2. 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.

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. Investments

The Company's short term investments consist of marketable securities, primarily high-grade corporate and government securities. The Company's long term investments consist of auction rate securities (“ARS”) and other marketable securities. The Company classifies its investments as available-for-sale based on the Company's intent.

d. Foreign Exchange Risk Management

The Company measures the financial statements of its foreign subsidiaries using the local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the exchange rate on the balance sheet date. Revenues, costs and expenses are translated at the rates of exchange prevailing during the year. Translation adjustments resulting from this process are included in stockholders' equity. Net results from foreign currency transactions for the years ended December 31, 2011, 2010 and 2009 were a $0.4 million gain, a $2.1 million gain and a $0.5 million loss, respectively, and are included in other income, miscellaneous.

The Company enters into foreign exchange forward contracts to reduce earnings and cash flow volatility associated with foreign exchange rate changes to allow management to focus its attention on its core business operations. Accordingly, the Company enters into contracts which change in value as foreign exchange rates change to economically offset the effect of changes in value of foreign currency assets and liabilities, commitments and anticipated foreign currency denominated sales and operating expenses. The Company enters into foreign exchange forward contracts in amounts between minimum and maximum anticipated foreign exchange exposures, generally for periods not to exceed one year. These derivative instruments are not designated as accounting hedges. As of December 31, 2011, the Company had an outstanding forward exchange contract for 50.0 million Euros and a forward exchange contract for 108.8 million Indian Rupees. As of December 31, 2010, the Company had an outstanding forward exchange contract for 30 million Euros.

e. Accounts Receivable, Net

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is determined by analyzing specific customer accounts and assessing the risk of uncollectibility based on insolvency, disputes or other collection issues. In addition, the Company routinely analyzes the different aging categories and establishes allowances based on the length of time receivables are past due (based on contractual terms). A write-off will occur if the settlement of the account receivable is less than the carrying amount or the Company ultimately determines the balance will not be collected. We do not have any off-balance-sheet credit exposure related to our customers.

The following are changes in the allowance for doubtful accounts for the years ended December 31, 2011, 2010 and 2009 (in thousands):

	Balance at Beginning of Year		Additions		Write-offs and Recoveries		Balance at End of Year
December 31, 2011	$	685	$	1,091	$	229	$	1,547
December 31, 2010	$	851	$	260	$	426	$	685
December 31, 2009	$	686	$	740	$	575	$	851

f. Inventories

Inventories are stated at the lower of cost (determined on a standard cost basis which approximates first-in, first-out (FIFO) 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 write-down, 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 (in thousands):

	December 31,
	2011		2010
Raw materials	$	8,533	$	9,459
Work-in-process		65,645		49,825
Finished goods		43,095		34,974
	$	117,273	$	94,258

g. Production Tooling

The Company's production tooling primarily consists of graphite tooling used in the manufacturing and furnace processes. This tooling is being amortized over three to nine months and is included in the cost of the products produced and expensed through cost of product sales in the income statement. The production tooling expense for the years ended December 31, 2011 and 2010 was $23.5 million and $12.4 million, respectively.

h. Property, Plant and Equipment, Net

Property, plant and equipment is recorded at cost and consists of the following (in thousands):

	December 31,
	2011			2010
Land and land improvements	$	18,550		$	18,902
Buildings and improvements		117,961			97,076
Machinery and equipment		233,702			209,334
Leasehold improvements		8,482			8,401
Office equipment		37,906			32,269
Construction in progress		11,961			37,286
		428,562			403,268
Accumulated depreciation and amortization		(185,186	)		(159,587	)
	$	243,376		$	243,681

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

Buildings and improvements	30 years

Machinery and equipment	3 to 12 years

Office equipment	3 to 5 years

Leasehold improvements	Shorter of 10 years or the term of lease

Maintenance, repairs and minor renewals are charged to expense as incurred. Repairs and maintenance expense approximated $11.2 million, $10.8 million, and $10.9 million in 2011, 2010, and 2009, 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. Depreciation expense was approximately $32.0 million, $30.4 million, and $34.6 million in 2011, 2010, and 2009, respectively.

i. Goodwill and Intangible Assets, Net

Goodwill is not amortized, but instead goodwill and indefinite lived assets are required to be tested for impairment annually and under certain circumstances. The Company performs such testing of goodwill in the fourth quarter of each year at year end, or as events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. During the fourth quarter of 2011, the Company early adopted new accounting guidance which simplifies goodwill impairment testing. The new accounting guidance allows the Company to conduct an assessment of qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, it then conducts a two-step test for impairment of goodwill. The first step of the test for goodwill impairment compares the fair value of the applicable reporting unit with its carrying value. The Company conducts the test for impairment of goodwill at the reporting unit level. The Company's reporting units engage in business activities for which discrete financial information is available. Fair value is determined using a discounted cash flow method and/or prevailing earnings multiples for each reporting unit. The use of discounted cash flows requires the use of various economic, market and business assumptions in developing the Company's internal forecasts, the useful life over which cash flows will occur, and determination of the Company's weighted average cost of capital that reflect the Company's best estimates when performing the annual impairment test. However, the Company's assumptions and estimates may differ significantly from actual results. If the fair value of a reporting unit is less than the reporting unit's carrying value, the Company will perform the second step of the test for impairment of goodwill. During the second step of the test for impairment of goodwill, the Company will compare the implied fair value of the reporting unit's goodwill with the carrying value of that goodwill. If the carrying value of the goodwill exceeds the calculated implied fair value, the excess amount will be recognized as an impairment loss.

Goodwill Impairment

During the second quarter of 2009, the Company determined that the demand for its Boral® product line, which was a large part of the revenue of the Company's operations in Canada, which formerly was classified as the Ceradyne Canada operating segment, but which now is included in the Boron operating segment (see Note 8), continued to decline due to competitive market forces causing a decline in demand for this product line and that this condition required a goodwill impairment test before the annual test for this reporting unit. To complete the test for impairment, the Company utilized several valuation techniques in making the determination, including a discounted cash flow methodology, which requires the forecasting of cash flows and requires the selection of discount rates. Management used available information to make these fair value estimates, including discount rates, commensurate with the risks relevant to the Company's business. Based on the goodwill impairment test performed on the Ceradyne Canada reporting unit, the Company recorded a $3.8 million impairment charge, which was recognized during the second quarter of 2009.

During the second quarter of 2009, the Company also conducted a test on the forecasted undiscounted cash flows to determine whether there was an impairment of its long lived assets in the Ceradyne Canada reporting unit. Based on the analysis of the forecasted undiscounted cash flows for this reporting unit, the Company determined that there was no impairment of the long lived assets for the Ceradyne Canada reporting unit.

The valuation methodologies and the underlying financial information that are used to determine fair value require significant judgments to be made by management. These judgments include, but are not limited to, long-term projections of future financial performance, terminal growth rate and the selection of an appropriate discount rate used to calculate the present value of the estimated future cash flows. The long-term projections used in the valuation were developed as a part of the Company's annual budgeting and forecasting process. The discount rate used in the valuation was selected based upon an analysis of comparable companies and included adjustments made to account for the Company's specific attributes such as size and industry. During the fourth quarter of 2011, the Company observed a continuing sharp contraction in the solar industry, which is a material part of the VIOX reporting unit business that the Company believed would negatively impact its current and future business performance. In performing the step one analysis, the Company used a discounted cash flow analysis which reflected estimates of cash flows which had decreased significantly since those estimated at the time of the VIOX acquisition in January 2011. Accordingly, as of December 31, 2011, the VIOX reporting unit failed step one of the impairment test. The Company performed step two of the impairment test which resulted in no implied value of goodwill for VIOX. Accordingly the Company recognized a charge for goodwill impairment of $7.8 million during 2011.

The roll forward of the goodwill balance by segment for the years ended December 31, 2011 and 2010 is as follows (in thousands):

	ACO			Thermo		ESK			Boron			Total

Goodwill	$	5,311		$	10,331	$	9,987		$	22,083		$	47,712
Accumulated impairment losses		-			-		-			(3,832	)		(3,832	)
Balance at December 31, 2009		5,311			10,331		9,987			18,251			43,880
Translation and other		-			-		(661	)		-			(661	)
Goodwill		5,311			10,331		9,326			22,083			47,051
Accumulated impairment losses		-			-		-			(3,832	)		(3,832	)
Balance at December 31, 2010		5,311			10,331		9,326			18,251			43,219
Acquisition of VIOX		7,797											7,797
Goodwill impairment		(7,797	)										(7,797	)
Translation and other		-			-		(293	)		-			(293	)
Goodwill	$	13,108			10,331		9,033			22,083			54,555
Accumulated impairment losses		(7,797	)		-		-			(3,832	)		(11,629	)
Balance at December 31, 2011	$	5,311		$	10,331	$	9,033		$	18,251		$	42,926

Intangible assets with definite lives are amortized over their estimated useful lives based on the economic consumption method. The components of intangibles assets were as follows (in thousands):

	December 31, 2011						December 31, 2010
	Gross Amount		Accumulated Amortization		Net Amount		Gross Amount		Accumulated Amortization		Net Amount
Amortizing Intangible Assets
Backlog	$	1,808	$	1,808	$	-	$	1,826	$	1,826	$	-
Developed technology		70,590		7,233		63,357		50,530		5,387		45,143
Trade name		4,110		698		3,412		1,110		571		539
Customer relationships		47,604		16,212		31,392		47,604		12,087		35,517
Non-compete agreement		1,100		775		325		500		500		-
Non-amortizing tradename		2,204		-		2,204		2,276		-		2,276
Total	$	127,416	$	26,726-	$	100,690	$	103,846	$	20,371-	$	83,475

Amortization of definite-lived intangible assets will be approximately $9,806 in 2012, $9,023 in 2013, $12,114 in 2014 and $15,384 in 2015. Amortization expense was $6,465 in 2011, $5,676 in 2010 and $4,749 in 2009.

All of the intangible assets were acquired in the years 2004 through 2011 (see Note 3).

The estimated useful lives for intangible assets are:

Identified Intangible Asset	Estimated Useful Life in Years or Months
Developed technology	10 years –12.5 years
Tradename	10 years
Customer relationships	10 years – 12.5 years
Backlog	1 month – 3 months
Non-compete agreement	15 months

j. Other Assets

Other assets primarily consist of precious metals, primarily platinum and rhodium, that are used as molds in the Company's production of specialty glass products and small amounts are consumed in the production process. The molds are periodically refurbished to maintain their metallurgical qualities required in the production process. In connection with the refurbishment process, approximately 5-10% of the platinum per mold is replaced per year and expensed. The Company expensed $0.7 million during the year ended December 31, 2011 to refurbish platinum molds. There was no expense in 2010 because this expense is associated with VIOX Corporation, who we acquired in January 2011.

k. Accrued expenses

The following is a summary of the accrued expenses at December 31, 2011 and 2010, respectively (in thousands):

	December 31, 2011		December 31, 2010
Payroll and benefits	$	18,107	$	16,051
Workers compensation reserve		3,642		3,469
Foreign currency contract settlements		4,314		-
Purchase price liability, current portion		-		1,205
Professional fees		969		919
Property and value added taxes		497		947
Other		2,941		2,012
	$	30,470	$	24,603

l. Sales Recognition

Sales are recorded when all of the following have occurred: an agreement of sale exists, the price is fixed and determinable, the product has been delivered according to the terms of the sales order and collection is reasonably assured. Management is required to make judgments about whether or not collection is reasonably assured. The Company reduces revenue with allowances for sales returns. Allowances for sales returns, which are recorded at the time revenue is recognized, are based upon historical sales returns which are minimal and immaterial. There were allowances for sales returns of $0.2 million as of December 31, 2011 and none as of December 31, 2010. The amount is immaterial since the Company typically does not experience a significant amount of sales returns from year to year because most of its products are produced and sold on a made to order basis. Therefore, as of December 31, 2011 and 2010, the Company did not anticipate any material sales returns for products shipped to customers.

The Company does not record a warranty reserve on the sale of its products. For its largest product line, body armor, all of which is sold to the U.S. Government, each lot of body armor is tested at an independent laboratory and the lot cannot be released for shipment to the U.S. Government until positive test results are received by both the U.S. Government and the Company. For its non-body armor sales, the Company has experienced minimal claims from these types of sales. Additionally, due to the inherent nature, strength, durability and structural properties of ceramics, as well as a rigid quality control program that includes, for some of our customers, having the customer accept quality test results prior to shipment, management does not believe a warranty reserve is necessary.

m. Net Income 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 restricted stock units using the treasury stock method and the net share settlement method for the convertible debt.

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,
	2011		2010		2009
Weighted average number of shares outstanding		24,613,825		25,190,985		25,683,963
Dilutive stock options		125,462		179,244		118,281
Dilutive restricted stock units		46,819		-		-
Number of shares used in dilutive computation		24,786,106		25,370,229		25,802,244

Potentially dilutive shares representing 163,620 shares,192,982 shares and 363,924 shares for 2011, 2010 and 2009, respectively, were excluded from the computation of diluted earnings per common share for these periods because their effect would have been anti-dilutive.

n. Accounting for Long-Lived Assets

Long-lived assets and intangible assets with definite lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment indicators include, among other conditions, cash flow deficits, historic or anticipated declines in revenue or operating profit and adverse legal or regulatory developments. If it is determined that such indicators are present and the review indicates that the assets will not be fully recoverable, based on undiscounted estimated cash flows over the remaining amortization periods, their carrying values are reduced to estimated fair market value. Estimated fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. For the purposes of identifying and measuring impairment, long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities.

o. 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.

p. Research and Development

Costs associated with research and development were $12.4million, $11.7 million, and $12.3 million for years ended December 31, 2011, 2010 and 2009, respectively. In addition, the Company historically has and continues to engage in application engineering and internally funded research to improve and reduce the cost to manufacture existing products, which is reflected in cost of sales and to develop new products which is expensed to research and development.

q. Income Taxes

The Company accounts for income taxes using the asset and liability approach. Under this approach, deferred taxes are determined based on the differences between the financial statements and the tax bases using rates as enacted in tax laws. A valuation allowance is established if it is “more likely than not” that all or a portion of the deferred tax asset will not be realized. The Company also has a liability for uncertain tax positions which must meet a more likely than not recognition threshold at the end of each reporting period.

r. Share-Based Compensation

The Company recognizes compensation expense for all share-based payment awards made to employees and directors, including employee stock options, based on estimated fair values on the grant date, over the requisite vesting period.

The Company followed the simplified method to establish the beginning balance as of January 1, 2006 of the additional paid-in capital pool (“APIC pool”) related to the tax effects of employee share-based compensation, and uses this method to determine the subsequent impact on the APIC pool and Consolidated Statements of Cash Flows of the tax effects of employee share-based compensation awards.

s. Comprehensive Income

Comprehensive income encompasses all changes in equity other than those arising from transactions with stockholders, and consists of net income, currency translation adjustments, pension liability changes and unrealized net gains and losses on investments classified as available-for-sale. As of December 31, 2011, 2010 and 2009, accumulated other comprehensive income is as follows (in thousands):

	December 31,
	2011			2010			2009
Unrealized gain (loss) on available-for-sale securities, net	$	(4,947	)	$	(1,912	)	$	(1,991	)
Net change in pension liability		(6,432	)		(4,841	)		(4,059	)
Cumulative translation adjustment		14,475			17,210			27,578
	$	3,096		$	10,457		$	21,528

The tax effect related to the change in unrealized gain (loss) on available-for-sale securities was $1.9 million, $3.3 million and $(2.4) million in 2011, 2010 and 2009, respectively. The tax effect related to the net change in pension liability was $0.8 million, $345,000 and $301,000 in 2011, 2010 and 2009, respectively.

t. Fair Value Measurements

The Company measures fair value and provides required disclosures about fair value measurements as it relates to financial and nonfinancial assets and liabilities in accordance with a framework specified by GAAP. This framework addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under GAAP. In 2009, the Company adopted new recognition and disclosure requirements for nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. This adoption in 2009 did not have a significant impact on the financial statements.

The fair value framework requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

Level 1: quoted market prices in active markets for identical assets and liabilities

Level 2: observable market based inputs or unobservable inputs that are corroborated by market data

Level 3: unobservable inputs that are not corroborated by market data

The carrying value of cash and cash equivalents, accounts receivable and trade payables approximates the fair value due to their short-term maturities.

For recognition purposes, on a recurring basis, the Company measures available for sale short-term and long-term investments at fair value. The fair value of the following investments is determined using quoted prices in active markets (Level 1):

	Level 1 Investments at December 31, 2011
(In thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Short term investments:
Investment funds – debt securities	$	220,778	$	30	$	(4,881	)	$	215,927
Corporate bonds		8,851		1		(7	)		8,845
Total short term investments	$	229,629	$	31	$	(4,888	)	$	224,772
	Level 1 Investments at December 31, 2010
(In thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Short term investments:
Investment funds – debt securities	$	172,081	$	379	$	(998	)	$	171,462
Corporate bonds		21,437		19		(58	)		21,398
Total short term investments	$	193,518	$	398	$	(1,056	)	$	192,860
Long term investments:
Corporate bonds	$	10,384	$	18	$	(4	)	$	10,398

The fair value of long-term investments in auction rate securities is based on a Level 3 valuation technique that includes the present value of future cash flows (principal and interest payments), review of the underlying collateral, and considers relevant probability weighted and risk adjusted observable inputs and minimizes the use of unobservable inputs. The fair values of auction rate securities at December 31, 2011 and December 31, 2010 were $15.0 million and $15.8 million, respectively.

On April 1, 2009, the Company adopted new recognition principles for additional guidance to provide greater clarity about the credit and noncredit component of an other-than-temporary impairment event. Adoption of the new recognition principles resulted in a pre-tax other-than-temporary impairment charge of $2.9 million in 2009. This other-than-temporary impairment adjustment related to the credit risk component of certain auction rate securities which were previously recognized in other comprehensive income prior to the adoption of the new recognition principles. Total other than temporary impairment losses from auction rate securities were $1.0 million in 2010 and $5.2 million in 2009. The Company recognized a gain from the sale of auction rate securities of $0.6 million in 2011. The Company also recognized pre-tax temporary gains (losses) of ($0.8) million in 2011, $211,000 in 2010 and $6.1 million in 2009 which have been recorded in other comprehensive income due to temporary changes in the value of its investments in auction rate securities.

Cumulatively to date, the Company has incurred $4.7 million in pre-tax charges due to other-than-temporary reductions in the value of its investments in auction rate securities, realized losses of $8.8 million from sales of auction rate securities and pre-tax temporary impairment charges of $3.0 million reflected in other comprehensive income. The Company's investments in auction rate securities represent interests in insurance securitizations collateralized by pools of residential and commercial mortgages, asset backed securities and other structured credits relating to the credit risk of various bond guarantors that mature at various dates from June 2021 through July 2052. These auction rate securities were intended to provide liquidity via an auction process which is scheduled every 28 days, that resets the applicable interest rate, allowing investors to either roll over their holdings or gain immediate liquidity by selling such interests at par. Interest rates are capped at a floating rate of one month LIBOR plus additional spread ranging from 1.25% to 4.00% depending on prevailing rating. During the second half of the year 2007, through 2011, the auctions for these securities failed. As a result of current negative conditions in the global credit markets, auctions for the Company's investment in these securities have recently failed to settle on their respective settlement dates. Consequently, the investments are not currently liquid through the normal auction process and may be liquidated if a buyer is found outside the auction process. Although the auctions have failed, the Company continues to receive underlying cash flows in the form of interest income from the investments in auction rate securities. As of December 31, 2011, the fair value of the Company's investments in auction rate securities was below cost by approximately $7.8 million. The fair value of the auction rate securities has been below cost for more than one year.

Beginning in the third quarter of 2008 and at December 31, 2011, the Company determined that the market for its investments in auction rate securities and for similar securities continued to be inactive since there were few observable or recent transactions for these securities or similar securities. The Company's investments in auction rate securities were classified within Level 3 of the fair value hierarchy because the Company determined that significant adjustments using unobservable inputs were required to determine fair value as of December 31, 2011 and December 31, 2010.

An auction rate security is a type of structured financial instrument where its fair value can be estimated based on a valuation technique that includes the present value of future cash flows (principal and interest payments), review of the underlying collateral and considers relevant probability weighted and risk adjusted observable inputs and minimizes the use of unobservable inputs. Probability weighted inputs included the following:

• Probability of earning maximum rate until maturity

• Probability of passing auction at some point in the future

• Probability of default at some point in the future (with appropriate loss severity assumptions)

The Company determined that the appropriate risk-free discount rate (before risk adjustments) used to discount the contractual cash flows of its auction rate securities ranged from 0.1% to 3.0%, based on the term structure of the auction rate security. Liquidity risk premiums are used to adjust the risk-free discount rate for each auction rate security to reflect uncertainty and observed volatility of the current market environment. This risk of nonperformance has been captured within the probability of default and loss severity assumptions noted above. The risk-adjusted discount rate, which incorporates liquidity risk, appropriately reflects the Company's estimate of the assumptions that market participants would use (including probability weighted inputs noted above) to estimate the selling price of the asset at the measurement date.

In determining whether the decline in value of the ARS investments was other-than-temporary, the Company considered several factors including, but not limited to, the following: (1) the reasons for the decline in value (credit event, interest related or market fluctuations); (2) the Company's ability and intent to hold the investments for a sufficient period of time to allow for recovery of value; (3) whether the decline is substantial; and (4) the historical and anticipated duration of the events causing the decline in value. The evaluation for other-than-temporary impairments is a quantitative and qualitative process, which is subject to various risks and uncertainties. The risks and uncertainties include changes in the credit quality of the securities, changes in liquidity as a result of normal market mechanisms or issuer calls of the securities, and the effects of changes in interest rates.

Assets measured at fair value on a recurring basis include the following as of December 31, 2011 and 2010 (in thousands):

	Fair Value Measurements at December 31, 2011 Using
(In thousands)	Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Carrying Value at December 31, 2011
Cash equivalents	$	50,275	$	-	$	-	$	50,275
Short term investments:
Investment funds – debt securities		215,927		-		-		215,927
Corporate bonds		8,845		-		-		8,845
Total short term investments		224,772		-		-		224,772
Long term investments:
Auction rate securities		-		-		15,026		15,026
Corporate bonds		-		-		-		-
Total long term investments		-		-		15,026		15,026
Other long-term financial assets		655		-		-		655
Derivative financial instrument	$	(925)	$	-	$	-	$	(925)
	Fair Value Measurements at December 31, 2010 Using
(In thousands)	Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Carrying Value at December 31, 2010
Cash equivalents	$	53,436	$	-	$	-	$	53,436
Short term investments:
Investment funds – debt securities		171,462		-		-		171,462
Corporate bonds		21,398		-		-		21,398
Total short term investments		192,860		-		-		192,860
Long term investments:
Auction rate securities		-		-		15,789		15,789
Corporate bonds		10,398		-		-		10,398
Total long term investments		10,398		-		15,789		26,187
Other long-term financial assets		1,335		-		-		1,335
Derivative financial instrument	$	49	$	-	$	-	$	49

Activity in long term investments (Level 3) was as follows (in thousands):

	Year Ended December 31,
	2011			2010
Balance at beginning of year	$	15,789		$	20,019
Proceeds from sale of auction rate securities		(630	)		(3,463	)
Realized gain included in net earnings		630			1,052
Unrealized loss included in net earnings		-			(2,030	)
Unrealized gain (loss) included in other comprehensive income		(763	)		211
Balance at end of year	$	15,026		$	15,789

Additionally, on a nonrecurring basis, the Company uses fair value measures when analyzing asset impairment. Long-lived tangible assets and definite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If it is determined such indicators are present and the review indicates that the assets will not be fully recoverable, based on undiscounted estimated cash flows over the remaining amortization periods, their carrying values are reduced to estimated fair value. Estimated fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. During the fourth quarter of each year, the Company evaluates goodwill and indefinite-lived intangibles for impairment using the income and other valuation approaches. The income approach is a valuation technique under which estimated future cash flows are discounted to their present value to calculate fair value. When analyzing indefinite-lived intangibles for impairment, the Company uses a relief from royalty method which calculates the cost savings associated with owning rather than licensing the intangible asset, applying an assumed royalty rate within the Company's discounted cash flow calculation.

The Company is also required to test goodwill for impairment before the annual test if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount, such as a significant adverse change in the business climate. Goodwill in the VIOX reporting unit, which included in the ACO operating segment, with a carrying amount of $7.8 million was written down in full as there was no implied fair value as of December 31, 2011, the effective date of the impairment test, resulting in an impairment charge of $7.8 million, which was included in earnings during the fourth quarter of 2011. Goodwill in the Ceradyne Canada reporting unit segment, which included in the Boron operating segment, with a carrying amount of $3.8 million was written down in full as there was no implied fair value as of June 30, 2009, the effective date of the impairment test, resulting in an impairment charge of $3.8 million, which was included in earnings during the second quarter of 2009. There was no goodwill impairment charge in 2010.

For disclosure purposes, the Company is required to measure the fair value of outstanding debt on a recurring basis. The fair value of outstanding debt is determined using quoted prices in active markets. Long-term debt is reported at amortized cost. The fair value of long-term debt, based on quoted market prices, was $93.5 million at December 31, 2011 and $93.1 million at December 31, 2010. 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 predominantly on variable reference rates.

The carrying value of accounts receivable and trade payables approximates the fair value due to their short-term maturities.

u. Recent Accounting Pronouncements

In January 2010, the FASB issued revised authoritative guidance that requires more robust disclosures about the different classes of assets and liabilities measured at fair value, the valuation techniques and inputs used, the activity in Level 3 fair value measurements, and the transfers between Levels 1, 2 and 3. This guidance was adopted on January 1, 2010 except for the disclosures about purchases, sales, issuances, and settlements in the roll forward activity in Level 3 fair value measurements. Those disclosure requirements were adopted on January 1, 2011. The adoption of this guidance did not have a material impact on the Company's consolidated financial position, results of operations and cash flows.

In December 2010, the FASB issued authoritative guidance that amended the disclosure requirements for supplementary pro forma related to business combinations. The amendments specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The Company adopted this guidance on January 1, 2011 and the amended disclosure requirements are included in the consolidated financial statements as applicable for the year ended December 31, 2011.

In May 2011, the FASB issued new guidance which changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements to ensure consistency between U.S. GAAP and International Financial Reporting Standards (“IFRS”). This new guidance also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This new guidance is to be applied prospectively. The Company anticipates that the adoption of this standard in the first quarter of 2012 will not materially expand its consolidated financial statement footnote disclosures.

In June 2011, the FASB issued new guidance which eliminates the option to report other comprehensive income and its components in the statement of changes in equity. This new guidance requires that all nonowner changes in stockholders' equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. This new guidance is to be applied retrospectively. The Company anticipates that the adoption of this standard in the first quarter of 2012 may materially change the presentation of its consolidated financial statements.

In September 2011, the FASB issued Accounting Standards Update No. 2011-09, “Compensation - Retirement Benefits - Multiemployer Plans (Subtopic 715-80),” (“ASU 2011-09”). ASU 2011-09 requires that employers provide additional separate disclosures for multiemployer pension plans and multiemployer other postretirement benefit plans. The additional quantitative and qualitative disclosures will provide users with more detailed information about an employer's involvement in multiemployer pension plans. The Company adopted this standard and has expanded its footnote disclosures in the consolidated financial statements. This adoption did not have a material impact on its consolidated financial statements for the year ending December 31, 2011.

In September 2011, the FASB issued Accounting Standards Update No. 2011-08, “Intangibles - Goodwill and Other (Topic 350),” (“ASU 2011-08”). ASU 2011-08 allows entities to first assess qualitatively whether it is necessary to perform the two-step goodwill impairment test. If an entity believes, as a result of its qualitative assessment, that it is more likely than not that the fair value of a reporting period is less than its carrying amount, the quantitative two-step goodwill impairment test is required. An entity has the unconditional option to bypass the qualitative assessment and proceed directly to performing the first step of the goodwill impairment test. The Company adopted this standard and it did not have a material impact on its consolidated financial statements and footnote disclosures.