Forward-Looking Statements

This Management's Discussion and Analysis contains forward-looking statements as defined by Section 21E of the Securities Exchange Act of 1934, as amended, including any statements regarding projected growth rates, markets, product development, financial position, capital expenditures and foreign currency exposure. Forward-looking statements are also identified by words such as "expects," "anticipates," "intends," "plans," "projects" or similar expressions.

Actual results could materially differ from such statements due to the following factors: materially adverse changes in economic or industry conditions generally (including capital markets) or in the markets served by the Company, the development and use of new technology and the actions of competitors.

There are additional risk factors that could affect the Company's business, results of operations or financial condition. Investors are encouraged to review the risk factors set forth in the Company's most recent Form 10-K as filed with the Securities and Exchange Commission on August 27, 2008 and in this Form 10-Q.

Introduction

The Company generates revenues, earnings and cash flows from developing, manufacturing and marketing high technology materials and derivative products for precision use in industrial, medical, military, security and aerospace applications. We also generate revenue, earnings and cash flows from external customer and government funded research and development contracts relating to the development and manufacture of new technologies, materials and products.

Our customer base includes original equipment manufacturers (OEM), laser end users, system integrators of high-power lasers, manufacturers of equipment and devices for industrial, security and monitoring applications, U.S. government prime contractors, various U.S. government agencies and thermoelectric solutions suppliers.

Critical Accounting Estimates

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America and the Company's discussion and analysis of its financial condition and results of operations require the Company's management to make judgments, assumptions, and estimates that affect the amounts reported in its condensed consolidated financial statements and accompanying notes. Note A of the Notes to Consolidated Financial Statements in the Company's most recent Form 10-K describes the significant accounting policies and methods used in the preparation of the Company's consolidated financial statements. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates.

Management believes the Company's critical accounting estimates are those related to revenue recognition, allowance for doubtful accounts, warranty reserves, inventory valuation, valuation of long-lived assets including acquired intangibles and goodwill, accrual of bonus and profit sharing estimates, accrual of income tax liability estimates, accounting for share-based payments and workers compensation accrual for our self insurance program. Management believes these estimates to be critical because they are both important to the portrayal of the Company's financial condition and results of operations, and they require management to make judgments and estimates about matters that are inherently uncertain.

The Company recognizes revenues when the criteria of SEC Staff Accounting Bulletin: No. 104-"Revenue Recognition in Financial Statements" ("SAB 104") are met. Revenues for product shipments are realizable when we have persuasive evidence of a sales arrangement, the product has been shipped or delivered, the sales price is fixed or determinable and collectibility is reasonably

assured. Title and risk of loss passes from the Company to its customer at the time of shipment in all cases with the exception of certain customers. For these customers, which represent approximately 5% of our consolidated revenues, title does not pass and revenue is not recognized until the customer has received the product at its physical location.

We establish an allowance for doubtful accounts and a warranty reserve based on historical experience and believe the collection of revenues, net of these reserves, is reasonably assured. Our allowance for doubtful accounts and warranty reserve balances at March 31, 2009 was approximately $0.9 million and $0.7 million, respectively. Our reserve estimates have historically been proven to be materially correct based upon actual charges incurred.

The Company's revenue recognition policy is consistently applied across the Company's segments, product lines and geographical locations. Further, we do not have post shipment obligations such as training or installation, customer acceptance provisions, credits and discounts, rebates and price protection, or other similar privileges. Our distributors and agents are not granted price protection. Our distributors and agents, who comprise less than 10% of consolidated revenue, have no additional product return rights beyond the right to return defective products that are covered by our warranty policy. We believe our revenue recognition practices are consistent with SAB 104, and that we have adequately considered the requirements of SFAS No. 48 "Revenue Recognition When Right of Return Exists" (SFAS 48).

Revenues generated from transactions other than product shipments are contract related and have historically accounted for approximately 5% or less of the Company's consolidated revenues. For this portion of revenues, the Company follows the guidelines of Statement of Position 81-1 "Accounting for Performance of Construction-Type and Certain Production-Type Contracts" for these contracts, which are related to research and development.

The Company had previously announced its intention to sell its x-ray and gamma-ray radiation, sensor business eV PRODUCTS, Inc. eV PRODUCTS was previously reported in the Compound Semiconductor Group for segment reporting. Management's Discussion and Analysis information for all periods presented herein exclude eV PRODUCTS as this business is accounted for as a discontinued operation. In spite of the current world-wide economic environment, the Company and its advisers have identified potential acquirers of eV PRODUCTS and believes it is progressing in its divestiture efforts.

New Accounting Standards

In September 2006, the Financial Accounting Standard Board ("FASB") issued Statement of Financial Accounting Standards No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles ("GAAP"), and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements where the FASB previously concluded in those accounting pronouncements that fair value is the relevant measurement attributes.

SFAS 157 establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. The hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on assumptions used to measure assets and liabilities at fair value. A financial asset or liability's classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company's adoption of SFAS 157 on July 1, 2008 did not have a material impact on the Company's financial position, results of operations or cash flows.

In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment of SFAS No. 115" ("SFAS 159"). SFAS 159 permits entities to measure eligible financial assets, financial liabilities and firm commitments at fair value, on an instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value under other accounting principles generally accepted in the United States. The adoption of SFAS 159 on July 1, 2008 did not have a material impact on the Company's financial position, results of operations or cash flows.

As of March 31, 2009, there have been no other significant changes with regard to the critical accounting policies disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended June 30, 2008.

Results of Continuing Operations ($000)




                                        Three Months Ended                     Nine Months Ended         %
                                            March 31,             %                March 31,          Increase
                                         2009         2008     Decrease        2009        2008      (Decrease)
Bookings                              $    62,252   $ 93,735        (34 )%   $ 203,884   $ 253,156          (19 )%
Revenues                                   64,111     80,956        (21 )%     226,155     224,382            1 %
Earnings from continuing operations         6,736     13,353        (50 )%      32,593      50,342          (35 )%
Diluted earnings per share                   0.23       0.44        (48 )%        1.08        1.65          (35 )%

The results of operations include HIGHYAG for the three and nine months ended March 31, 2009 and only three months ended March 31, 2008 as this acquisition was completed in January 2008.

Net earnings from continuing operations for the three months ended March 31, 2009 were $6,736,000 or $0.23 per share-diluted. This compares to net earnings from continuing operations of $13,353,000 or $0.44 per share-diluted for the three months ended March 31, 2008. The decrease in earnings from continuing operations for the three months ended March 31, 2009 compared to the same period last fiscal year was primarily the result of lower margins realized at the Company's Infrared Optics segment resulting from the reduction of shipments to the segment's industrial customer base. The Infrared Optics segment revenues decreased $13.2 million or 32% as its industrial customer base retrenched its operations as a result of the current worldwide economic downturn. In addition, earnings from continuing operations were negatively impacted from the Near Infrared Optics segment due to lower shipments of its UV Filter product line as well as writing-off approximately $0.8 million pre-tax of certain equipment of its UV Filter product line due to continued reduction in product demand.

For the nine months ended March 31, 2009, net earnings from continuing operations were $32,593,000 or $1.08 per share-diluted. This compares to net earnings from continuing operations of $50,342,000 or $1.65 per share-diluted for the nine months ended March 31, 2008. During the nine months ended March 31, 2008, the Company sold its equity investment in a Canadian company for $30.2 million in cash on which it recorded an after-tax gain of $15.9 million or $0.52 per share diluted. In addition to the absence of a gain on sale of equity investment in the nine months ended March 31, 2009, other factors that contributed to lower earnings from continuing operations during the current nine months compared to the same period last year were an overall deterioration of global economies, particularly the worldwide industrial markets which impacted the Company via lower product shipments and lower margins, as well as the items noted above that impacted the current three months financial results. Net earnings from continuing operations for the nine months ended March 31, 2009 were favorably impacted by the recognition of a favorable income tax benefit in accordance with FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" relating to the reversal of unrecognized income tax benefits resulting from the completion of an Internal Revenue Service's examination of certain of the Company's federal income tax returns. This benefit was partially offset by additional income tax exposure at certain foreign locations.

Revenues from continuing operations for the third quarter of fiscal 2009 decreased 21% to $64,111,000 compared to $80,956,000 in the third quarter of last fiscal year. The decrease in revenues for the three months ended March 31, 2009 compared to the same period

last fiscal year was primarily due to lower volume of shipments from the Infrared Optics segment resulting from a lowering demand from the Company's industrial customers as a result of the continued deterioration of the worldwide economy. In addition, the Company's Near-Infrared Optics segment experienced lower revenue volume due to the continued ramp down of its UV Filter product line. Revenues for the nine months ended March 31, 2009 increased 1% to $226,155,000 compared to $224,382,000 from the same period last fiscal year. The increase in revenues for the nine months ended March 31, 2009 compared to the same period last fiscal year was due to increased sales volume at the Company's EEO, PRM and Marlow business units, which helped offset lower revenues in the Infrared Optics and Near-Infrared Optics segments. Exclusive of PRM, the increase in revenues at EEO and Marlow was attributed to increased shipments to their military customers. The revenue increase at PRM was due to their continued expansion of its raw material product supply chain.

Bookings from continuing operations for the third quarter of fiscal 2009 decreased 34% to $62,252,000 compared to $93,735,000 for the same period last fiscal year. Bookings from continuing operations are defined as customer orders received that are expected to be converted to revenues over the next twelve months. For long-term customer orders, the Company does not include in bookings the portion of the customer order that is beyond twelve months due to the inherent uncertainty of an order that far out in the future. Bookings from continuing operations for the nine months ended March 31, 2009 decreased 19% to $203,884,000 compared to $253,156,000 for the same period last fiscal year. The decrease in bookings from continuing operations for the three and nine months ended March 31, 2009 compared to the same periods last fiscal year was primarily driven by the worldwide industrial slowdown that has occurred during the Company's fiscal year 2009 as a result of the worldwide recession. The Infrared Optics segment was significantly impacted by this economic downturn as its bookings for the current three and nine months decreased 48% and 19%, respectively, compared to the same periods last year as this segment's industrial based customers have either slowed the utilization of their laser systems in their operations or have delayed manufacturing new laser systems. The Company's PRM bookings were negatively impacted during the three and nine months ended March 31, 2009 compared to the same periods last fiscal year due to a sharp decline in the market prices of selenium and tellurium, two significant products the Company refines and sells based on market-based pricing. In addition, the continued ramp down of the Near-Infrared Optic's UV Filter product line also negatively contributed approximately $11.0 million in lower bookings during the current fiscal nine months compared to the same period last year.

Bookings, revenues and segment earnings from continuing operations for the Company's reportable segments are discussed below. Segment earnings from continuing operations differ from income from continuing operations in that segment earnings from continuing operations exclude certain operational expenses included in Other expense (income) - net as reported. Management believes segment earnings to be a useful measure as it reflects the results of segment performance over which management has direct control. See also "Note M Segment Reporting" to the Company's condensed consolidated financial statements for further information on the Company's reportable segments and the reconciliation of segment earnings from continuing operations to earnings from continuing operations before income taxes.

Outlook

Demand for the Company's non-military product offerings are being impacted by global macroeconomic factors. For the remainder of fiscal year 2009, the Company expects the difficult economic conditions to continue. Given this fact, the Company is anticipating lower revenues for the fourth quarter of fiscal year 2009 compared to the recently completed fiscal quarter. The Company is continuing to take actions in light of these economic factors to reduce its operating costs, including layoffs, reduction in overtime, elimination of certain discretionary spending and reductions in capital expenditures.

Infrared Optics ($000)



                       Three Months Ended                     Nine Months Ended
                           March 31,             %                March 31,            %
                        2009         2008     Decrease        2009        2008      Decrease
  Bookings           $    22,530   $ 43,607        (48 )%   $  96,184   $ 118,124        (19 )%
  Revenues                27,785     41,004        (32 )%     105,069     108,539         (3 )%
  Segment earnings         4,369     10,200        (57 )%      24,459      25,388         (4 )%

The Company's Infrared Optics segment includes the combined operations of Infrared Optics and HIGHYAG. The results of operations include HIGHYAG for the three and nine months ended March 31, 2009 and only three months ended March 31, 2008 as this acquisition was completed in January 2008.

Bookings for the third quarter of fiscal 2009 for Infrared Optics decreased 48% to $22,530,000 from to $43,607,000 in the third quarter of last fiscal year. Bookings for the nine months ended March 31, 2009 decreased 19% to $96,184,000 from $118,124,000 for the same period last fiscal year. The decrease in bookings for the three and nine months ended March 31, 2009, compared to the same periods last fiscal year, was due to the continued weakness in the worldwide industrial markets for which the segment services. Based on data from our customers we believe that laser system utilization within these markets has decreased almost 50% from the prior year, which in turn has lowered demand for the segment's replacement optics. In addition, bookings from high power laser Original Equipment Manufacturers (OEMs) in Japan and Europe were down significantly as these customers continue to consume inventory and face lower product demand due to decreased laser utilization rates and lower new laser manufacturing. The segment anticipates that the reduced bookings rate will continue for the near-term as OEM and aftermarket customers continue their cautious development and buying habits as a result of the worldwide economic environment. The Company is anticipating an improvement in its business environment to occur sometime in the fiscal year ending June 30, 2010 due to signs of growth from China and the positive impact that the world government's economic stimulus plans should have on the industrial markets. However it is unclear at this time as to the quarter in which this will occur.

Revenues for the third quarter of fiscal 2009 for Infrared Optics decreased 32% to $27,785,000 from $41,004,000 in the third quarter of last fiscal year. Revenues for the nine months ended March 31, 2009 decreased 3% to $105,069,000 from $108,539,000 for the same period last fiscal year. HIGHYAG contributed approximately $2.3 million and $7.5 million of revenues during the three and nine months ended March 31, 2009. The decrease in revenues for the three and nine months ended March 31, 2009 compared to the same periods last fiscal year was due to lower shipment volume to OEM and aftermarket customers worldwide. This lower shipment volume began to occur during the Company's current year second fiscal quarter and is the direct result of the general deterioration of the industrial markets brought on by the global macroeconomic environment.

Segment earnings for the third quarter of fiscal 2009 decreased 57% to $4,369,000 from $10,200,000 in the third quarter of last fiscal year. Segment earnings for the nine months ended March 31, 2009 decreased 4% to $24,459,000 from $25,388,000 for the same period last fiscal year. The decrease in segment earnings for the three and nine months ended March 31, 2009 compared to the same periods last fiscal year was primarily due to the reduction of margin on the segment's lower revenues. In addition, the segment has absorbed approximately $0.9 million more share-based compensation expense during the current nine months ended March 31, 2009 compared to the same period last fiscal year. The segment continues to reduce its operating costs to align them with lower product demand.

Near-Infrared Optics ($000)




                      Three Months Ended         %             Nine Months Ended
                          March 31,           Increase             March 31,            %
                       2009         2008     (Decrease)         2009        2008     Decrease
 Bookings           $    10,063   $  8,332           21 %    $   28,059   $ 42,573        (34 )%
 Revenues                 9,602     14,769          (35 )%       35,505     43,420        (18 )%
 Segment earnings           647      2,705          (76 )%        5,803      8,444        (31 )%

Bookings for the third quarter of fiscal 2009 for Near-Infrared Optics increased 21% to $10,063,000 from $8,332,000 in the third quarter of last fiscal year. The increase in bookings for the three months ended March 31, 2009 compared to the same period last fiscal year was primarily driven by increased non-UV Filter military demand. Bookings for the nine months ended March 31, 2009 decreased 34% to $28,059,000 as compared to $42,573,000 for the same period last fiscal year due primarily to the anticipated decrease of the segment's UV Filter product line order rate which experienced a $10.9 million or 70% reduction during the current nine months ended March 31, 2009 compared to the same period last fiscal year. In addition to the decrease from the UV Filter product line, the segment also experienced a decrease in bookings from its industrial and medical customers as the demand for these products have slowed as a result of the current economic environment.

Revenues for the third quarter of fiscal 2009 for Near-Infrared Optics decreased 35% to $9,602,000 from $14,769,000 in the third quarter of last fiscal year. Revenues for the nine months ended March 31, 2009 decreased 18% to $35,505,000 compared to $43,420,000 for the same respective periods of last fiscal year. The decrease in revenues for the three and nine months ended March 31, 2009 compared to the same period last fiscal year was due to the planned reduction in the shipment volume of the UV Filter product line as well as a general decline in shipments to the segment's industrial and medical markets.

Segment earnings for the third quarter of fiscal 2009 decreased 76% to $647,000 from $2,705,000 in the third quarter of last fiscal year. Segment earnings for the nine months ended March 31, 2009 decreased 31% to $5,803,000 from $8,444,000 for the same period last fiscal year. The decrease in segment earnings for the three and nine months ended March 31, 2009 compared to the same periods was primarily due to the reduction in margin realized on fewer shipments from its UV Filter, industrial and medical product lines. Segment earnings were also negatively impacted by a $0.8 million write-off of certain equipment of its UV Filter product line due to discontinuation of certain product demand.

Military & Materials ($000)




                     Three Months Ended         %             Nine Months Ended         %
                         March 31,           Increase             March 31,          Increase
                      2009         2008     (Decrease)         2009        2008     (Decrease)
Bookings           $    13,617   $ 15,823          (14 )%   $   38,072   $ 46,338          (18 )%
Revenues                14,068     11,975           17 %        43,068     36,191           19 %
Segment earnings         1,224      1,415          (13 )%        5,111      5,183           (1 )%

The Company's Military & Materials segment includes the combined operations of EEO and PRM.

Bookings for the third quarter of fiscal 2009 for Military & Materials decreased 14% to $13,617,000 from $15,823,000 in the third quarter of last fiscal year. Bookings for the nine months ended March 31, 2009 decreased 18% to $38,072,000 from $46,338,000 for the same period last fiscal year. The decrease in bookings for the three and nine months ended March 31, 2009 compared to the same periods last fiscal year was primarily due lower booking levels at the segment's PRM operations. During the current fiscal year, the market price of selenium and tellurium, two significant raw materials the Company refines and sells, have seen significant reductions in the market price as a result of lower industrial demand for these materials which are used in steel, glass and automobile

manufacturing. The lower booking level at PRM was partially offset by increased bookings at EEO for both the three and nine months ended March 31, 2009 compared to the same periods last fiscal year as a result of increased bookings for its core military windows and sapphire product lines.

Revenues for the third quarter of fiscal 2009 for Military & Materials increased 17% to $14,068,000 from $11,975,000 in the third quarter last fiscal year. The increase in revenues during the three months ended March 31, 2009 compared to the same period last fiscal year was due to increased shipments at EEO of its core military and sapphire product lines. Revenues for the nine months ended March 31, 2009 increased 19% to $43,068,000 from to $36,191,000 for the same period last fiscal year. The increase in revenues for the nine months ended March 31, 2009 compared to the same period last fiscal year was from contributions at both EEO and PRM. The increase in revenues at PRM was the result of increased expansion of its raw materials procurement supply chain enabling PRM to increase its sales volume of both selenium and tellurium. The revenue increase at EEO for the nine months ended March 31, 2009 compared to the same period last fiscal year was due to increased shipment of both the Company's core military and sapphire product lines.

. . .