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 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 Annual Report as filed with the Securities and Exchange Commission on August 28, 2012, and set forth herein.

Introduction

II-VI Incorporated ("II-VI," the "Company," "we," "us" or "our"), the worldwide leader in engineered materials and opto-electronic components, is a vertically-integrated manufacturing company that creates and markets products for diversified markets including industrial manufacturing, military and aerospace, high-power electronics, optical communications, medical and thermoelectronics applications.

The Company generates revenues, earnings and cash flows from developing, manufacturing and marketing engineered materials and opto-electronic components for precision use in industrial, military, optical communications, photovoltaic, medical, semiconductor and consumer applications. We also generate revenue, earnings and cash flows from 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 ("OEMs"), laser end users, system integrators of high-power lasers, manufacturers of equipment and devices for industrial, optical communications, security and monitoring applications, U.S. government prime contractors, various U.S. government agencies and thermoelectric solutions suppliers.

Effective July 1, 2012, the Company changed its reportable segments in accordance with how the Company's chief operating decision maker receives and reviews financial information. Effective July 1, 2012, VLOC has been included in the Military & Materials operating segment for financial reporting purposes. Prior to July 1, 2012, the Company's VLOC business unit was included in the Near-Infrared Optics operating segment. The Company has revised the consolidated segment information for all periods presented in this Quarterly Report on Form 10-Q to reflect this reclassification.

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 1 of the Notes to Consolidated Financial Statements in the Company's most recent Annual Report 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 and accounting for share-based payments. 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 in accordance with U.S. GAAP. Revenues for product shipments are realizable when we have persuasive evidence of a sales arrangement, the product has been shipped or delivered, the sale price is fixed or determinable and collectability is reasonably assured. Title and risk of loss passes from the Company to its customer at the time of shipment in most cases with the exception of certain customers. For these customers title does not pass and revenue is not recognized until the customer has received the product at its physical location. 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 Staff Accounting Bulletin ("SAB") 104 and that we have adequately considered the requirements of Accounting Standards Codification ("ASC") 605 Revenue Recognition. Revenues generated from transactions other than product shipments are contract-related and have historically accounted for less than 5% of the Company's consolidated revenues.

We establish an allowance for doubtful accounts and warranty reserves 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 December 31, 2012 were $1.5 million and $1.2 million, respectively. Our reserve estimates have historically been proven to be materially correct based upon actual charges incurred. The Company had one customer that represented 11% and 12%, respectively, of total accounts receivable as of December 31, 2012 and June 30, 2012.

New Accounting Standards

See "Note 2. Recent Accounting Pronouncements," to our unaudited financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements.

Results of Operations (millions except per-share data)

The following tables set forth bookings and select items from our Condensed
Consolidated Statements of Earnings for the three and six months ended
December 31, 2012 and 2011, respectively:



                                                Three Months  Ended                Three Months Ended
                                                 December 31, 2012                  December 31, 2011

Bookings                                    $    127.1                         $   116.9


                                                                 % of                              % of
                                                               Revenues                          Revenues
Total Revenues                              $    125.9             100.0 %     $   126.8             100.0 %
Cost of goods sold                                79.0              62.7            83.3              65.7

Gross margin                                      46.9              37.3            43.5              34.3

Operating Expenses:
Internal research and development                  5.6               4.4             5.0               3.9
Selling, general and administrative               26.3              20.9            24.2              19.1
Interest and other, net                           (4.3 )            (3.4 )          (1.4 )            (1.1 )

Earnings before income tax                        19.3              15.3            15.7              12.4
Income taxes                                       6.8               5.4             2.2               1.7

Net earnings                                      12.5               9.9            13.5              10.6
Net earnings attributable to
noncontrolling interests                           0.3                -              0.2                -

Net earnings attributable to II-VI
Incorporated                                $     12.2               9.7 %     $    13.3              10.5 %

Diluted earnings per share                  $     0.19                         $    0.21

                                                  Six Months Ended                  Six Months Ended
                                                 December  31, 2012                December 31, 2011

Bookings                                     $   241.5                         $   247.1


                                                                 % of                             % of
                                                               Revenues                         Revenues
Total Revenues                               $   258.2             100.0 %     $   265.1            100.0 %
Cost of goods sold                               162.5              62.9           166.7             62.9

Gross margin                                      95.7              37.1            98.5             37.1

Operating Expenses:
Internal research and development                 11.2               4.3            10.2              3.8
Selling, general and administrative               53.0              20.5            51.0             19.2
Interest and other, net                           (5.1 )            (2.0 )          (3.0 )           (1.1 )

Earnings before income tax                        36.6              14.2            40.3             15.2
Income taxes                                      11.0               4.3             8.0              3.0

Net earnings                                      25.6               9.9            32.2             12.1
Net earnings attributable to
noncontrolling interests                           0.7                -              0.4               -

Net earnings attributable to II-VI
Incorporated                                 $    24.9               9.6 %     $    31.9             12.0 %

Diluted earnings per share                   $    0.39                         $    0.50

Executive Summary

Worldwide economic uncertainty remained prevalent as further fiscal and political uneasiness in the U.S. and abroad contributed to a cautious customer base across most markets. The Company remained focused on its long-term growth initiatives, completing three acquisitions during the three months ended December 31, 2012. We believe these acquisitions will provide long-term growth prospects and the potential for broadening current product offerings while realizing synergies and providing the Company an opportunity to enter new markets. Net earnings attributable to II-VI Incorporated for the three months ended December 31, 2012 decreased to $12.2 million ($0.19 per-share diluted) compared to $13.3 million ($0.21 per-share diluted) for the same period last fiscal year. Net earnings attributable to II-VI Incorporated for the six months ended December 31, 2012 decreased to $24.9 million ($0.39 per-share diluted) compared to $31.9 million ($0.50 per-share diluted) for the same period last fiscal year. During the three and six months ended December 31, 2012, the Company realized higher revenues and gross margins at Photop and Photop Aegis as well as income of $5.2 million from a contractual settlement with a former contract manufacturer related to the October 2011 flooding in Thailand. These favorable operating results were offset by low gross margins at PRM caused by reduced revenues and selling prices of selenium and tellurium, transaction costs incurred related to the three recently completed acquisitions as well as high worldwide tax expense related to interim tax adjustments that were recorded in accordance with current accounting standards.

Consolidated

Bookings. 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. Bookings for the three months ended December 31, 2012 increased 9% to $127.1 million, compared to $116.9 million for the same period last fiscal year. Excluding bookings from the current quarter acquisitions, the increase in overall bookings during the three months ended December 31, 2012 compared to the same period last fiscal year was mostly the result of increased demand for Photop products as well as higher order volume within the core Infrared Optics business, particularly in North America. These increases were somewhat offset by reduced bookings at PRM caused by lower pricing and order volumes of selenium and tellurium, a $2.2 million order cancellation at WBG from a customer who ceased operations and reduced demand at HIGHYAG. Bookings for the six months ended December 31, 2012 decreased 2% to $241.5 million, compared to $247.1 million for the same period last fiscal year. Excluding bookings from the current quarter acquisitions, the decrease in overall bookings was mostly attributable to PRM and VLOC within the Company's Military & Materials operating segment as well as reduced orders at Marlow and WBG within the Company's Advanced Products operating segment. PRM experienced lower bookings as a result of reduced orders and pricing for selenium and tellurium while bookings at VLOC were unfavorably impacted by reduced demand for military products, mostly as a result of the federal budget uncertainty and potential sequestration. Within the Advanced Products Group segment, the previously referenced order cancellation at WBG as well as reduced end user demand for Marlow's gesture recognition product line put additional downward pressure on bookings. These

decreases were offset somewhat by booking increases at Photop for its green laser device products within the Company's Near-Infrared Optics segment.

Revenues. Revenues for the three months ended December 31, 2012 decreased 1% to $125.9 million, compared to $126.8 million for the same period last fiscal year. Revenues for the six months ended December 31, 2012 decreased 3% to $258.2 million, compared to $265.1 million for the same period last fiscal year. Excluding revenues from the recently completed acquisitions, the decrease in revenues for the three and six months ended December 31, 2012 compared to the same periods last fiscal year was attributable to PRM and VLOC within the Military & Materials segment and Marlow within the Advanced Products Group segment. These decreases in revenue were somewhat offset by higher revenue at Photop and Photop Aegis within the Near-Infrared Optics segment. PRM revenue decreased as a result of lower shipment volumes and selling prices to customers for both selenium and tellurium while revenue at VLOC decreased as a result of lower product demand for military applications. Marlow experienced lower shipment volume of gesture recognition product as a result of decreased demand, while higher revenue levels at Photop and Photop Aegis were the result of increased sales volumes related to their optical communication product portfolios.

Gross margin. Gross margin for the three months ended December 31, 2012 was $46.9 million or 37.3% of total revenues, compared to $43.5 million or 34.3% of total revenues, for the same period last fiscal year. The increase in gross margin was mostly attributable to Photop and Photop Aegis, which realized higher margins from increased revenues and a larger concentration of high-margin optical communication products. In addition, Photop and Photop Aegis benefited from increased operating efficiency which allowed the businesses to realize favorable absorption of manufacturing overhead costs when compared to the prior year period, which was severely impacted by the October 2011 Thailand flood. Furthermore, Photop Aegis realized a favorable cost of sales adjustment of $0.8 million related to proceeds received from the contractual settlement with its former contract manufacturer relating to the October 2011 Thailand flood, specifically, recovery of previously impaired equipment and inventory that was damaged during the flood. Somewhat offsetting the favorable margin at Photop and Photop Aegis were lower gross margins within the Company's Infrared Optics segment, which was impacted by higher input prices of raw materials used in production. In addition, the Company's Marlow business unit realized lower gross margins as a result of declining sales of its gesture recognition product line which had historically yielded a high gross margin. Gross margin for the six months ended December 31, 2012 was $95.7 million or 37.1% of total revenues, compared to $98.5 million or 37.1% of total revenues, for the same period last fiscal year.

Internal research and development. Company-funded internal research and development expenses for the three months ended December 31, 2012 were $5.6 million or 4.4% of revenues, compared to $5.0 million or 3.9% of revenues, for the same period last fiscal year. Company-funded internal research and development expenses for the six months ended December 31, 2012 were $11.2 million, or 4.3% of revenues, compared to $10.2 million, or 3.8% of revenues, for the same period last fiscal year. This increase in Company-funded internal research and development expenses was primarily the result of ongoing research and development investment at Photop and Photop Aegis within the Near-Infrared Optics segment. Photop is focusing research and development efforts on high-end components and module products to satisfy future high-speed network requirements. Photop Aegis continues to invest in new product development of high performance flexible bandwidth optical channel monitors and high-power fiber laser couplers and combiners. In addition, the acquisition of M Cubed contributed to the increase in internal research and development expense for the three and six months ended December 31, 2012.

Selling, general and administrative. Selling, general and administrative expenses for the three months ended December 31, 2012 were $26.3 million or 20.9% of revenues, compared to $24.2 million or 19.1% of revenues, for the same period last fiscal year. Selling, general and administrative expenses for the six months ended December 31, 2012 were $53.0 million or 20.5% of revenues, compared to $51.0 million or 19.2% of revenues, for the same period last fiscal year. Selling, general and administrative expense as a percentage of revenues increased during the three and six months ended December 31, 2012 compared to the same periods last fiscal year, mostly as a result of pre-tax transaction expenses of $0.8 million and $1.1 million, respectively, incurred related to the three acquisitions that were completed during the quarter ended December 31, 2012.

Interest and other, net. Interest and other, net for the three and six months ended December 31, 2012 was income of $4.3 million and $5.1 million, respectively. Included in interest and other, net for the three and six months ended December 31, 2012 are earnings from the Company's equity investment in Fuxin, interest income on excess cash reserves, gains on the deferred compensation plan and net foreign currency losses. As these items were mostly offsetting, the majority of interest and other, net for the three and six months ended December 31, 2012 was the result of $4.4 million of other income related to the contractual settlement related to the Thailand flooding that occurred in October 2011. Interest and other, net for the three and six months ended December 31, 2011 was income of $1.4 million and $3.0 million, respectively. The majority of interest and other, net for the three months ended December 31, 2011 was the result of foreign currency gains of approximately $0.9 million. The majority of interest and other, net for the six months ended December 31, 2011 was the result of foreign currency gains of approximately $0.6 million as well as a $1.4 million gain related to the sale of precious metals inventory used in the production process. In addition, the Company benefited from earnings of equity investments, gains on the deferred compensation plan and interest income on excess cash reserves during the three and six months ended December 31, 2011.

Income taxes. The Company's year-to-date effective income tax rate at December 31, 2012 and 2011 was 30.0% and 20.0%, respectively. The variations between the Company's effective tax rates and the U.S. statutory rate of 35.0% were primarily due to the consolidation of the Company's foreign operations, which are subject to income taxes at lower statutory rates. A change in the mix of

pretax income from these various tax jurisdictions could have a material impact on the Company's effective tax rate. During the six months ended December 31, 2012, the Company recorded certain interim tax adjustments in accordance with current accounting standards. As a result, the Company recorded additional income tax expense of $1.2 million during the three months ended December 31, 2012. In addition, the Company experienced a shift in earnings to higher tax jurisdictions resulting in a higher effective tax rate for the period. During the three months ended December 31, 2011, certain of the Company's Photop subsidiaries received notification of approval of high-technology status in China. As a result, these subsidiaries benefited from a preferential tax rate of 15% which resulted in an income tax benefit of $1.3 million, which was recorded during the three months ended December 31, 2011. In addition, the Company recorded an income tax benefit of $0.7 million during the three months ended December 31, 2011, from the reversal of a tax liability related to an uncertain tax position as a result of the completion of an examination by the United States Internal Revenue Service.

Segment Reporting

Effective July 1, 2012, the Company's VLOC business unit has been included in the Military & Materials operating segment for financial reporting purposes in accordance with how the Company's chief operating decision maker receives and reviews financial information. Prior to July 1, 2012, VLOC was included in the Near-Infrared Optics operating segment. The Company has revised the consolidated segment information to reflect this reclassification for all periods presented in Part I, Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations in this Quarterly Report on Form 10-Q.

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 and is used by management in its evaluation of segment performance. See "Note 11. Segment Reporting," to our unaudited financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information on the Company's reportable segments and for the reconciliation of segment earnings to net earnings.

Infrared Optics (millions)




                                         Three Months Ended             %               Six Months Ended
                                            December 31,             Increase             December 31,               %
                                         2012           2011        (Decrease)          2012          2011       (Decrease)

Bookings                               $    44.6       $  43.8                2 %     $    92.1      $ 94.9               (3 )%
Revenues                               $    45.4       $  46.8               (3 )%    $    97.0      $ 97.6               (1 )%
Segment earnings                       $    10.5       $  11.5               (8 )%    $    22.4      $ 23.8               (6 )%

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

Bookings for the three months ended December 31, 2012 for Infrared Optics increased 2% to $44.6 million, compared to $43.8 million for the same period last fiscal year. Bookings for the six months ended December 31, 2012 for Infrared Optics decreased 3% to $92.1 million, compared to $94.9 million for the same period last fiscal year. The relatively consistent bookings for the three and six months ended December 31, 2012 compared to the same periods last fiscal year was primarily driven by stagnant world-wide component optics demand from OEMs for new high-power CO2 laser systems as well as decreased laser utilization in North America. Economic uncertainty in Japan and Europe combined with fiscal uncertainty in the U.S. resulted in a cautious customer base across industrial markets.

Revenues for the three months ended December 31, 2012 for Infrared Optics decreased 3% to $45.4 million, compared to $46.8 million for the same period last fiscal year. Revenues for the six months ended December 31, 2012 for Infrared Optics decreased 1% to $97.0 million, compared to $97.6 million for the same period last fiscal year. These decreases in revenue for the three and six months ended December 31, 2012 compared to the same periods last fiscal year were a reflection of cautious buying patterns from customers in Asia and Europe.

Segment earnings for the three months ended December 31, 2012 for Infrared Optics decreased 8% to $10.5 million, compared to $11.5 million for the same period last fiscal year. Segment earnings for the six months ended December 31, 2012 for Infrared Optics decreased 6% to $22.4 million, compared to $23.8 million for the same period last fiscal year. These decreases in segment earnings for the three and six months ended December 31, 2012 compared to the same periods last fiscal year are the result of reduced gross margins caused by higher raw material input prices, lower revenue volume and a higher level of allocated corporate expenses related to the transaction costs incurred by the Company associated with its recently completed acquisitions.

Near-Infrared Optics (millions)



                       Three Months Ended                         Six Months Ended
                          December 31,               %              December 31,              %
                       2012           2011       Increase         2012          2011      Increase
. . .