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 28, 2009 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, military, medical, security and aerospace applications. Revenue, earnings and cash flows are also generated 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 September 30, 2009 were approximately $1.3 million and $0.8 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 U.S. GAAP.

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 U.S. GAAP for these contracts, which are related to research and development.

New Accounting Standards

As of September 30, 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, 2009.

Results of Operations ($000)



                                                   Three Months Ended
                                                     September 30,           %
                                                    2009         2008     Decrease

   Bookings                                      $    73,336   $ 74,295         (1 )%
   Revenues                                           65,538     87,766        (25 )%
   Earnings attributable to II-VI Incorporated         6,306     17,495        (64 )%
   Diluted earnings per share                           0.21       0.57        (63 )%

Bookings for the first quarter of fiscal 2010 decreased 1% to $73,336,000 compared to $74,295,000 for the same period last fiscal year. Bookings 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. The Company's Infrared Optics segment was significantly impacted by the worldwide economic downturn as its bookings decreased $12 million or 30% compared to the same period last year. Industrial-based aftermarket and OEM customers have either slowed the utilization of laser systems in their operations or have delayed introducing new laser systems into the market which has created a lower demand for optical products from the Infrared Optics segment. The decrease in the Infrared Optics segment bookings during the current fiscal quarter was offset by receipt of an $8 million order in the Near-Infrared Optics segment for UV Filter product assemblies. In addition, the Company recognized increased bookings in the Military & Materials segment due to increased sapphire product demands for the Joint Strike Fighter program, higher selenium market index pricing and increased demand for selenium and tellurium products.

Revenues from continuing operations for the three months ended September 30, 2009 decreased 25% to $65,538,000 compared to $87,766,000 for the same period last fiscal year. The decrease in revenues for the three months ended September 30, 2009 compared to the same period last fiscal year was primarily due to lower volume of shipments from the Infrared Optics and Marlow business units as a result of lower product demand from their industrial based customers during this current depressed economic environment. In addition, the Company's Near-Infrared Optics segment has experienced lower revenue volume as the segment continues its planned ramp down of its UV Filter product line.

Net earnings attributable to II-VI Incorporated for the first quarter of fiscal 2010 were $6,306,000 ($0.21 per share-diluted). This compares to net earnings attributable to II-VI Incorporated of $17,495,000 ($0.57 per share-diluted) in the first quarter of fiscal 2009. The decrease in net earnings attributable to II-VI Incorporated during the three months ended September 30, 2009 compared to the same period last fiscal year was due to several factors. During the prior year's quarter ended September 30, 2008, the Company recognized a favorable income tax benefit in accordance with U.S. GAAP relating to the reversal of unrecognized income tax benefits resulting from the completion of the Internal Revenue Service's examination of certain of the Company's federal income tax returns. This benefit was partially offset by additional tax exposure at certain foreign locations. The net favorable impact was approximately $3.6 million or $0.12 per share-diluted. In addition to the absence of the income tax benefit, other factors that contributed to lower earnings during the current three months compared to the same period last fiscal year were lower margins realized at the Company's Infrared Optics, Near-Infrared Optics and Marlow business units resulting from reduced shipments to their industrial-based customers as a result of the global recession. Also, the Company recorded approximately $0.9 million more in share-based compensation expense during the current fiscal quarter as compared to the same period last fiscal year as a result of an increased use of share-based compensation and an adjustment to the actual forfeiture rates from the estimated forfeitures rates for stock options that became fully vested during the current fiscal quarter.

Bookings, revenues and segment earnings for the Company's reportable segments are discussed below. Segment earnings differ from income from operations in that segment earnings 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 to earnings before income taxes.

Infrared Optics ($000)



                                     Three Months Ended
                                       September 30,           %
                                      2009         2008     Decrease

                Bookings           $    28,170   $ 40,178        (30 )%
                Revenues                29,167     43,230        (33 )%
                Segment earnings         4,876     10,373        (53 )%

The Company's Infrared Optics segment includes the combined operations of Infrared Optics and HIGHYAG.

Bookings for the first quarter of fiscal 2010 for Infrared Optics decreased 30% to $28,170,000 from $40,178,000 in the first quarter of last fiscal year. The decrease in bookings for the three months ended September 30, 2009 compared to the same period last fiscal year was due to the weakness of the worldwide industrial markets for which the segment services, as a result of the depressed worldwide economic environment. Laser system utilization within these markets has decreased significantly from the prior year, which in turn has lowered demand for the segment's replacement optics. In addition, bookings from high-power laser OEMs in Japan and Europe have decreased significantly as these customers continue to consume their existing inventory and face lower product demand due to decreased laser utilization rates and lower levels of new laser manufacturing.

Revenues for the first quarter of fiscal 2010 for Infrared Optics decreased 33% to $29,167,000 from $43,230,000 in the first quarter of last fiscal year. The decrease in revenues for the three months ended September 30, 2009 compared to the same period last fiscal year was due to lower shipment volume to OEMs and aftermarket customers worldwide. The lower shipment volume began during the second quarter of the prior fiscal year and is the direct result of the general deterioration of the industrial markets brought on by the global macroeconomic environment.

Segment earnings for the first quarter of fiscal 2010 decreased 53% to $4,876,000 from $10,373,000 in the first quarter of last fiscal year. The decrease in segment earnings for the three months ended September 30, 2009 compared to the same period last year was primarily due to the reduction of margin realized due to the segment's lower shipment volume. Also, the Company recorded $0.9 million more in share-based compensation expense during the current fiscal quarter as compared to the same period last fiscal year as a result of an increased use of share-based compensation and an adjustment to the actual forfeiture rates from the estimated forfeiture rates for stock options that became fully vested during the current fiscal quarter.

Near-Infrared Optics ($000)




                                    Three Months Ended         %
                                      September 30,         Increase
                                     2009         2008     (Decrease)

               Bookings           $    12,728   $  9,765           30 %
               Revenues                 8,901     13,680          (35 )%
               Segment earnings         1,022      2,677          (62 )%

Bookings for the first quarter of fiscal 2010 for Near-Infrared Optics increased 30% to $12,728,000 from $9,765,000 in the first quarter of last fiscal year. The increase in bookings for the three months ended September 30, 2009 compared to the same period last fiscal year was primarily due to the timing of receipt of a large order for UV Filter product assemblies of approximately $8 million. The increase was partially offset by a decrease in industrial orders for Yttrium Aluminum Garnet (YAG) and crystal product lines as a result of the depressed worldwide economic environment.

Revenues for the first quarter of fiscal 2010 for Near-Infrared Optics decreased 35% to $8,901,000 from $13,680,000 in the first quarter of last fiscal year. The decrease in revenues for the three months ended September 30, 2009 compared to the same period last fiscal year was primarily due to the planned reduction of the shipment volume of the UV Filter product line as well as a general decline in shipments to the segment's industrial and medical customers as a result of the poor economic climate. In addition, the segment also recorded $0.9 million less in contract revenues during the current quarter compared to the prior year as a result of a delay in the receipt of a certain government research and development contract that is now expected to be received in the segment's second quarter of the current fiscal year.

Segment earnings for the first quarter of fiscal 2010 decreased 62% to $1,022,000 from $2,677,000 in the first quarter of last fiscal year. The decrease in segment earnings for the three months ended September 30, 2009 compared to the same period last fiscal year was directly related to the reduction in margin realized on lower shipments of its UV Filter, industrial and medical product lines as well as lower contract research and development activity.

Military & Materials ($000)




                                    Three Months Ended         %
                                      September 30,         Increase
                                     2009         2008     (Decrease)

               Bookings           $    19,003   $ 11,632           63 %
               Revenues                15,642     15,459            1 %
               Segment earnings         2,255      2,881          (22 )%

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

Bookings for the first quarter of fiscal 2010 for Military & Materials increased 63% to $19,003,000 as compared to $11,632,000 in the first quarter of last fiscal year. Bookings received at both EEO and PRM increased during the current fiscal quarter compared to the same period last fiscal year. The increase in bookings at EEO of 38% in the current fiscal quarter was driven by increased orders of the segment's sapphire product line for the Joint Strike Fighter program. The bookings increase at PRM of over 100% in the current fiscal quarter was due to higher market price for selenium as well as increased order volume for both selenium and tellurium product lines from China's glass and steel industries.

Revenues for the first quarter of fiscal 2010 for Military & Materials increased 1% to $15,642,000 as compared to $15,459,000 in the first quarter of last fiscal year. The increase in revenues during the three months ended September 30, 2009 compared to the same period last fiscal year was due to increased shipments at EEO of its sapphire product line. The increase in revenues at EEO was somewhat offset by lower revenues at PRM during the current three months compared to the same period last fiscal year due to lower industrial demands for selenium, exclusive of the recent increase in demand from China.

Segment earnings for the first quarter of fiscal 2010 for Military & Materials decreased 22% to $2,255,000 as compared to $2,881,000 in the first quarter of last fiscal year. The decrease in segment earnings for the three months ended September 30, 2009 compared to the same period last fiscal year was due to PRM's increased production costs and lower of cost or market write-down of the tellurium inventory of approximately $0.2 million due to a market index price decrease experienced in the quarter.

Compound Semiconductor Group ($000)




                                    Three Months Ended         %
                                      September 30,         Increase
                                     2009         2008     (Decrease)

               Bookings           $    13,435   $ 12,720            6 %
               Revenues                11,828     15,397          (23 )%
               Segment earnings           343      1,691          (80 )%

The Company's Compound Semiconductor Group includes the combined operations of Marlow, the Wide Bandgap Group (WBG) and the Worldwide Materials Group (WMG).

Bookings for the first quarter of fiscal 2010 for the Compound Semiconductor Group increased 6% to $13,435,000 as compared to $12,720,000 in the first quarter of last fiscal year. The increase in bookings for the three months ended September 30, 2009 compared to the same period last fiscal year was due to receipt of two large orders at the segment's WBG operations for semi-insulating silicon carbide wafers due to increased demand in both the radio frequency and power switching industries. The increase in bookings was somewhat offset by lower customer orders at Marlow as a result of lower demand from industrial, defense and medical customers.

Revenues for the first quarter of fiscal 2010 for the Compound Semiconductor Group decreased 23% to $11,828,000 as compared to $15,397,000 in the first quarter of last fiscal year. The decrease in revenues for the

three months ended September 30, 2009 compared to the same period last fiscal year was due to lower shipment volume at the segment's Marlow operations. The lower revenues are a result of defense program cycles and overall demand reductions that are resulting in part from the wind down of certain military activities. In addition, demand for Marlow's industrial and medical customers has slowed as a result of the general deterioration of the economic climate that has occurred over the last year. The lower revenues were somewhat offset by increased shipment activity at WBG resulting from increased commercial demand from its Japanese and United States customer base for its radio frequency and power switching product lines.

Segment earnings for the first quarter of fiscal 2010 decreased 80% to $343,000 compared to segment earnings of $1,691,000 in the first quarter of the prior fiscal year. The decrease in segment earnings for the three months ended September 30, 2009 compared to the same period last fiscal year was primarily due to reduction in margins realized on fewer shipments of defense, industrial and medical customers at Marlow.

Overall

Manufacturing gross margin, which is defined as net sales less cost of goods sold, for the first quarter of fiscal 2010 was $25,222,000 or 40% of net sales compared to $36,782,000 or 43% of net sales for the same period last fiscal year. The decrease in manufacturing gross margin for the three months ended September 30, 2009 compared to the same period last fiscal year was due to reduction in margin on lower revenue levels, primarily in the Infrared Optics, Near-Infrared Optics and Marlow business units which realized 33%, 35% and 23% lower revenues, respectively, during the current quarter compared to the same period last fiscal year.

Contract research and development gross margin, which is calculated as contract research and development revenues less contract research and development expenses, for the first quarter of fiscal 2010 was $648,000 or 34% of research and development revenues compared to a gross margin of $579,000 or 21% of research and development revenues for the same period last fiscal year. The contract research and development revenues and costs are a result of development efforts in the Near-Infrared Optics and the Military & Materials segments as well as activities in the Compound Semiconductor Group. The improvement in contract research and development gross margin for the three months ended September 30, 2009 compared to the same period last fiscal year was due to higher profit margins realized on most of the Company's cost plus fixed fee contracts.

Company-funded internal research and development expenses for the first quarter of fiscal 2010 were $2,435,000 or 4% of revenue compared to $3,191,000 or 4% of revenues for the same period last fiscal year. Company-funded internal research and development as a percentage of revenues was consistent with the prior fiscal quarter but in terms of absolute dollars, the decrease in the current fiscal quarter compared to the same period last year was due to certain cost-cutting initiatives implemented during the second half of fiscal year 2009 as a result of the worldwide economic recession.

Selling, general and administrative expenses for the first quarter of fiscal 2010 were $14,939,000 or 23% of revenues compared to $16,548,000 or 19% of revenues for the same period last fiscal year. The decrease in the dollar amount of selling, general and administration expense for the three months ended September 30, 2009 compared to the same period last fiscal year was due to certain cost reductions primarily labor and labor-related costs initiated by the Company in the second half of fiscal year 2009 to align its cost structure with the decreased revenues brought on by the current depressed economic environment.

Interest expense for the first quarter of fiscal 2010 was $24,000 and was consistent with the amount from the prior year's first fiscal quarter of $25,000. The low level of interest expense is the result of the Company having relatively low levels of outstanding debt during the quarters ended September 30, 2009 and 2008.

Other expense, net for the three months ended September 30, 2009 was $73,000 compared to other income of $235,000 for the same period last fiscal year. Other expense for the current three months ended September 30, 2009 consists of foreign currency losses in the quarter ended September 30, 2009 as the U.S. dollar weakened against certain of the Company's international subsidiaries' foreign currencies. Other expense was somewhat offset by equity earnings on unconsolidated investments and interest income and other miscellaneous income.

The Company's year-to-date effective income tax rate is 25.0% compared to an effective tax rate of 1.6% for the same period last fiscal year. During the quarter ended September 30, 2008, the Company recorded a favorable income tax benefit of approximately $4.7 million in accordance with U.S. GAAP relating to the reversal of unrecognized tax benefits resulting from the completion of the Internal Revenue Service's examination of certain of the Company's federal income tax returns. This benefit was partially offset by increased income tax expense of $0.9 million at certain Company foreign locations. The net favorable impact of these and other income tax changes during the fiscal quarter ended September 30, 2008 was approximately $3.6 million.

Liquidity and Capital Resources

Historically, our primary source of cash has been provided through operations. Other sources of cash include proceeds received from the exercise of stock options, as well as through long-term borrowings. Our historical uses of cash have been for capital expenditures, purchases of businesses, payment of principal and interest on outstanding debt obligations and purchases of treasury stock. Supplemental information pertaining to our sources and uses of cash is presented as follows:

Sources (uses) of Cash: ($000)

                                                            Three Months Ended
                                                               September 30,
                                                            2009           2008

   Net cash provided by continuing operating activities   $  15,655      $  1,898
   Proceeds from exercise of stock options                      363         1,483
   Investment in unconsolidated businesses                   (2,933 )      (4,834 )
   Additions to property, plant and equipment                (2,547 )      (4,707 )
   Payments on deferred purchase price of business             (997 )          -

Cash provided by operating activities was $15.6 million for the three months ended September 30, 2009 compared to cash provided by operations of $1.9 million for the same period last fiscal year. The increase in cash provided by . . .