CeO2-stabilised ZrO2-based functionally graded materials (FGMs) can be successfully produced using electrophoretic deposition and pressureless sintering in air. A cylindrical Al2O3/ZrO2 FGM, for instance, shows an ideal structure for applications such as drill blanks. It has a central hole with a diameter less than 0.5 mm, a tough Ce-ZrO2 core with a diameter of about 3 mm, a gradient layer of about 1 mm, and a hard Al2O3-rich surface layer. The Ce-ZrO2 core shows a Vickers hardness between 10 and 11 GPa and an excellent toughness (>10 MPa m1/2). In the gradient layer, hardness and toughness vary continuously along the radius. The Al2O3-rich surface layer has a hardness of 15.2 GPa but a modest toughness of 2 MPa m1/2. Annealing experiments of the air-sintered FGM in inert atmosphere (Ar + 5 vol % N2) allows a significant toughness enhancement, especially in the surface layer (up to 8 MPa m1/2). The experimental results indicate that a proper controlled reduction of the Ce-TZP phase allows a modification of the toughness of the Ce-TZP phase. The influence of the annealing cycle on the properties of the FGM are reported and elucidated.