This Quarterly Report on Form 10-Q contains statements which may constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. One generally can identify forward-looking statements by the use of forward-looking terminology such as "believes," "may," "will," "expects," "intends," "estimates," "anticipates," "plans," "seeks," or "continues," or the negative thereof, or variations thereon, or similar terminology. Forward-looking statements regarding future events and the future performance of the Company involve risks and uncertainties that could cause actual results to differ materially. Reference is made to the risks and uncertainties which are described in this report in Note 13 "Commitments and Contingencies" of the Notes to Consolidated Financial Statements, in this Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations," and in Part II, Item 1A under the caption "Risk Factors." Reference is also made to the risks and uncertainties described in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2008, as filed with the Securities and Exchange Commission, in Item 1A under the caption "Risk Factors," and in Item 7 under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations."

We develop, manufacture and market advanced technical ceramic products, ceramic powders and components for defense, industrial, automotive/diesel and commercial applications. Our products include:

• lightweight ceramic armor and enhanced combat helmets for soldiers and other military applications;

• ceramic industrial components for erosion and corrosion resistant applications;

• ceramic powders, including boron carbide, boron nitride, titanium diboride, calcium hexaboride, zirconium diboride and fused silica, which are used in manufacturing armor and a broad range of industrial products and consumer products;

• evaporation boats for metallization of materials for food packaging and other products;

• durable, reduced friction, ceramic diesel engine components;

• functional and frictional coatings primarily for automotive applications;

• translucent ceramic orthodontic brackets;

• ceramic-impregnated dispenser cathodes for microwave tubes, lasers and cathode ray tubes;

• ceramic crucibles for melting silicon in the photovoltaic solar cell manufacturing process;

• ceramic missile radomes (nose cones) for the defense industry;

• fused silica powders for precision investment casting (PIC) and ceramic crucibles;

• neutron absorbing materials, structural and non-structural, in combination with aluminum metal matrix composite that serve as part of a barrier system for spent fuel wet and dry storage in the nuclear industry, and non-structural neutron absorbing materials for use in the transport of nuclear fresh fuel rods;

• nuclear chemistry products for use in pressurized water reactors and boiling water reactors;

• boron dopant chemicals for semiconductor silicon manufacturing and for ion implanting of silicon wafers; and

• ceramic bearings and bushings for oil drilling and fluid handling pumps.

Our customers include the U.S. government, prime government contractors and large industrial, automotive, diesel and commercial manufacturers in both domestic and international markets.

Segment revenues (in millions):

                              Three Months Ended          Nine Months Ended
                                 September 30,              September 30,
                               2009          2008          2009         2008
ACO                         $     60.6      $ 110.1     $    169.5     $ 359.4
ESK Ceramics                      28.0         38.0           75.6       123.0
Semicon Associates                 1.8          2.2            5.9         6.6
Thermo Materials                  16.4         20.7           48.0        59.7
Ceradyne Canada                    0.3          0.1            0.6         4.9
Boron                              5.8          4.3           19.2        14.5
Inter-segment elimination         (4.9 )       (7.7 )        (15.8 )     (26.8 )
Total                       $    108.0      $ 167.7     $    303.0     $ 541.3

Segment income (loss) before provision for taxes (in millions):
ACO $ 6.4 $ 34.4 $ 15.5 $ 118.9

ESK Ceramics                  (3.0 )      (0.1 )     (23.1 )       5.3
Semicon Associates             0.1         0.3         0.6         1.1
Thermo Materials               3.7         6.8        10.8        15.8
Ceradyne Canada               (0.7 )      (0.3 )      (6.3 )       0.4
Boron                         (0.1 )     (12.8 )      (3.7 )     (12.5 )
Inter-segment elimination        -         1.1           -         2.4
Total                       $  6.4     $  29.4     $  (6.2 )   $ 131.4

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

                      Three Months Ended          Nine Months Ended
                         September 30,              September 30,
                       2009          2008          2009         2008
Defense                   52.4 %       60.8 %         52.5 %      62.0 %
Industrial                38.6         31.1           38.6        30.2
Automotive/Diesel          6.3          6.4            5.9         5.9
Commercial                 2.7          1.7            3.0         1.9
Total                    100.0 %      100.0 %        100.0 %     100.0 %

The principal factor contributing to our growth in sales from 2002 through 2007 was increased demand by the U.S. military for ceramic body armor that protects soldiers, which was driven primarily by military conflicts such as those in Iraq and Afghanistan. Our sales also increased from 2004 through 2007 because of our acquisition of ESK Ceramics in August 2004, our acquisition of Minco, Inc. in July 2007, our acquisition of EaglePicher Boron, LLC in August 2007, which we renamed Boron Products, LLC, and the recent expansion of our operations into China. Our sales declined in 2008 primarily because of a reduction in shipments of body armor. Our sales also declined in the first nine months of 2009 not only because of a reduction in shipments of body armor but we also incurred a decline in sales of our industrial, automotive/diesel and commercial market product lines due to the severe economic recession.

Our sales of body armor, as well as other armor components for defense applications, declined by $46.5 million and $171.0 million for the three and nine months ended September 30, 2009, respectively, compared to the same periods in 2008. We expect that body armor sales for the full year ending December 31, 2009 will decline compared to the full year of 2008. Furthermore, we expect that body armor sales for the full year of 2010 will decline compared to the full year of 2009.

As a result of the ESK acquisition, we believe that we are the only ceramic body armor manufacturer with a vertically integrated approach of designing much of our key equipment and controlling the manufacturing process from the principal raw material powder to finished product.

Our Minco operation manufactures fused silica powders for a wide range of industrial applications and is a key supplier of this raw material to our Thermo Materials division. Our Boron Products operation produces the boron isotope 10B. This isotope is a strong neutron absorber and is used for both nuclear waste containment and nuclear power plant neutron radiation critical control. Boron Products also produces complementary chemical isotopes used in the normal operation and control of nuclear power plants, and the boron isotope 11B, which is used in the semiconductor manufacturing process as an additive to semiconductor grade silicon as a "doping" agent and where ultra high purity boron is required.

In August 2008, we acquired SemEquip, Inc., a late-stage startup technology company located in Billerica, Massachusetts. SemEquip develops and markets "cluster molecules" such as B18H22 for use in the ion implantation of boron (B) in the manufacturing of semiconductors. SemEquip owns a portfolio of approximately 130 issued patents and pending patent applications.

In June 2009, we acquired substantially all of the business and assets and all technology and intellectual property related to ballistic combat and non-combat helmets of Diaphorm Technologies, LLC, based in Salem, New Hampshire. The purchase price consisted of $9.7 million in cash paid at closing, the assumption of approximately $274,000 of liabilities, plus contingent consideration not to exceed $10.0 million over the next 5 years based upon performance milestones and revenues achieved during that period from Diaphorm's existing products and new products developed using Diaphorm technology. We used a portion of our existing cash for the payment made at closing. In connection with this acquisition, we submitted a proposal to the U.S. Marine Corps Systems Command in June 2009 in response to a solicitation for the procurement of Enhanced Combat Helmets, which are intended to provide substantially increased levels of protection compared to combat helmets now in use. In late July 2009, in response to our proposal, the U.S. Marine Corps System Command awarded us a contract for development test helmets valued at approximately $1.2 million. We delivered all of these test helmets in the quarter ended September 30, 2009. The Marine Corps has the option under this contract to procure up to a maximum of 246,840 helmets. Our strategy regarding this acquisition is to combine our successful track record in body armor programs with the proprietary helmet-forming technologies acquired from Diaphorm to create a world class manufacturer of Enhanced Combat Helmets. We expect that revenues from this acquisition during 2009 will be approximately $2.0-$3.0 million and that the contribution to our estimated net income for the fiscal year ending December 31, 2009 from this acquisition will be immaterial. Even with the award of this contract for Enhanced Combat Helmets, we expect that revenue from this program during the remainder of 2009 will be minimal, with volume shipments not occurring until sometime in 2010.

In the fourth quarter of 2008, we completed our final deliveries of the current generation of ESAPI (enhanced small arms protective inserts) body armor for the U.S. Army under the $747.5 million adjusted value Indefinite Delivery/Indefinite Quantity (ID/IQ) contract awarded to us in August 2004.

In October 2008, we were awarded an ID/IQ contract by the U.S. Army for the next ballistic threat generation of ceramic body armor plates, called XSAPI, as well as for the current generation ESAPI plates. The total amount of this contract is $2.37 billion and covers a period of approximately five years. The U.S. Army can order one or both types of plates over the five year life of the contract. However, we anticipate that the government will order either XSAPI or ESAPI, but not both. Therefore, the total amount of this ID/IQ award likely will not exceed $1.1 billion over the life of the contract. Two of our competitors were awarded similar ID/IQ contracts. We expect that government orders under these contracts will be split among the three successful bidders, so the potential orders we may receive under our contract will likely be less than the $1.1 billion possible total amount. In October 2008, we also received a production delivery order under this ID/IQ contract for $72.2 million, but this order was subsequently withdrawn by the U.S. Army when a competitor protested the award. The protest was resolved during March 2009 and on March 31, 2009, we received a revised first production delivery order under this ID/IQ contract for $76.8 million for XSAPI ceramic body armor plates to be delivered from April 2009 to December 2009, with early delivery allowed. We commenced shipments of XSAPI plates under this order during April 2009 and expect to complete delivery of this order during the quarter ending December 31, 2009. Based on informal discussions with U.S. Army personnel, we believe the U.S. Army has decided that the current XSAPI weight from all suppliers, although in compliance with the weight limitations specified in the ID/IQ contract, is too heavy for use in the current military campaign in Afghanistan, and therefore the Army will only purchase a contingency quantity of 120,000 sets, which will be issued to the field if the ballistic threat that the XSAPI plate defeats becomes more prevalent. Consequently, unless the U.S. Army changes its position, we do not expect any additional orders for the current version of XSAPI ceramic body armor plates.

With the recent growth of military operations in Afghanistan, the U.S. military has shown more interest in procuring body armor that weighs less than the current ESAPI and XSAPI body armor inserts while being able to defeat similar ballistic threats. We are currently developing ESAPI and XSAPI designs that weigh 10%-15 % less than the current designs and will offer these to the U.S. Army and other Department of Defense users once these designs meet the current ballistic requirements. There is no assurance that we will be successful with these lighter weight designs.

There will continue to be a viable replacement business for body armor inserts that is procured through the Defense Supply Center Philadelphia (DSCP) and Ceradyne expects continued procurements for replacement inserts during 2010. We will also continue to bid on Foreign Military Sales (FMS) for the first generation of inserts called Small Arms Protective Inserts (SAPI) through our existing ID/IQ contract with Aberdeen Proving Grounds.

Based on our current backlog and anticipated orders for ceramic body armor and the level of sales to date in 2009, we expect our shipments of ceramic body armor to be lower in fiscal year 2009 than in 2008 and also lower in fiscal year 2010 than in fiscal year 2009. Moreover, government contracts typically may be cancelled by the government at any time without penalty. For the next several quarters, and perhaps longer, demand for ceramic body armor is likely to be the most significant factor affecting our sales.

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

Our ESK Ceramics subsidiary produces boron carbide powder, which serves as a starter ceramic powder in the manufacture of our lightweight ceramic body armor. The lower demand for body armor has negatively impacted inter-segment sales of boron carbide powder by our ESK Ceramics subsidiary to our Advanced Ceramic Operations division in the first nine months of 2009 and we expect that this trend will continue for the remainder of this year.

In May 2009, our ESK Ceramics France subsidiary ("ESK France") presented to the local employees' representatives a plan for closing its manufacturing plant in Bazet, France, effective later in 2009. As a result, we anticipate that ESK France will reduce its workforce by approximately 97 employees, primarily composed of manufacturing, production and additional support staff at the plant. We are implementing this action as a cost-cutting measure to eliminate losses that were incurred at this facility due to the recent severe economic contraction and is consistent with our ongoing objective to lower the costs of our manufacturing operations. This manufacturing facility is an 88,000 square foot building owned by ESK France that has been used to support the production of various industrial ceramic products. We will transfer production of these products to our ESK Ceramics subsidiary in Kempten, Germany. Affected employees will be eligible for a severance package that includes severance pay, continuation of benefits and outplacement services. Pre-tax charges relating to this corporate restructuring will include severance pay, continuation of benefits, outplacement services, losses from disposal and abandonment of fixed assets and various other costs to close the plant. We estimate that the total pre-tax charges will be in the range of approximately $11.0 to $13.0 million, including non-cash pre-tax charges of approximately $2.2 million relating primarily to accelerated depreciation of fixed assets in connection with the closure of the facility. During the second quarter of 2009, ESK Ceramics recorded pre-tax charges totaling $10.0 million in connection with this restructuring and plant closure, which comprised $9.4 million for severance, termination of contracts and other shutdown costs that is reported as Restructuring - plant closure and severance in Operating Expenses and $0.6 million for accelerated depreciation of fixed assets that is reported in Cost of Goods Sold. Pre-tax restructuring and plant closure charges for the three months ended September 30, 2009 for ESK Ceramics were $30,000 for the closure of the Bazet manufacturing plant.

Our order backlog was $156.3 million as of September 30, 2009 and $174.9 million as of September 30, 2008. The backlog for ceramic body armor represented approximately $69.6 million, or 44.5% of the total backlog as of September 30, 2009 and $98.4 million, or 56.3%, of the total backlog as of September 30, 2008. We expect that substantially all of our order backlog as of September 30, 2009 will be shipped during 2009.

New orders for the three months ended September 30, 2009 were $100.5 million, compared to $119.4 million for the same period last year. For the nine months ended September 30, 2009, new orders were $330.6 million, compared to $476.6 million for the comparable period last year. Orders for ceramic body armor for the three months ended September 30, 2009 were approximately $33.4 million, compared to $56.2 million for the same period last year. Orders for ceramic body armor for the nine months ended September 30, 2009 were approximately $154.4 million, compared to $253.9 million for the same period last year.

In May 2008, the FASB Staff issued new accounting guidance for convertible debt instruments that may be settled in cash upon conversion (including partial settlement) which specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the issuer's nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. The Company adopted this new guidance as of January 1, 2009, and the adoption impacted the historical accounting for our 2.875% senior subordinated convertible notes due December 15, 2035 (the "Notes"). The implementation of this new accounting guidance for convertible debt resulted in the following retrospective changes in long-term debt, debt issuance costs (included in other noncurrent assets), deferred tax liability, additional paid in capital and retained earnings (in thousands):

                                                            Net Increase (Decrease)
                                                    Debt          Deferred        Additional
                                  Long-Term       Issuance           Tax           Paid In         Retained
                                     Debt           Costs         Liability        Capital         Earnings
Allocation of long term debt
proceeds and issuance costs
 to equity component on
issuance date                     $  (29,261 )   $    (1,018 )   $    11,015     $     17,228     $         -
Cumulative retrospective impact
from amortization of
 discount on liability
component and debt issuance
costs                                  7,009             385          (2,584 )              -          (4,040 )
Cumulative retrospective impact
at January 1, 2008                   (22,252 )          (633 )         8,431           17,228          (4,040 )
Retrospective impact from
amortization of discount on
 liability component and debt
issuance costs during the year         3,883             163          (1,450 )              -          (2,270 )
Cumulative retrospective impact
at December 31, 2008              $  (18,369 )   $      (470 )   $     6,981     $     17,228     $    (6,310 )

For the three and nine months ended September 30, 2008, the adoption of the new accounting guidance for convertible debt resulted in increased interest expense of approximately $1.0 million and $2.8 million, respectively, and decreased net income by $0.6 million and $1.7 million, respectively. The retrospective impact to earnings per share was a decrease of $0.02 and $0.06 for the three and nine months ended September 30, 2008, respectively. As a result of the adoption of the accounting guidance for convertible debt, interest expense for the three months ended September 30, 2009 includes non-cash interest expense from amortization of the discount on the liability component of $0.8 million and amortization of debt issuance costs of $91,000 which reduced net income by $0.6 million and earnings per share by $0.02 for the three months ended September 30, 2009. Interest expense for the nine months ended September 30, 2009 includes non-cash interest expense from amortization of the discount on the liability component of $2.8 million and amortization of debt issuance costs of $310,000 which reduced net income by $1.9 million and earnings per share by $0.07 for the nine months ended September 30, 2009.

Results of Operations for the Three and Nine Months Ended September 30, 2009 and 2008

Net Sales. Our net sales for the three months ended September 30, 2009 were $108.0 million, a decrease of $59.7 million, or 35.6%, from $167.7 million of net sales in the corresponding quarter of the prior year. Net sales for the nine months ended September 30, 2009 were $303.0 million, a decrease of $238.3 million, or 44.0%, from $541.3 million in the corresponding prior year period.

Net sales for our Advanced Ceramic Operations division for the three months ended September 30, 2009 were $60.6 million, a decrease of $49.5 million, or 45.0%, from $110.1 million of net sales in the corresponding quarter of the prior year. Net sales of ceramic body armor in the third quarter of 2009 were $47.9 million, a decrease of $46.5 million, or 49.3%, from $94.4 million in the third quarter of 2008. The primary reason for the decline in shipments was a reduction in demand for ESAPI body armor sets from us by the U.S. Army because they achieved their targeted goal of 960,000 total sets of ESAPI received from all suppliers since 2005. This targeted goal of shipments was met at the end of September 2008. We received our first production order for XSAPI plates on March 31, 2009 under the ID/IQ contract discussed above under "Overview," and commenced shipments during April 2009. Net sales of XSAPI body armor for the three and nine month periods ended September 30, 2009 were $20.9 million and $38.1 million, respectively.

Net sales for our automotive/diesel component product line for the three months ended September 30, 2009 were $1.2 million, a decrease of $3.7 million, or 75.3%, from $4.9 million in the corresponding quarter of the prior year. The reasons for this decrease were that our heavy duty diesel truck business has been negatively affected by trucking companies' inability to secure financing to purchase new trucks and some of our customers have initiated reduced work hours to reduce production because of the decline in sales in the transportation industry as a result of the severe economic contraction during this year. We expect sales of this product line to continue at approximately the current rate during the fourth quarter of 2009 and throughout 2010. The recent events in the automotive/diesel industry have not had a material impact on our results of operations or liquidity.

Net sales for our Advanced Ceramic Operations division for the nine months ended September 30, 2009 were $169.5 million, a decrease of $189.9 million, or 52.9%, from $359.4 million in the corresponding period of the prior year. This decline reflects lower demand, primarily for body armor for the reasons described above, as well as other armor components for defense applications. Net sales of ceramic body armor for the nine months ended September 30, 2009 were $137.8 million, a decrease of $171.0 million, or 55.4%, from $308.8 million in the corresponding prior year period.

Net sales for our automotive/diesel component product line for the nine months ended September 30, 2009 were $4.0 million, a decrease of $9.4 million, or 69.8%, from $13.4 million in the corresponding prior year period. This decrease reflects the reduction in the production of heavy-duty diesel truck engines by our customers as described above.

Net sales of our orthodontic brackets product line for the nine months ended September 30, 2009 were $7.4 million, a decrease of $0.7 million, or 8.5%, from $8.1 million in the corresponding prior year period.

Our ESK Ceramics subsidiary had net sales for the three months ended September 30, 2009 of $28.0 million, a decrease of $10.0 million, or 26.5%, from $38.0 million in the corresponding quarter of the prior year. On a constant currency basis, sales for the three months ended September 30, 2009 were $29.0 million, a decrease of $9.0 million from the corresponding quarter of the prior year. Sales . . .