------------------------------------------------------------------------------------

Corrosion resistant non-oxide         The industry has historically used silicon metal,     Ceradyne has created a business unit
ceramics for use as semiconductor     quartz, and aluminum oxide ceramics to fabricate      called "Semiconductor Equipment
equipment chamber components that     chamber components.  Next generation equipment may    Components" and has begun supplying
handle wafers.                        have operating conditions that may deteriorate        high density and high purity nitride
                                      currently used materials in some sections.            and carbide ceramics to several
                                                                                            equipment suppliers. The Research and
                                                                                            Development group is attempting to
                                                                                            develop compositions tailored to each
                                                                                            equipment manufacturer's environment.

Wear resistant components required   Failure of industrial equipment is often caused by     Ceralloy 147(R) Sintered Reaction
on the rubbing or cutting surfaces   premature wearing out of surfaces due to abrasive      Bonded Silicon Nitride (SRBSN)
of industrial machinery, such as     action.  Examples include paper making where the       industrial wear parts and cutting tool
in paper making equipment,           pulp slurry runs at 5000 feet per minute, or in        inserts are designed to replace hard
centrifuges, and cutting tool        metal cutting where as much as .125 inch depth of      metal or even oxide ceramic wear
inserts.                             cut are removed in a single pass.                      surfaces, resulting in great
                                                                                            productivity, quality and longer
                                                                                            "uptime".
------------------------------------------------------------------------------------------------------------------------------------


                                                         DEFENSE
------------------------------------------------------------------------------------------------------------------------------------

Lightweight armor for military        As tactical conflicts as well as terrorist and        Ceralloy 546(R) (boron carbide),
personnel.                            other activities result in the increased use of       Ceralloy(R) 146 (silicon carbide) and
                                      automatic weapons, it has become necessary to stop    Ceralloy(R) 147 (silicon nitride) backed
                                      bullets as great as a .50 caliber machine gun         with Kevlar(TM), Spectra(TM) or other
                                      round.  However, vests or other armor must be         laminates are designed to provide
                                      light enough in weight to allow freedom of            lightweight ballistic protection greater
                                      movement without undue fatigue.                       than Kevlar alone at an acceptable
                                                                                            weight.

Missile nose cones (radomes).         Next generation defensive missiles (Standard          The Company's advanced technical
                                      Missile Block IV and Block IVA and Patriot PAC-3)     ceramic radomes are designed to
                                      will be required to fly at extremely high             address demanding  specifications of
                                      velocities, tight turning radii, and severe           next  generation missile nose cones.
                                      weather conditions.  These operating conditions
                                      may preclude the use of conventional polymer
                                      materials.

Lightweight applique armor for        The increased necessity for worldwide military        New armor development initiatives at
ground combat vehicles.               police actions and rapid response peacekeeping        Ceradyne are focused on a low cost,
                                      missions is driving the military vehicle force to     durable modular armor kit technology
                                      lightweight systems that are air transportable.       called Ramtech that can be added to
                                      These vehicles must provide armor protection          many different vehicles.  Multi-hit
                                      beyond their original design specification, which     protection is provided against 7.62mm,
                                      can only be met through the addition of               12.7mm and 14.5mm armor piercing
                                      lightweight modular armor applique.                   ammunition.
------------------------------------------------------------------------------------------------------------------------------------


                                                          CONSUMER
------------------------------------------------------------------------------------------------------------------------------------

Orthodontic brackets                  Traditional stainless steel orthodontic ceramic       Ceradyne's Transtar translucent
                                      brackets are often considered unsightly.              orthodontic brackets are inert, pick up
                                      Substitute clear plastic materials can be weak and    the color of the patient's teeth and
                                      may stain.  Some orthodontic patients prefer          allow the orthodontist to correct the
                                      aesthetically pleasing brackets which can be          patient's bite.  The Company and its
                                      affixed to each tooth to support the archwire.        marketing partner, 3M/Unitek,
                                                                                            introduced an enhanced version of this
                                                                                            ceramic bracket in 1996, which is
                                                                                            marketed by Unitek under the brand name
                                                                                            "Clarity". Shipments of orthodontic
                                                                                            brackets in 2000 increased from the
                                                                                            prior year period. The Company has
                                                                                            recently introduced a new Clarity
                                                                                            prescription known as "MBT".
------------------------------------------------------------------------------------------------------------------------------------


                                                         AUTOMOTIVE
------------------------------------------------------------------------------------------------------------------------------------

Automobile internal combustion        In order to achieve diesel engine life of one         Ceradyne's Ceralloy(R) 147 SRBSN is a
engine and diesel engine valve        million miles and automobile engine life of over      candidate for a variety of engine
train and other engine components.    125,000 miles without major maintenance, it may be    components including cam rollers,
                                      necessary to replace metal engine components with     bucket tappet inserts, engine valves,
                                      longer lasting, lighter weight, higher temperature    clevis pins and fuel pump parts.  The
                                      resistant ceramic parts at acceptable unit costs.     Company is in production of parts for
                                                                                            diesel engines. Ceradyne continues its
                                                                                            prototype development for internal
                                                                                            combustion components with the Ford
                                                                                            Motor Company.
------------------------------------------------------------------------------------------------------------------------------------

</TABLE>

                                       4
<PAGE>

As part of the Company's strategy, management has and intends to further
establish additional sales representative and distributor relationships,
particularly in international markets.  The Company will also seek to develop
strategic product development or marketing relationships with other
manufacturing companies or key customers whose expertise, marketing or financial
resources will assist the Company in accomplishing these objectives.  See "Risk
Factors".

Strategic Relationships

The Company has established two strategic relationships which have been, and the
Company expects will continue to be, important factors in the Company's efforts
to develop and expand its advanced technical ceramic technology into new
products and markets.  These relationships are described below.

Ford Motor Company Joint Development Program.  Ceradyne completed a series of
transactions with the Ford Motor Company ("Ford") in March 1986 with a long-term
objective of developing ceramic components for automobiles.  Key to this venture
was the transfer of technology developed by Ford relating to technical ceramics,
including a portfolio of United States and corresponding foreign patents and
patent applications, and the investment by Ford of $10 million in the Company in
exchange for Common Stock which eventually resulted in an ownership interest in
Ceradyne of approximately 14.6%.  Ford and the Company also entered into a joint
development program pursuant to which Ceradyne has been applying its experience
and expertise in technical ceramics to develop this technology into commercial
products with a view to eventually develop components for automobile engines.
The technology acquired from Ford and the efforts of this joint development
program have led to the development of Ceradyne's Ceralloy(R) 147 sintered
reaction bonded silicon nitride (SRBSN) advanced technical ceramic, from which
the Company now produces a line of industrial wear components and has a line of
components for use in diesel engines and fuel pumps.

3M/Unitek Orthodontic Bracket Joint Program.  In March 1986, Ceradyne entered
into a joint development and supply agreement with Unitek Corporation, a
subsidiary of Minnesota Mining and Mfg ("3M/Unitek") for the development of a
translucent ceramic bracket for orthodontic appliances commonly known as braces.
Under this agreement, 3M/Unitek, which is a major manufacturer of stainless
steel orthodontic brackets, provided Ceradyne with information regarding the
functional specifications and properties which ceramic brackets would be
required to satisfy.  Based on this information and utilizing its experience
with translucent ceramics originally produced by Ceradyne for defense electronic
countermeasure applications, Ceradyne developed, and in 1987 began
manufacturing, translucent ceramic brackets.  These brackets cosmetically blend
with the natural color of the patient's teeth while performing the structural
functions formerly performed by traditional stainless steel brackets.

Ceradyne and 3M/Unitek have obtained and jointly own two United States patents
covering the basic use of translucent ceramics for an orthodontic bracket.
3M/Unitek has an exclusive right to market brackets based on this technology
until 2007.

                                       5
<PAGE>

Market Applications

The Company's products can be categorized by the table below which represents
principal market applications they address in percent of total sales.

                                         Year Ended December 31,
                                      -----------------------------
                                        2000       1999       1998
                                      -----------------------------

      Industrial                         34%        38%        46%

      Defense                            33%        21%        14%

      Consumer                           14%        18%        16%

      Microwave Tube Products            16%        21%        23%

      Automotive                          3%         2%         1%

      TOTAL                             100%       100%       100%


Set forth below is a description of the Company's principal products itemized by
market:

  Industrial

Industrial Wear Components. Ceradyne's industrial wear components are made
primarily of its Ceralloy(R) 147 sintered reaction bonded silicon nitride
(SRBSN).  These SRBSN ceramic components are generally incorporated in
industrial machinery where severe abrasive conditions exist which wear out vital
components.  The Ceradyne wear resistant parts are used to replace conventional
wear materials such as tungsten carbide or ceramics such as alumina or zirconia.
Often these parts are incorporated in high wear areas at the original equipment
manufacturer's plant.  Applications include metal cutting tool inserts, paper
making equipment, abrasive blasting nozzles as well as custom applications.

Semiconductor Equipment Components.  The equipment used to make semiconductor
devices is extremely advanced and the newest generation has operating
environments that are harsh enough to severely limit the life of the traditional
ceramic and metal components.  Ceradyne is positioned to offer a new generation
of non-oxide ceramics which have exceptional corrosion resistance.

Tempered Glass Furnace Components and Metallurgical and Industrial Tooling.
Fused silica ceramic is a ceramic which does not materially expand when heated,
nor materially contract when cooled.  Therefore, it is used to produce
industrial tooling and molds where complicated shapes and dimensions must be
maintained over a wide range of temperatures.  Such applications include the
forming and shaping of titanium metal, used in the manufacturing of aircraft.
Other applications take advantage of fused silica's excellent thermal shock
resistance and inertness when in contact with glass. These applications include
components for equipment used in the fabrication of flat plate and tempered
glass or contoured shapes such as automobile windshields and architectural

                                       6
<PAGE>

glass.  Fused silica ceramic shapes of up to 14 feet in length are produced in
the Company's facility located near Atlanta, Georgia.

  Defense

Lightweight Ceramic Armor.  Although armor has progressed through the centuries
from animal skin shields to metal armored suits, to Kevlar(TM) vests (for light
armor), to heavy steel plates, the requirements for light weight and maximum
projectile stopping capability vary little.  Ceradyne has developed and
currently produces lightweight ceramic armor capable of protecting against
threats as great as .50 caliber armor piercing machine gun bullets.  Compared to
traditional steel armor plates, Ceradyne's ceramic armor systems offer weight
savings as great as 50% for .50 caliber and 75% for 7.62mm armor piercing
projectiles.  Utilizing hot pressed Ceralloy(R) ceramic, the Company's armor
plates are laminated with either Kevlar(TM), Spectra(TM), fiberglass, or custom
laminates and formed into a wide variety of shapes, structures and components.
Historically, ceramic armor manufactured by the Company has been used
principally for military helicopter crew seats and airframe panels.  The Company
believes it is a leader in producing lightweight ceramic armor for military
helicopters.  Recently, Ceradyne has become a major supplier of lightweight
ceramic body armor for the U.S. Army.  See "Risk Factors".

The Company received its first production contract for ceramic armor vests for
military personnel in January 1995.  This order, from the Defense Logistics
Agency of the United States Government, was for $3.5 million in vests, which the
Company shipped during 1996.

On March 2, 1998, a U.S. government agency selected Ceradyne to provide certain
ceramic armor products over a multi-year period.  The multi-year contract
provides for total orders over the 6 year life of the program which could exceed
$100 million.  Through December 31, 2000, the Company has received production
orders under this program totaling $17.3 million.  However, there can be no
assurances as to the exact quantities or deliveries under this program as the
government is not required to purchase any minimum amount and all orders are at
the full discretion of the government.

In 2000, the Company received two Small Business Innovation Research (SBIR)
grants from the Department of Defense for development of vehicle armor totaling
$2.4 million.  The goal of these programs is to develop an improved armor system
which can be applied to new generations of land and sea based fighting vehicles.

Missile Nose Cones (Radomes). The Company produces conical shaped, precision
machined ceramic components which are designed to be mounted by its customers on
the front end of defensive missiles.  These nose cones, or radomes, are designed
for applications where the velocities and operating environments are severe
enough that the thermal shock and erosion resistance, high strength and
microwave transparency properties of advanced technical ceramics are required.
Radomes manufactured by the Company have been qualified for the Standard Missile
Block IV and Block IVA missile program and for the Patriot PAC-3 missile
program.

                                       7
<PAGE>

  Consumer

Ceramic Orthodontic Brackets. In the orthodontic process of correcting a
patient's tooth alignment, typically small (about 1/4'') stainless steel
brackets are adhered to each individual tooth in order to serve as a guide to
the archwire which is the wire that sets into each bracket. The cosmetic
appearance of all this metal is often considered quite unattractive.  Ceradyne,
together with its marketing partner, 3M/Unitek, have developed and are marketing
ceramic orthodontic brackets made of Ceradyne's translucent ceramic,
Transtar(R).  The translucency of this ceramic bracket, together with the
classic ceramic properties of hardness, chemical inertness and imperviousness,
have resulted in a cosmetic substitute for traditional stainless steel brackets.
These products are generally sold as aesthetic alternatives to conventional
metal brackets and have been in production since 1987.  Ceradyne and 3M/Unitek
introduced a new enhanced ceramic bracket called "Clarity" in October of 1996.
This product has patent protection and offers new features which improve the
bracket's strength and functionality, compared to earlier designs manufactured
by the Company. Comments from orthodontists who have purchased Clarity(TM)
brackets have been positive. The Company believes Clarity(TM) brackets offer the
orthodontist a more robust product that will minimize treatment and chair time
while providing superior aesthetic appearance.

  Microwave Tube Products

Microwave Ceramic-Impregnated Dispenser Cathodes.  The Company manufactures
ceramic-impregnated dispenser cathodes which are used in microwave tubes for
applications in radar, satellite communications, electronic countermeasures and
other uses.  Dispenser cathodes, when heated, provide the stream of electrons
which are magnetically focused into an electron beam.  Microwave frequency
signals which interact with this beam of electrons are substantially increased
in power. Microwave dispenser cathodes are primarily composed of a porous
tungsten matrix impregnated with ceramic oxide compounds.

Samarium Cobalt Permanent Magnets.  The Company's samarium cobalt magnets are
sold as components primarily for microwave tube applications.  Electron beams in
microwave tubes generated by the dispenser cathodes described above can be
controlled by the magnetic force provided by these powerful permanent magnets.
The magnets are generally small sub-components of microwave traveling wave
tubes.

Precision Ceramics.  Ceradyne produces a wide variety of hot pressed Ceralloy(R)
ceramic compositions, precision diamond ground to close tolerances, primarily
for microwave tube applications.  The interior cavities of microwave tubes often
require ceramic components capable of operating at elevated temperatures and in
high vacuums.

  Automotive Market

Internal Combustion and Diesel Engine Components.  The demand for higher
performance, more efficient and more durable engines for heavy duty diesel
trucks and automobiles creates additional opportunities for advanced technical
ceramics.  The Company believes that if engines could be produced using certain
advanced technical ceramic components, they could be lighter and last longer
than those using metal components, and could operate at higher temperatures with
reduced cooling and lubrication requirements.  As a result, engines would use
less fuel, achieve more complete combustion, thereby reducing emissions, and be
less costly to maintain.  Because of these

                                       8
<PAGE>

potential benefits, industry-wide efforts are being made to develop advanced
technical ceramic technology to replace critical steel components in diesel and
automobile engines.

Ceradyne has provided a number of prototype parts made of Ceradyne's Ceralloy(R)
147-31N sintered reaction bonded silicon nitride (SRBSN) materials for
evaluation and testing in internal combustion and diesel engines.  In the second
quarter of 1999, the Company received a purchase order for the production of cam
rollers for use in diesel engines.  Production began in the third quarter of
1999 and shipments are continuing at present.  This contract runs through 2002.
Contingent upon Ceradyne's performance, including meeting certain customer
quality and delivery milestones, the Company expects to receive orders for
significantly higher volumes in the future.  Also, Ceradyne, in the fourth
quarter of 1999, began preproduction qualification of a component for a high
pressure fuel pump which is used in light duty diesel engines.  Production began
in mid-2000 and shipments are scheduled through mid-2002.  Furthermore, Ceradyne
is engaged in a joint development program with Ford to develop ceramic
components for automobile engines.  Ford is not obligated to purchase any
minimum quantities of components developed under this program, and Ceradyne's
efforts in this area are still in the experimental stage with future success
greatly dependent on achieving cost reductions while maintaining high quality
levels.  See "Risk Factors".

  Other

Utilizing its advanced technical ceramic technologies and facilities, the
Company also manufactures a number of other products related to the foregoing
markets, such as dispenser cathodes for ion laser applications, samarium cobalt
permanent magnets for motors and instruments, and other precision advanced
technical ceramics.  None of these products provide a material amount of revenue
to the Company.

Marketing and Customers

Each of Ceradyne's three manufacturing locations maintains an autonomous sales
and marketing force promoting their individual products.  The Company has more
than 12 employees directly involved in marketing, including a marketing manager
located in the United Kingdom who was hired in February, 2000, and a sales
manager located in Beijing, China, who was hired in January 2001.  The Company
also has agreements with manufacturers' representatives in the United States and
other countries who are compensated as a percent of sales in their territory.
Ceradyne is focusing much of its marketing effort outside the United States
through direct involvement of senior management personnel from the Company's
U.S. facilities in concert with local manufacturing representatives.  Revenues
from export sales represented approximately 16% of total net sales in 1998, 11%
in 1999 and 13% in 2000.

Generally, the Company sells components to contractors or original equipment
manufacturers.  To a lesser extent, Ceradyne sells its products directly to the
end user.  The Company sells its translucent ceramic orthodontic brackets only
to 3M/Unitek pursuant to an exclusive marketing agreement with that customer.
See "Risk Factors".  Sales to 3M/Unitek represented approximately 16% of total
net sales in 1998, 18% in 1999, and 14% in 2000.

The Company continues to explore various domestic and international marketing,
and other relationships to increase its sales and market penetration.
Furthermore, Ceradyne is attempting to create long-term relationships with its
customers to promote a smoother, more predictable flow of

                                       9
<PAGE>

orders and shipments by entering into multi-year agreements or exclusive
relationships where possible.

Manufacturing Processes

Ceradyne has a number of manufacturing processes which are dedicated to specific
products and markets.  These processes and the product applications are
described below.

Hot Pressing.  The Company's hot pressing process is generally used to fabricate
ceramic shapes for lightweight ceramic armor and semiconductor equipment
components.  Ceradyne has developed and constructed induction heated furnaces
capable of operating at temperatures exceeding 4000(degrees)F in inert
atmospheres at pressures up to 5000 lbs. per square inch. This equipment enables
Ceradyne to fabricate parts more than 26 inches in diameter, which is considered
large for advanced technical ceramics. Through the use of multiple cavity dies
and special tooling, the Company can produce a number of parts in one furnace
during a single heating and pressing cycle.

Ceradyne procures its raw materials (fine powders) from several outside
suppliers.  After processing by the Company, the powders are either loaded
directly into the hot pressing molds or are shaped into preforms prior to
loading into the hot pressing molds.  The powders are placed in specially
prepared graphite tooling, most of which is produced by Ceradyne.  Heat and
pressure are gradually applied to the desired level, carefully maintained and
finally reduced.  The furnace is removed from the press while cooling to permit
the press to be used with another furnace.  For most products, approximately 20
hours are required to perform this cycle.  The resultant ceramic product
generally has mechanical, chemical and electrical properties of a quality
approaching that only theoretically obtainable.  Almost all products are then
finished by diamond grinding to meet precise dimensional specifications.

Sintering of Fused Silica Ceramics.  Sintering of fused silica ceramics is the
process Ceradyne uses to fabricate fused silica ceramic shapes for applications
in glass tempering furnaces, metallurgical tooling and other industrial uses.
To fabricate fused silica ceramic shapes, fused silica powders are made into
unfired shapes through slip casting or other ceramic compaction processes.
These unfired "green" shapes are fired as they move through a continuously
operated 150 foot long tunnel kiln at temperatures up to 2500(degrees)F. The
final shapes are often marketed in the "as fired" condition or, in some cases,
precision diamond ground to achieve specific dimensional tolerances or surface
finishes required by certain customers. See "Business, Manufacturing Processes-
Diamond Grinding".

Ceramic-Impregnated Dispenser Cathode Fabrication.  Ceramic-impregnated
dispenser cathode fabrication is used to produce cathodes for microwave power
tube applications.  To produce ceramic-impregnated dispenser cathodes, both
tungsten metal powders and ceramic powders are used.  The tungsten metal powders
are isostatically pressed in polymer tooling, removed and fired in special
atmospheres at temperatures in excess of 4000(degrees)F. The tungsten billets
are machined into precision shapes with exacting tolerances. The tungsten
machined shapes are impregnated with a ceramic composite and fired at high
temperatures in special atmospheres. The ceramic impregnated components are
assembled and furnace brazed.

Final processing includes the insertion of a metal heating element within a
ceramic insulating compound and the addition of an extremely thin layer of
precious metals to the surface.  The

                                       10
<PAGE>

Company's final quality inspection often includes a test of the cathode's
electron emitting capabilities at normal operating temperatures.

Sintering and Reaction Bonding of Silicon Nitride.  The sintering of reaction
bonding silicon nitride results in the Company's Ceralloy(R) 147 SRBSN, which is
used in industrial and automotive applications.  Ceradyne's SRBSN is based on
technology acquired from Ford. See "Strategic Relationships".  This SRBSN
process begins with relatively inexpensive high purity elemental silicon (Si)
powders, which contrasts sharply with most other competitors' manufacturing
techniques which start with relatively more expensive silicon nitride
(Si\3\N\4\) powders.

After additives are incorporated by milling and spray drying, the silicon
powders are formed into shapes through conventional ceramic processing such as
dry pressing.  These shapes are then fired in a nitrogen atmosphere which
converts the silicon part to a silicon nitride part.  At this step (reaction
bonding), the silicon nitride is pressure sintered in an inert atmosphere
increasing the strength of the component threefold.  As a result of SRBSN
processing, the ceramic crystals grow in an intertwining "needle-like" fashion
which the Company has named NeedleLok/TM/.  Ceradyne's NeedleLok/TM/ structure
results in a tough, high fracture energy part.  The process is economical due to
the low cost of the starting powders and can be used to produce extremely high
production volumes of parts due to the use of conventional pressing processes.

Fabrication of Translucent Ceramics (Transtar(R)).  Ceradyne produces
translucent aluminum oxide (Transtar(R)) components primarily for use as
orthodontic ceramic brackets.  The high purity powders are purchased from
outside vendors and processed by dedicated conventional ceramic mechanical dry
presses.  The formed blanks are then fired in a segregated furnace in a hydrogen
atmosphere at 3272(degrees)F until the ceramics enter into a strong translucent
condition.  These fired aesthetic brackets then have certain critical features
diamond ground into them.  The final step is a proprietary treatment of the
bonding side in order to permit a sound mechanical seal when bound to the
patient's teeth.

Diamond Grinding. Many of Ceradyne's advanced technical ceramic products must be
finished by diamond grinding because of their extreme hardness.  The Company's
finished components typically are machined to tolerances of (plus or minus) .001
inch and occasionally are machined to tolerances up to (plus or minus) .0001
inch. To a limited extent, the Company also performs diamond grinding services
for customers independently of its other manufacturing processes to
specifications provided by the customer. The Company's diamond grinding
department can perform surface grinding, diameter grinding, ultrasonic diamond
grinding, diamond lapping, diamond slicing and honing. The equipment includes
manual, automatic and computer numerically controlled (CNC) grinders. The CNC
grinders have been specially adapted by the Company for precision grinding of
ceramic contours to exacting tolerances.

Fabrication of Samarium Cobalt Permanent Magnets.  The fabrication of samarium
cobalt permanent magnets results in various magnet shapes which are primarily
used in microwave tube applications. The Company procures premixed samarium
cobalt powder either as SmCo\5\ or Sm\2\Co\17\ compositions. The powders are
then milled and formed into the final configuration by pressing in a magnetic
field using a specially designed magnet press. These "pre-fire" or "green"
magnets are then sintered at 2000(degrees) in helium or vacuum. The magnets may
then be subsequently diamond ground and characterized as to each individual
magnet's strength.

                                       11
<PAGE>

Raw Materials.  The starting raw materials for Ceradyne's manufacturing
operations are generally fine, man-made powders available from several domestic
and foreign sources. The raw materials, such as Kevlar/TM/, graphite, metal
components and ceramic powders are readily available from several commercial
sources.

Quality Control.  Ceradyne products are made to a number of exacting
specifications.  In order to meet both internal quality criteria and customer
requirements, the Company has implemented a number of quality assurance and in-
process statistical process control programs.  These quality programs are
implemented separately at each of Ceradyne's three manufacturing locations.
Thermo Materials Division in Scottdale, Georgia received its ISO 9002
Certification in 1997.  Advanced Ceramic Operations in Costa Mesa, California
received its ISO 9001 Certification in 1998.

Engineering and Research

Ceradyne's engineering and research efforts consist of applications engineering
in response to customer requirements, in addition to new materials and product
development performed by its Research and Development Department.  These efforts
are directed toward the creation of new products, the modification of existing
products to fit specific customer needs, or the development of enhanced ceramic
process technology.  The Company is also engaged in research to develop new
products.  Costs associated with application engineering and research are
generally expensed as incurred and are included in cost of product sales, or in
Research and Development expense. Costs associated with research were
approximately $1,610,000 in 2000, $878,000 in 1999 and $728,000 in 1998.  The
totals consist of $1,252,000, $597,000 and $344,000 from the Research and
Development Department, and $358,000, $281,000 and $384,000 from the Engineering
Department (included in cost of product sales) for the years ended December 31,
2000, 1999 and 1998, respectively.

Competition

Ceradyne competes on the basis of product performance, material specifications,
applications engineering capabilities, customer support, reputation and price.
Competitive pressures vary in each specific product market, depending on the
product and program.  In many instances, the competitors are well-known
companies with greater financial, marketing and technical resources than
Ceradyne. Ceradyne intends to continue to focus on selected business areas in
which it can exploit its technological, manufacturing and marketing strengths.
Some of Ceradyne's competitors are divisions of larger companies, with each of
Ceradyne's product lines subject to completely different competitors.  Some of
the competitors of the Company include Kyocera Corporation's Industrial Ceramics
Group, Vesuvius, Cercom, CoorsTek, Inc., Spectra-Mat, and others.  In many
applications, the Company also competes with manufacturers of non-ceramic
materials.  For future automotive applications, there is a wide range of both
current and potential domestic and international competitors.  See "Risk
Factors".

Backlog

Ceradyne records an item as backlog when it receives a contract or purchase
order indicating the number of units to be purchased, the purchase price,
specifications and other customary terms and conditions.  Ceradyne customarily
includes unexercised options as a separate item in its backlog because the
purchase orders are given on the basis of the total order, including options.
Total backlog as of December 31, 2000 was approximately $26.7 million,
consisting of $26.0 million of

                                       12
<PAGE>

firm scheduled orders and $.7 million of unexercised options. As of December 31,
1999 total backlog approximated $23.7 million consisting of $21.1 million of
firm scheduled orders and $2.6 million of unexercised options. Typically, firm
orders are scheduled to be shipped within 12 to 18 months from receipt of order.

Patents, Licenses and Trademarks

The Company relies primarily on trade secrecy to protect compositions and
processes that it believes are proprietary.  In certain cases, the disclosure of
information concerning such compositions or processes in issuing a patent could
be competitively disadvantageous.  However, management believes that patents are
important for technologies where trade secrecy alone is not a reliable source of
protection.  Accordingly, Ceradyne has applied for, or has been granted, several
United States patents relating to compositions, products or processes that
management believes are proprietary, including lightweight ceramic armor.

Two U.S. patents have been issued to the Company relating to translucent
ceramics for orthodontic brackets.  The earliest of these patents expires in
2007.  These patents are co-invented and co-owned by Ceradyne and 3M/Unitek.
Ceradyne and 3M/Unitek have granted licenses to eight companies whose ceramic
orthodontic brackets infringe the Ceradyne-3M/Unitek patents, wherein those
companies pay royalties to Ceradyne and 3M/Unitek based on sales of their
orthodontic ceramic brackets for the remaining life of the patents.  See "Risk
Factors".

Through its association with Ford, Ceradyne acquired in excess of 80 U.S.
patents, of which 10 are still active, and corresponding foreign patents and
applications relating to technical ceramics for automotive technology.  The last
of these patents will expire in August 2007.  See "Strategic Relationships".

In addition to the above, Ceradyne has been issued 18 U.S. patents and has 3
patents pending and has applied for corresponding foreign patents in various
foreign countries.  The earliest of these patents expires in 2002.

"Ceralloy(R)", the name of Ceradyne's technical ceramics, "Ceradyne(R)" and the
Ceradyne logo, comprising the stylized letters "CD(R)", are major trademarks of
the Company which have been registered in the United States and various foreign
countries.  The Company also has other trademarks, including "Transtar(R)",
"Semicon(R)", "Thermo(R)", "Isomolded(R)", "NeedleLok/TM/", and "Ramtech(TM)".

Employees

At December 31, 2000, Ceradyne employed approximately 405 persons, including 14
employees with undergraduate or graduate degrees in ceramic engineering or
material sciences.  Management considers its employee relations to be excellent.
The Company has not experienced difficulty in attracting personnel.  None of the
Company's employees are represented by a labor union.

Risk Factors

This annual report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934.

                                       13
<PAGE>

Our actual results may differ materially from the results projected in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, the following:

  We Must Successfully Develop and Market New Products; We have Limited Volume
Manufacturing Experience for Products Under Development

Our future prospects will depend to a large extent on the success of products
which currently provide little revenue or which remain under development. These
products include:

  .  semiconductor equipment components;
  .  ceramic components for automobile and diesel engines.

We are developing ceramic automotive and diesel engine components based on our
belief that a significant market for these products will emerge.  However,
predicting future demand for such components is fraught with uncertainties.
This is a new and evolving market and advanced technical ceramics are not
currently used in any significant automotive applications.  It is possible that
such applications will never emerge.

Even if a market emerges, our efforts to produce ceramic components for
automobile and diesel engines remain in an early stage.  To successfully produce
these components, we must significantly lower manufacturing costs and develop
high volume manufacturing capabilities while maintaining component quality.  If
we meet our production goals, it typically takes several years to introduce new
materials and components into production automobiles.  Thus, demand for these
products and our ability to service such demand are subject to a high degree of
uncertainty.

Nevertheless, we believe that such a market will emerge eventually and that we
will be well-positioned to capitalize on it.  We have received a purchase order
for the production of diesel engine components made from Ceradyne's Ceralloy(R)
147-31N sintered reaction bonded silicon nitride (SRBSN).  Production began late
in the third quarter of 1999.  Ceradyne shipped approximately $1.4 million in
automotive products during the year ended December 31, 2000. Ceradyne also
received purchase orders for preproduction qualification of a component for a
high pressure fuel pump which is used in light duty diesel engines.  Production
began in mid-2000 and shipments are scheduled through mid-2002.

  Failure to Manage Our Growth Could Adversely Affect Us

Our current introduction of new products is placing, and will continue to place,
a significant strain on our resources and personnel.  To continue our growth, we
must introduce new products that apply our core advanced technical ceramic
technologies.  Managing this transition to new products will strain our
operational, financial and managerial resources into the foreseeable future.

To effectively manage growth, we must:

  .  add manufacturing capacity and personnel;
  .  continue to implement and improve our operational, financial and management
     information systems;
  .  develop the management skills of our managers and supervisors;

                                       14
<PAGE>

  .  add new management personnel and improve the expertise of existing
     management personnel; and
  .  train, motivate and manage our employees.

Any failure to effectively manage growth could have material adverse effects on
our business, operating results and financial condition.

  We Depend on Joel P. Moskowitz and Our Other Key Personnel

Our success largely depends on the continued service of our principal managers.
Many of these managers, and in particular Joel P. Moskowitz, who is Chairman,
Chief Executive Officer and President, and a principal stockholder of Ceradyne,
would be extremely difficult to replace.  We also depend on other key personnel,
and our ability to attract, motivate and retain highly qualified personnel.

Competition for skilled employees is intense and there can be no assurance that
we will be able to recruit and retain such personnel.  In addition, although Mr.
Moskowitz has an employment agreement with the Company that expires in July
2001, no other employee has an agreement for a specified term of employment with
Ceradyne.  If we are unable to retain our existing managers and employees or
hire and integrate new employees, it could have material adverse effects on our
business, operating results and financial condition.

  The Advanced Technical Ceramics Markets Are Highly Competitive

The markets for applications of advanced technical ceramics are competitive.  We
believe the principal competitive factors in these matters are:

  .  product performance;
  .  material specifications;
  .  application engineering capabilities;
  .  customer support;
  .  reputation; and
  .  price

At present, while we believe that we compete favorably with respect to these
factors, this may change.  If we fail to address our competitive challenges,
there could be material adverse effects on our business, financial condition and
results of operations.

Our competitors include divisions of larger companies and manufacturers of non-
ceramic materials.  Many of these competitors, both domestic and international,
have greater financial, marketing and technical resources than we do.  Our
primary competitors include Kyocera Corporation's Industrial Ceramics Group,
Vesuvius, Cercom, CoorsTek, Inc., Spectra-Mat, and others.  Not only do we
compete with many large companies, but each of our product lines competes with
completely different companies.

We cannot guaranty that we will be able to compete successfully against our
current or future competitors or that competition will not have material adverse
effects on our business, operating results and financial condition

                                       15
<PAGE>

  We Could Be Liable for Violations of Environmental Laws and Regulations

We are subject to a variety of environmental regulations relating to the use,
storage, discharge and disposal of hazardous materials used to manufacture our
products.  Authorities could impose fines, suspend production, alter our
manufacturing processes, or stop our operations if we do not comply with these
regulations.

In the past, we produced certain products using beryllium oxide, which is highly
toxic in powder form.  This powder, if inhaled, can cause chronic beryllium
disease in a small percentage of the population.  In recent years, we have been
sued by former employees and family members of the former employees alleging
that they had contracted chronic beryllium disease as a result of exposure to
beryllium oxide powders used in our products.  We settled several of these
claims without incurring material liability, but several lawsuits are still
pending.  We cannot guaranty that we will avoid future liability to persons who
allege that they contracted chronic beryllium disease as a result of exposure to
beryllium oxide utilized by Ceradyne.

While we believe we are in material compliance with all applicable environmental
statutes and regulations, any failure to comply with current or subsequently
enacted statutes and regulations could subject us to liabilities, fines or the
suspension of production.  Furthermore, claims asserted against us related to
exposure to beryllium oxide powder may not be covered by insurance.  Even if
covered, the amount of insurance may be inadequate to cover any adverse
judgment.

Fines and other punishments imposed in connection with environmental violations
and expenses related to remediation or compliance with environmental regulations
and future liability for incidences of chronic beryllium disease contracted by
employees or employees of customers could have material adverse effects on our
business, operating results and financial condition.

  We Depend Upon Sales to Agencies of the United States Government; We Face the
Risk That a Key Government Contract May be Terminated

We have a $26.7 million backlog of orders as of December 31, 2000.  Of this
amount, approximately $12.2 million, or 46%, represents orders for defense
applications.  These orders are closely tied to the level of U.S. defense
spending.  Certain contracts for armor or radomes are directly or indirectly
with agencies of the United States government.  Moreover, we anticipate that a
significant percentage of our revenues for the foreseeable future will derive
from direct or indirect sales to government agencies.

In recent years, the budgets of many government agencies have been reduced,
causing some of our customers and potential customers to re-evaluate their
needs.  However, this trend was partially arrested in the first quarter of 1998.
A U.S. government agency selected Ceradyne to provide certain ceramic armor
products over a 6-year period.  The government has indicated that it may order
as much as $100 million or more in products from us over the 6-year life of this
program, but there is no minimum amount that the government is required to
purchase and all orders are at the full discretion of the government.  Through
December 31, 2000, we have received production orders under this program
totaling $17.3 million.

Under U.S. law, defense-related contracts may be canceled by the government for
convenience at any time and without cause.  If that happens, we receive
reimbursement only for the expenses we

                                       16
<PAGE>

actually incurred. Any such cancellations could have material adverse effects on
our business, operating results and financial condition.

  Sales of our Ceramic Orthodontic Brackets Depend on Our Exclusive Marketing
and Sales Relationship with Unitek, a Division of 3M Corporation

We developed our translucent ceramic orthodontic bracket pursuant to a joint
development agreement with Unitek.  We sell this product only to Unitek pursuant
to an exclusive marketing agreement, which expires in 2007.  Consequently, our
sales of this product depend entirely on Unitek's marketing and sales efforts.

We also depend on customer and technical feedback from Unitek for the design of
improvements to the bracket.  Some orthodontists were reluctant to use early
versions of this product.  They preferred  using traditional stainless steel
brackets and were wary of certain technical problems associated with earlier
versions of our ceramic bracket.  These problems included:

 .  difficulty in removing, or debonding, the bracket from the tooth;
 .  breakage of brackets during the treatment process more often than experience
   with stainless steel brackets; and
 .  slower movement of the metal archwire through the ceramic brackets, resulting
   in longer treatment times than with stainless steel brackets.

Designs introduced in October 1996 under the Unitek brand name "Clarity" are
intended to improve certain features of earlier versions of the bracket, but we
cannot guaranty that these new products will completely eliminate the
aforementioned problems or will receive wide market acceptance.  Furthermore, we
cannot guaranty that Unitek will devote substantial marketing efforts to sales
of our orthodontic products, or that Unitek will not reassess its commitment to
our technologies or develop its own competitive technologies.  If Unitek fails
to actively market our orthodontic brackets, or such brackets fail to achieve
market acceptance, there may be material adverse effects on our business,
operating results and financial condition.

  We Depend on Our International Sales; We are Subject to Risks Associated with
Operating in International Markets

Shipments to customers outside of the United States accounted for approximately
16% of our sales in 1998, 11% in 1999, and 13% in 2000.  We anticipate that
international shipments will account for a significant portion of our sales for
the foreseeable future.  Therefore, the following risks associated with
international business activities could have material adverse effects on our
performance:

 .  burdens to comply with multiple and potentially conflicting foreign laws and
   regulations, including export requirements, tariffs and other barriers,
   health and safety requirements, and unexpected changes in any of the
   foregoing;
 .  difficulty in obtaining export licenses from the U.S. government;
 .  differences in intellectual property protections;
 .  longer accounts receivable payment cycles;
 .  potentially adverse tax consequences due to overlapping or differing tax
   structures;
 .  fluctuations in currency exchange rates; and

                                       17
<PAGE>

 .  risks associated with sales to foreign government agencies similar to the
   risks associated with dealing with U.S. government agencies.

We have traditionally invoiced our foreign sales in U.S. dollars.  Accordingly,
we do not currently engage in foreign currency hedging transactions that could
protect against the risk of currency fluctuations.  This approach could pose
risks.  If the U.S. dollar were to become more expensive relative to the
currencies of our foreign customers, the price of our products in those
countries rises and our sales into those countries, or our profitability within
those countries, may fall.

Future international activity may require that we denominate foreign sales in
the local currencies of our customers.  In that case, if the U.S. dollar were to
become more expensive relative to the currencies of our foreign customers, we
would receive fewer U.S. dollars for each unit of foreign currency that we
receive when our customers pay us. Therefore, a more expensive U.S. dollar would
cause us to incur losses upon the conversion of accounts receivable denominated
in foreign currencies.  Such losses could harm our results of operations

We cannot export some of our products to certain foreign countries without an
export license obtained from the U.S. government. We have experienced difficulty
in obtaining licenses to export our products to certain countries.  Similar
difficulties may arise again in the future.  If any of the above risks emerge,
there may be material adverse effects on our business, operating results and
financial condition.

  We May be Adversely Affected If We Are Unable to Adequately Safeguard Our
Intellectual Property or If We Infringe on Other's Intellectual Property

We rely on a combination of patents, trade secrets, trademarks, and other
intellectual property law, nondisclosure agreements and other protective
measures to preserve our proprietary rights to our products and production
processes.  These measures afford only limited protection and may not preclude
competitors from developing products or processes similar or superior to ours.
Moreover, the laws of certain foreign countries do not protect intellectual
property rights to the same extent as the laws of the United States.

Although we implement protective measures and intend to defend our proprietary
rights, there can be no assurance that these efforts will succeed.  We may have
to litigate within the United States or abroad to enforce patents issued or
licensed to us, to protect trade secrets or know-how owned by us or to determine
the enforceability, scope and validity of our proprietary rights and the
proprietary rights of others.  Enforcing or defending our proprietary rights
could be expensive and might not bring us timely and effective relief.

Furthermore, there can be no assurance that our products or processes are not in
violation of the patent rights of third parties, or that any of our patents will
not be challenged, invalidated or circumvented.  Although there are no pending
or threatened intellectual property lawsuits against us, we may face litigation
or infringement claims in the future.  Infringement claims could result in
substantial costs and diversion of our resources even if we ultimately prevail.
A third party claiming infringement may also obtain an injunction or other
equitable relief, which could effectively block the distribution or sale of
allegedly infringing products.  Although we may seek licenses from third parties
covering intellectual property that we are allegedly infringing, we cannot
guarantee that any such licenses could be obtained on acceptable terms, if at
all.

                                       18
<PAGE>

If we fail to adequately protect our intellectual property, or if we face claims
for infringement on the intellectual property of third parties, there may be
material adverse effects on our business, operating results, and financial
condition.

Item 2. Properties
        ----------

The Company serves its markets from three manufacturing facilities across the
United States.  The Company's Advanced Ceramic Operations, located in Costa
Mesa, California, primarily produces armor and orthodontic products, components
for semiconductor equipment, and houses the Company's SRBSN research and
development activities.  The Company's cathode development and production are
handled through its Semicon Associates division located in Lexington, Kentucky.
Fused silica products, including missile radomes, are produced at the Company's
Thermo Materials division located in Scottdale, Georgia.  These three facilities
comprise approximately 74,000, 35,000 and 85,000 square feet, respectively.  The
Company's Costa Mesa and Scottdale facilities are held under long-term leases
which expire in October 2005, and November 2005, respectively.  The Company owns
its Lexington, Kentucky facilities.

Ceradyne's manufacturing structure is summarized in the following table:

<TABLE>
<CAPTION>
================================================================================================
FACILITY LOCATION                                         PRODUCTS
------------------------------------------------------------------------------------------------
<S>                                      <C>
Advanced Ceramic Operations              . Semiconductor Equipment Components
Costa Mesa, California                   . Lightweight ceramic armor
 Approximately 74,000 square feet        . Orthodontic ceramic brackets
                                         . Ceralloy(R) 147 SRBSN wear parts
                                         . Precision ceramics
                                         . Ceralloy(R) 147 SRBSN diesel/automotive engine parts
                                           (Research and Development)
------------------------------------------------------------------------------------------------
Semicon Associates                       . Microwave ceramic-impregnated dispenser cathodes
Lexington, Kentucky                      . Ion laser ceramic-impregnated dispenser cathodes
 Approximately 35,000 square feet        . Samarium cobalt magnets
------------------------------------------------------------------------------------------------
Thermo Materials                         . Glass tempering rolls (fused silica ceramics)
Scottdale, Georgia                       . Metallurgical tooling (fused silica ceramics)
Approximately 85,000 square feet         . Missile radomes (fused silica ceramics)
                                         . Castable and other fused silica product
================================================================================================
</TABLE>

Item 3. Legal Proceedings
        -----------------

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

From October 1995 through November 2000, the Company, along with other
companies, was served with seven different complaints that were filed by eleven
former employees of one of the Company's customers, and eight spouses.  The
complaints, filed in the United States District Court, Eastern District of
Tennessee, allege that the customers' employees contracted chronic beryllium
disease as a result of their exposure to beryllium-containing products sold by
Ceradyne and other companies.  The total of all the above complaints seeks
compensatory damages in the amount of $59 million and punitive damages in the
amount of $140 million.

                                       19
<PAGE>

Also, in September 2000, the Company was served with a cross complaint from the
Company's lessor who received a complaint from an employee of the Company
alleging he contacted chronic beryllium disease.  The complaint seeks legal
expense reimbursement from the Company.  This complaint was filed in the
Superior Court of the State of California in Santa Ana, California.

The Company believes that all above plaintiffs' claims are without merit and
that the resolution of these matters will not have a material adverse effect on
the financial condition or operations of the Company.  Defense of these cases
has been tendered to the Company's insurance carriers, some of which are
providing a defense subject to a reservation of rights.  There can be no
assurances, however, that these claims will be covered by insurance, or that, if
covered, the amount of insurance will be sufficient to cover any potential
judgments.

Item 4.  Submission of matters to a vote of security holders
         ---------------------------------------------------

    Not applicable.

                                       20
<PAGE>

                                  MANAGEMENT

Executive Officers of the Registrant.

  The executive officers of the Company as of March l, 2001 are as follows:

         Name           Age                 Position
----------------------  ---                 --------

Joel P. Moskowitz.....   61   Chairman of the Board, President and Chief
                              Executive Officer

Earl E. Conabee.......   63   Vice President, and Director of Marketing at
                              Thermo Materials

Garry DeBoer..........   64   Vice President, and Consultant of Semicon
                              Associates

Howard F. George......   56   Vice President Finance, Chief Financial
                              Officer and Secretary

Donald A. Kenagy......   59   Vice President, and President of Thermo
                              Materials

David P. Reed.........   46   Vice President, and General Manager of
                              Advanced Ceramic Operations

  Joel P. Moskowitz co-founded the Company's predecessor in 1967. He served as
President of the Company from 1974 until January 1987, and from September 1987
to the present. Mr. Moskowitz currently serves as Chairman of the Board,
President and Chief Executive Officer of the Company, which positions he has
held since 1983.  Mr. Moskowitz currently serves on the Board of Trustees of
Alfred University.  Mr. Moskowitz obtained a B.S. in Ceramic Engineering from
Alfred University in 1961 and an M.B.A. from the University of Southern
California in 1966.

  Earl E. Conabee joined the Company in July 1985, and has served as Vice
President of the Company since June 1986.  Mr. Conabee serves as Vice President
of Marketing for the Company's Thermo Materials division, where he is
responsible for the overall marketing and sales effort for fused silica
ceramics.  Prior to joining the Company, Mr. Conabee served as General Manager
of Ceramatec, a manufacturer of technical ceramics, from 1983 to 1985, and as
Director of Refinery Operations for Englehard Minerals Corporation from 1973 to
1983.  Mr. Conabee obtained a B.S. in Ceramic Engineering from Alfred University
in 1960.

  Garry DeBoer joined the Company as President of its Semicon Associates
Division in September 1997, and has served as Vice President of the Company
since February 1999.  Since September 1999, Mr. DeBoer is serving Semicon
Associates as a Marketing Consultant.  Mr. DeBoer attended Newark College of
Engineering, majoring in Metallurgy.  He has spent most of his career in the
field of microwave electronics, used primarily in military defense systems and
commercial satellite communications.  For the past twenty-five years prior to
joining the Company, Mr. DeBoer was employed by Varian Associates and
Communications and Power Industries in various Senior Technical and Management
positions, and also served as Manager of Commercial Products for CPI's Traveling
Wave Tube Product Division.

                                       21
<PAGE>

  Howard F. George joined the Company in December 1995 and serves in the
positions of Vice President Finance, Chief Financial Officer, and Corporate
Secretary.  Prior to joining Ceradyne, Mr. George was Chief Financial Officer of
Richmond Technology, Inc. and Chief Operating Officer of its subsidiary, Static
Control Services from 1992 to 1995.  From 1990 to 1992, Mr. George was Vice
President of Finance for Sunset Richards, a subsidiary of Hanson, PLC.  Mr.
George earned his B.A. degree in Business and Economics in 1970 at California
State University Long Beach, and an MBA from Pepperdine University, Malibu in
1980.

  Donald A. Kenagy joined the Company in December 1986 when the Company acquired
Thermo Materials, and has served as Vice President of the Company since July
1991.  Mr. Kenagy is currently President of the Company's Thermo Materials
division, and as such is responsible for the operations, finances and marketing
of Thermo Materials.  Mr. Kenagy joined Thermo Materials in 1972.  Mr. Kenagy
received a B.S. in Ceramic Technology from Penn State in 1963, an M.S. in
Metallurgy from the Massachusetts Institute of Technology in 1965, and a Met.
Eng. degree from MIT in 1968.

  David P. Reed joined the Company in November 1983, and has served as Vice
President since January 1988.  Mr. Reed is responsible for the operations,
finances and marketing of the Company's Costa Mesa, California operations.
Prior to joining the Company, Mr. Reed served as Manager, Process Engineering
for the Industrial Ceramic Division of Norton Co. from 1980 to 1983. Mr. Reed
obtained a B.S. in Ceramic Engineering from Alfred University in 1976 and an
M.S. in Ceramic Engineering from the University of Illinois in 1978.

Officers serve at the discretion of the Board of Directors except for Mr.
Moskowitz, who serves pursuant to a two year employment agreement which expires
in July 2001.

                                       22
<PAGE>

                                    PART II

Item 5. Market for the Registrant's Common Equity and Related
        -----------------------------------------------------
        Stockholder Matters
        -------------------

The Company's Common Stock is traded on the Nasdaq National Market under the
symbol CRDN. The following table sets forth for the calendar quarters indicated
the high and low closing sale prices per share on the National Market as
reported by Nasdaq.  As of December 31, 2000, the Company had approximately 426
record holders of its Common Stock.

                                    High        Low
                                    ----        ---

Year ended December 31, 2000
     First Quarter.............      9.88       4.38
     Second Quarter............     11.75       6.63
     Third Quarter.............     10.50       7.50
     Fourth Quarter............      9.50       5.88

Year ended December 31, 1999
     First Quarter.............      4.00       3.13
     Second Quarter............      4.75       3.00
     Third Quarter.............      5.00       3.53
     Fourth Quarter............      5.50       3.50


The present policy of Ceradyne is to retain earnings for the operation and
expansion of its business.  Ceradyne has never paid cash dividends, and
management does not anticipate that it will do so in the foreseeable future.

The Company did not sell any equity securities during the year ended December
31, 2000 that were not registered under the Securities Act of 1933.

                                       23
<PAGE>

Item 6.  Selected Financial Data
         -----------------------

Statements of Operations Data: (Amounts in thousands, except per share data)
-----------------------------

<TABLE>
<CAPTION>
                                                                Years Ended December 31,
                                                                ------------------------
                                            2000           1999           1998           1997           1996
                                           -------        -------        -------        -------        -------
<S>                                        <C>            <C>            <C>            <C>            <C>

Net sales                                  $45,930        $30,382        $26,279        $28,693        $28,212
Cost of product sales                       33,743         23,674         21,292         23,274         21,065
                                           -------        -------        -------        -------        -------
Gross profit                                12,187          6,708          4,987          5,419          7,147
                                           -------        -------        -------        -------        -------

Operating expenses:
Selling                                      1,605          1,480          1,494          1,515          1,571
General and administrative                   4,456          3,400          3,239          3,660          3,137
Research and development                     1,252            597            344             --             --
                                           -------        -------        -------        -------        -------
                                             7,313          5,477          5,077          5,175          4,708
                                           -------        -------        -------        -------        -------
Income (loss) from operations                4,874          1,231           ( 90)           244          2,439

Other income (expense):
Other income                                   357            344            382            265          1,890
Interest expense                               (34)           (16)            --           (134)          (162)
                                           -------        -------        -------        -------        -------

Income before provision (benefit)
 for income taxes                            5,197          1,559            292            375          4,167
Provision (benefit) for income taxes           104            (44)            10         (1,675)           127
                                           -------        -------        -------        -------        -------
      Net income                           $ 5,093        $ 1,603        $   282        $ 2,050        $ 4,040
                                           =======        =======        =======        =======        =======

Basic income per share                       $0.62          $0.20          $0.04          $0.26          $0.52
                                           =======        =======        =======        =======        =======
Diluted income per share                     $0.61          $0.20          $0.04          $0.26          $0.51
                                           =======        =======        =======        =======        =======
Weighted average shares
   outstanding                               8,395          8,189          8,068          8,035          7,985
</TABLE>
<TABLE>
<CAPTION>

Balance Sheet Data:                                                    December 31,
-------------------                                                    ------------

                                            2000           1999           1998           1997           1996
                                          -------        -------        -------        -------        -------
<S>                                       <C>            <C>            <C>            <C>            <C>

Working capital                           $20,436        $15,156        $15,051        $15,327        $15,892
Total assets                               38,463         32,893         29,493         29,017         28,398
Long-term obligations                         258            358             --             --             --
Stockholder's equity                      $34,989        $29,137        $27,352        $26,760        $24,440
</TABLE>

                                       24
<PAGE>

Item 7. Management's Discussion and Analysis of Financial Condition and Results
        -----------------------------------------------------------------------
        of Operations
        -------------

Overview

The Company's technology was developed primarily for defense and aerospace
applications, which have historically represented and continue to represent a
substantial portion of its business. Utilizing this historical base, the Company
has transitioned over several years to a more balanced product offering,
including industrial, consumer, microwave tube products, automotive,
semiconductor, and defense applications.

The Company's cost of product sales includes the cost of materials, direct labor
expenses and manufacturing overhead expenses.  The Company's business requires
that it maintain a relatively high fixed manufacturing overhead.  As a result,
the Company's gross profit, in absolute dollars and as a percentage of net
sales, is greatly impacted by the Company's sales volume and the corresponding
absorption of fixed manufacturing overhead expenses.  Furthermore, due to the
customized nature of many of its products, the Company is frequently required to
devote resources to sustaining engineering expenses, which are also included in
cost of product sales and are expensed as incurred.

Results of Operations

The percentage relationships to net sales of certain income and expense items
for the three years ended December 31, 2000, 1999 and 1998 are contained in the
following table.

<TABLE>
<CAPTION>
                                                Years Ended December 31,
                                                ------------------------
                                          2000           1999          1998
                                         ------         ------        ------
<S>                                      <S>            <C>           <C>

Net sales                                100.00%        100.00%       100.00%
Cost of product sales                     73.47          77.92         81.02
                                         ------         ------        ------

Gross profit                              26.53          22.08         18.98
                                         ------         ------        ------

Operating expenses:
Selling                                    3.49           4.87          5.69
General & administrative                   9.70          11.19         12.33
Research & Development                     2.73           1.97          1.30
                                         ------         ------        ------
                                          15.92          18.03         19.32
                                         ------         ------        ------

Income (loss) from operations             10.61           4.05          (.34)
Other income                                .78           1.14          1.45
Interest expense                           (.07)          (.05)          ---
                                         ------         ------        ------

Income before provision
  (benefit) for income taxes              11.32           5.14          1.11
Provision (benefit) for income taxes       (.23)          (.14)          .04
                                         ------         ------        ------

Net income                                11.09%          5.28%         1.07%
                                         ======         ======        ======
</TABLE>

                                       25
<PAGE>

Years Ended December 31, 2000 and 1999

Net Sales.  Net sales for the year ended December 31, 2000 were $45.9 million,
an increase of $15.5 million, or 51% compared to the prior year.

The increase in sales was primarily attributable to the Company's Advanced
Ceramic Operations in Costa Mesa, California.  This increase was approximately
$13.4 million over the prior year.  The major increase was in armor products due
to increasing demand for protective body armor by the U.S. military services.
The industrial/automotive products recorded strong increases in sales, mainly
due to demand for ceramic cam rollers for diesel engines.  Additionally,
orthodontic products contributed to the increase over the prior year due to
continually increased demand by orthodontists for the Clarity orthodontic
brackets.

The Company's Semicon Associates Division in Lexington, Kentucky, posted a sales
increase of $.8 million, or 13% over the prior year.  Increases were mainly due
to demand by the Company's customers for dispenser cathodes, which are used in
microwave tubes for radar and satellite communications.  In addition, sales
increases were due to modest price increases.

Additionally, the Company's Thermo Materials Division in Scottdale, Georgia,
posted a sales increase of $1.3 million, or 22% over the prior year.  The
increases were attributable to demand from a major customer because of their low
fused silica inventory.  Also contributing was an increase in demand from
existing and new customers for the fused silica product line that the Company
acquired from Harbison Walker Refractories Company in 1998.  There were slight
increases in the defense sector for ceramic missile radomes for the Patriot PAC-
3 and Standard Missile Block IV and Block IVA programs.  Furthermore, a new
product line for high purity fused silica ceramic crucibles for melting silicon
for incorporation into photovoltaic cells for energy production had slight sales
increases over the prior year initial startup.

International sales have been, and are expected to be, an important part of the
Company's business, representing 13% of total sales for the year ended 2000 as
compared to 11% in 1999.  In April 2000, the Company opened a European sales and
marketing office located in England and hired a new European marketing director.
Also, in January 2001, the Company opened its sales and marketing office in
Beijing, China and hired a new director for this location.

Gross Profit.  The Company's gross profit was $12.2 million, or 27% of net
sales, for the year ended December 31, 2000, compared to $6.7 million, or 22% of
net sales, for the prior year. The increase in gross profit for the year ended
December 31, 2000 as compared to the prior year was $5.5 million or 82%.

The Company's Advanced Ceramic Operations in Costa Mesa, California, posted
gross profit of $8.4 million compared to $4.2 million, or a 100% increase over
the prior year.  The favorable results were mainly due to higher volume and
higher capacity utilization resulting in economies of scale.

Semicon Associates in Lexington, Kentucky, posted gross profit of $1.7 million,
compared to $1.1 million, or a 55% increase over the prior year.  The increase
over the prior year is attributed to higher volume and greater capacity
utilization.  Additionally, price increases and improvements in production
yields were contributing factors.

                                       26
<PAGE>

Thermo Materials in Scottdale, Georgia, posted gross profit of $2.1 million,
compared to $1.4 million, or a 50% increase over the prior year.  The increases
were attributable to volume and the product mix of larger quantities yielding
better manufacturing efficiencies than in the prior year.

Selling Expenses.  Selling expenses were $1.6 million for the year ended
December 31, 2000, as compared to $1.5 million in the prior year.  Increases in
salaries, travel expenses, product literature, consulting, and the addition of a
new marketing director in the United Kingdom contributed to the increase in
selling expenses over the prior year.

General and Administrative Expenses.  General and administrative expenses were
$4.5 million for the year ended December 31, 2000, a $1.1 million increase from
the prior year.  Approximately 42% of the increase was attributable to the
increase in employee bonuses which was charged to general and administrative
expense.  Bonuses were resumed in the year 2000 because of the increased
profitability of the Company.  The other increases involved two additional
personnel at the Thermo Materials division, investor relations consulting fees,
salary increases and fringe benefits.

Research and Development Expenses.  Research and development expenses were
approximately $1.3 million for the year ended December 31, 2000, as compared to
$.6 million for the prior year.  The expenses incurred for both years are
related to wages for engineering, technicians and production personnel,
materials, outside services, small tools and travel.  The increased expenses
over the prior year are directly related to the Company being awarded $2.4
million in Small Business Innovation Research (SBIR) grants in 2000 for military
ceramic armor systems and microwave ceramics.

In addition, the Company historically has and continues to engage in application
engineering and internally funded research to improve and reduce the cost of
production and to develop new products.  The costs associated with application
engineering and research are expensed as incurred and are included in cost of
product sales.

Other Income.  Other income was $.36 million and $.34 million for the years
ended 2000 and 1999, respectively.  An increase in interest income over the
prior year due to greater cash reserves was offset by a decrease in royalty
income.

Interest Expense.  Interest expense was $34,000 for the year ended December 31,
2000, compared to $16,000 in the prior year.  The increase was caused by having
a capital equipment loan in place for the full year in 2000, as compared to
partial year in 1999.

Income Taxes.  The Company has recorded a $104,000 provision for income tax for
the year ended December 31, 2000.  The Company's net deferred tax asset of $1.7
million at December 31, 2000 relates primarily to its tax net operating loss
carryforwards, which total approximately $5.2 million.  The Company expects to
use its remaining net operating loss carryforward in 2001.  (See Note 3 of Notes
to Consolidated Financial Statements).

Net Income.  Reflecting all of the matters discussed above, net income was $5.1
million  (or $0.62 per share basic and $0.61 diluted) for the year ended
December 31, 2000 compared to a net income of $1.6 million (or $.20 per share
basic and diluted) for the prior year.

                                       27
<PAGE>

Years Ended December 31, 1999 and 1998

Net Sales.  Net sales for the year ended December 31, 1999 were $30.4 million,
an increase of $4.1 million, or 16% compared to the prior year.

The increase in sales was primarily attributable to the Company's Advanced
Ceramic Operations in Costa Mesa, California.  This increase was approximately
$3.7 million over the prior year.  Contributing to the increase was armor
products due to increasing demand for protective armor vests and helicopter wing
panels.  Orthodontic brackets also contributed to the increase over the prior
year due to the increased demand by orthodontists for the "Clarity" orthodontic
brackets.  The automotive product line had increased demand over the prior year
due to a new order for advanced technical ceramic components by a major diesel
engine manufacturer.  Additionally, sales of structural ceramics for
semiconductor equipment increased over the prior year period because of the
continued improvement in the semiconductor industry.  The Company has also
engaged in new research contracts in 1999 for the development of new structural
ceramic components with the U.S. Government.  However, the above product line
sales increases were slightly offset from the prior year due to reduced demand
for wear resistant components used on capital equipment machinery and oil
exploration ceramic components.

Additionally, the Company's Semicon Associates Division in Lexington, Kentucky,
posted a sales increase of $.4 million as compared to the prior year period.
The increase was mainly due to price increases and, to a lesser degree, the
introduction of extended cathode assemblies.

The Company's Thermo Materials Division in Scottdale, Georgia posted a slight
sales increase over the prior year.

International sales have and continue to be an important part of the Company's
business, representing 11% of the Company's net sales for the period ended
December 31, 1999.  This compares to 16% of net sales in the comparable prior
year period.  The decrease was mainly attributable to domestic increases in the
armor and orthodontic product lines.

Gross Profit.  The Company's gross profit was $6.7 million, or 22% of net sales,
for the year ended December 31, 1999, compared to $5.0 million, or 19% of net
sales, for the comparable prior year. The increase in gross profit for the year
ended December 31, 1999 as compared to the prior year was $1.7 million or 35%.

All of the major product lines at the Company's Advanced Ceramic Operations in
Costa Mesa, California, except for wear resistant components, had an increase in
gross profit as compared to the prior year period.  This result was due to
higher volume and higher capacity utilization resulting in favorable cost
absorption.  Hence, the favorable variance compared to the prior year period was
$1.2 million.

Gross profit for Semicon Associates in Lexington, Kentucky, had a favorable
variance over the comparable prior year period of $.4 million.  The increase in
the gross profit can be attributed to slightly higher production yields and
price increases.

Gross profit for Thermo Materials in Scottdale, Georgia, posted a favorable
variance of $.1 million compared to the prior year period.

                                       28
<PAGE>

Selling Expenses.  Selling expenses were $1.5 million for the years ended
December 31, 1999 and 1998.  Increases in salaries and travel expenses were
offset by a reduction in commission expense for the current year over the prior
comparable period.

General and Administrative Expenses.  General and administrative expenses were
$3.4 million for the year ended December 31, 1999, a $.2 million increase from
the prior year.  The key elements for the increase between the years was a
favorable settlement with a customer in the prior year resulting in net proceeds
of $.4 million.  However, this was offset in the prior year by a non-recurring
charge of $.2 million related to legal fees.  For the current year, increases in
salaries, consultant, and travel expenses were offset by a favorable settlement
in the final payment for the superfund cleanup of the Casmalia Disposal Site in
Santa Barbara County, California.

Research and Development Expenses.  Research and development expenses were
approximately $.6 million for the year ended December 31, 1999 as compared to
$.35 million for the prior year.  The Company established a new research and
development department in 1998 to focus on new materials technology.  The
expenses incurred related to salaries, travel, outside services, materials and
small tools.

In addition, the Company historically has and continues to engage in application
engineering and internally-funded research to improve and reduce the cost of
production and to develop new products.  The costs associated with application
engineering and internally-funded research are generally expensed as incurred
and are included in cost of product sales.

Other Income.  Other income was approximately $.3 million for the year ended
December 31, 1999 compared to $.4 million for the prior year.  The significant
difference for the decrease was the reduction of interest income due to lower
cash balances in the current year.

Interest Expense.  Interest expense was $16,000 for the year ended December 31,
1999 compared to none in the prior year.  The increase was caused by entering
into a capital equipment loan in 1999.

Income Taxes.  The Company has recorded a $44,000 net benefit for income tax for
the year ended December 31,1999.  The net benefit is the result of a refund of
Federal and State taxes from the prior year for $83,000.  This was offset by a
current year provision of $39,000.

Net Income.  Reflecting all of the matters discussed above, net income was
$1,603,000 (or $.20 per share basic and diluted) for the year ended December 31,
1999 compared to a net income of $282,000 (or $.04 per share basic and diluted)
for the prior year.

Liquidity and Capital Resources

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

In November 1997, the Company entered into a revolving credit agreement with
Comerica Bank.  The credit facility amount remains at $4,000,000 as of year
ended December 31, 2000.  As of December 31, 2000 there had been no borrowing
under this credit facility.  Under a separate credit facility with Comerica
Bank, the Company entered into a $500,000 capital equipment loan

                                       29
<PAGE>

agreement during the third quarter of 1999. The term of the loan is for 60
months with no prepayment penalty.

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

New Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities."  SFAS No. 133, as amended by SFAS No. 137
and SFAS No. 138, is effective for fiscal years beginning after June 15, 2000.
SFAS No. 133 requires that all derivative instruments be recorded on the balance
sheet at their fair value.  Currently, the Company does not have any instruments
that would qualify as derivatives under SFAS No. 133.  Accordingly, the Company
does not believe SFAS No. 133 will have a material impact on the Company's
financial position, results of operations, or liquidity at the current time.

During the third quarter of fiscal year 2000, Emerging Issues Task Force (EITF)
No. 00-10, "Accounting for Shipping and Handling Fees and Costs" was issued.
EITF No. 00-10 governs the accounting treatment and classification of the
Company's shipping revenues and certain of its shipping expenses.  In accordance
with the Issue, the Company adopted EITF No. 00-10 during the fourth quarter of
fiscal 2000.  The adoption of this EITF did not materially affect the
classification of revenues from shipments to customers and certain expenses
related to shipping and handling of the Company's product for all periods
presented.  In addition, there was no affect on the Company's net income.

In December 1999, the Securities and Exchange Commission staff released Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition", to provide guidance on
the recognition, presentation and disclosure of revenue in financial statements.
While SAB No. 101 provides a framework by which to recognize revenue in the
financial statements, the adoption of this SAB did not have a material impact on
the Company's financial statement.

In March 2000, the Financial Accounting Standards Board issued Interpretation
(FIN) No. 44, "Accounting for Certain Transactions Involving Stock Compensation
- an Interpretation of APB No. 25."  FIN No. 44 clarifies (a) the definition of
employee for purposes of applying APB No. 25, (b) the criteria for determining
whether a plan  qualifies as a non-compensatory plan, (c) the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination.  FIN No. 44 became effective July 1, 2000 and
had no impact on the Company's financial statements.


Item 7A. Quantitative and Qualitative Disclosure About Market Risk
         ---------------------------------------------------------

The Company is exposed to market risks related to fluctuations in interest rates
on its debt.  Currently, the Company does not utilize interest rate swaps,
forward or option contracts on foreign currencies or commodities, or other types
of derivative financial instruments.  The purpose of the following analysis is
to provide a framework to understand the Company's sensitivity to

                                       30
<PAGE>

hypothetical changes in interest rates as of December 31, 2000. Many of the
statements contained in this section are forward looking and should be read in
conjunction with the Company's disclosures under the heading "Risk Factors".

The Company utilized debt financing during 2000 primarily for the purpose of
acquiring manufacturing equipment.  For fixed rate debt, changes in interest
rates generally affect the fair market value of the debt instrument, but not the
Company's earnings or cash flows.  The Company does not have an obligation to
prepay fixed rate debt prior to maturity, and as a result, interest rate risk
and changes in fair market value should not have a significant impact on the
fixed rate debt until the Company would be required to refinance such debt.  The
fair market value estimates for debt securities are based on discounting future
cash flows utilizing current rates offered to the Company for debt of the same
type and remaining maturity.

As of December 31, 2000, the Company's debt consisted of a $358,000 capital
equipment loan at a fixed interest rate of 8.18% due July 28, 2004.  The
carrying amount is a reasonable estimate of fair value as the rate of interest
paid on the note approximates the current rate available for financing with
similar terms and maturity.

Item 8. Consolidated Financial Statements and Supplementary Data
        --------------------------------------------------------

The Consolidated Financial Statements and Supplementary Data commence at page 47
of this report and an index thereto is included in Part IV, Item 14 of this
report on page 42.

Item 9. Changes in and Disagreements with Accountants on Accounting and
        ---------------------------------------------------------------
        Financial Disclosure
        --------------------

Not applicable.

                                       31
<PAGE>

                                   PART III

Item 10.  Directors and Executive Officers of Registrant
          ----------------------------------------------

  Information regarding executive officers of the Company is included in Part I
of this report.

  The Directors of the Company are as follows:

               Name              Age              Position
               ----              ---              --------

     Joel P. Moskowitz.......     61     Chairman of the Board, President and
                                         Chief Executive Officer

     Leonard M. Allenstein...     62     Director

     Richard A. Alliegro.....     70     Director

     Paul N. Blumberg........     57     Director

     Frank Edelstein.........     75     Director

     Wilford D. Godbold, Jr.      62     Director

     Milton L. Lohr..........     75     Director

  Joel P. Moskowitz co-founded the Company's predecessor in 1967. He served as
President of the Company from 1974 until January 1987, and from September 1987
to the present.  Mr. Moskowitz currently serves as Chairman of the Board and
Chief Executive Officer of the Company, which positions he has held since 1983.
Mr. Moskowitz currently serves on the Board of Trustees of Alfred University.
Mr. Moskowitz obtained a B.S. in Ceramic Engineering from Alfred University in
1961 and an M.B.A. from the University of Southern California in 1966.

  Leonard M. Allenstein has served on the Board of Directors of the Company
since 1983. Mr. Allenstein has been a private investor and businessman for more
than the past five years.  Mr. Allenstein was a founder and general partner of
Bristol Restaurants, which owns and operates restaurants in the Southern
California area, from 1978 until December 1986.

  Richard A. Alliegro has served on the Board of Directors of the Company since
1992.  Mr. Alliegro retired from Norton Company in 1990 after 33 years, where
his last position was Vice President, Refractories and Wear, for Norton's
Advanced Ceramics operation.  He served as President of Lanxide Manufacturing
Co., a subsidiary of Lanxide Corporation, from May 1990 to February 1993.  Mr.
Alliegro currently is the owner of AllTec Consulting, Inc., a ceramic technology
consulting firm.  Mr. Alliegro obtained B.S. and M.S. degrees in Ceramic
Engineering from Alfred University in 1951 and 1952, respectively, and serves as
a member of the Board of Trustees of that university.

  Dr. Paul N. Blumberg has been a member of the Board of Directors of the
Company since July 2000.  Since 1999, Dr. Blumberg has held the position of
Director in Research and Vehicle Technology at Ford Motor Company.  From 1994 to
1999, he was Director of Product Development Systems at Ford Motor Company.
From 1982 to 1994, he was President and Principal Engineer at Ricardo North
America Inc., a contract engineering firm specializing in internal combustion
engines and in engine driven systems.  Dr. Blumberg obtained B.S. and M.S.
degrees in Chemical Engineering from the Massachusetts Institute of Technology
and a Ph.D. in Chemical Engineering from the University of Michigan.

                                       32
<PAGE>

  Frank Edelstein has served on the Board of Directors of the Company since
1984.  Mr. Edelstein has been a Vice President of Stone Creek Capital, Inc., an
investment banking firm, since November 1986.  From 1979 to November 1986, he
was Chairman of the Board of International Central Bank & Trust Company, which
was acquired by Continental Insurance Co. in July 1983.  Mr. Edelstein is
currently a director of Arkansas Best Corp. and IHOP Corp.

  Wilford D. Godbold, Jr. has been a member of the Board of Directors of the
Company since July 2000.  Mr. Godbold is currently a private investor.  From
1982 to 1998, Mr. Godbold was employed by Zero Corporation, a manufacturer of
packaging systems for the electronics industry, where he served as President and
Chief Executive Officer from 1984 to 1998.  From 1966 to 1982, he was engaged in
the private practice of law with Gibson Dunn & Crutcher, specializing in mergers
and acquisitions, corporate finance and general corporate law.  Mr. Godbold
holds an A.B. degree in Political Science from Stanford University, and a J.D.
from UCLA Law School.  Mr. Godbold is a director of Sempra Energy and K2, Inc.

  Milton L. Lohr served as a Director of the Company from 1986 until October
1988, when he resigned to accept a position as Deputy Undersecretary of Defense
for Acquisitions.  He held that position until May 1989 and was re-elected as a
Director of the Company in July 1989.  Mr. Lohr is currently a partner of L. F.
Global Investments, LLC, a San Diego based financial institution with activities
in money management funds, venture capital and asset management coupons.  He
served as the first Deputy Under Secretary for Acquisitions in both the Reagan
and Bush administrations, with responsibility to assist in overseeing the
Department of Defense's major acquisition programs as well as exercising
oversight of international programs and U.S. Arms Control Compliance activities.
He also served as U.S. Acquisition Representative to the NATO Conference of
National Armament Directors and provided leadership guiding U.S. armament
cooperative programs, and in developing and establishing policy initiatives
aimed at promoting cooperation on major weapon systems and technology among the
NATO Allies.  He also serviced on the Four Power Group with members from the
U.K., France, Germany and the U.S.  Mr. Lohr previously held the position of
President of Defense Development Corporation, a defense-related research and
development company from 1990 to 1993.  Mr. Lohr also held the position of
Senior Vice President of Titan Systems, a defense-related research and
development company, from 1986 to 1988, and was founder and CEO of Defense
Research Corporation, a defense consulting firm, from 1983 to 1986.  Mr. Lohr
served from 1969 to 1983 as Executive Vice-President of Flight Systems, Inc., a
firm engaged in aerospace and electronic warfare systems.  Mr. Lohr has over
thirty-five years experience in government positions and aerospace and defense
management.  He currently serves as a panel member of the President's Science
Advisory Committee, a member of the Office of the Secretary of Defense, Army
Science Board, as well as other ad hoc government related assignments.

Directors are elected annually and hold office until the next annual meeting of
stockholders and until their successors have been elected and qualified.  The
Company has agreed to nominate a representative of Ford for election as a
Director pursuant to an agreement made in March 1986, pursuant to which
agreement Ford acquired a total of 1,207,299 shares of the Company's Common
Stock.  Joel P. Moskowitz and members of his family have agreed to vote a
portion of their shares of the Company's Common Stock, if necessary, for the
election of Ford's nominee.  Dr. Paul N. Blumberg is Ford's current
representative.  Officers serve at the discretion of the Board of Directors
except for Mr. Moskowitz, who serves pursuant to a two-year employment agreement
which expires in July 2001.

                                       33
<PAGE>

Compliance with Section 16(a) of the Securities Exchange Act of 1934

     Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file with the Securities
and Exchange Commission ("SEC") initial reports of ownership and reports of
changes in ownership of Common Stock and other equity securities of the Company.
Officers, directors and greater than ten percent shareholders are required by
SEC regulations to furnish the Company with copies of all Section 16(a) forms
they file.

     To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required during the fiscal year ended December 31, 2000, its
officers, directors and greater than ten percent beneficial owners complied with
all Section 16(a) filing requirements.

Item 11.  Executive Compensation
          ----------------------

Summary Compensation Table
--------------------------
The following table shows certain information concerning the compensation of the
Chief Executive Officer and four other most highly compensated executive
officers of the Company whose aggregate compensation for services in all
capacities rendered during the year ended December 31, 2000 exceeded $100,000
(collectively-the "Named Executive Officers"):

<TABLE>
<CAPTION>
                                                               Long Term
                                                              Compensation
                                                              -------------
                                  Annual Compensation          Securities
                                  -------------------          Underlying
Name &                                                           Options
Principal Position          Year       Salary      Bonus      (# of Shares)
------------------          ----       ------      -----      -------------
<S>                         <C>       <C>          <C>        <C>

Joel P. Moskowitz           2000      $259,000    $51,970           -
Chairman of the Board,      1999       240,085     16,027           -
Chief Executive             1998       228,191       -              -
Officer and President



Earl E. Conabee             2000      $113,000       -            2,000
Vice President              1999       106,872       -              -
                            1998       101,220       -            4,000

Howard F. George            2000      $111,000    $ 8,545         2,000
Vice President and          1999       104,327       -              -
Chief Financial             1998       101,062       -            5,000
Officer
</TABLE>

                                       34
<PAGE>

<TABLE>
<CAPTION>
<S>                         <C>       <C>          <C>        <C>

Donald A. Kenagy            2000      $115,000       -            4,000
Vice President              1999       108,350       -            5,000
                            1998       103,142       -            4,000

David P. Reed               2000      $143,000    $37,905        10,000
Vice President              1999       132,919       -           10,000
                            1998       121,295       -           10,000
</TABLE>


Option Grants in Last Fiscal Year
---------------------------------

   The following table sets forth certain information concerning grants of
options to each of the Named Executive Officers during the year ended December
31, 2000.  In addition, in accordance with the rules and regulations of the
Securities and Exchange Commission, the following table sets forth the
hypothetical gains or "option spreads" that would exist for the options.  Such
gains are based on assumed rates of annual compound stock appreciation of 5% and
10% from the date on which the options were granted over the full term of the
options.  The rates do not represent the Company's estimate or projection of
future Common Stock prices, and no assurance can be given that any appreciation
will occur or that the rates of annual compound stock appreciation assumed for
the purposes of the following table will be achieved.

<TABLE>
<CAPTION>
                                                                                       Potential Realizable
                                                                                      Value at Assumed Annual
                                           Percent of                                  Rates of Stock Price
                                           Total Options                                 Appreciation for
                                           Granted to     Exercise                       Option Term/(2)/
                      Options Granted      Employees in    Price       Expiration        ----------------
Name                  (# of Shares)/(1)/   Fiscal Year    ($/Share)       Date          5%($)         10%($)
----                  ------------------   -----------    ----------      ----          -----         ------
<S>                   <C>                  <C>            <C>          <C>             <C>            <C>

Joel P. Moskowitz             -                  -                          -             -             -
Earl E. Conabee             2,000              1.8%          7.50        9/27/10        9,433         23,906
Howard F. George            2,000              1.8%          3.50        1/06/10        4,402         11,156
Donald A. Kenagy            2,000              1.8%          7.50        9/27/10        9,433         23,906
                            2,000              1.8%          3.50        1/06/10        4,402         11,156
David P. Reed               5,000              4.5%          7.50        9/27/10       23,584         59,765
                            5,000              4.5%          3.50        1/06/10       11,005         27,890
</TABLE>
---------------
(1)  The per share exercise price of all options granted is the fair market
     value of the Company's Common Stock on the date of grant.  Options have a
     term of 10 years and become exercisable in five equal installments, each of
     which vests at the end of each year after the grant date.

(2)  The potential realizable value is calculated from the exercise price per
     share, assuming the market price of the Company's Common Stock appreciates
     in value at the stated percentage rate from the date of grant to the
     expiration date.  Actual gains, if any, are dependent on the future market
     price of the Common Stock.

                                       35
<PAGE>

Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
--------------------------------------------------------------------------
Values
------

     The following table sets forth certain information regarding option
exercises during the year ended December 31, 2000 by the Named Executive
Officers, the number of shares covered by both exercisable and unexercisable
options as of December 31, 2000 and the value of unexercised in-the-money
options held by the Named Executive Officers as of December 31, 2000:

<TABLE>
<CAPTION>
                                                                                                   Value of Unexercised
                                                         Number of Securities Underlying          In-the-Money Options at
                                                      Unexercised Options at Fiscal Year-End        Fiscal Year-End (1)
                                                      --------------------------------------        -------------------
                      No. of Shares
                       Acquired on        Value
       Name             Exercise      Realized/(2)/       Exercisable    Unexercisable          Exercisable    Unexercisable
       ----             --------      -------------       -----------    -------------          -----------    -------------
<S>                   <C>             <C>             <C>                <C>                    <C>            <C>

Joel P. Moskowitz          ---             ---                ---             ---                   ---            ---
Earl E. Conabee           2,800          $16,150              ---            5,200                  ---          $11,176
Howard F. George           ---             ---              27,400           4,600               $136,525         16,100
Donald A. Kenagy           ---             ---               9,200          10,800                 22,100         29,776
David P. Reed              ---             ---              47,100          28,400                122,906         71,717
</TABLE>


(1) Based upon the closing price of the Common Stock on December 31, 2000, as
    reported by the Nasdaq National Market ($6.625 per share).

(2) Represents the closing sale price of the Common Stock on the date of
    exercise, less the exercise price per share, multiplied by the number of
    shares acquired.

                                       36
<PAGE>

Employment Agreement
--------------------

  In July 1994, the Company entered into a five-year employment agreement with
Mr. Moskowitz, pursuant to which he will serve as Chairman of the Board of
Directors, Chief Executive Officer and President of the Company.  In February,
2000, the agreement was extended to July, 2001.  Effective January 15, 2001, Mr.
Moskowitz' base annual salary under this agreement was increased to $277,000.
Under the agreement, if Mr. Moskowitz' employment is terminated by the Company
(other than as a result of death, incapacity or for "good cause" as defined in
the agreement) or if Mr. Moskowitz elects to resign for "good reason" (as
defined in the agreement), Mr. Moskowitz will be entitled to receive severance
pay in an amount equal to his annual base salary, at the rate in effect on the
date of termination, payable on normal pay dates for the remainder of the term
of the agreement.  "Good reason" includes a "change in control" of the Company,
a removal of Mr. Moskowitz from any of his current positions with the Company
without his consent, or a material change in Mr. Moskowitz' duties,
responsibilities or status without his consent.  A "change in control" of the
Company shall be deemed to occur if (1) there is a consolidation or merger of
the Company where the Company is not the surviving corporation and the
shareholders prior to such transaction do not continue to own at least 80% of
the common stock of the surviving corporation, (2) there is a sale of all, or
substantially all, of the assets of the Company, (3) the stockholders approve a
plan for the liquidation or dissolution of the Company, (4) any person becomes
the beneficial owner, directly or indirectly, of 30% or more of the Company's
outstanding Common Stock or (5) if specified changes in the composition of the
Company's Board of Directors occur.

Compensation of Directors
-------------------------

  Directors are paid fees for their services on the Board of Directors in such
amounts as are determined from time to time by the Board.  During 2000, a fee of
$500 per month plus $1000 for each Board meeting attended was paid to each non-
employee director other than the Ford representative, Peter Beardmore and his
replacement Paul Blumberg, who did not receive a fee.

  In addition, non-employee directors, other than the Ford representative,
receive stock options from time-to-time under the Company's 1994 Stock Incentive
Plan.  During 2000, options to purchase 10,000 shares were granted to Mr.
Godbold and options to purchase 5,000 shares were granted to each of Messrs.
Allenstein, Alliegro, Edelstein, and Lohr.  Each option vests in full three
months after the date of grant, has a term of 10 years, and an exercise price
equal to the fair market value of the Common Stock on the date of grant.

Compensation Committee Interlocks and Insider Participation
-----------------------------------------------------------

  The Board of Directors has established Audit, Compensation and Stock Option
Committees.  The Compensation Committee's function is to review and make
recommendations to the Board regarding executive officers' compensation.  This
committee is composed of Messrs. Blumberg, Edelstein, Alliegro, and Lohr.  The
Audit Committee meets with the Company's independent public accountants to
review the Company's financial condition and internal accounting controls.  This
committee is composed of Messrs. Edelstein, Blumberg, Alliegro, Godbold and
Lohr.  The Stock Option Committee is composed of Mr. Moskowitz and Dr. Blumberg.
This committee administers the Company's 1994 Stock Incentive Plan and the 1995
Employee Stock Purchase Plan.  Paul Blumberg is serving as Ford's representative
on the Board of Directors.

                                       37
<PAGE>

Item 12.   Security Ownership of Certain Beneficial Owners
           and Management
           --------------

  The following table sets forth information as of February 2, 2001, regarding
the beneficial ownership of the common stock of the Company by (i) each person
or group known by the Company to be the beneficial owner of more than 5% of the
outstanding shares of common stock, (ii) each of the directors of the Company,
(iii) each of the executive officers named in the Summary Compensation Table,
and (iv) all current executive officers and directors of the Company as a group.

<TABLE>
<CAPTION>
         Name of                   Amount and Nature of          Percent
     Beneficial Owner             Beneficial Ownership(1)        of Class
     ----------------             -----------------------        --------
<S>                               <C>                            <C>
Joel P. Moskowitz                       1,163,110                  14.0%
3169 Redhill Avenue
Costa Mesa, CA 92626

Ford Motor Company                      1,207,299                  14.6%
The American Road
Dearborn, MI 48121

Dimensional Fund Advisors, Inc.           553,800 (2)               6.7%
1299 Ocean Ave., 11th Floor
Santa Monica, CA 90401
Leonard M. Allenstein                     122,000 (3)               1.5%

Richard A. Alliegro                        30,000 (4)                *

Earl E. Conabee                            13,825 (5)                *

Dr. Paul Blumberg                               -                    -

Frank Edelstein                            52,400 (6)                *

Donald A. Kenagy                           31,545 (7)                *

Wilford D. Godbold, Jr.                    11,000 (8)                *

Milton L. Lohr                             32,000 (9)                *

David P. Reed                              95,967(10)               1.2%

Howard F. George                           35,057(11)                *

All current executive                   1,591,904(12)              19.2%
officers and directors as a
group (12 persons)
</TABLE>

                                       38
<PAGE>

*    Less than 1%

(1)  Except as otherwise noted, the beneficial owners have sole voting and
     investment powers with respect to the shares indicated, subject to
     community property laws where applicable.

(2)  Based on information contained in a statement on Schedule 13G dated
     February 2, 2001, as filed with the Securities and Exchange Commission. As
     stated in such Schedule 13G, all shares are held on behalf of advisory
     clients of Dimensional Fund Advisors, Inc., which disclaims beneficial
     ownership of such shares.

(3)  Includes 32,000 shares subject to options held by Mr. Allenstein which are
     currently exercisable or will become exercisable within 60 days of February
     2, 2001.

(4)  Includes 27,000 shares subject to options held by Mr. Alliegro which are
     currently exercisable or will become exercisable within 60 days of February
     2, 2001.

(5)  Includes 800 shares subject to options held by Mr. Conabee which are
     currently exercisable or will become exercisable within 60 days of February
     2, 2001.

(6)  Includes 34,500 shares subject to options held by Mr. Edelstein which are
     currently exercisable or will become exercisable within 60 days of February
     2, 2001.

(7)  Includes 11,000 shares subject to options held by Mr. Kenagy which are
     currently exercisable or will become exercisable within 60 days of February
     2, 2001.

(8)  Includes 10,000 shares subject to options held by Mr. Godbold which are
     currently exercisable or will become exercisable within 60 days of February
     2, 2001.

(9)  Includes 32,000 shares subject to options held by Mr. Lohr which are
     currently exercisable or will become exercisable within 60 days of February
     2, 2001.

(10) Includes 50,800 shares subject to options held by Mr. Reed which are
     currently exercisable or will become exercisable within 60 days of February
     2, 2001.

(11) Includes 27,400 shares subject to options held by Mr. George which are
     currently exercisable or will become exercisable within 60 days of February
     2, 2001.

(12) Includes 230,500 shares subject to options which are currently exercisable
     or will become exercisable within 60 days of February 2, 2001.

                                       39
<PAGE>

Item 13.  Certain Relationships and Related Transactions
          ----------------------------------------------

     On March 11, 1986, the Company sold 526,316 shares of its Common Stock to
Ford Motor Company ("Ford") at a price of $19.00 per share, for a total purchase
price of $10,000,000.  At the same time, the Company and Ford created a new
corporation, Ceradyne Advanced Products, Inc. ("CAPI"), and entered into
agreements involving a broad-based technology transfer, licensing and joint
development program.  Under the agreements, Ford contributed technology and a
portfolio of United States and foreign patents relating to technical ceramics to
CAPI in exchange for 80% of CAPI's capital stock, and Ceradyne acquired the
remaining 20% of CAPI in exchange for $200,000.  The technology and patents
contributed by Ford were developed in the Ford Research Laboratories over a 15-
year period.  Under the March 11, 1986 agreements, the Company was granted an
option to acquire Ford's 80% interest in CAPI in exchange for an additional
680,983 shares of Ceradyne Common Stock, which the Company exercised effective
February 12, 1988.  As a result, Ceradyne now owns 100% of CAPI and Ford owns a
total of 1,207,299 shares of the Company's Common Stock.  The Company and Ford
also entered into a joint development agreement, under which Ford agreed to
contribute on a matching value basis with Ceradyne, for the development by
Ceradyne of technical ceramic products oriented towards the automotive market.

     So long as Ford continues to own 5%, or more, of the Company's outstanding
common stock, Ceradyne has agreed to use its best efforts to cause one person
designated by Ford to be elected a member of the Ceradyne Board of Directors
and, under certain circumstances in the event the Company issues additional
shares of its Common Stock in a public or private transaction, to permit Ford to
purchase, at the same price and terms upon which sold by the Company in such
transaction, additional shares of Ceradyne Common Stock to enable Ford to
maintain its percentage ownership of the Company.

     In connection with the sale of stock to Ford, Joel P. Moskowitz, Chairman
of the Board, Chief Executive Officer and President of the Company, and members
of his immediate family agreed to vote shares of the Company's Common Stock
owned by them in favor of the election of Ford's nominee to the Board of
Directors.  However, they may first vote that number of shares that is necessary
to assure the election of Joel P. Moskowitz as a Director of the Company, and
any shares that are not necessary to assure the election of Mr. Moskowitz and a
Ford nominee to the Board of Directors may be voted by them without restriction.

                                       40
<PAGE>

                                    PART IV

Item 14.   Exhibits, Financial Statement Schedules and Reports on Form 8-K
           ---------------------------------------------------------------

(a) List of documents filed as part of this report:

    (1) Financial Statements:                                           Page
        ---------------------                                           ----

        Report of Independent Public Accountants                        46

        Consolidated Balance Sheets at December 31, 2000 and 1999       47-48

        Consolidated Statements of Operations for                       49
         the Years Ended December 31, 2000, 1999 and 1998

        Consolidated Statements of Stockholders Equity for              50
         the Years Ended December 31, 2000, 1999, and 1998

        Consolidated Statements of Cash Flows for the Years ended       51-52
         December 31, 2000, 1999 and 1998

        Notes to Consolidated Financial Statements                      53-65

    (2) Financial Statement Schedules:

    Schedule VIII -- Valuation and Qualifying Accounts                  66

    All other schedules are omitted since the required information is not
    present or is not present in amounts sufficient to require submission of the
    schedule, or because the information required is included in the
    Consolidated Financial Statements and Notes thereto.

(b) The following reports on Form 8-K were filed during the last quarter of the
    fiscal year ended  December 31, 2000:

    None

(c) List of Exhibits

    3.1    Certificate of Incorporation of the Registrant. Incorporated herein
           by reference to Exhibit 3.1 to the Registrant's Registrant Statement
           on Form 8-B.

    3.2    Bylaws of Registrant. Incorporated herein by reference to Exhibit 3.2
           to the Registrant's Form 10-Q Report for the period ended June 30,
           1996.

    3.3    Amendment to Bylaws of Registrant, adopted April 29, 1996.
           Incorporated herein by reference to Exhibit 3.3 to the Registrant's
           Form 10-Q Report for the period ended June 30, 1996.

   10.1*   Ceradyne, Inc. 1983 Stock Option Plan as amended and restated.
           Incorporated by reference from Exhibit 10.13 to the Company's
           Registration Statement on Form S-1 (File No. 2-99930) filed on
           September 25, 1985 (the "1985 S-1").

   10.2    Lease between Trico Rents and the Registrant dated March 23, 1984,
           covering premises located at 235 Paularino Avenue, Costa Mesa,
           California. Incorporated herein by

                                       41
<PAGE>

           reference to Exhibit 10.14 to the Registrant's Registration Statement
           on Form S-1 (File No. 2-90821).

   10.3    Lease covering premises located at 3169-A Red Hill Avenue, Costa
           Mesa, California dated October 28, 1985. Incorporated herein by
           reference to Exhibit 10.30 to the Registrant's Annual Report on Form
           10-K for the fiscal year ended December 31, 1985.

   10.4    Stock Sale Agreement between the Registrant and Ford Motor Company
           dated March 11, 1986. Incorporated herein by reference to Exhibit
           10.31 to the Registrant's Annual Report on Form 10-K for the fiscal
           year ended December 31, 1985.

   10.5    Agreement between certain shareholders of the Registrant and Ford
           Motor Company dated March 11, 1986. Incorporated herein by reference
           to Exhibit 10.32 to the Registrant's Annual Report on Form 10-K for
           the year ended December 31, 1985.

   10.6    Stock Purchase Agreement between Ceradyne Advanced Products, Inc.,
           the Registrant and Ford Motor Company dated March 11, 1986.
           Incorporated herein by reference to Exhibit 10.33 to the Registrant's
           Annual Report on Form 10-K for the fiscal year ended December 31,
           1985.

   10.7    Patent and Technology Transfer Agreement between Ford Motor Company
           and Ceradyne Advanced Products, Inc. dated March 11, 1986.
           Incorporated herein by reference to Exhibit 10.34 to the Registrant's
           Annual Report on Form 10-K for the fiscal year ended December 31,
           1985.

   10.8    License Agreement between the Registrant and Ceradyne Advanced
           Products, Inc., dated March 11, 1986. Incorporated herein by
           reference to Exhibit 10.35 to the Registrant's Annual Report on Form
           10-K for the fiscal year ended December 31, 1985.

   10.9    License Agreement between Ford Motor Company and the Registrant dated
           March 11, 1986. Incorporated herein by reference to Exhibit 10.36 to
           the Registrant's Annual Report on Form 10-K for the fiscal year ended
           December 31, 1985.

   10.10   Joint Development Agreement between the Registrant and Ford Motor
           Company dated March 11, 1986. Incorporated herein by reference to
           Exhibit 10.37 to the Registrant's Annual Report on Form 10-K for the
           fiscal year ended December 31, 1985.


   10.11   Lease dated March 31, 1986 covering premises located at 3163 Red Hill
           Avenue, Costa Mesa, California. Incorporated herein by reference to
           Exhibit 10.45 to the Registrant's Annual Report on Form 10-K for the
           fiscal year ended December 31, 1986.

   10.12   Lease dated August 5, 1986 covering premises located at 225 Paularino
           Avenue, Costa Mesa, California. Incorporated herein by reference to
           Exhibit 10.46 to the Registrant's Annual Report on Form 10-K for the
           fiscal year ended December 31, 1986.

   10.13   Short-form Memorandum of Lease Assignment dated December 15, 1986,
           and Lease dated June 23, 1980, covering premises located at 3449
           Church Street, Scottdale, Georgia. Incorporated herein by reference
           to Exhibit 10.47 to the Registrant's Annual Report on Form 10-K for
           the fiscal year ended December 31, 1986.

                                       42
<PAGE>

   10.14*  Amendment dated June 3, 1986 to the Ceradyne, Inc. 1983 Stock Option
           Plan. Incorporated herein by reference to Exhibit 10.50 to the
           Registrant's Annual Report on Form 10-K for the fiscal year ended
           December 31, 1986.

   10.15*  Amendment dated March 16, 1987 to the Ceradyne, Inc. 1983 Stock
           Option Plan. Incorporated herein by reference to Exhibit 10.51 to the
           Registrant's Annual Report on Form 10-K for the fiscal year ended
           December 31, 1986.

   10.16   Joint Development Agreement dated March 28, 1986 between Unitek
           Corporation and the Registrant, and First and Second Amendments
           thereto. Incorporated herein by reference to Exhibit 10.52 to the
           Registrant's Annual Report on Form 10-K for the fiscal year ended
           December 31, 1986.

   10.17*  Amendment dated April 30, 1987 to the Ceradyne, Inc. 1983 Stock
           Option Plan. Incorporated herein by reference to Exhibit 10.56 to the
           Registrant's Registration Statement on Form 8-B.

   10.18*  Employment Agreement entered into as of July 5, 1994 by and between
           Joel P. Moskowitz and the Registrant. Incorporated herein by
           reference to Exhibit 10.30 to the Registrant's Annual Report on Form
           10-K for the fiscal year ended December 31, 1994.

   10.19*  Ceradyne, Inc. 1994 Stock Incentive Plan. Incorporated herein by
           reference to Exhibit 10.31 to the Registrant's Annual Report on Form
           10-K for the fiscal year ended December 31, 1994.

   10.20*  Amendment No. 1 to the Ceradyne, Inc. 1994 Stock Incentive Plan.
           Incorporated herein by reference to Exhibit 4.2 to Registrant's
           Registration Statement on Form S-8 (File No. 33-61675).

   10.21*  Ceradyne, Inc. 1995 Employee Stock Purchase Plan. Incorporated herein
           by reference to Exhibit 4.1 to Registrant's Registration Statement on
           Form S-8 (File No. 33-61677).

   10.22   Amendment No. 2, dated June 5, 1995, to Lease between Trico Rents and
           the Registrant covering premises located at 235 Paularino Avenue,
           Costa Mesa, California. Incorporated herein by reference to Exhibit
           10.32 to the Registrant's Registration Statement on Form S-1 (File
           No. 33-62345).

   10.23   Amendment No. 2, dated June 5, 1995, to Lease covering premises
           located at 3169-A Red Hill Avenue, Costa Mesa, California.
           Incorporated herein by reference to Exhibit 10.33 to the Registrant's
           Registration Statement on Form S-1 (File No. 33-62345).

   10.24   Amendment No. 2, dated June 5, 1995, to Lease dated March 31, 1986
           covering premises located at 3163 Red Hill Avenue, Costa Mesa,
           California. Incorporated herein by reference to Exhibit 10.34 to the
           Registrant's Registration Statement on Form S-1 (File No. 33-62345).

                                       43
<PAGE>

   10.25   Amendment No. 2, dated June 5, 1995, to Lease dated August 5, 1986
           covering premises located at 225 Paularino Avenue, Costa Mesa,
           California. Incorporated herein by reference to Exhibit 10.35 to the
           Registrant's Registration Statement on Form S-1 (File No. 33-62345).

   10.26*  Amendment No. 2 to the Ceradyne, Inc. 1994 Stock Incentive Plan.
           Incorporated herein by reference to Exhibit 10.36 to the Registrant's
           Annual report on Form 10-K for the fiscal year ended December 31,
           1996.

   10.27*  Amendment No. 3 to the Ceradyne, Inc. 1994 Stock Incentive Plan.
           Incorporated herein by reference to Exhibit 4.4 to Registrant's
           Registration Statement on Form S-8 (File No. 333-31679).

   10.28*  Amendment No. 4 to the Ceradyne, Inc. 1994 Stock Incentive Plan.
           Incorporated herein by reference to Exhibit 10.28 to the Registrant's
           Annual report on Form 10-K for the fiscal year ended December 31,
           1998.

   10.29   Amendment No. 5 to the Ceradyne, Inc. 1994 Stock Incentive Plan.

   21.1    Subsidiaries of the Registrant. Incorporated herein by reference to
           Exhibit 23.2 to the Registrant's Statement on Form S-1 (File No.
           33-62345).

   23.1    Consent of Arthur Andersen LLP.


   *       Each of these exhibits constitutes a management contract,
           compensatory plan, or arrangement required to be filed as an exhibit
           to this Report pursuant to Item 14(c) of this Report.

                                       44
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Stockholders and Directors
 of Ceradyne, Inc.:

We have audited the accompanying consolidated balance sheets of Ceradyne, Inc.
(a Delaware corporation) and subsidiaries as of December 31, 2000 and 1999, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ceradyne, Inc. and subsidiaries
as of December 31, 2000 and 1999, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not a required part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.


/s/ ARTHUR ANDERSEN LLP

Orange County, California
February 22, 2001

                                       45
<PAGE>

                                CERADYNE, INC.
                                --------------

                          CONSOLIDATED BALANCE SHEETS
                          ---------------------------

                          DECEMBER 31, 2000 AND 1999
                          --------------------------

                                    ASSETS
                                    ------
                            (Amounts in thousands)
<TABLE>
<CAPTION>
                                                                2000       1999
                                                                ----       ----
<S>                                                           <C>         <C>
CURRENT ASSETS:
 Cash and cash equivalents                                    $  6,656    $  1,407
 Accounts receivable, net of allowances of
  approximately $84 and $39 for doubtful
  accounts in 2000 and 1999, respectively                        6,290       5,837
 Other receivables                                                  63          98
 Inventories                                                     8,193       8,452
 Production tooling                                              1,655       1,343
 Prepaid expenses and other                                        795       1,147
                                                              --------    --------
   Total current assets                                         23,652      18,284
                                                              --------    --------


PROPERTY, PLANT AND EQUIPMENT:
 Land                                                              422         422
 Buildings and improvements                                      1,825       1,825
 Machinery and equipment                                        25,450      23,462
 Leasehold improvements                                          2,280       1,870
 Office equipment                                                2,975       2,456
 Construction in progress                                          197         700
                                                              --------    --------
                                                                33,149      30,735
  Less--Accumulated depreciation and amortization              (21,751)    (19,733)
                                                              --------    --------
                                                                11,398      11,002
                                                              --------    --------
COSTS IN EXCESS OF NET ASSETS ACQUIRED,
 net of accumulated amortization of $2,239 and $2,071 in
 2000 and 1999, respectively                                     1,678       1,846
                                                              --------    --------

OTHER ASSETS, net of accumulated amortization of
 $671 and $645 in 2000 and 1999, respectively                    1,735       1,761
                                                              --------    --------

   Total assets                                               $ 38,463    $ 32,893
                                                              ========    ========

</TABLE>


                  The accompanying notes are an integral part
                     of these consolidated balance sheets.

                                       46
<PAGE>

                                CERADYNE, INC.
                                --------------

                          CONSOLIDATED BALANCE SHEETS
                          ---------------------------

                           DECEMBER 31, 2000 AND 1999
                           --------------------------

                      LIABILITIES AND STOCKHOLDERS' EQUITY
                      ------------------------------------
                   (Amounts in thousands, except share data)
<TABLE>
<CAPTION>

                                                       2000       1999
                                                       ----       ----
<S>                                                   <C>        <C>
CURRENT LIABILITIES:
 Current maturities of long-term debt                 $   100    $   100
 Accounts payable                                       1,953      2,214
 Accrued expenses:
   Payroll and payroll related                            914        665
   Other                                                  249        149
                                                      -------    -------
      Total current liabilities                         3,216      3,128
                                                      -------    -------

LONG-TERM DEBT, less current maturities                   258        358
                                                      -------    -------
DEFERRED REVENUE                                          ---        270
                                                      -------    -------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
  Common stock, $.01 par value:
    Authorized--12,000,000 shares
    Outstanding--8,288,142 and 8,095,848 shares
     in 2000 and 1999, respectively                    38,659     37,900
  Accumulated deficit                                  (3,670)    (8,763)
                                                      -------    -------

      Total stockholders' equity                       34,989     29,137
                                                      -------    -------

      Total liabilities and stockholders' equity      $38,463    $32,893
                                                      =======    =======

</TABLE>



                  The accompanying notes are an integral part
                     of these consolidated balance sheets.

                                       47
<PAGE>

                                CERADYNE, INC.
                                --------------

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     -------------------------------------

             FOR THE YEARS ENDED DECEMBER 31, 2000 , 1999 AND 1998
             -----------------------------------------------------
                 (Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
                                           2000       1999       1998
                                           ----       ----       ----
<S>                                       <C>        <C>        <C>
NET SALES                                 $45,930    $30,382    $26,279

COST OF PRODUCT SALES                      33,743     23,674     21,292
                                          -------    -------    -------

    Gross profit                           12,187      6,708      4,987
                                          -------    -------    -------

OPERATING EXPENSES:
 Selling                                    1,605      1,480      1,494
 General and administrative                 4,456      3,400      3,239
 Research and development                   1,252        597        344
                                          -------    -------    -------

                                            7,313      5,477      5,077
                                          -------    -------    -------

    Income (loss) from operations           4,874      1,231        (90)
                                          -------    -------    -------

OTHER INCOME (EXPENSE):
 Other income                                 357        344        382
 Interest expense                             (34)       (16)       ---
                                          -------    -------    -------
                                              323        328        382
                                          -------    -------    -------

   Income before provision (benefit)
    for income taxes                        5,197      1,559        292

PROVISION (BENEFIT) FOR INCOME
  TAXES                                       104        (44)        10
                                          -------    -------    -------

    Net income                            $ 5,093    $ 1,603    $   282
                                          =======    =======    =======

BASIC INCOME PER SHARE                      $0.62      $0.20      $0.04
                                          =======    =======    =======

DILUTED INCOME PER SHARE                    $0.61      $0.20      $0.04
                                          =======    =======    =======

WEIGHTED AVERAGE NUMBER OF
  COMMON SHARES OUTSTANDING:
    Basic                                   8,212      8,070      8,005
                                          =======    =======    =======
    Diluted                                 8,395      8,189      8,068
                                          =======    =======    =======
</TABLE>
                  The accompanying notes are an integral part
                       of these consolidated statements.

                                       48
<PAGE>

                                CERADYNE, INC.
                                --------------

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                ------------------------------------------------

              FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
              ----------------------------------------------------
                   (Amounts in thousands, except share data)

<TABLE>
<CAPTION>
                                  Common Stock
                                  ------------                        Total
                                Number              Accumulated   Stockholders'
                               of Shares   Amount     Deficit        Equity
                               ---------   ------     -------        ------
<S>                            <C>         <C>      <C>             <C>
BALANCE, December 31, 1997     7,963,459   $37,408   $(10,648)      $26,760

  Issuance of common stock        50,179       197        ---           197
  Exercise of stock options       41,200       113        ---           113
  Net income                         ---       ---        282           282
                               ---------   -------   --------       -------

BALANCE, December 31, 1998     8,054,838   $37,718   $(10,366)      $27,352

  Issuance of common stock        30,741       154        ---           154
  Exercise of stock options       10,269        28        ---            28
  Net income                         ---       ---      1,603         1,603
                               ---------   -------   --------       -------

BALANCE, December 31, 1999     8,095,848   $37,900   $ (8,763)      $29,137

  Issuance of common stock        64,304       190        ---           190
  Exercise of stock options      127,990       569        ---           569
  Net income                         ---       ---      5,093         5,093
                               ---------   -------   --------       -------

BALANCE, December 31, 2000     8,288,142   $38,659   $ (3,670)      $34,989
                               =========   =======   ========       =======

</TABLE>

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

                                       49
<PAGE>

                                CERADYNE, INC.
                                --------------

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                     -------------------------------------

             FOR THE YEARS ENDED DECEMBER 31,  2000, 1999 AND 1998
             -----------------------------------------------------
                             (Amounts in thousands)
<TABLE>
<CAPTION>
                                                                        2000       1999       1998
                                                                        ----       ----       ----
<S>                                                                   <C>        <C>        <C>

CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                                          $ 5,093    $ 1,603    $   282
  Adjustments to reconcile net income to net cash
     provided by operating activities:
     Depreciation and amortization                                      2,212      1,835      1,505

     Changes in operating assets and liabilities:
        (Increase) decrease in accounts receivable, net                  (453)    (1,456)       304
        Decrease (increase) in other receivables                           35         69        (71)
        Decrease (increase) in inventories                                259       (932)      (154)
        Increase in production tooling                                   (312)      (239)      (222)
        Decrease (increase) in prepaid expenses and other assets          352       (352)      (324)
       (Decrease) increase in accounts payable                           (261)     1,130       (113)
        Increase (decrease) in accrued expenses                           349         27         (3)
        Decrease in deferred revenue                                     (270)       ---        ---
                                                                      -------    -------    -------

          Net cash provided by operating activities                     7,004      1,685      1,204
                                                                      -------    -------    -------

CASH FLOWS FROM INVESTING ACTIVITIES:

  Purchases of property, plant and equipment                           (2,414)    (3,788)    (2,213)
                                                                      -------    -------    -------

          Net cash used in investing activities                        (2,414)    (3,788)    (2,213)
                                                                      -------    -------    -------

</TABLE>


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

                                       50
<PAGE>

                                CERADYNE, INC.
                                --------------

              CONSOLIDATED STATEMENTS OF CASH FLOWS - (continued)
              -------------------------------------
                             (Amounts in thousands)
<TABLE>
<CAPTION>
                                                                        2000       1999       1998
                                                                        ----       ----       ----
<S>                                                                    <C>       <C>         <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from issuance of common stock                               $  190    $   154     $  197
  Proceeds from exercise of stock options                                 569         28        113
  Borrowings on long-term debt                                            ---        500        ---
  Payments on long-term debt                                             (100)       (42)       ---

      Net cash provided by financing activities                           659        640        310
                                                                       ------    -------    -------

  Increase (decrease) in cash and cash equivalents                      5,249     (1,463)      (699)

  Cash and cash equivalents, beginning of period                        1,407      2,870      3,569
                                                                       ------    -------    -------

  Cash and cash equivalents, end of period                             $6,656    $ 1,407     $2,870
                                                                       ------    -------    -------

SUPPLEMENTAL DISCLOSURES OF CASH FLOW
  INFORMATION:

  Interest paid                                                        $   34    $    16    $   ---
                                                                       ======    =======     ======
  Income taxes paid                                                    $   78    $    39     $   10
                                                                       ======    =======     ======

</TABLE>



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

                                       51
<PAGE>

                                CERADYNE, INC.
                                --------------

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  ------------------------------------------

                              DECEMBER 31,  2000
                              ------------------

1.  Summary of Significant Accounting Policies
    ------------------------------------------

    a.  Principles of Consolidation and Nature of Operations
        ----------------------------------------------------

    The consolidated financial statements include the financial statements of
    Ceradyne, Inc. (a Delaware Corporation), and its subsidiaries. Ceradyne,
    Inc. and its subsidiaries are collectively referred to herein as the
    Company. All significant intercompany accounts and transactions have been
    eliminated.

    The Company develops, manufactures and markets advanced technical ceramic
    products and components for industrial, defense, consumer and microwave
    applications. The products are sold primarily to industrial, consumer, and
    defense concerns globally.

    b.  Cash and Cash Equivalents
        -------------------------

    The Company considers all highly liquid investments with an initial maturity
    of three months or less when purchased to be cash equivalents.

    c.  Accounts Receivable
        -------------------

    The allowance for doubtful accounts includes management's estimate of the
    amount expected to be uncollectable on specific accounts and unidentified
    accounts included in accounts receivable. In estimating the potential losses
    on specific accounts, management relies on in-house prepared analysis and
    review of other available information. The amounts the Company will
    ultimately realize could differ from the amounts assumed in arriving at the
    allowance for doubtful accounts in the accompanying financial statements.

    d.  Inventories
        -----------

    Inventories are valued at the lower of cost (first-in, first-out) or market.
    The write down of inventory for obsolete items is based on management's
    estimate of the amount considered obsolete based on specific reviews of
    inventory items. In estimating the allowance, management relies on its
    knowledge of the industry as well as its current inventory levels. The
    amounts the Company will ultimately realize could differ from amounts
    estimated by management. Inventory costs include the cost of material, labor
    and manufacturing overhead. The following is a summary of inventories by
    component:

                                          December 31,
                                          ------------
                                        2000         1999
                                        ----         ----
                Raw materials        $4,815,000   $4,454,000
                Work-in-process       2,800,000    3,198,000
                Finished goods          578,000      800,000
                                     ----------   ----------
                                     $8,193,000   $8,452,000
                                     ==========   ==========

                                       52
<PAGE>

    e.  Property, Plant and Equipment
        -----------------------------

    Depreciation and amortization of property, plant and equipment are provided
    using the straight-line method over the following estimated useful lives:

                Buildings and improvements     20 years
                Machinery and equipment        3 to 12 years
                Leasehold improvements         Term of lease
                Office equipment               5 years

    Maintenance, repairs and minor renewals are charged to expense as incurred.
    Repairs and maintenance expense approximated $965,000, $720,000, and
    $729,000 in 2000, 1999 and 1998, respectively. Additions and improvements
    are capitalized. When assets are disposed of, the applicable costs and
    accumulated depreciation and amortization are removed from the accounts and
    any resulting gain or loss is included in the results of operations.

    f.  Sales Recognition
        -----------------

    The Company recognizes sales as of the date shipments are made and title
    passes to the customer. Shipping and handling costs billed to a customer are
    recorded as sales and cost of product sales.

    g.  Deferred Revenue
        ----------------

    In January 2001, Ford Motor Company contributed $270,000 for the year 2001
    to the Joint Product Development Program. The Company will amortize this
    amount to revenue during 2001. In October 1999, 1998 and 1997, Ford also
    contributed $270,000 for each year and the Company fully amortized these
    amounts to revenue during 2000, 1999 and 1998. As of December 31, 2000,
    there was no deferred revenue.

    h.  Net Income Per Share
        --------------------

    The Company accounts for net income per share in accordance with SFAS No.
    128 "Earnings Per Share". Basic net income per share is computed by dividing
    income available to common stockholders by the weighted average number of
    common shares outstanding. Diluted net income per share is computed by
    dividing income available to common stockholders by the weighted average
    number of common shares outstanding plus the effect of any dilutive stock
    options and common stock warrants using the treasury stock method.

                                       53
<PAGE>

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

                                                          December 31,
                                                          ------------
                                                  2000       1999        1998
                                                  ----       ----        ----
    Weighted average number of
     shares outstanding                       8,211,568   8,070,225   8,005,000

    Dilutive stock options and common stock
     warrants                                   183,769     119,174      63,000
                                              ---------   ---------   ---------

    Number of shares used in
     diluted computation                      8,395,337   8,189,399   8,068,000
                                              =========   =========   =========

    i.  Accounting for Long-Lived Assets
        --------------------------------

    As prescribed by Statement of Financial Accounting Standards (SFAS) No. 121,
    "Accounting for the Impairment of Long-lived Assets and for Long-lived
    Assets to be Disposed of," the Company assesses the recoverability of its
    long-lived assets (including goodwill) by determining whether the asset
    balance can be recovered over the remaining depreciation or amortization
    period through projected undiscounted future cash flows. Cash flow
    projections, although subject to a degree of uncertainty, are based on
    trends of historical performance and management's estimate of future
    performance, giving consideration to existing and anticipated competitive
    and economic conditions. There were no impairment charges in any of the
    three years ended December 31, 2000.

    j.  Deferred Start-up and Pre-Production Engineering
        ------------------------------------------------

    In April 1998, the American Institute of Certified Public Accountants
    (AICPA) issued Statement of Position (SOP) 98-5, "Reporting on the Costs of
    Start-Up Activities", effective for fiscal years beginning after December
    15, 1998. This statement requires cost of start-up activities and
    organization costs to be expensed as incurred. Prior to the effective date,
    the Company incurred and amortized approximately $252,000 of deferred start-
    up costs related to the semiconductor product line during the year ended
    December 31, 1998.

    Effective for design and development costs incurred after December 31, 1999,
    the Emerging Issues Task Force (EITF) released issue No. 99-5, "Accounting
    for Pre-Production Costs Related to Long Term Supply Arrangements". The task
    force reached a consensus that design and development costs for products to
    be sold under long-term supply arrangement should be expenses as incurred.
    The effect of adoption was immaterial to the Company's financial statements.

    In 1998, the Company capitalized $188,000 in pre-production engineering
    costs relating to a new government contract for the armor vest product line.
    In November 1999, the company commenced shipments of the product and began
    to amortize these costs. The remaining $172,000 was completely amortized by
    March 31, 2000.

                                       54
<PAGE>

    k.  Use of Estimates
        ----------------

    The preparation of financial statements in accordance with accounting
    principles generally accepted in the United States requires management to
    make estimates and assumptions that affect the reported amounts of assets
    and liabilities and disclosure of contingent assets and liabilities at the
    date of the financial statements. Actual results could differ from those
    estimates.

    l.  Engineering and Research
        ------------------------

    The costs associated with application engineering and internally-funded
    research are expensed as incurred and are included in cost of product sales
    or other operating expenses. The Company established a new research and
    development department in 1998 to focus on new materials technology. Costs
    associated with the research and development department were $1,252,000,
    $597,000, and $344,000 for years ended December 31, 2000, 1999 and 1998,
    respectively. In addition, the Company has historically and continues to
    engage in application engineering and internally funded research to improve
    and reduce the cost of products and to develop new products. Costs
    associated with the engineering department were approximately $358,000,
    $281,000 and $384,000 in 2000, 1999 and 1998, respectively.

    m.  Comprehensive Income
        --------------------

    In accordance with SFAS No. 130, the Company reports and displays
    comprehensive income and its components in the financial statements.
    Comprehensive income generally represents all changes in stockholder's
    equity except those resulting from investments by and distributions to
    owners. Currently, no difference exists between the Company's net income and
    its comprehensive net income.

    n.  Fair Value of Financial Instruments
        -----------------------------------

    The carrying value of accounts receivable and trade payables approximates
    the fair value due to their short-term maturities. The carrying value of the
    Company's unused line of credit is considered to approximate fair market
    value, as the interest rates of these instruments are based predominately on
    variable reference rates. The carrying value of the Company's long-term debt
    is a reasonable estimate of fair value as the rate of interest paid on the
    note approximates the current rate available for financing with similar
    terms and maturities.

    o.  Environmental Liabilities and Expenditures
        ------------------------------------------

    Accruals for environmental matters are recorded in operating expenses when
    it is probable that a liability has been incurred and the amount of the
    liability can be reasonably estimated. In the fourth quarter of 1998, the
    Company recorded approximately $178,000 as an accrual for the written
    notification from the United States Environmental Protection Agency that the
    Company was a responsible party in the Superfund cleanup of the Casmalia
    Disposal Site in Santa Barbara County, CA. The notification states that
    Ceradyne, along with approximately 10,000 other parties, have been
    designated as "de minimus" waste generators due to the relatively small
    quantities of their waste disposal. The Company properly disposed of this
    waste material in the 1970's and 1980's, however the Casmalia Disposal Site
    leaked into the water table. Thus the waste generators must pay their share
    of the cost of the cleanup effort. After review and

                                       55
<PAGE>

    negotiation, the EPA reduced the charge to $112,000. The amount was paid in
    full in December 1999. There were no environmental issues as of December 31,
    2000.

    p.  Income Taxes
        ------------

    The Company accounts for income taxes in accordance with SFAS No. 109,
    "Accounting for Income Taxes," which requires the liability method of
    accounting for income taxes.

    q.  New Accounting Pronouncements
        -----------------------------

    In June 1998, the Financial Accounting Standards Board issued Statement of
    Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
    Instruments and Hedging Activities." SFAS No. 133, as amended by SFAS No.
    137 and SFAS No. 138, is effective for fiscal years beginning after June 15,
    2000. SFAS No. 133 requires that all derivative instruments be recorded on
    the balance sheet at their fair value. Currently, the Company does not have
    any instruments that would qualify as derivatives under SFAS No. 133.
    Accordingly, the Company does not believe SFAS No. 133 will have a material
    impact on the Company's financial position, results of operations, or
    liquidity at the current time.

    During the third quarter of fiscal year 2000, Emerging Issues Task Force
    (EITF) No. 00-10, "Accounting for Shipping and Handling Fees and Costs" was
    issued. EITF No. 00-10 governs the accounting treatment and classification
    of the Company's shipping revenues and certain of its shipping expenses. In
    accordance with the Issue, the Company adopted EITF No. 00-10 during the
    fourth quarter of fiscal 2000. The adoption of this EITF did not materially
    affect the classification of revenues from shipments to customers and
    certain expenses related to shipping and handling of the Company's net
    income.

    In December 1999, the Securities and Exchange Commission staff released
    Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition", to provide
    guidance on the recognition, presentation and disclosure of revenue in
    financial statements. While SAB No. 101 provides a framework by which to
    recognize revenue in the financial statements, the adoption of this SAB did
    not have a material impact on the Company's financial statement.

    In March 2000, the Financial Accounting Standards Board issued
    Interpretation (FIN) No. 44, "Accounting for Certain Transactions Involving
    Stock Compensation - an Interpretation of APB No. 25." FIN No. 44 clarifies
    (a) the definition of employee for purposes of applying APB No. 25, (b) the
    criteria for determining whether a plan qualifies as a non-compensatory
    plan, (c) the accounting consequence of various modifications to the terms
    of a previously fixed stock option or award, and (d) the accounting for an
    exchange of stock compensation awards in a business combination. FIN No. 44
    became effective July 1, 2000 and had no impact on the Company's financial
    statements.

2.  Debt and Bank Borrowing Arrangements
    ------------------------------------

In November 1997 the Company entered into a revolving credit agreement with
Comerica Bank.  The unused credit facility amount remains at $4,000,000 as of
the year ended December 31, 2000.

                                       56
<PAGE>

Under a separate credit facility with Comerica Bank, the Company entered into a
$500,000 capital equipment loan agreement during the third quarter of 1999.  The
term of the loan is for 60 months with no prepayment penalty.  The equipment
serves as the collateral for the loan.

    Long Term Debt
    --------------


    Capital equipment loan bearing interest at 8.18%         $ 358,000
    APR, as of December 31, 2000.  Payable in
    monthly installments of $8,333 expiring July
    2004.

    Less:  current portion                                    (100,000)
                                                             ---------
    Long term debt                                           $ 258,000
                                                             =========

3.  Income Taxes
    ------------

The provision (benefit) for income taxes is comprised of the following for the
year ended December 31:

                          2000       1999       1998
                          ----       ----       ----

    Current             $104,000   $(44,000)   $10,000
    Deferred                 ---        ---        ---
                        --------   --------    -------
                        $104,000   $(44,000)   $10,000
                        ========   ========    =======

The Company's net deferred tax asset of $1.7 million at December 31, 2000
relates primarily to its tax net operating loss carryforwards, which total
approximately $5.2 million and expire as follows:

             2008            $ 1,752,000
             2009              1,828,000
             2012              1,620,000
                             -----------
                             $ 5,200,000
                             ===========

The components of the Company's deferred tax asset as of December 31, 2000 and
1999 are as follows:
                                                          December 31,
                                                          ------------
                                                      2000           1999
                                                      ----           ----
             Inventory adjustments                $   299,000    $   264,000
             Vacation accrual                         113,000        104,000
             Bad debt allowance                        33,000         16,000
             Net operating loss and tax credit
              carryforwards                         2,371,000      4,248,000
             Other                                     44,000         67,000
                                                  -----------    -----------
                                                    2,860,000      4,699,000
             Valuation allowance                   (1,152,000)    (2,991,000)
                                                  -----------    -----------
                 Net deferred tax asset           $ 1,708,000    $ 1,708,000
                                                  ===========    ===========

The deferred tax asset is classified in other assets at December 31, 2000 and
1999.

                                       57
<PAGE>

The effective income tax rate for the years ended December 31, 2000, 1999 and
1998 differs from the Federal statutory income tax rate due to the following
items:
<TABLE>
<CAPTION>
                                                             December 31,
                                                             ------------
                                                  2000          1999          1998
                                                  ----          ----          ----
<S>                                            <C>            <C>           <C>

   Income before taxes                         $ 5,197,000    $1,559,000    $292,000
                                               -----------    ----------    --------

   Provision for income taxes at federal
    statutory rate                               1,766,980       530,060      99,280
   State income taxes                              252,055        75,612      14,162
   Reduction of valuation allowance             (1,839,000)     (708,000)    (15,000)
   Other                                           (76,035)       58,328     (88,442)
                                               -----------    ----------    --------
   Provision (benefit) for income taxes        $   104,000    $  (44,000)   $ 10,000
                                               ===========    ==========    ========
   Effective tax rate                                 2.00%        (2.82)%      3.42%
                                               ===========    ==========    ========
</TABLE>


4. Commitments and Contingencies
   -----------------------------

   a.  Operating Lease Obligations
       ---------------------------

   The Company leases certain of its manufacturing facilities under
   noncancelable operating leases expiring at various dates through October
   2005.  The Company incurred rental expense under these leases of $691,365,
   $653,433 and $667,000 for the years ended 2000, 1999 and 1998, respectively.
   The approximate minimum rental commitments required under existing
   noncancelable leases as of December 31, 2000 are as follows:

                    2001      $  771,190
                    2002         820,899
                    2003         850,312
                    2004         859,202
                    2005         764,008
                              ----------
                              $4,065,611
                              ==========

   b.  Employment Agreement
       --------------------

   The Company has an employment agreement with the Chief Executive Officer
   which expires on July 5, 2001.  In addition to a base salary, the agreement
   provides for a bonus to be determined by the Compensation Committee of the
   Board of Directors.  No maximum compensation limit exists. Compensation
   expense pursuant to this agreement in 2000, 1999 and 1998 was $310,970,
   $256,112 and $228,191, respectively.

   c.  Legal Proceedings
       -----------------

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

                                       58
<PAGE>

   From October 1995 through November 2000, the Company, along with others, was
   served with seven different complaints that were filed by eleven former
   employees of one of the Company's customers, and eight spouses. The
   complaints, filed in the United States District Court, Eastern District of
   Tennessee, allege that the customers' employees contracted chronic beryllium
   disease as a result of their exposure to beryllium-containing products sold
   by Ceradyne and others. The total of all the above complaints seeks
   compensatory damages in the amount of $59 million and punitive damages in the
   amount of $140 million.

   Also, in September 2000, the Company was served with a cross complaint from
   the Company's lessor who received a complaint from an employee of the Company
   alleging he contacted chronic beryllium disease. The complaint seeks legal
   expense reimbursement from the Company. This complaint was filed in the
   Superior Court of the State of California in Santa Ana, California.

   The Company believes that all above plaintiffs' claims are without merit and
   that the resolution of these matters will not have a material adverse effect
   on the financial condition or operations of the Company. Defense of these
   cases has been tendered to the Company's insurance carriers, some of which
   are providing a defense subject to a reservation of rights. There can be no
   assurances, however, that these claims will be covered by insurance, or that,
   if covered, the amount of insurance will be sufficient to cover any potential
   judgments.


5. Disclosure About Segments of Enterprise and Related Information
   ---------------------------------------------------------------

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

Ceradyne's manufacturing structure is summarized in the following table:

<TABLE>
<CAPTION>
===============================================================================================
       FACILITY LOCATION                                 PRODUCTS
<S>                                      <C>
Advanced Ceramic Operations              . Semiconductor Equipment Components
Costa Mesa, California                   . Lightweight ceramic armor
 Approximately 74,000 square feet        . Orthodontic ceramic brackets
                                         . Ceralloy(R) 147 SRBSN wear parts
                                         . Precision ceramics
                                         . Ceralloy(R) 147 SRBSN diesel/automotive engine parts
                                           (Research and Development
-----------------------------------------------------------------------------------------------
Semicon Associates                       . Microwave ceramic-impregnated dispenser cathodes
Lexington, Kentucky                      . Ion laser ceramic-impregnated dispenser cathodes
 Approximately 35,000 square feet        . Samarium cobalt magnets
-----------------------------------------------------------------------------------------------
Thermo Materials                         . Glass tempering rolls (fused silica ceramics)
Scottdale, Georgia                       . Metallurgical tooling (fused silica ceramics)
 Approximately 85,000 square feet        . Missile radomes (fused silica ceramics)
                                         . Castable and other fused silica product
===============================================================================================
</TABLE>

                                       59
<PAGE>

                                Ceradyne, Inc.
              Segment Statement of Operations for the Years Ended
                       December 31, 2000, 1999, and 1998
                             (amounts in thousands)
<TABLE>
<CAPTION>
                    Advanced Ceramic Ops           Semicon  Associates           Thermo Materials                  TOTAL
                    --------------------           -------------------           ----------------                  -----
-----------------------------------------------------------------------------------------------------------------------------------
                     2000      1999      1998     2000     1999      1998      2000     1999     1998      2000      1999      1998
-----------------------------------------------------------------------------------------------------------------------------------
<S>               <C>       <C>       <C>       <C>      <C>      <C>        <C>      <C>      <C>      <C>       <C>       <C>

Revenue from      $31,250   $17,839   $14,176   $7,191   $6,385    $5,995    $7,489   $6,158   $6,108   $45,930   $30,382   $26,279
External          -------   -------   -------   ------   ------    ------    ------   ------   ------   -------   -------   -------
Customers

Depreciation      $ 1,564   $ 1,272   $   992   $  362   $  347    $  301    $  286   $  216   $  212   $ 2,212   $ 1,835   $ 1,505
and               -------   -------   -------   ------   ------    ------    ------   ------   ------   -------   -------   -------
Amortization

Segment Income    $ 3,389   $   762   $    37   $  895   $  395    $ (114)   $  913   $  402   $  369   $ 5,197   $ 1,559   $   292
(loss) before     -------   -------   -------   ------   ------    ------    ------   ------   ------   -------   -------   -------
provision
(benefit) for
income taxes

Segment Assets    $27,298   $23,196   $19,960   $5,994   $5,877    $6,398    $5,171   $3,820   $3,135   $38,463   $32,893   $29,493
                  -------   -------   -------   ------   ------    ------    ------   ------   ------   -------   -------   -------

Expenditures      $ 1,211   $ 2,989   $ 1,827   $  394   $  322    $  272    $  809   $  477   $  114   $ 2,414   $ 3,788   $ 2,213
for Segment       -------   -------   -------   ------   ------    ------    ------   ------   ------   -------   -------   -------
Assets of PP&E
               --------------------------------------------------------------------------------------------------------------------
</TABLE>

                    Segment Statement for Net Sales by Area
                              for the Years Ended
                       December 31, 2000, 1999, and 1998
                                     (in %)
<TABLE>
<CAPTION>
                    Advanced Ceramic Ops           Semicon  Associates           Thermo Materials                  TOTAL
                    --------------------           -------------------           ----------------                  -----
-----------------------------------------------------------------------------------------------------------------------------------
                     2000      1999      1998     2000     1999      1998      2000     1999     1998      2000      1999      1998
-----------------------------------------------------------------------------------------------------------------------------------
<S>               <C>       <C>       <C>       <C>      <C>      <C>        <C>      <C>      <C>      <C>       <C>       <C>

U.S. Net Sales        63%       54%       47%      12%      18%       18%       12%      17%      19%       87%       89%       84%

Western                3%        3%        4%       2%       2%        3%        1%       1%       2%        6%        6%        9%
Europe Net
Sales

Asia Net Sales         1%        1%        1%       1%       1%        2%        2%       2%       1%        4%        4%        4%

Israel Net             1%       ---        2%      ---      ---       ---       ---      ---      ---        1%       ---        2%
Sales

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

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

Total Net             68%       59%       54%      16%      21%       23%       16%      20%      23%      100%      100%      100%
Sales             =======   =======   =======   ======   ======    ======    ======   ======   ======   =======   =======   =======
              ---------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       60
<PAGE>

For fiscal year 2000, one customer accounted for approximately 14% of net sales.
For 1999, one customer accounted for approximately 18% of net sales.  For fiscal
year 1998, two customers accounted for approximately 16% and 11% of net sales.

6. Stock Options
   -------------

The Company has a stock option plan, the 1994 Stock Incentive Plan and an
employee stock purchase plan, the 1995 Employee Stock Purchase Plan.  The
Company accounts for these plans under APB Opinion No. 25, under which no
compensation cost has been recognized.  Had compensation cost for these plans
been determined consistent with FASB Statement No. 123, the Company's net income
and earnings per share would have been reduced to the following pro forma
amounts:
<TABLE>
<CAPTION>
                                               2000         1999        1998
                                               ----         ----        ----
<S>                           <C>           <C>          <C>          <C>
Net income:                   As reported   $5,093,000   $1,603,000   $282,000
                              Pro forma     $4,696,815   $1,276,320     97,371

Basic income per share        As reported      $.62         $.20        $.04
                              Pro forma        $.57         $.16        $.01

Diluted income per share      As reported      $.61         $.20        $.04
                              Pro forma        $.56         $.16        $.01
</TABLE>

Because the Statement No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
Additionally, the 2000, 1999 and 1998 pro forma net income include immaterial
amounts related to the purchase discount offered under the 1995 Employee Stock
Purchase Plan.

The Company may sell up to 100,000 shares of stock to its full-time employees
under the 1995 Employee Stock Purchase Plan.  The Company has sold 27,925
shares, 26,793 shares and 24,162 shares in 2000, 1999 and 1998, respectively,
under the 1995 Employee Stock Purchase Plan.  Employees may purchase shares at
the lower of 85 percent of the quoted market value of the shares as determined
on the first or last day of the plan year.  The weighted average fair value of
shares sold in 2000, 1999 and 1998 was $3.876, $3.876 and $3.93, respectively.

The Company may grant options for up to 800,000 shares under the 1994 Stock
Incentive Plan.  The Company has granted options for 865,600 shares and has had
cancellations of 136,205 shares through December 31, 2000.  Options are granted
at or above the fair market value at the date of grant and generally become
exercisable over a five-year period.

A summary of the status of the Company's stock option plan at December 31, 1998,
1999 and 2000 and changes during the years then ended is presented in the table
and narrative below:

                                       61
<PAGE>

<TABLE>
<CAPTION>
                                                     Weighted Average
                                          Shares      Exercise  Price
                                          ------      ---------------
<S>                                      <C>         <C>
     OUTSTANDING, December 31, 1997       465,850          $ 4.26
                                         ========          =======

     Granted                              128,500          $ 4.41
     Exercised                            (41,200)          (2.75)
     Canceled                             (55,000)          (5.92)
                                         --------          -------
     OUTSTANDING, December 31, 1998       498,150          $ 4.24
                                         ========          =======

     Granted                              151,000          $ 3.39
     Exercised                            (10,200)          (2.63)
     Canceled                             (10,400)          (4.66)
                                         --------          -------
     OUTSTANDING, December 31, 1999       628,550          $ 4.06
                                         ========          =======

     Granted                              107,900          $ 6.828
     Exercised                           (127,990)          (4.228)
     Canceled                             (11,000)          (4.162)
                                         --------          -------
     OUTSTANDING, December 31, 2000       597,460          $ 4.565
                                         ========          =======
</TABLE>

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 2000, 1999, and 1998, respectively:  risk free
interest rates of 5.76, 6.51 and 5.40 percent; expected life for 2000, 1999 and
1998 of 7 years; expected volatility of 66.53, 65.06, and 94.87 percent.  The
assumed dividend yield in 2000, 1999 and 1998 is zero percent.

Of the 597,460 options outstanding at December 31, 2000, 333,700 have exercise
prices between $2.00 and $4.375, with a weighted average exercise price of
$3.15, and a weighted average remaining contractual life of seven years.  The
remaining 263,760 options have exercise prices between $4.75 and $7.50, with a
weighted average exercise price of $5.49, and a weighted average remaining
contractual life of eight years.

7. Supplemental Retirement Plan
   ----------------------------

In December 1988 the Board of Directors of the Company approved the adoption of
a supplemental retirement plan (Ceradyne SMART 401(k) Plan) in which
substantially all employees are eligible to participate after completing 90 days
of employment.  Participation in the Plan is voluntary.  An employee may elect
to contribute up to fifteen percent (15% or the maximum deferred tax amount of
$10,500 in 2000, whichever is less) of the employee's pretax compensation as a
basic contribution.  The exception to this rule are the highly compensated
employees ($85,000 and above) who are limited to 7% of pretax compensation as a
basic contribution.  The Company may contribute any amount which the Board of
Directors annually determines appropriate.  Company contributions fully vest and
are nonforfeitable after the participant has completed five years of service.
During the years ended December 31, 2000, 1999, and 1998, the related Company
contribution was approximately $82,052, $14,601 and $102,455, respectively.

The Company's contribution is in the form of shares of its common stock.  The
number of shares to be contributed will be determined by dividing the total
Company match for the Plan year by the higher of the market value per share of
common stock as of the end of that Plan year

                                       62
<PAGE>

(December 31), or the audited book value per share of common stock as of the end
of that Plan year. The participants' cash contributions may be invested, at
their discretion, in several funds. The member can elect to allocate the
accumulated and future contributions to their accounts among these funds in
increments of 10 percent.

The Company has reserved 250,000 shares of its common stock for possible
issuance under the Plan.  At December 31, 2000, 104,064 shares were available
for issuance under the Plan.

8. Joint Venture and Joint Development Agreement
   ---------------------------------------------

On March 11, 1986, the Company sold 526,316 shares of its common stock to Ford
Motor Company (Ford) for a gross sales price of $10,000,000.  In addition, Ford
and the Company formed a joint venture, Ceradyne Advanced Products, Inc. (CAPI),
in which the Company acquired a 20 percent interest for $200,000.  Ford
contributed certain technology in exchange for its 80 percent interest in the
joint venture.  The Company granted Ford an option to have Ford's 80 percent
interest in the joint venture to the Company in exchange for 608,020 shares of
the Company's common stock.  Ford granted the Company an option to call Ford's
80 percent interest in the joint venture in exchange for 680,983 shares of the
Company's common stock.

On February 13, 1988, the Company exercised its call option and issued 680,983
shares of its common stock to Ford.  The value of the shares issued ($2,043,000)
was allocated to the technology acquired and is being amortized over a 20 year
period utilizing the purchase method of accounting.

Ford and the Company have also entered into a joint development program to
develop a prototype production facility to produce ceramics with automotive
applications.  Under the terms of the joint development agreement, Ford and the
Company share equally in the cost of this project.  Ford contributed $270,000
for each of the years ended December 31, 1999 and 1998.  In addition, Ford
contributed $270,000 in January 2001.

9. Interim Financial Information (unaudited)
   -----------------------------------------

The results by quarter for 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
                                            Quarter Ending
                                            --------------
                         March 31,       June 30,     September 30,   December 31,
                           2000            2000            2000           2000
                           ----            ----            ----           ----
<S>                  <C>              <C>           <C>             <C>

 Net sales              $11,148,000   $11,699,000     $11,493,000    $11,590,000
 Net income               1,156,000     1,338,000       1,409,000      1,190,000
 Diluted income
  per share-            $       .14   $       .16     $       .17    $       .14
                        ===========   ===========     ===========    ===========
</TABLE>

                                       63
<PAGE>

<TABLE>
<CAPTION>
                                           Quarter Ending
                                           --------------
                       March 31,       June 30,    September 30,   December 31,
                         1999           1999           1999           1999
                         ----           ----           ----           ----
<S>                    <C>              <C>          <C>             <C>

 Net sales            $6,305,000      $7,331,000    $7,810,000     $8,936,000
 Net income               48,000         401,000       496,000        658,000
 Diluted income
  per share-          $      .01      $      .05    $      .06     $      .08
                      ==========      ==========    ==========     ==========

</TABLE>

                                       64
<PAGE>

               SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
               -------------------------------------------------

                             (Amounts in thousands)
<TABLE>
<CAPTION>
                          Balance    Charged                 Balance
                            at       to Costs                  at
                         Beginning     and                   End of
     Description         of Period   Expenses   Deductions   Period
----------------------   ---------   --------   ----------   -------
<S>                      <C>         <C>        <C>          <C>

For the Year Ending
December 31, 2000:
------------------

Allowance for
doubtful
accounts receivable            $39       $134         $ 89       $84
                              ====      =====         ====      ====

For the Year Ending
December 31, 1999:
------------------

Allowance for
doubtful
accounts receivable            $92       $ 77        $130        $39
                              ====      =====        ====       ====

For the Year Ending
December 31, 1998:
------------------

Allowance for
doubtful
accounts receivable           $179      $  55       $142         $92
                              ====      =====       ====       =====
</TABLE>

                                       65
<PAGE>

SIGNATURES

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

March 26, 2001                         CERADYNE, INC.

                                          By   s/ Joel P. Moskowitz
                                                  --------------------
                                                  Joel P. Moskowitz
                                                  Chief Executive Officer

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


s/ Joel P. Moskowitz             Chairman of the Board,     March 26, 2001
----------------------------     Chief Executive Officer,
   Joel P. Moskowitz             President and Director
                                 (Principle executive
                                 officer)

s/ Howard F. George              Chief Financial Officer    March 26, 2001
----------------------------     (Principle financial
   Howard F. George              and accounting officer)

s/ Leonard M. Allenstein         Director                   March 26, 2001
----------------------------
   Leonard M. Allenstein

s/ Richard A. Alliegro           Director                   March 26, 2001
----------------------------
   Richard A. Alliegro

s/ Paul Blumberg                 Director                   March 26, 2001
----------------------------
   Paul Blumberg

s/ Frank Edelstein               Director                   March 26, 2001
----------------------------
   Frank Edelstein

s/ Wilford D. Godbold, Jr.       Director                   March 26, 2001
----------------------------
   Wilford D. Godbold, Jr.

s/ Milton L. Lohr                Director                   March 26, 2001
----------------------------
   Milton L. Lohr

                                       66
<PAGE>

<TABLE>
<CAPTION>

Exhibit    Description
-------    -----------
<C>        <S>

   3.1     Certificate of Incorporation of the Registrant. Incorporated herein
           by reference to Exhibit 3.1 to the Registrant's Registrant Statement
           on Form 8-B.

   3.2     Bylaws of Registrant. Incorporated herein by reference to Exhibit 3.2
           to the Registrant's Form 10-Q Report for the period ended June 30,
           1996.

   3.3     Amendment to Bylaws of Registrant, adopted April 29, 1996.
           Incorporated herein by reference to Exhibit 3.3 to the Registrant's
           Form 10-Q Report for the period ended June 30, 1996.

  10.1*    Ceradyne, Inc. 1983 Stock Option Plan as amended and restated.
           Incorporated by reference from Exhibit 10.13 to the Company's
           Registration Statement on Form S-1 (File No. 2-99930) filed on
           September 25, 1985 (the "1985 S-1").

  10.2     Lease between Trico Rents and the Registrant dated March 23, 1984,
           covering premises located at 235 Paularino Avenue, Costa Mesa,
           California. Incorporated herein by reference to Exhibit 10.14 to the
           Registrant's Registration Statement on Form S-1 (File No. 2-90821).

  10.3     Lease covering premises located at 3169-A Red Hill Avenue, Costa
           Mesa, California dated October 28, 1985. Incorporated herein by
           reference to Exhibit 10.30 to the Registrant's Annual Report on Form
           10-K for the fiscal year ended December 31, 1985.

  10.4     Stock Sale Agreement between the Registrant and Ford Motor Company
           dated March 11, 1986. Incorporated herein by reference to Exhibit
           10.31 to the Registrant's Annual Report on Form 10-K for the fiscal
           year ended December 31, 1985.

  10.5     Agreement between certain shareholders of the Registrant and Ford
           Motor Company dated March 11, 1986. Incorporated herein by reference
           to Exhibit 10.32 to the Registrant's Annual Report on Form 10-K for
           the year ended December 31, 1985.

  10.6     Stock Purchase Agreement between Ceradyne Advanced Products, Inc.,
           the Registrant and Ford Motor Company dated March 11, 1986.
           Incorporated herein by reference to Exhibit 10.33 to the Registrant's
           Annual Report on Form 10-K for the fiscal year ended December 31,
           1985.

  10.7     Patent and Technology Transfer Agreement between Ford Motor Company
           and Ceradyne Advanced Products, Inc. dated March 11, 1986.
           Incorporated herein by reference to Exhibit 10.34 to the Registrant's
           Annual Report on Form 10-K for the fiscal year ended December 31,
           1985.

  10.8     License Agreement between the Registrant and Ceradyne Advanced
           Products, Inc., dated March 11, 1986. Incorporated herein by
           reference to Exhibit 10.35 to the Registrant's Annual Report on Form
           10-K for the fiscal year ended December 31, 1985.
</TABLE>
<PAGE>

<TABLE>
<CAPTION>

Exhibit    Description
-------    -----------
<C>        <S>
  10.9     License Agreement between Ford Motor Company and the Registrant dated
           March 11, 1986. Incorporated herein by reference to Exhibit 10.36 to
           the Registrant's Annual Report on Form 10-K for the fiscal year ended
           December 31, 1985.

  10.10    Joint Development Agreement between the Registrant and Ford Motor
           Company dated March 11, 1986. Incorporated herein by reference to
           Exhibit 10.37 to the Registrant's Annual Report on Form 10-K for the
           fiscal year ended December 31, 1985.


  10.11    Lease dated March 31, 1986 covering premises located at 3163 Red Hill
           Avenue, Costa Mesa, California. Incorporated herein by reference to
           Exhibit 10.45 to the Registrant's Annual Report on Form 10-K for the
           fiscal year ended December 31, 1986.

  10.12    Lease dated August 5, 1986 covering premises located at 225 Paularino
           Avenue, Costa Mesa, California. Incorporated herein by reference to
           Exhibit 10.46 to the Registrant's Annual Report on Form 10-K for the
           fiscal year ended December 31, 1986.

  10.13    Short-form Memorandum of Lease Assignment dated December 15, 1986,
           and Lease dated June 23, 1980, covering premises located at 3449
           Church Street, Scottdale, Georgia. Incorporated herein by reference
           to Exhibit 10.47 to the Registrant's Annual Report on Form 10-K for
           the fiscal year ended December 31, 1986.

  10.14*   Amendment dated June 3, 1986 to the Ceradyne, Inc. 1983 Stock Option
           Plan. Incorporated herein by reference to Exhibit 10.50 to the
           Registrant's Annual Report on Form 10-K for the fiscal year ended
           December 31, 1986.

  10.15*   Amendment dated March 16, 1987 to the Ceradyne, Inc. 1983 Stock
           Option Plan. Incorporated herein by reference to Exhibit 10.51 to the
           Registrant's Annual Report on Form 10-K for the fiscal year ended
           December 31, 1986.

  10.16    Joint Development Agreement dated March 28, 1986 between Unitek
           Corporation and the Registrant, and First and Second Amendments
           thereto. Incorporated herein by reference to Exhibit 10.52 to the
           Registrant's Annual Report on Form 10-K for the fiscal year ended
           December 31, 1986.

  10.17*   Amendment dated April 30, 1987 to the Ceradyne, Inc. 1983 Stock
           Option Plan. Incorporated herein by reference to Exhibit 10.56 to the
           Registrant's Registration Statement on Form 8-B.

  10.18*   Employment Agreement entered into as of July 5, 1994 by and between
           Joel P. Moskowitz and the Registrant. Incorporated herein by
           reference to Exhibit 10.30 to the Registrant's Annual Report on Form
           10-K for the fiscal year ended December 31, 1994.

  10.19*   Ceradyne, Inc. 1994 Stock Incentive Plan. Incorporated herein by
           reference to Exhibit 10.31 to the Registrant's Annual Report on Form
           10-K for the fiscal year ended December 31, 1994.

  10.20*   Amendment No. 1 to the Ceradyne, Inc. 1994 Stock Incentive Plan.
           Incorporated herein by reference to Exhibit 4.2 to Registrant's
           Registration Statement on Form S-8 (File No. 33-61675).

  10.21*   Ceradyne, Inc. 1995 Employee Stock Purchase Plan. Incorporated herein
           by reference to Exhibit 4.1 to Registrant's Registration Statement on
           Form S-8 (File No. 33-61677).
</TABLE>
<PAGE>

<TABLE>
<CAPTION>

Exhibit    Description
-------    -----------
<C>        <S>

 10.22     Amendment No. 2, dated June 5, 1995, to Lease between Trico Rents and
           the Registrant covering premises located at 235 Paularino Avenue,
           Costa Mesa, California. Incorporated herein by reference to Exhibit
           10.32 to the Registrant's Registration Statement on Form S-1 (File
           No. 33-62345).

 10.23     Amendment No. 2, dated June 5, 1995, to Lease covering premises
           located at 3169-A Red Hill Avenue, Costa Mesa, California.
           Incorporated herein by reference to Exhibit 10.33 to the Registrant's
           Registration Statement on Form S-1 (File No. 33-62345).

 10.24     Amendment No. 2, dated June 5, 1995, to Lease dated March 31, 1986
           covering premises located at 3163 Red Hill Avenue, Costa Mesa,
           California. Incorporated herein by reference to Exhibit 10.34 to the
           Registrant's Registration Statement on Form S-1 (File No. 33-62345).

 10.25     Amendment No. 2, dated June 5, 1995, to Lease dated August 5, 1986
           covering premises located at 225 Paularino Avenue, Costa Mesa,
           California. Incorporated herein by reference to Exhibit 10.35 to the
           Registrant's Registration Statement on Form S-1 (File No. 33-62345).

 10.26*    Amendment No. 2 to the Ceradyne, Inc. 1994 Stock Incentive Plan.
           Incorporated herein by reference to Exhibit 10.36 to the Registrant's
           Annual report on Form 10-K for the fiscal year ended December 31,
           1996.

 10.27*    Amendment No. 3 to the Ceradyne, Inc. 1994 Stock Incentive Plan.
           Incorporated herein by reference to Exhibit 4.4 to Registrant's
           Registration Statement on Form S-8 (File No. 333-31679).

 10.28*    Amendment No. 4 to the Ceradyne, Inc. 1994 Stock Incentive Plan.
           Incorporated herein by reference to Exhibit 10.28 to the Registrant's
           Annual report on Form 10-K for the fiscal year ended December 31,
           1998.

 10.29     Amendment No. 5 to the Ceradyne, Inc. 1994 Stock Incentive Plan.

 21.1      Subsidiaries of the Registrant. Incorporated herein by reference to
           Exhibit 23.2 to the Registrant's Statement on Form S-1 (File No.
           33-62345).

 23.1      Consent of Arthur Andersen LLP.

 *         Each of these exhibits constitutes a management contract,
           compensatory plan, or arrangement required to be filed as an exhibit
           to this Report pursuant to Item 14(c) of this Report.
</TABLE>