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SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission file no. 0-28178

Carbo Ceramics Inc.

6565 MacArthur Boulevard

(972) 401-0090

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

Securities registered pursuant to Section 12(g) of the Act:

      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 þ          No o

      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.     þ

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).     Yes þ          No o

      The aggregate market value of the Common Stock held by non-affiliates of the Registrant, based upon the closing sale price of the Common Stock on June 30, 2003, as reported on the New York Stock Exchange, was approximately $447,769,473. Shares of Common Stock held by each officer and director and by each person who owns 10% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

      As of February 26, 2004, Registrant had outstanding 15,880,407 shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the Proxy Statement for Registrant’s Annual Meeting of Shareholders to be held April 13, 2004 are incorporated by reference in Parts II and III.

PART I

Item 1.     Business

General

      Since its founding in 1987, CARBO Ceramics Inc. (the “Company”) has become the world’s largest producer and supplier of ceramic proppant for use in the hydraulic fracturing of natural gas and oil wells. Demand for ceramic proppant depends primarily upon the demand for natural gas and oil and on the number of natural gas and oil wells drilled, completed or recompleted worldwide. More specifically, the demand for ceramic proppant is dependent on the number of oil and gas wells that are hydraulically fractured to stimulate production.

      Hydraulic fracturing is the most widely used method of increasing production from oil and gas wells. The hydraulic fracturing process consists of pumping fluids down a natural gas or oil well at pressures sufficient to create fractures in the hydrocarbon-bearing rock formation. A granular material, called proppant, is suspended and transported in the fluid and fills the fracture, “propping” it open once high-pressure pumping stops. The proppant-filled fracture creates a permeable channel through which the hydrocarbons can flow more freely from the formation to the well and then to the surface.

      There are three primary types of proppant that can be utilized in the hydraulic fracturing process: sand, resin-coated sand and ceramic. Sand is the least expensive proppant, resin-coated sand is more expensive and ceramic proppant is typically the highest cost. The higher initial cost of ceramic proppant is justified by the fact that the use of these proppants in certain well conditions results in increased production of oil and gas and increased cash flow for the operators of oil and gas wells. The increased production rates are primarily attributable to the higher strength and more uniform size and shape of ceramic proppant versus alternative materials.

      Based on the Company’s internally generated market information and information contained in the United States Geological Survey Minerals Yearbook, the Company estimates that it supplies approximately 52% of the ceramic proppant and 11% of all proppant used worldwide. During the year ended December 31, 2003, the Company generated approximately 64% of its revenues in the U.S. and 36% in international markets.

      In 2002, the Company expanded its business through the acquisition of Pinnacle Technologies, Inc. (“Pinnacle”). Pinnacle provides fracture diagnostic and mapping services, sells fracture simulation software and provides fracture design services to oil and gas companies worldwide. The acquisition was made to expand the Company’s ability to provide production-enhancing solutions to oil and gas exploration and production companies worldwide and to provide a catalyst for accelerating the growth of ceramic proppant sales. Pinnacle is the world’s leading provider of fracture mapping services, and its fracture simulation software FracproPT® is the most widely used model in the world. For the year ended December 31, 2003, Pinnacle accounted for less than 10% of the Company’s total revenues, net income and operating assets.

Products

      The Company manufactures four distinct ceramic proppants. CARBOHSP^TM and CARBOPROP® are premium priced, high strength proppants designed primarily for use in deep gas wells. CARBOHSP^TM was the original ceramic proppant and was introduced in 1979. The Company continues to manufacture and sell an improved version of this original product. CARBOHSP^TM has the highest strength of any of the ceramic proppants manufactured by CARBO Ceramics and is used primarily in the fracturing of deep gas wells. CARBOPROP®, which was introduced by the Company in 1982, is slightly lower in weight and strength than CARBOHSP^TM and was developed for use in deep gas wells that do not require the strength of CARBOHSP^TM.

      CARBOLITE® and CARBOECONOPROP® are lightweight proppants designed for use in gas wells of moderate depth and shallower oil wells. CARBOLITE®, introduced in 1984, is used in medium depth oil and gas wells, where the additional strength of ceramic proppant may not be essential, but where higher production rates can be achieved due to the product’s uniform size and spherical shape. CARBOECONOPROP®,

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Competition

      The Company’s chief worldwide competitor is Norton Proppants (“Norton”). Norton is owned by Compagnie de Saint-Gobain, a large French glass and materials company. Norton manufactures ceramic proppants that directly compete with each of the Company’s products. In addition, Mineracao Curimbaba (“Curimbaba”), based in Brazil, manufactures a sintered bauxite product similar to the Company’s CARBOHSP^TM, which is marketed in the United States under the name “Sinterball”. Curimbaba has notified the Company that it intends to introduce an intermediate strength ceramic proppant similar to the Company’s CARBOPROP® although the Company believes that it would be difficult for Curimbaba to introduce such a product without infringing patents held by the Company and Norton. The Company believes that Curimbaba has not expanded its U.S. product line to include a lightweight ceramic proppant and is unlikely to do so in light of patents held by the Company. Borovichi Refractories (“Borovichi”) is a manufacturer of ceramic proppant located in Russia. While the Company has limited information about Borovichi, the Company believes that Borovichi currently manufactures only an intermediate strength ceramic proppant and markets that product exclusively within Russia.

      Competition for CARBOHSP^TM and CARBOPROP® principally includes ceramic proppant manufactured by Norton, Curimbaba and Borovichi. The Company’s CARBOLITE® and CARBOECONOPROP® products compete with ceramic proppant produced by Norton and with sand-based proppant for use in the hydraulic fracturing of medium depth natural gas and oil wells. The leading suppliers of mined sand are Unimin Corp., Badger Mining Corp., Fairmount Minerals Limited, Inc. and Ogelbay-Norton Company. The leading suppliers of resin-coated sand are Borden Chemical, Inc. Oilfield Products Group and Santrol, a subsidiary of Fairmount Minerals.

      The Company believes that the most significant factors that influence a customer’s decision to purchase the Company’s products are (i) price/performance ratio, (ii) on-time delivery performance, (iii) technical support and (iv) proppant availability. The Company believes that its products are competitively priced and that its delivery performance is excellent. The Company also believes that its superior technical support has enabled it to persuade customers to use ceramic proppant in an increasingly broad range of applications and thus increased the overall market for the Company’s products. Since 1993, the Company has consistently expanded its manufacturing capacity and plans to continue its strategy of adding capacity to meet anticipated future increases in sales demand.

      The Company continually conducts testing and development activities with respect to alternative raw materials to be used in the Company’s existing and alternative production methods. The Company is not aware of the development of alternative products for use as proppant in the hydraulic fracturing process. The Company believes that the main barriers to entry for additional competitors are the patent rights held by the Company and certain of its current competitors, the “know-how” and trade secrets necessary to manufacture a competitive product and the capital costs involved in building production facilities of sufficient size to be operated efficiently.

Customers and Marketing

      The Company’s largest customers are, in alphabetical order, BJ Services Company, Halliburton Energy Services, Inc. and Schlumberger, the three largest participants in the worldwide petroleum pressure pumping industry. These companies collectively accounted for approximately 71% of the Company’s 2003 revenues and

marks of CARBO Ceramics Inc.

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      The Company recognizes the importance of a technical marketing program when selling a product that offers financial benefits over time but is initially more costly than alternative products. The Company markets its products both to its direct customers and to owners and operators of natural gas and oil wells. The Company’s sales and marketing staff regularly calls on and keeps close contact with the people who are influential in the proppant purchasing decision: production companies, regional offices of oilfield service companies that offer pressure pumping services and various completion engineering consultants. Beginning in 1999, the Company increased its marketing efforts to production companies and has continued to expand its relationships with production companies. The Company increased the size of its technical sales force in recent years and plans to continue to increase its efforts to educate end users on the benefits of using ceramic proppant. While the Company’s products have historically been used in very deep wells that require high-strength proppant, the Company believes that there is economic benefit to well operators of using ceramic proppant in shallower wells that do not necessarily require a high-strength proppant. The Company believes that its education-based technical marketing efforts will allow it to capture a greater portion of the large market for sand-based proppant over time.

      The Company provides a variety of technical support services and has developed computer software that models the return on investment achievable by using the Company’s ceramic proppant versus other proppant in the hydraulic fracturing of a natural gas or oil well. In addition to the increased technical marketing effort, the Company has engaged in large-scale field trials to demonstrate the economic benefits of its products and validate the findings of its computer simulations. Occasionally, the Company will sell its products on a discounted basis in exchange for a production company’s agreement to provide production data for direct comparison of the results of fracturing with ceramic proppant as compared to alternative proppants. During 2003, the Company initiated eight such field trials, principally in markets that had not previously used ceramic proppant.

      The Company’s worldwide sales and marketing activities are coordinated by its North American and International Marketing Managers. The Company’s international marketing efforts in 2003 were conducted through its sales office in Aberdeen, Scotland, and through commissioned sales agents located in South America, China and Australia.

      The Company’s products and services are used worldwide by U.S. customers operating domestically and abroad, and by foreign customers. Sales outside the United States accounted for 36%, 30% and 27% of the Company’s sales for 2003, 2002 and 2001, respectively. The distribution of the Company’s international and domestic revenues is shown below, based upon the region in which the customer used the products and services:

Distribution

      The Company maintains finished goods inventories at its plants in New Iberia, Louisiana; Eufaula, Alabama; McIntyre, Georgia; and Luoyang, China; and at 11 remote stocking facilities located in Rock Springs, Wyoming; Oklahoma City, Oklahoma; San Antonio, Texas; Fairbanks, Alaska; Edmonton, Alberta,

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Raw Materials

      Ceramic proppant is made from alumina-bearing ores (commonly referred to as bauxite, bauxitic clay or kaolin, depending on the alumina content), that are readily available on the world market. Bauxite is largely used in the production of aluminum metal, refractory material and abrasives. The main deposits of alumina-bearing ores in the United States are in Arkansas, Alabama and Georgia; other economically mineable deposits are located in Australia, Brazil, China, Jamaica, Russia and Surinam.

      For the production of CARBOHSP^TM in the Company’s New Iberia, Louisiana, and McIntyre, Georgia, facilities, the Company uses calcined, abrasive-grade bauxite imported from Australia, and typically purchases its annual requirements at the seller’s current prices. The Company has entered into an agreement with a foreign supplier to supply its anticipated need for this ore at a fixed price through 2005. While prices for the material are fixed through 2005, the Company has seen recent increases in the cost (which is borne by the Company) of transporting this material to the U.S. For the production of CARBOPROP®, also produced in both New Iberia and McIntyre, the Company uses a variety of materials that meet specific chemical and mineralogical requirements. Raw material for the production of CARBOPROP® may be either as-mined bauxitic clays or a blend of bauxite and kaolin, either of which is readily available to the Company at sellers’ current prices or through long-term contracts.

      The Company’s Eufaula facility uses primarily locally mined kaolin for the production of CARBOLITE® and CARBOECONOPROP®. The Company has entered into a contract that requires a supplier to sell to the Company up to 200,000 net tons of kaolin per year and the Company to purchase from the supplier 70% of the Eufaula facility’s annual kaolin requirements through 2010.

      The Company’s production facility in McIntyre, Georgia, uses locally mined uncalcined kaolin for the production of CARBOECONOPROP®. During 2002 and 2003, the Company acquired on both a fee simple and leasehold basis, acreage in Wilkinson County, Georgia, which contains approximately 12 million tons of raw material suitable for production of CARBOLITE® and CARBOECONOPROP®. At current production rates, the acquired raw material would supply the needs of the McIntyre facility for a period in excess of 80 years. Based on maximum production capacity after the planned construction of a second plant in the area, these raw material reserves would supply the needs of both plants for a period in excess of 40 years. The Company has entered into a long-term agreement with a third party to mine and transport this material at a fixed price subject to annual adjustment. The agreement requires the Company to utilize the third party to mine and transport at least 80% of the McIntyre facility’s annual kaolin requirement.

      The Company’s production facility in Luoyang, China, uses locally mined kaolin and bauxite for the production of CARBOPROP® and CARBOLITE®. Each of these materials is purchased under long-term contracts with a minimum term of five years. The contracts stipulate a fixed price subject to annual adjustment. Under the terms of the agreements, the Company has an obligation to purchase, in total, a minimum of 10,000 metric tons of bauxite per year or 100% of its annual requirements for bauxite if it purchases less than 10,000 metric tons per year.

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Production Process

      Ceramic proppants are made by grinding or dispersing ore to a fine powder, combining the powder into small, green (i.e., unfired) pellets and sintering the pellets at 2,500F to 3,000F in a rotary kiln.

      The Company uses two different methods to produce ceramic proppant. The Company’s plants in New Iberia, Louisiana; McIntyre, Georgia; and Luoyang, China, use a dry process (the “Dry Process”) which starts with bauxite, bauxitic clay or kaolin that has been dried to remove both free water and water which was chemically bound within the ore. This drying process is referred to as calcining. The Company has calcining facilities at its McIntyre, Georgia, and Luoyang, China, plants. Once the raw material is calcined, the ore is ground to a very fine powder. Pellets are then formed by combining the powder with water and binders and introducing the mixture into high-shear mixers. The process is completed once these pellets are sintered in a rotary kiln. The Company believes its competitors also use the Dry Process to produce ceramic proppant.

      The Company’s plant in Eufaula, Alabama, uses a wet process (the “Wet Process”), which starts with moist, uncalcined kaolin from local mines. The kaolin is dispersed with chemicals in a water slurry. With an atomizer, the slurry is sprayed into a dryer that causes the slurry to harden into green pellets. These green pellets are then sintered in rotary kilns. The Company believes that the Wet Process is unique to its plant in Eufaula, Alabama.

Patent Protection

      The Company makes ceramic proppant by processes and techniques that involve a high degree of proprietary technology, some of which are protected by patents.

      The Company owns six U.S. patents and three foreign patents. Two of these U.S. patents and two of these foreign patents relate to the CARBOPROP® product. One of these U.S. patents and one of these foreign patents relate to the CARBOLITE® and CARBOECONOPROP® products. The Company’s U.S. patents relating to the CARBOPROP® product expire in 2006. The Company’s U.S. patent relating to the CARBOLITE® and CARBOECONOPROP® products expires in 2009. The three foreign patents cover various products in Canada, Mexico and Argentina and do not have a significant effect on the Company’s business.

      The Company believes that its patents have been and will continue to be important in enabling the Company to compete in the market to supply proppant to the natural gas and oil industry. The Company intends to enforce, and has in the past vigorously enforced, its patents. The Company may be involved from time to time in the future, as it has been in the past, in litigation to determine the enforceability, scope and validity of its patent rights. Past disputes with its main competitor have been resolved in settlements that permit the Company to continue to benefit fully from its patent rights. The Company and this competitor have cross-licensed certain of their respective patents relating to intermediate and low density proppant on both a royalty-free and royalty-bearing basis. Royalties under these licenses are not material to the Company’s financial results. As a result of these cross licensing arrangements, the Company is able to produce a broad range of ceramic proppant while third parties are unlikely to be able to produce certain of these ceramic proppant without infringing on the patent rights held by the Company, its main competitor or both.

      Pinnacle owns one U.S. patent application (together with a number of counterparts to that application in numerous foreign jurisdictions) that covers certain of its proprietary systems. The patent application is in the early stages of the patent prosecution process, and a patent may not issue on such application in any jurisdiction for some time, if it issues at all. Pinnacle also licenses several patents from third parties for use in its business. In addition to patent rights, Pinnacle uses a significant amount of “Know-how” and other proprietary technology in the conduct of its business, and a substantial portion of this “Know-how” and technology is licensed by Pinnacle from third parties.

Production Capacity

      The Company believes that constructing adequate capacity ahead of demand while incorporating new technology to reduce manufacturing costs are important competitive strategies to increase its overall share of

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      In June 1999, the Company substantially completed construction of a new manufacturing facility in McIntyre, Georgia. Design capacity of the plant is 200 million pounds per year and the total initial cost of the plant was approximately $60 million. The plant consists of two distinct production lines housed in a single building. Initial production was generated from the first production line in June 1999 and full design throughput was achieved on that line in November 1999. Initial production from the second production line began in December 1999 and the plant operated at approximately 61% of its design capacity in 2000 and 88% in 2001. During 2002 and 2003, the Company spent approximately $17.2 million to expand the capacity of the McIntyre facility. Upon completion of this expansion project in early 2003, total annual capacity at the McIntyre facility was increased to 275 million pounds.

      In late 2002, the Company completed construction of a new manufacturing facility in Luoyang, China, at a cost of approximately $10 million. The plant began operation on schedule in the fourth quarter of 2002 and the first commercial shipments were made from the plant in January 2003. Since mid-2003, the plant has consistently demonstrated the ability to operate at rates in excess of its original design capacity and the plant’s annual capacity has been demonstrated to be 45 million pounds instead of the 40 million pounds initially projected.

      The Company has announced plans to add a second production line to its facility in Luoyang, China, at a projected cost of $6.6 million. The second line is expected to double the capacity of the facility and is expected to be operational in mid-2004. The Company has also announced plans to construct a new manufacturing facility in Wilkinson County, Georgia. This facility is expected to cost $62 million, have annual capacity of 250 million pounds, and be completed at the end of 2005.

      The following table sets forth the current capacity of each of the Company’s existing manufacturing facilities:

      The Company generally supplies its customers with products on a just-in-time basis and operates without any material backlog.

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Environmental and Other Governmental Regulations

      The Company believes that its operations are in substantial compliance with applicable federal, state and local environmental and safety laws and regulations. The Company does not anticipate any significant expenditures in order to continue to comply with such laws and regulations.

Employees

      At December 31, 2003, the Company had 360 full-time employees. In addition to the services of its employees, the Company employs the services of consultants as required. The Company’s employees are not represented by labor unions. There have been no work stoppages or strikes during the last three years that have resulted in the loss of production or production delays. The Company believes its relations with its employees are satisfactory.

Forward-Looking Information

      The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. This Form 10-K, the Company’s Annual Report to Shareholders, any Form 10-Q or any Form 8-K of the Company or any other written or oral statements made by or on behalf of the Company may include forward-looking statements which reflect the Company’s current views with respect to future events and financial performance. The words “believe”, “expect”, “anticipate”, “project” and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, each of which speaks only as of the date the statement was made. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The Company’s forward-looking statements are based on assumptions that we believe to be reasonable but that may not prove to be accurate. All of the Company’s forward-looking information is subject to risks and uncertainties that could cause actual results to differ materially from the results expected. Although it is not possible to identify all factors, these risks and uncertainties include the risk factors discussed below.

      The Company’s results of operations could be adversely affected if its business assumptions do not prove to be accurate or if adverse changes occur in the Company’s business environment, including but not limited to:

	•	a potential decline in the demand for oil and natural gas;
	•	potential declines or increased volatility in oil and natural gas prices that would adversely affect our customers, the energy industry or our production costs;
	•	potential reductions in spending on exploration and development drilling in the oil and natural gas industry that would reduce demand for our products and services;
	•	the development of alternative stimulation techniques;
	•	the development of alternative proppants for use in hydraulic fracturing;
	•	general global economic and business conditions;
	•	fluctuations in foreign currency exchange rates; and
	•	the potential expropriation of assets by foreign governments.

      The Company’s results of operations could also be adversely affected as a result of worldwide economic, political and military events, including war, terrorist activity or initiatives by the Organization of the Petroleum Exporting Countries.

Available Information

      The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the

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      The Company maintains its corporate headquarters (approximately 8,000 square feet of leased office space) in Irving, Texas, owns its manufacturing facilities, land and substantially all of the related production equipment in New Iberia, Louisiana, and Eufaula, Alabama, and leases its McIntyre, Georgia, facility through 2016, at which time title will be conveyed to the Company. The Company owns the buildings and production equipment at its facility in Luoyang, China, and has been granted use of the land on which the facility is located through 2051 under the terms of a land use agreement with the People’s Republic of China. The Company maintains a sales office in Houston, Texas (approximately 2,100 square feet of leased office space).

      The facility in New Iberia, Louisiana, located on 24 acres of land owned by the Company, consists of two production units (approximately 85,000 square feet), a laboratory (approximately 4,000 square feet) and an office building (approximately 3,000 square feet). The Company also owns an 80,000 square foot warehouse on the plant grounds in New Iberia, Louisiana.

      The facility in Eufaula, Alabama, located on 14 acres of land owned by the Company, consists of one production unit (approximately 111,000 square feet), a laboratory (approximately 2,000 square feet) and an office (approximately 1,700 square feet).

      The facility in McIntyre, Georgia, includes real property, consisting of approximately 36 acres, plant and equipment that are leased by the Company from the Development Authority of Wilkinson County. The term of the lease commenced on September 1, 1997 and terminates on December 1, 2016. Under the terms of the lease, as amended in 2003, the Company was responsible for all costs incurred in connection with the premises, including costs of construction of the plant and equipment. As an inducement to locate the facility in Wilkinson County, Georgia, the Company received certain ad-valorem property tax incentives. The lease and a related memorandum of understanding define a negotiated value of the Company’s leasehold interest during the term of the lease. The lease also calls for annual payments of rent to the Development Authority of Wilkinson County. The total additional rent payments are immaterial in relation to the cost of the facility borne by the Company. At the termination of the lease, title to all of the real property, plant and equipment will be conveyed to the Company in exchange for nominal consideration. The Company has the right to purchase the property, plant and equipment at any time during the term of the lease for a nominal price plus payment of any rent due to the Development Authority of Wilkinson County through the remaining lease term.

      The facility in Luoyang, China, is located on approximately 9 acres and consists of various production and support buildings (approximately 106,000 square feet), a laboratory (approximately 6,000 square feet) and an office building (approximately 6,000 square feet).

      The Company’s customer service and distribution operations are located at the New Iberia facility, while its quality control, testing and development functions operate at the New Iberia, Eufaula and McIntyre facilities. The Company owns distribution facilities in San Antonio, Texas; Rock Springs, Wyoming; Edmonton and Grande Prairie, Alberta, Canada.

      During 2002 and 2003, the Company completed the acquisition of approximately 1,500 acres of land and leasehold interests in Wilkinson County, Georgia, near its plant in McIntyre, Georgia. The land contains approximately 12 million tons of raw material for use in the production of the Company’s lightweight ceramic proppants. The Company has contracted with a third party to mine and haul the reserves and bear the responsibility for subsequent reclamation of the mined areas.

      The Company’s wholly-owned subsidiary, Pinnacle Technologies, Inc., leases its corporate headquarters in San Francisco, California (approximately 6,800 square feet), and maintains leased offices totaling approximately 23,000 square feet in Houston, Texas; Centennial, Colorado; Delft, The Netherlands; and

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      In November 2002, a $993,000 judgment was entered against the Company in Texas state court in a lawsuit commenced by Proppant Technology, Inc. In December 2003, the Company settled the claim for an amount that did not differ materially from the amount of the judgment. The Company paid the settlement amount in January 2004.

      From time to time, the Company is the subject of legal proceedings arising in the ordinary course of business. The Company does not believe that any of these proceedings will have a material adverse effect on its business or its results of operations.

      No matters were submitted to a vote of security holders during the fourth quarter of fiscal year 2003.

Executive Officers of the Registrant

      Dr. C. Mark Pearson (age 48) has served as President and Chief Executive Officer since April 2001. Prior to assuming these positions, Dr. Pearson served as the Company’s Senior Vice President of Marketing & Technology from March 1997 to 2001. Prior to joining the Company, Dr. Pearson was an Associate Professor of Petroleum Engineering at the Colorado School of Mines from 1995 to March 1997. Dr. Pearson held various positions with Atlantic Richfield Company from 1984 to 1995.

      Paul G. Vitek (age 45) has been the Senior Vice President of Finance and Administration and Chief Financial Officer since January 2000. Prior to serving in his current capacity, Mr. Vitek served as Vice President of Finance from February 1996 and has served as Treasurer and Secretary of the Company since 1988.

      Mark L. Edmunds (age 48) has been the Vice President, Operations since April 2002. From 2000 until joining the Company, Mr. Edmunds served as Business Unit Manager and Plant Manager for FMC Corporation. Prior to 2000, Mr. Edmunds served Union Carbide Corporation and The Dow Chemical Company in a variety of management positions including Director of Operations, Director of Internal Consulting and Manufacturing Operations Manager.

      Christopher A. Wright (age 39) has been a Vice President of the Company since May 2002. Mr. Wright has been President of Pinnacle Technologies, Inc., a provider of fracture diagnostic products and services, and subsidiary of the Company, since its founding in 1992.

      All officers are elected at the Annual Meeting of the Board of Directors for one-year terms or until their successors are duly elected. There are no arrangements between any officer and any other person pursuant to which he was selected as an officer. There is no family relationship between any of the named executive officers or between any of them and the Company’s directors.

PART II

Item 5.     Market for Registrant’s Common Equity and Related Stockholder Matters

Common Stock Market Prices and Dividends

      The Company’s Common Stock is traded on the New York Stock Exchange (ticker symbol CRR). The approximate number of holders, including both record holders and individual participants in security position listings, of the Company’s Common Stock at February 13, 2004 was 9,100.

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      High and low stock prices and dividends for the last two fiscal years were:

      The Company currently expects to continue its policy of paying quarterly cash dividends, although there can be no assurance as to future dividends because they depend on future earnings, capital requirements and financial condition.

Item 6.     Selected Financial Data

      The following selected financial data are derived from the audited consolidated financial statements of the Company. The data should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes thereto included elsewhere in this Report.

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(1)

Selling, general and administrative (SG&A) expenses for 2003, 2002, 2001, 2000 and 1999 include costs of start-up activities of $80,000, $1,099,000, $35,000, $27,000 and $1,464,000, respectively. Start-up costs for 2003 are related to expansion of the McIntyre and New Iberia facilities and initial operation of the new China facility. Start-up costs for 2002 and 2001 are related to the new production facility in China, including organizational and administrative costs associated with plant construction plus labor, materials and utilities expended to bring installed equipment to operating condition. Start-up costs prior to 2001 consist of labor, materials and utilities expended in bringing installed equipment to normal operating conditions at the Company’s plant in McIntyre, Georgia. SG&A expenses in 2002 also include the accrual of a $993,000 reserve related to a legal judgment against the Company. SG&A expenses in 2003 also include a loss of $717,000 associated with the disposal of certain equipment.

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

Executive Level Overview

      CARBO Ceramics Inc. generates revenue through the sale of products and services to the oil and gas industry. The Company’s principal business consists of manufacturing and selling ceramic proppant for use in the hydraulic fracturing of oil and natural gas wells. The Company’s products and services help oil and gas producers increase production and recovery rates from their wells, thereby lowering overall reservoir development costs. As a result, the Company’s business is dependent to a large extent on the level of drilling activity in the oil and gas industry worldwide. However, the Company has increased its revenues and income over an extended period and across various industry business cycles by increasing its market share of worldwide proppant sales. While the Company’s ceramic proppants are more expensive than alternative products, the Company has been able to demonstrate the cost-effectiveness of its products to numerous operators of oil and gas wells through increased technical marketing activity in recent years. The Company believes its future prospects will benefit from both an expected increase in drilling activity worldwide and the desire of industry participants to lower their overall development costs.

      Recently, the Company has expanded its operations outside the United States. International revenues represented 36%, 30% and 27% of total revenues, respectively, over the past three years. In 2002 the Company constructed a manufacturing plant in China, its first plant located outside the United States, and currently is constructing a second production line that will double the capacity of this plant. The Company recently established a subsidiary company and opened two sales offices in Russia, and by mid-2004 expects to establish a warehouse there. The Company believes international operations will represent an increasingly important role in its future growth.

      Revenue growth in recent years has been driven primarily by increases in sales volume. Because the Company’s products compete in part against lower-cost alternatives, price increases for the Company’s products have been minimal in recent years and the Company expects future growth will continue to be dependent on increasing sales volume. As a result, the Company has initiated construction of significant new manufacturing capacity to meet anticipated future demand.

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      The Company’s gross profit margins are principally impacted by natural gas costs and the Company’s production levels as a percentage of its capacity. While most direct production expenses have been relatively stable or predictable over time, natural gas, which is the fuel used to fire the kilns in which ceramic proppant is made, has varied from approximately 14% to 24% of total direct production costs over the last two years due to the price volatility of this fuel source. The Company’s practice had been to purchase its estimated annual natural gas requirement in the spring of each year. However, beginning in 2003, the Company has initiated a program to purchase its natural gas requirement at various times during the year, in order to average the cost and reduce exposure to short-term spikes in commodity prices. Despite the efforts to reduce exposure to changes in natural gas prices, it is possible that, given the significant portion of manufacturing costs represented by this fuel, future changes in net income may not be proportionate to changes in revenue.

      Over the past five years, the Company has expanded its production capacity by 97%. While the Company has operated near full capacity for much of this period, the addition of significant new capacity in the future could adversely impact gross profit and operating margins if the timing of this new capacity does not match increases in demand for the Company’s products. However, the Company believes that the addition of this capacity is a key component to continuing long-term growth in sales volume and revenue.

      As the Company’s sales volume has increased, there has also been an increase in activities and expenses related to marketing, distribution, research and development, and finance and administration. As a result, selling, general and administrative expenses have increased as a percentage of revenue in recent years. In the future, the Company expects to continue to actively pursue new business opportunities by:

	•	increasing marketing activities,
	•	improving and expanding its distribution capabilities,
	•	focusing on new product development, and
	•	increasing international activities.

      The Company expects that these activities will generate increased revenue and that selling, general and administrative expenses as a percentage of revenue will not change significantly.

General Business Conditions

      The Company’s business is significantly impacted by the number of natural gas wells drilled in North America, where the majority of wells are hydraulically fractured. In markets outside North America, sales of the Company’s products are less dependent on natural gas markets but are influenced by the overall level of drilling and hydraulic fracturing activity. Furthermore, because the decision to use ceramic proppant is based on comparing the higher cost of ceramic proppant to the future value derived from increased production rates, the Company’s business is influenced by the current and expected prices of natural gas and oil.

      Natural gas prices and drilling activity in the North American market have been highly variable over the past three years. The North American natural gas market remained very strong through the first half of 2001. As a result of the strong market conditions in North America, the Company established new annual records for sales volume, average selling price, revenues and net income in 2001 despite a downturn in North American natural gas drilling activity in the second half of the year. This decline in North American drilling activity continued through much of 2002. In 2002, the average natural gas rig count declined by 26% in the U.S. and 24% in Canada compared to 2001. In 2003, activity levels in North America rebounded and the Company established new sales volume records in a number of regions including the U.S. Rocky Mountains, Canada and East Texas. In addition, the Company experienced significant sales growth in overseas markets due to an increase in drilling and fracturing activity in Europe and Asia.

Critical Accounting Policies

      The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S., which require the Company to make estimates and assumptions (see Note 1 to the

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      Revenue is recognized when title passes to the customer upon delivery. The Company generates a significant portion of its revenues and corresponding accounts receivable from sales to the petroleum pressure pumping industry. In addition, the Company generates a significant portion of its revenues and corresponding accounts receivable from sales to three major customers, all of which are in the petroleum pressure pumping industry. As of December 31, 2003, approximately 68% of the balance in accounts receivable was attributable to those three customers. As stated in Note 1 to the consolidated financial statements, credit losses historically have been insignificant. Therefore, except in circumstances in which management is aware of a specific customer’s inability to meet its financial obligations (e.g., bankruptcy filings), the Company generally does not record a reserve for bad debts. If a prolonged economic downturn in the petroleum pressure pumping industry were to occur or, for some other reason, any of the Company’s primary customers were to experience significant adverse conditions, its estimates of the recoverability of accounts receivable could be reduced by a material amount.

      Inventory is stated at the lower of cost or market. Obsolete or unmarketable inventory historically has been insignificant and generally written off when identified. Assessing the ultimate realization of inventories requires judgments about future demand and market conditions, and management believes that current inventories are properly valued at cost. Accordingly, no reserve to write-down inventories has been recorded. If actual market conditions are less favorable than those projected by management, inventory write-downs may be required.

      Income taxes are provided for in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes”. This standard takes into account the differences between financial statement treatment and tax treatment of certain transactions. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences betwee