**SECURITIES
        AND EXCHANGE COMMISISSION**
 **WASHINGTON,
        DC 20549**
 
 **FORM
        10-QSB**
 _________________________
 
 (Mark
        One)
 
 x
              Quarterly
                  report pursuant to Section 13 or 15(d) of the Securities Exchange
                  Act of
                  1934For
                  the quarterly period ended June 30, 2005, oro
              Transition
                  report pursuant to Section 13 or 15(d) of the Securities Exchange
                  Act of
                  1934For
                  the transition period from ____________ to
                  _____________Commission
                  file number 0-49939
 
 _________________________
 
 **DICON
        FIBEROPTICS, INC.**
 (Exact
        Name of Small Business Issuer as Specified in Its Charter)
 
 **California**
              
              **94-3006185**(State
                  or Other Jurisdiction of
              
              (IRS
                  EmployerIncorporation
                  or Organization)
              
              Identification
                  No.)**1689
                  Regatta Blvd.****Richmond,
                  California**
              
              **94804**(Address
                  of Principal Executive Offices)
              
              (Zip
                  Code)
 
 **(510)
        620-5000**
 (Issuer’s
        Telephone Number, Including Area Code)
 _________________________
 
 Check
        whether the issuer (1) filed all reports required to be filed by Section
        13 or
        15(d) of the Exchange Act during the past 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  x  No  o
 
 The
        number of shares outstanding of the issuer’s common stock as of December 31,
        2004, was 111,961,199.
 
 Transitional
        Small Business Disclosure Format (check one):  Yes  o  No  x
 
 __________________________________________________________________________________________________________
  Table
            of Contents
  
 **DICON
        FIBEROPTICS, INC.**
 
 **Table
        of Contents**
 **PART
                  I**
              **FINANCIAL
                  INFORMATION****Item
                  1.**
              **Financial
                  Statements.****Item
                  2.**
              **Management’s
                  Discussion and Analysis or Plan of
                  Operation.****Item
                  3.**
              **Controls
                  and Procedures.****PART
                  II**
              **OTHER
                  INFORMATION****Item
                  1.**
              **Legal
                  Proceedings.****Item
                  2.**
              **Unregistered
                  Sales of Equity Securities and Use of
                  Proceeds.****Item
                  3.**
              **Defaults
                  Upon Senior
                  Securities.****Item
                  4.**
              **Submission
                  of Matters to a Vote of Security
                  Holders.****Item
                  5.**
              **Other
                  Information.****Item
                  6.**
              **Exhibits.****Signatures.****Exhibit
                  Index.**
 
  2
 Table
            of Contents
  
 **PART
        I**
 
 **FINANCIAL
        INFORMATION**
 
 **Item
        1. Financial Statements.**
 **DiCon
                  Fiberoptics, Inc. and Subsidiary**
                **Unaudited
                  Consolidated Balance Sheets**
                **(in
                  thousands)****June
                  30,**
              
              **March
                  31,****2005**
              
              **2005**
                **(1)****Assets**Current
                  assets:Cash
                  and cash equivalents
              
              $
              2,848
              
              $
              1,784Marketable
                  securities
              
              
              13,994
              
              
              14,677Accounts
                  receivable, net of allowance for doubtful accounts of $188
                  and$180, respectively
              
              
              2,561
              
              
              4,104Inventories
              
              
              3,653
              
              
              3,998Interest
                  receivables and prepaid expenses
              
              
              263
              
              
              232Total
                  current assets
              
              
              23,319
              
              
              24,795Property,
                  plant and equipment, net
              
              
              46,976
              
              
              48,465Other
                  assets
              
              
              15
              
              
              41Total
                  assets
              
              $
              70,310
              
              $
              73,301**Liabilities
                  and Shareholders' Equity**Current
                  liabilities:Accounts
                  payable and accrued liabilities
              
              $
              2,374
              
              $
              3,110Advances
                  received from customers
              
              
              3,636
              
              
              3,594Mortgage
                  and other debt
              
              
              2,382
              
              
              2,685Total
                  current liabilities
              
              
              8,392
              
              
              9,389Mortgage
                  and other debt, net of current portion
              
              
              17,904
              
              
              19,528Total
                  liabilities
              
              
              26,296
              
              
              28,917Commitments
                  (Note 14)Shareholders'
                  equity:Common
                  stock: no par value; 200,000 shares authorized; 111,942 and 111,950
                  shares
                  issued and outstanding at June 30, 2005 and March 31, 2005,
                  respectively
              
              
              22,230
              
              
              22,238Additional
                  paid-in capital
              
              
              13,273
              
              
              13,285Deferred
                  compensation
              
              
              (131
              )
              
              (176
              )Retained
                  earnings
              
              
              8,985
              
              
              9,537Accumulated
                  other comprehensive loss
              
              
              (343
              )
              
              (500
              )Total
                  shareholders' equity
              
              
              44,014
              
              
              44,384Total
                  liabilities and shareholders' equity
              
              $
              70,310
              
              $
              73,301
 
 The
        accompanying notes are an integral part of these unaudited consolidated
        financial statements.
 
 (1)
        Balances at March 31, 2005 are derived from the audited Financial Statements
        at
        that date.
  3
 Table
            of Contents
 
 **DiCon
                  Fiberoptics, Inc. and Subsidiary**
                **Unaudited
                  Consolidated Statements of Operations and Comprehensive
                  Loss**
                **(in
                  thousands, except per share data)****For
                  the three months ended**
                **June
                  30,****2005**
              
              **2004**Net
                  sales
              
              $
              5,626
              
              $
              4,429Cost
                  of goods sold
              
              
              3,724
              
              
              4,347Gross
                  profit
              
              
              1,902
              
              
              82Selling,
                  general and administrative expenses
              
              
              1,197
              
              
              1,298Research
                  and development expenses
              
              
              1,137
              
              
              1,4142,334
              
              
              2,712Loss
                  from operations
              
              
              (432
              )
              
              (2,630
              )Other
                  (expense) income:Interest
                  expense
              
              
              (315
              )
              
              (300
              )Interest
                  income
              
              
              121
              
              
              93Gain
                  (loss) on disposal of fixed assets
              
              
              56
              
              
              (19
              )Other
                  income, net
              
              
              18
              
              
              58Loss
                  before income taxes
              
              
              (552
              )
              
              (2,798
              )Income
                  tax benefit
              
              
              -
              
              
              -Net
                  loss
              
              $
              (552
              )
              $
              (2,798
              )Other
                  comprehensive income (loss):Foreign
                  currency translation adjustment
              
              
              157
              
              
              (274
              )Unrealized
                  holding (losses) gains on marketable securitiesarising
                  during the period, net of realized (losses) gains
              
              
              -
              
              
              2Comprehensive
                  loss
              
              $
              (395
              )
              $
              (3,070
              )Net
                  loss per share - Basic and diluted
              
              $
              (0.01
              )
              $
              (0.03
              )Average
                  shares used in computing net loss per share - basic and
                  diluted
              
              
              111,947
              
              
              111,988
 
 The
        accompanying notes are an integral part of these unaudited consolidated
        financial statements.
  4
 Table
            of Contents
 
 **DiCon
                  Fiberoptics, Inc. and Subsidiary**
                **Unaudited
                  Consolidated Statement of Cash Flows**
                **(in
                  thousands)****Three
                  Months Ended****June
                  30,****2005**
              
              **2004****Cash
                  flows from operating activities:**Net
                  loss
              
              $
              (552
              )
              $
              (2,798
              )Adjustments
                  to reconcile net loss to net cash provided by (used in) operating
                  activities:Depreciation
              
              
              1,572
              
              
              2,083Write
                  down excess and obsolete inventories
              
              
              -
              
              
              270Provision
                  for bad debts
              
              
              8
              
              
              5(Gain)
                  loss on disposal of property, plant and equipment
              
              
              (56
              )
              
              19Stock
                  compensation expense
              
              
              33
              
              
              111Changes
                  in assets and liabilities:Accounts
                  receivable
              
              
              1,535
              
              
              455Inventories
              
              
              337
              
              
              (891
              )Prepaid
                  expenses and other current assets
              
              
              (31
              )
              
              293Other
                  assets
              
              
              27
              
              
              12Accounts
                  payable and accrued liabilities
              
              
              (524
              )
              
              (208
              )Deferred
                  compensation payable
              
              
              -
              
              
              3Net
                  cash provided by (used in) operating activities
              
              
              2,349
              
              
              (646
              )**Cash
                  flows from investing activities:**Purchases
                  of marketable securities
              
              
              (6,297
              )
              
              (426
              )Sales
                  of marketable securities
              
              
              6,979
              
              
              2,167Sale
                  of property, plant and equipment
              
              
              60
              
              
              -Purchases
                  of property, plant and equipment
              
              
              (102
              )
              
              (10
              )Net
                  cash provided by investing activities
              
              
              640
              
              
              1,731**Cash
                  flows from financing activities:**Borrowings
                  under mortgages and other debt
              
              
              669
              
              
              869Repayment
                  of mortgages and other debt
              
              
              (2,588
              )
              
              (533
              )Repurchases
                  of common stock
              
              
              (8
              )
              
              (14
              )Net
                  cash (used in) provided by financing activities
              
              
              (1,927
              )
              
              322Effect
                  of exchange rate changes on cash and cash equivalents
              
              
              2
              
              
              2Net
                  change in cash and cash equivalents
              
              
              1,064
              
              
              1,409Cash
                  and cash equivalents, beginning of period
              
              
              1,784
              
              
              1,359Cash
                  and cash equivalents, end of period
              
              $
              2,848
              
              $
              2,768**Supplemental
                  disclosures of cash flow information:**Cash
                  paid for interest
              
              $
              301
              
              $
              298
 
 The
        accompanying notes are an integral part of these unaudited consolidated
        financial statements.
  5
 Table
            of Contents
 
 **DiCon
        Fiberoptics, Inc. and Subsidiary**
 **Notes
        to Unaudited Consolidated Financial Statements**
 **(in
        thousands)**
 **_________________________________________________________________________________________________________**
 
 **1.**
              **Nature
                  of operations**
 
 The
        business of DiCon Fiberoptics, Inc. and Subsidiary (the “Company”) is
        developing, manufacturing and marketing optical components, modules, and
        test
        instruments for optical communications markets. DiCon Fiberoptics, Inc.
        (“DiCon”) is incorporated in California. The Company has its headquarters and a
        domestic manufacturing facility in California. The Company, through Global
        Fiberoptics Inc. (“Global”), its wholly owned Taiwanese subsidiary, formed in
        December 1999, also operates a manufacturing and sales facility in Kaohsiung,
        Taiwan, and conducts manufacturing and Asian marketing and sales activities
        there.
 
 **2.**
              **Basis
                  of presentation**
 
 The
        Company operates and reports based on a fiscal year that ends on March 31st.
        The
        accompanying unaudited consolidated financial statements have been prepared
        in
        accordance with generally accepted accounting principles in the United States
        of
        America for interim financial information and on the same basis of presentation
        as the audited financial statements included in the Company’s Annual Report on
        Form 10-KSB/A-1 as filed with the Securities and Exchange Commission (SEC)
        on
        July 11, 2005 (the “Company’s 10-KSB/A-1”). Accordingly, they do not include all
        of the information and footnotes required by generally accepted accounting
        principles for audited financial statements. In the opinion of the Company’s
        management, the interim information includes all adjustments, consisting
        only of
        normal recurring adjustments, necessary for a fair presentation of the results
        for the interim periods. Footnote disclosures related to the interim financial
        information included herein are also unaudited. Such financial information
        should be read in conjunction with the audited consolidated financial statements
        and related notes thereto for the year ended March 31, 2005 included in the
        Company’s 10-KSB/A-1.
 
 The
        preparation of financial statements in accordance with generally accepted
        accounting principles in the United States requires management to make estimates
        and assumptions that affect the reported amount of assets and liabilities
        and
        disclosures of contingent assets and liabilities at the date of the financial
        statements and the reported amount of revenues and expenses during the reporting
        period. Actual results could differ from these estimates.
 
 Certain
        prior year balances have been reclassified to conform to the current year
        presentation.
 
 **3.**
              **Stock-based
                  compensation**
 
 The
        Company accounts for stock-based compensation issued to employees using the
        intrinsic value method of Accounting Principles Board (“APB”) Opinion No. 25,
“Accounting for Stock Issued to Employees,” and, accordingly, presents
        disclosure of pro forma information required under Statement of Financial
        Accounting Standard (“SFAS”) No. 123, “Accounting for Stock-Based Compensation”,
        as amended by SFAS No. 148, “Accounting for Stock-Based Compensation, Transition
        and Disclosure.” Stock and other equity instruments issued to non-employees are
        accounted for in accordance with SFAS No. 123 and Emerging Issues Task Force
        Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other
        Than Employees for Acquiring, or in Conjunction with Selling Goods or Services,”
        and recorded at their fair value. Expenses associated with stock-based
        compensation is amortized on a straight line basis over the vesting period
        of
        the individual award.
 
 Had
        compensation cost for the Company's stock option plans been determined based
        on
        the fair value of such awards at the grant dates as prescribed by SFAS No.
        123,
        stock-based compensation costs would have impacted net loss and loss per
        common
        share for the fiscal periods presented, as follows:
  6
 Table
            of Contents
 
 **DiCon
        Fiberoptics, Inc. and Subsidiary**
 **Notes
        to Unaudited Consolidated Financial Statements**
 **(in
        thousands,**  **except
        per share data)**
 **__________________________________________________________________________________________________________**
 
  **For
                  the three months ended****June
                  30,****2005**
              
              **2004**Net
                  loss, as reported
              
              $
              (552
              )
              $
              (2,798
              )Add:
                  Stock-based employee compensation expense included in reported
                  net loss,
                  net of tax
              
              
              33
              
              
              111Deduct:
                  Compensation expense based on fair value method, net of
                  tax
              
              
              (134
              )
              
              (135
              )Pro
                  forma net loss
              
              $
              (653
              )
              $
              (2,822
              )**Reported
                  net loss per share—basic and diluted**
              
              $
              (0.01
              )
              $
              (0.03
              )**Pro
                  forma net loss per share—basic and diluted**
              
              $
              (0.01
              )
              $
              (0.03
              )
  No
        tax
        effects were included in the determination of pro forma net loss because
        the
        deferred tax asset resulting from stock-based employee compensation would
        be
        offset by an additional valuation allowance for deferred tax
        assets.
  **4.**  **Recent
        accounting pronouncements** ****
  In
        May
        2005, the Financial Accounting Standards Board (FASB) issued Statement
        of Financial Accounting Standards No. 154 ("SFAS No.154") ,
        “Accounting Changes and Error Corrections.” This statement replaces APB 20
        and SFAS 3 and changes the requirements for the accounting for and
        reporting of a change in accounting principle. APB 20 previously required
        that most voluntary changes in accounting principle be recognized by including
        in net income of the period of the change the cumulative effect of changing
        to
        the new accounting principle. SFAS No.154 requires retrospective
        application to prior periods’ financial statements of changes in accounting
        principle. Adoption of this statement is not expected to have a material
        impact on
        its
        financial position and results of operations.
 
 In
        December 2004, the FASB issued Statement of Financial Accounting Standards
        No.
        123(R) ("SFAS No. 123(R)"), "Accounting for Stock-Based Compensation". SFAS
        No.
        123(R) establishes standards for the accounting for transactions in which
        an
        entity exchanges its equity instruments for goods or services. This Statement
        focuses primarily on accounting for transactions in which an entity obtains
        employee services in share-based payment transactions. SFAS No. 123(R) requires
        that the fair value of such equity instruments be recognized as expense in
        the
        historical financial statements as services are performed. Prior to SFAS
        No.
        123(R), only certain pro-forma disclosures of fair value were required. SFAS
        No.
        123(R) shall be effective for nonpublic companies and small business issuers as
        of the
        beginning of the first annual reporting period that begins after December
        15,
        2005. The
        Company has historically provided pro forma disclosures reflecting the effects
        of such compensation costs on its results of operations and financial condition.
        See Note 3, Stock-Based Compensation. The Company is still evaluating the
        impact
        of the adoption of this standard.
 
 In
        November 2004, the FASB issued Statement of Financial Accounting Standards
        No.
        151 ("SFAS No. 151"), Inventory Costs, an amendment of ARB No. 43, Chapter
        4.
        The amendments made by SFAS No. 151 will improve financial reporting by
        clarifying those abnormal amounts of idle facility expense, freight, handling
        costs, and wasted materials (spoilage) that should be recognized as
        current-period charges and by requiring the allocation of fixed production
        overheads to inventory based on the normal capacity of the production
        facilities. SFAS No. 151 is effective for inventory costs incurred during
        fiscal
        years beginning after June 15, 2005. Earlier application is permitted for
        inventory costs incurred during fiscal years beginning after November 24,
        2004. Adoption
        of this statement is not expected to have a material impact on
        its
        financial position and results of operations.
  7
 Table
            of Contents
  **DiCon
        Fiberoptics, Inc. and Subsidiary**
 **Notes
        to Unaudited Consolidated Financial Statements**
 **(in
        thousands,**  **except
        per share data)**
 **___________________________________________________________________________________________________________**
 
 **5.**
              **Liquidity**
 
 As
        of
        June 30, 2005, the Company had cash and cash equivalents of $2.8 million.
        In
        addition, in conformity with the requirements of generally accepted accounting
        principles, $14.0 million was invested in certificates of deposit and other
        marketable securities that were classified as marketable securities. The
        Company
        invests cash in excess of short-term needs in these investments to attempt
        to
        improve yields on its total investment portfolio.
 
 The
        Company believes its current cash and cash equivalents and marketable securities
        will be sufficient to meet its anticipated cash needs for working capital
        and
        capital expenditures for at least the next 12 months. There remains some
        possibility that the Company may need to raise additional capital. For instance,
        it might need additional capital in order to refinance its loans, finance
        unanticipated growth or to invest in new technology. There can be no certainty
        that the Company would be successful in raising the required capital or in
        raising capital at acceptable rates.
 
 **6.**
              **Basic
                  net loss per share**
 
 Basic
        loss per share is computed by dividing the net loss (numerator) by the weighted
        average number of common shares outstanding (denominator) during the periods
        presented, excluding the dilutive effect of stock options. Diluted net loss
        per
        share gives effect to all potentially dilutive common stock equivalents
        outstanding during the period. In computing diluted net loss per share, the
        average stock price for the period is used in determining the number of shares
        assumed to be purchased from the proceeds of stock option exercises.
 
 The
        following is a reconciliation of the numerators and denominators of the basic
        and diluted net loss per share computations for the periods presented
        below:
 **For
                  the three months ended****June
                  30,****2005**
              
              **2004**Numerator:Net
                  loss
              
              $
              (552
              )
              $
              (2,798
              )Denominator:Basic
                  and diluted weighted average shares
              
              
              111,947
              
              
              111,988Basicand diluted net loss per share
              
              $
              (0.01
              )
              $
              (0.03
              )
 
 Stock
        options totaling 4,129 for the three months ended June 30, 2005, and stock
        options totaling 4,546 for the three months ended June 30, 2004, were not
        included in the diluted earnings per share amounts as their effect would
        have
        been anti-dilutive.
  8
 Table
            of Contents
  **DiCon
        Fiberoptics, Inc. and Subsidiary**
 **Notes
        to Unaudited Consolidated Financial Statements**
 **(in
        thousands)**
 **__________________________________________________________________________________________________________**
 
 **7.**
              **Marketable
                  Securities**
 
 The
        value
        of the Company’s investments by major security type is as follows:
 
 **Cost**
              
              **Unrealized**
              
              **Unrealized**
              
              **Fair****Gain**
              
              **Losses**
              
              **Value****June
                  30, 2005**Certificate
                  of Deposit
              
              $
              13,994
              
              $
              -
              
              $
              -
              
              $
              13,994**March
                  31, 2005**Certificate
                  of Deposit
              
              $
              14,677
              
              $
              -
              
              $
              -
              
              $
              14,677
 
 Debt
        securities include certificates of deposit with original maturities of greater
        than 90 days .
 
 **8.**
              **Inventories**
 
 Inventories
        consist of the following as of June 30, 2005 and March 31, 2005:
  **June
                  30****,**
              
              **March
                  31,****2005**
              
              **2005**Raw
                  materials
              
              $
              1,017
              
              $
              1,177Work-in-process
              
              
              2,636
              
              
              2,821Total
              
              $
              3,653
              
              $
              3,998
 
 During
        the three months period ended June 30, 2005, no obsolete inventory was written
        off. During the fiscal year ended March 31, 2005, the Company wrote off
        approximately $1.3 million of obsolete inventory.
 
 **9.**
              **Property,
                  Plant and Equipment, net**
 
 Property,
        plant and equipment consist of the following as of June 30, 2005 and March
        31,
        2005:
 
 **June
                  30,**
              
              **March
                  31,****2005**
              
              **2005**Land
              
              $
              10,000
              
              $
              10,000Building
                  and improvements
              
              
              36,268
              
              
              36,281Machinery,
                  equipment and fixtures
              
              
              41,509
              
              
              41,571Property,
                  plant and equipment
              
              
              87,777
              
              
              87,852Less:
                  Accumulated depreciation
              
              
              (40,801
              )
              
              (39,387
              )Property,
                  plant and equipment, net
              
              $
              46,976
              
              $
              48,465
 
 Depreciation
        expense was $1,572 and $8,090 for the three months ended June 30, 2005 and
        for
        the year ended March 31, 2005.
 
 During
        the year ended March 31, 2005, the Company consolidated its research &
        development (“R&D”) projects to better align its business needs with
        existing operations and to provide more efficient use of its facilities.
        As a
        result, certain R&D projects were discontinued and it was
        determined that related support equipment had no alternative use within
        the
        Company. Accordingly the equipment was either abandoned or scrapped. The
        loss on
        the disposal of fixed assets was $1,935 for the year ended March 31, 2005.
        In
        addition the Company wrote off excess and idle equipment with a net book
        value
        of $796 in the year ended March 31, 2005.
  9
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            of Contents
  **DiCon
        Fiberoptics, Inc. and Subsidiary**
 **Notes
        to Unaudited Consolidated Financial Statements**
 **(in
        thousands)**
 _________________________________________________________________________________________________________
 
 **10.**
              **Accounts
                  Payable and Accrued
                  Liabilities**
 
 Accounts
        payable and accrued liabilities consist of the following as of June 30, 2005
        and
        March 31, 2005:
 **June
                  30,**
              
              **March
                  31,****2005**
              
              **2005**Accounts
                  payable
              
              $
              562
              
              $
              1,186Accrued
                  payroll
              
              
              532
              
              
              723Temporary
                  receipts
              
              
              608
              
              
              510Accrued
                  liabilities
              
              
              672
              
              
              691$
              2,374
              
              $
              3,110
 
 **11.**
              **Mortgage
                  and Other Debt******
 
 The
        Company financed, in part, a new corporate campus by obtaining a construction
        loan from a bank of $27.0 million on August 24, 2000. In November
        2001, the
        same bank refinanced the outstanding balance of the construction loan with
        a
        mortgage loan maturing on November 20, 2004, with an amortization schedule
        based
        on a 25-year loan. Interest on the mortgage loan is accrued at a variable
        interest rate based on changes in the lender’s prime rate as of the
        20 th of each
        month. Principal and interest are payable monthly. During the year ended
        March
        31, 2002, the Chairman, President and Chief Executive Officer of the institution
        with which the Company maintains the mortgage loan was appointed to the
        Company’s Board of Directors.
 
 On
        June
        28, 2004, the bank agreed to extend the maturity date of the mortgage loan
        to
        October 20, 2007, subject to additional terms and conditions requiring the
        Company to make additional principal repayments as follows: $1.5 million
        10 days
        after the date of execution of the loan extension agreement; $1.0 million
        on
        October 1, 2004; and seven installments each in the amount of $0.5 million
        on
        the first day of each calendar quarter, commencing on January 1, 2005 and
        ending
        on July 1, 2006.
 
 The
        Company was in compliance with the additional principal repayments requirement
        as of June 30, 2005. During the quarter ended June 30, 2005, the Company
        voluntarily prepaid four additional $0.5 million equal installments that
        were
        originally due on October 1, 2005, January 1, 2006, April 1, 2006 and July
        1,
        2006.  In
        addition, the Company voluntarily prepaid an additional $0.5 million  principal
        of the mortgage loan during the quarter ended June 30, 2005. Rates
        of
        interest on the borrowings ranged from 5.5% to 6.0% during the period. The
        balance of the mortgage loan as of June 30, 2005 was $18.3 million with an
        interest rate of 6.0%. Subsequent to June 30, 2005, the Company voluntarily
        prepaid additional $2.0 million principal of the mortgage loan. (See subsequent
        event on Note 15).
 In
        April
        2001, the Company obtained an equipment loan from a bank in the amount of
        $7.3
        million. The loan was secured by specific pieces of equipment. The loan was
        voluntarily prepaid in full on October 12, 2004.
 
 Global
        maintained a line of credit in Taiwan backed by commercial paper issued by
        Global for a maximum of 50 million New Taiwan Dollars (or approximately $1.6
        million as of June 30, 2005). The interest rate is based on a rate set by
        the
        bank at the time funds are drawn. The line of credit will mature on April
        7,
        2006. The outstanding balance of any commercial paper under this line of
        credit
        must be fully secured by either a cash deposit or bond fund certificate.
        As of
        June 30, 2005, there was no commercial paper outstanding.
 
 Global
        maintained its second line of credit of 80 million New Taiwan Dollars
        (or  approximately
        $2.5 million as of June 30, 2005) from a Taiwan bank. The line of credit
        will
        mature on September 30, 2005. The interest rate is based on a rate set by
        the
        bank at the time funds are drawn. Annual
        rate of interest on the borrowings was 3.35% during the period. The
        amount drawn as of June 30, 2005 was 62.0 million New Taiwan Dollars (or
        approximately $2.0 million as of June 30, 2005) with an interest rate of
        3.35%.
  10
 Table
            of Contents
  **DiCon
        Fiberoptics, Inc. and Subsidiary**
 **Notes
        to Unaudited Consolidated Financial Statements**
 **(in
        thousands)**
 __________________________________________________________________________________________________________
 
 **12.**
              **Stock
                  Plans and Deferred Compensation Liability**
 
 As
        an
        incentive for employees to assist in growing the Company, prior to March
        31,
        2001 the Company maintained a phantom stock plan (the “Phantom Stock Plan”)
        under which it granted eligible employees phantom stock units that entitled
        the
        employees to participate in the current and future value of the Company.
        In
        addition, the Company made contingent commitments to eligible employees to
        grant
        stock units in the future (the “Contingently Promised Stock Units”). The shares
        under the plan were valued semiannually, typically in May and December. These
        stock units vested 50 percent upon receipt and 50 percent on the first
        anniversary of the grant date and had an exercise price of zero. During the
        service period of one-year following the date of the grant, the vested units
        could be redeemed for cash on a net basis by forfeiting additional units
        equal
        to the number of units redeemed. Thereafter, a maximum of 60 percent of the
        units could be redeemed while the holder was still an employee of the Company.
        The Company recorded a liability for the value of the unredeemed vested shares
        at the current value as of the financial statement date.
 
 On
        March
        31, 2001, the Company offered its employees two new equity incentive plans,
        an
        Employee Stock Option Plan (the “Option Plan”) and an Employee Stock Purchase
        Plan (the “Purchase Plan”). Grants under the Phantom Stock Plan have been
        discontinued. Under both the Option Plan and the Purchase Plan, the exercise
        or
        purchase price is not to be less than 85 percent of the fair value of Company’s
        common stock at the time of grant under the Option Plan or purchase under
        the
        Purchase Plan. New options granted under the Option Plan generally vest over
        five years and expire after ten years.
 
 Under
        the
        terms of the Option Plan, employees who were participants in the Phantom
        Stock
        Plan could convert their awarded phantom stock units and their Contingently
        Promised Stock Units into (1) options with an exercise price of $4.11 per
        share
        and cash payments of $4.11 per share (paid over four years); (2) additional
        options with an exercise price of $4.11; or (3) a combination of both (1)
        and
        (2). The cash payments and the options that were converted from vested stock
        units vested immediately. The cash payments and the options that were converted
        from Contingently Promised Units will vest in accordance with the original
        vesting schedule, but not less than 20 percent per year. At March 31, 2001,
        all
        phantom stock units for current employees under the Phantom Stock Plan were
        converted to options or options and cash payments pursuant to one of the
        alternatives noted above.
 
 Cash
        payments related to the conversion are payable in four annual installments
        beginning on March 31, 2002. As of March 31, 2001, the Company
        anticipated making four annual payments of $5,930 each commencing March 31,
        2002 for those employees who elected to receive a cash payout in lieu of
        additional options. The present value of the cash payments related to the
        conversion of vested phantom stock units of $15,131 was recorded as a liability
        as of March 31, 2001. The cash payments related to the conversion
        of the
        Contingently Promised Units are subject to continuing employment and,
        accordingly, the related expense and liability are accrued as earned by the
        employees. The first annual installment of $5,812 to those employees electing
        to
        receive cash in lieu of additional options was paid on March 28, 2002.
 
 As
        of
        December 31, 2002, the total remaining undiscounted future cash payments
        related
        to the conversion of the Company’s Phantom Stock Plan to its Option Plan totaled
        $7,645, payable in three equal annual installments beginning March 31, 2003.
        In
        order to reduce this liability, the Company offered the participants an
        opportunity to receive an early payment in January 2003. As a result, under
        the
        terms of the early payment program, the Company paid $1,979 on January 10,
        2003
        and reduced the future liability for Contingently Promised Units by $2,058.
 
 The
        second, third and final annual installments of $416, $347 and $197 to those
        employees electing to receive cash in lieu of additional options but not
        electing the early payment program were paid on March 31, 2003, 2004 and
        2005.
 
 The
        Purchase Plan was available to all eligible employees who meet certain service
        requirements. Effective April 1, 2001, employees participating in the Purchase
        Plan could elect to deduct up to 10 percent of gross pay to purchase stock
        in
        the Company. Stock transactions pursuant to the Purchase Plan occurred
        semiannually on December 31 and March 31. The Company could sell up
        to
        3,230 shares of stock under the Purchase Plan. Employees purchased 70 shares
        at
        a price of $3.85 per share on December 31, 2001 and 174 shares at a price
        of
        $2.10 on March 31, 2002. In May 2002, the Company issued 659 additional shares
        of common stock to employees under the Purchase Plan for aggregate cash
        consideration of $1,384 at a price of $2.10. In September 2002, the Company
        suspended the sale of shares to employees under the Purchase
        Plan.
  11
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            of Contents
  **DiCon
        Fiberoptics, Inc. and Subsidiary**
 **Notes
        to Unaudited Consolidated Financial Statements**
 **(in
        thousands)**
 **___________________________________________________________________________________________________________**
 
 Compensation
        expense related to the Company’s stock compensation plans and conversion of the
        Contingently Promised Units has been reflected in the Unaudited Consolidated
        Statements of Operations and Comprehensive Loss for the three months ended
        June
        30, 2005 and 2004 as follows:
 
 **For
                  the three months ended****June
                  30,****2005**
              
              **2004**Cost
                  of goods sold
              
              $
              11
              
              $
              12Selling,
                  general and administrative expenses
              
              
              17
              
              
              41Research
                  and development expenses
              
              
              5
              
              
              88$
              33
              
              $
              141
 
 **13.**
              **Income
                  Taxes**
 
 Due
        to
        uncertainty surrounding the realization of the favorable tax attributes in
        future tax returns, the Company has recorded a valuation allowance against
        certain deferred tax assets as of June 30, 2005 and March 31, 2005. Management
        regularly evaluates the recoverability of the deferred tax asset and the
        level
        of the valuation allowance. At such time as it is determined that it is more
        likely than not that the deferred tax asset will be realizable, the valuation
        allowance will be reduced.
 
 During
        the fiscal year ended March 31, 2005, the Company’s federal income tax returns
        for fiscal years ended in 2000 to 2003 have been examined by the Internal
        Revenue Service. As a result of this review, certain tax credits previously
        claimed were considered to be excessive and therefore additional tax assessment
        was required. In the fiscal year ended March 31, 2005, the Company paid $281
        for
        the tax assessments that may result. The total related interest payable assessed
        was $59. After the payment of $28 during the quarter, the remaining balance
        of
        $31 was included in accounts payable and accrued liabilities in the unaudited
        consolidated balance sheets as of June 30, 2005.
 
 The
        Company was granted a five-year tax holiday in Taiwan, which will expire
        in
        2006. There was no net impact of this tax holiday for the quarter ended June
        30,
        2005 and year ended March 31, 2005.
 
 The
        Company’s investment in its Taiwan subsidiary is essentially permanent in
        duration and undistributed foreign earnings on June 30, 2005 amounted to
        $5.3
        million. In accordance with the Taiwan Company Law and Global’s Articles of
        Incorporation, 10% of annual earnings shall be appropriated as legal reserve
        until the accumulated reserve equals the total capital of Global.
 
 There
        is
        no plan to distribute these earnings to DiCon. If at some future date all
        or
        portions of these foreign earnings are distributed as dividends to DiCon,
        substantial additional taxes would be due. On October 22, 2004, the
        American Jobs Creation Act of 2004 (the “Act”) was signed into law. The Act
        creates a temporary incentive for U.S. companies to repatriate accumulated
        foreign earnings by providing a one-time deduction of 85% for certain dividends
        from controlled foreign corporations. The deduction is subject to certain
        limitations and numerous provisions of the Act contain uncertainties that
        require interpretation and evaluation. The Company has not accrued income
        taxes
        on the accumulated undistributed earnings of the Company’s Taiwan subsidiary, as
        these earnings are currently expected to be reinvested
        indefinitely.
 
 As
        of
        March 31, 2005, the Company had federal and state net operating loss
        carryforwards of approximately $11.8 million and $42.0 million, respectively,
        and federal and state tax credit carryforwards of approximately $0.8 million
        and
        $2.2 million, respectively. The net operating loss will expire at various
        dates
        beginning in 2013, if not utilized. The tax credit can be carried forward
        indefinitely. The Company also has foreign net operating loss carry-forward
        of
        119.0 million New Taiwan Dollars (or approximately $3.8 million as of March
        31,
        2005), which expire beginning in the year 2008.
  12
 Table
            of Contents
 
 **DiCon
        Fiberoptics, Inc. and Subsidiary**
 **Notes
        to Unaudited Consolidated Financial Statements**
 **(in
        thousands)**
 **___________________________________________________________________________________________________________**
 
 **14.**
              **Commitments
                  and contingencies**
 
 The
        Company normally provides warranties for its products for one year. The Company
        provides reserves for the estimated cost of product warranties at the time
        revenue is recognized. Estimates of the costs of warranty obligations are
        based
        on the Company’s historical experience of known project failure rates, use of
        materials and service delivery costs incurred in correcting product failures.
        In
        addition, from time to time, specific warranty accruals may be made if
        unforeseen technical problems arise. Should the Company’s accrual experience
        relative to these factors differ from estimates, the Company may be required
        to
        record additional warranty reserves. Alternatively, if the Company provides
        more
        reserves than needed, the Company may reverse a portion of such provision
        in
        future periods.
 
 Changes
        in the Company’s warranty reserve during the three months ended June 30, 2005
        and 2004 were as follows:
 
 **Three
                  months ended June 30,****2005**
              
              **2004**Beginning
                  balance
              
              $
              24
              
              $
              16Provision
                  for warranty
              
              
              10
              
              
              11Utilization
                  of reserve
              
              
              (5
              )
              
              (17
              )Ending
                  balance
              
              $
              29
              
              $
              10
  Global
        owns a condominium interest in the building in Kaohsiung, Taiwan. This facility
        is located on a ground lease that extends through 2011. The ground lease
        may be
        renewed indefinitely, and there is no penalty for early cancellation, except
        for
        forfeiture of the owned facility.
  As
        of
        June 30, 2005,the Company’s future gross commitments under all leases was $0.1
        million.
 
 Global
        maintained a line of credit in Taiwan backed by commercial paper issued by
        Global for a maximum of 50 million New Taiwan Dollars (or approximately $1.6
        million as of June 30, 2005). The interest rate is based on a rate set by
        the
        bank at the time funds are drawn. The line of credit will mature on April
        7,
        2006. The outstanding balance of any commercial paper under this line of
        credit
        must be fully secured by either a cash deposit or bond fund certificate.
        As of
        June 30, 2005, there was no commercial paper outstanding.
 
 Global
        maintained its second line of credit of 80 million New Taiwan Dollars
        (or  approximately
        $2.5 million as of June 30, 2005) from a Taiwan bank. The line of credit
        will
        mature on September 30, 2005. The interest rate is based on a rate set by
        the
        bank at the time funds are drawn. Annual
        rate of interest on the borrowings was 3.35% during the period. The
        amount drawn as of June 30, 2005 was 62.0 million New Taiwan Dollars (or
        approximately $2.0 million as of June 30, 2005) with an interest rate of
        3.35%.
  In
        May
        2005, Lucent Technologies Inc. (“Lucent”) filed an action against the Company in
        the United States District Court for the District of New Jersey. Lucent alleges
        that certain switches purchased by it under a contract with the Company entered
        into in 2000 were defective. The complaint asserts breach of contract and
        the
        implied duty of good faith and fair dealing by the Company and seeks damages,
        costs, expenses and other sums totaling in excess of $10 million. The Company
        intends to contest the case vigorously.
 
 **15.**
              **Subsequent
                  event**
 
 Subsequent
        to June 30, 2005, the Company voluntarily prepaid additional $2.0 million
        principal of the mortgage loan.
  13
 Table
            of Contents
  **Item
        2. Management’s Discussion and Analysis or Plan of
        Operation.**
 
 *Certain
        statements contained in this report on Form 10-QSB that are not purely
        historical are “forward-looking statements” within the meaning of the federal
        securities laws, including, without limitation, statements regarding the
        Company’s expectations, beliefs, anticipations, commitments, intentions and
        strategies regarding the future. Actual results could differ from those
        projected in any forward-looking statements. Factors that could contribute
        to
        such differences include, but are not limited to, those specific points
        discussed under “Risk Factors” in the Company’s 10-KSB/A-1.*
  **Overview**
 
 The
        Company designs and manufactures passive optical components, modules and
        test
        instruments for current and next-generation optical communications markets.
        The
        Company designs and manufactures a broad portfolio of technically advanced
        products that filter, split, combine, attenuate, and route light in optical
        networks. The Company also sells products used for testing optical devices
        and
        systems. The Company’s products are based on its proprietary technologies,
        including thin-film coating, micro-optic design, optical element finishing,
        Micro Electro-Mechanical Systems (“MEMS”), advanced packaging and process
        automation. The Company was founded in 1986 and first became profitable in
        1988.
        It remained profitable each fiscal year until the fiscal year ended March
        31,
        2002.
 
 The
        Company operates from its owned 200,000 square feet facility in Richmond,
        California, which contains all of the Company’s domestic manufacturing, R&D,
        sales and administration operations. The Company has overseas manufacturing
        operations at its 88,000 square foot facility in Kaohsiung, Taiwan. Although
        the
        Company owns a condominium interest in the building, it is located on a ground
        lease that extends through 2011. The ground lease may be renewed indefinitely,
        and there is no penalty for early cancellation, except for forfeiture of
        the
        owned facility.
 
 The
        Company’s communications products include Wavelength Division Multiplexers
        (“WDMs”), amplifier components, switches and attenuators, MEMS devices and
        modules. Its measurement products include variable attenuators, tunable filters,
        and test instruments for telecommunication applications. The Company markets
        and
        sells its products worldwide through its direct sales force, its subsidiary
        Global and through selected distributors.
 
 The
        optical networking industry is rapidly changing and the volume and timing
        of
        orders are difficult to predict. Since the fourth quarter of 2000, the
        fiberoptics industry has gone through a significant period of consolidation
        following a dramatic curtailment of capital spending by most carriers faced
        with
        substantial excess bandwidth capacity and very high levels of corporate debt.
        The Company’s customers are manufacturers of telecommunications equipment. The
        Company believes its customers generally view the purchase of the Company’s
        products as a significant and strategic decision. As a result, customers
        typically commit substantial effort in evaluating the Company’s technology, and
        testing and qualifying its products and manufacturing processes. This customer
        evaluation and qualification process frequently results in a lengthy initial
        sales cycle of nine months or longer.
 
 The
        Company’s cost of goods sold consists primarily of the cost of direct materials,
        labor and manufacturing overhead, scrap and rework associated with products
        sold, as well as production start up costs. As demand changes, the Company
        attempts to manage its manufacturing capacity to meet demand for existing
        and
        new products; however, certain portions of its costs are fixed and as volumes
        decrease, these expenses are difficult to reduce proportionately, if at all.
        The
        Company assesses its inventory position on a monthly and quarterly basis
        with
        its then current forecasts. During the three months ended June 30, 2005,
        no
        obsolete inventory was written off. During the fiscal year ended March 31,
        2005,
        the Company wrote off approximately $1.3 million of obsolete inventory.
 
 Research
        and development expenses consist primarily of salaries and related personnel
        expenses, fees paid to consultants and outside service providers, material
        and
        equipment costs, and other expenses related to the design, development, testing
        and enhancement of the Company’s products. The Company expenses all of its
        research and development costs as incurred and does not capitalize any research
        and development expenditures except for equipment with a useful life longer
        than
        one year and useful for purposes other than the current research and development
        project. The Company believes that research and development is critical to
        strategic product development and expects to continue to devote significant
        resources to product research and development. The Company expects its research
        and development expenses to fluctuate both in absolute dollars and as a
        percentage of sales based on its perceived need for, and expected return
        from,
        its research and development efforts.
  14
 Table
            of Contents
  Selling,
        general and administrative expenses include salaries, benefits, commissions,
        product promotion and administrative expenses. The Company expects these
        expenses to continue to be substantial as the Company strives to sustain
        its
        market share in the fiberoptic component manufacturing business.
 
 During
        the fiscal year 2005, the Company consolidated its R&D projects to better
        align its business needs with existing operations and to provide a more
        efficient use of its facilities. As a result, certain R&D projects were
        discontinued and it was determined that related support equipment
        had no
        alternative use within the Company. Accordingly the equipment was either
        abandoned or scrapped, and a loss on the disposal of fixed assets of $1.9
        million was recorded in the year ended March 31, 2005 in the consolidated
        statements of operations and comprehensive loss. The Company incurred a $56,000
        gain on disposal of fixed assets for the quarter ended June 30,
        2005.
 
 Excess
        and idle equipment with a net book value of $796,000 had been written off
        in the
        year ended March 31, 2005. No additional excess and idle equipment were written
        off in the three months ended June 30, 2005.
 
 Other
        income (expenses) consists primarily of interest income, offset by interest
        expense.
 
 The
        Company maintains an Employee Stock Option Plan and an Employee Stock Purchase
        Plan as a means of motivating its employees to make a tangible contribution
        towards achieving its corporate objectives. In September 2002, DiCon suspended
        the sale of DiCon shares to employees under the Employee Stock Purchase
        Plan.
 
 **Critical
        Accounting Policies and Estimates**
 
 The
        preparation of the Company’s consolidated financial statements in conformity
        with accounting principles generally accepted in the United States of America
        requires estimates and judgments that affect the reported amounts of assets
        and
        liabilities, disclosures of contingent assets and liabilities, net sales
        and
        expenses, and the related disclosures. Estimates are based on historical
        experience, knowledge of economic and market factors and various other
        assumptions that the Company believes to be reasonable under the circumstances.
        Actual results may differ from these estimates under different assumptions
        or
        conditions. The following critical accounting policies are affected by
        significant estimates, assumptions and judgments used in the preparation
        of the
        Company’s consolidated financial statements.
 
 *Revenue
        recognition*
 
 The
        Company derives its revenue from the sale of fiberoptic networking components.
        Revenue from product sales is recognized upon shipment of the product, provided
        that persuasive evidence of an arrangement exists, delivery has occurred
        and no
        significant obligations remain, the fee is fixed or determinable and
        collectibility is reasonably assured. Sales to distributors do not include
        the
        right to return or exchange products or price protection. A provision for
        returns and allowances is recorded at the time revenue is recognized based
        on
        the Company’s historical experience.
 
 *Allowances
        for doubtful accounts*
 
 The
        Company performs ongoing credit evaluations of its customers. Allowances
        for
        doubtful accounts for estimated losses are maintained resulting from the
        inability or unwillingness of customers to make required payments. When the
        Company becomes aware that a specific customer is unable to meet its financial
        obligations, such as the filing of a bankruptcy or deterioration in the
        customer’s operating results or financial position, the Company records a
        specific allowance to reflect the level of credit risk in the customer’s
        outstanding receivable balance. The Company is not able to predict changes
        in
        the financial condition of customers, and if circumstances related to the
        Company’s customers deteriorate, estimates of the recoverability of trade
        receivables could be materially affected and the Company may be required
        to
        record additional allowances. Alternatively, if the Company provides allowances
        on receivables that are ultimately collected, the Company will reverse such
        provisions in future periods based on actual collection
        experience.
  15
 Table
            of Contents
  *Warranty
        accrual*
 
 The
        Company generally provides warranties for its products for one year. The
        Company
        provides reserves for the estimated cost of product warranties at the time
        revenue is recognized. Because the Company’s products are manufactured, in most
        cases, to customer specifications and their acceptance is based on meeting
        those
        specifications, the Company historically has experienced minimal warranty
        costs.
        Estimates of the costs of warranty obligations are based on the Company’s
        historical experience of known product failure rates and the use of materials
        and service delivery costs incurred in correcting product failures. In addition,
        from time to time, specific warranty accruals may be made if unforeseen
        technical problems arise. Should the Company’s actual experience relative to
        these factors differ from its original estimates, the Company may be required
        to
        record additional warranty reserves. Alternatively, if the Company provides
        more
        reserves that are in excess of its actual warranty costs, the Company will
        reverse a portion of such provisions in future periods.
 
 *Fair
        value of financial instruments*
 
 The
        Company has determined that the amounts reported for cash and cash equivalents,
        accounts receivable, short-term borrowings, accounts payable and accrued
        liabilities, mortgage and other debt approximate fair value because of their
        short maturities and/or variable interest rates. Marketable securities are
        reported at their fair market value based on quoted market prices.
 
 *Inventories*
 
 Inventories
        are valued at the lower of cost or market using the first-in, first-out (FIFO)
        method. Cost is determined using standard cost, which approximates actual
        cost.
        The inventory of the Company is subject to rapid technological changes and
        obsolescence that could have an adverse affect on its utilization in future
        periods. Accordingly, the Company writes down excess and obsolete inventory
        based on the Company’s estimates of inventory to be sold or
        consumed.
 
 *Property,
        plant and equipment*
 
 The
        Company evaluates the recoverability of the net carrying value of its property,
        plant and equipment whenever events or changes in circumstances indicate
        impairment may exist, by comparing the carrying values to the estimated future
        undiscounted cash flows. A deficiency in these cash flows relative to the
        carrying values is an indication of the need for a write-down due to impairment.
        The impairment write-down would then be the difference between the carrying
        values and the fair value of these assets. A loss on impairment would be
        recognized by a charge to earnings. Changes in these estimates could have
        a
        material adverse effect on the assessment of property, plant and equipment,
        thereby requiring the Company to write down its assets.
 
 *Deferred
        taxes*
 
 Deferred
        income tax assets and liabilities represent the expected future tax consequences
        attributable to temporary differences between corresponding amounts stated
        on
        the Unaudited Consolidated Balance Sheets and their respective tax bases.
        Deferred tax assets and liabilities are measured using the enacted tax rates
        expected to apply to taxable income in the years in which those temporary
        differences are expected to be reversed. Valuation allowances are recognized
        as
        necessary to reduce the deferred tax assets to the amount that is more likely
        than not to be realized.
  16
 Table
            of Contents
  **Financial
        Results**
 
 **Three
        Months Ended June 30, 2005 Compared with Three Months Ended June 30,
        2004**
 
 *Net
        Sales*
 
 Net
        sales
        increased by 27.3% to $5.6 million for the quarter ended June 30, 2005 from
        $4.4
        million for the quarter ended June 30, 2004. The increase was primarily due
        to
        an increase in the demand for fiberoptic components and test equipment by
        telecommunications equipment vendors.
 
 The
        fiberoptic communications industry is characterized by dynamic technological
        changes. Specific products may have a relatively short product life, even
        though
        basic product designs may have a substantial life. Generally, customers expect
        prices to decline steadily. During the current period of significant excess
        capacity, the pressure to reduce average selling prices may be even greater.
        The
        Company seeks to offset this trend through aggressive programs to improve
        manufacturing yields and cost reductions. There is no certainty that these
        programs will be successful to offset the pricing pressure from customers
        in the
        future.
 
 Sales
        to
        different geographic areas may fluctuate from period to period depending
        on
        various factors such as new system development, purchase cycle and price.
        Net
        sales to customers in the United States accounted for $1.8 million
        and
        $1.9 million of total net sales, or 32.1% and 43.8%, for the three
        months
        ended June 30, 2005 and 2004, respectively.
 
 As
        of
        June 30, 2005 and 2004, the Company experienced the following concentrations
        in
        sales to customers.
 
 **Three
                  months ended****June
                  30,****2005**
              
              **2004**Percentage
                  of revenue for 3 largest customers
              58.4%
              
              36.9%No.
                  of customers accounting for over 10% of net sales
              4
              
              3
 
 Sales
        to
        the Company’s leading customers vary significantly from year to year and the
        Company does not have the ability to predict future sales to these customers.
 
 *Cost
        of Goods Sold and Gross Margin*
 
 Costs
        of
        goods sold declined 14.0% to $3.7 million in the quarter ended June 30, 2005
        from $4.3 million in the quarter ended June 30, 2004. Gross margin as a
        percentage of net sales was 33.8% in the quarter ended June 30, 2005, compared
        to 2.0% in the quarter ended June 30, 2004.
 
 The
        improvement in gross margin in the quarter ended June 30, 2005 is mainly
        due to
        expense and cost reductions. During the quarter ended June 30, 2005, no excess
        and obsolete inventory has been written off. For the quarter ended June 30,
        2004, the Company wrote off an approximately $0.3 million of obsolete inventory
        and inventory impairment, or 6.1% of total net sales.
 
 Gross
        margin can be affected by a number of factors, including product mix, customer
        mix, applications mix, product demand, pricing pressures, manufacturing
        constraints, higher costs resulting from new production facilities, and product
        yield. Considering these factors, gross margin fluctuations are difficult
        to
        predict and there can be no assurance that the Company will achieve or maintain
        gross margin percentages at historical levels in future periods.
 
 *Selling,
        General and Administrative Expenses*
 
 Selling,
        general and administrative (“SG&A”) expense was $1.2 million in the quarter
        ended June 30, 2005, compared to $1.3 million in the quarter ended
        June 30,
        2004.
  17
 Table
            of Contents
  *Research
        and Development Expenses*
 
 Research
        and development (“R&D”) expense was $1.1 million in the quarter ended
        June 30, 2005, compared to $1.4 million in the quarter ended June
        30, 2004.
        The decrease in R&D spending reflects the cost reductions resulting from the
        elimination of certain product development programs and workforce reductions.
        Future expenditures are expected to fluctuate both in absolute dollars and
        as a
        percentage of revenue based on the need to invest in new research and
        development in order to remain competitive in this rapidly changing industry.
 
 *Other
        (Expense) Income*
 
 Other
        (expense) ** income
        for the quarters ended June 30, 2005 and 2004 are as follows:
 
 **Three
                  months ended****June
                  30,****(in
                  thousands)**
              
              **2005**
              
              **2004**Other
                  (expense) income:Interest
                  expense
              
              $
              (315
              )
              $
              (300
              )Interest
                  income
              
              
              121
              
              
              93Gain
                  (loss) on disposal of fixed assets
              
              
              56
              
              
              (19
              )Loss
                  on currency exchange
              
              
              (163
              )
              
              -Gain
                  on disposal of expensed items
              
              
              103
              
              
              -Other
                  (expense) income, net
              
              
              78
              
              
              58$
              (120
              )
              $
              (168
              )
 
 Interest
        expense primarily represents the costs of borrowing by DiCon for its mortgage
        loan on the facility in Richmond, California. In the quarter ended June 30,
        2005, the Company sold certain expensed tools and equipment for total proceeds
        of $103.
 
 *Loss
        Before Income Tax*
 
 The
        Company reported a net loss before income tax of $0.6 million for the current
        quarter compared to $2.8 million for the same quarter in the prior year.
        This is
        primarily due to increase in sales and improvement in gross margin during
        the
        quarter ended June 30, 2005.
 
 *Income
        Tax (Expense) Benefit*
 
 Due
        to
        the uncertainty surrounding the realization of the favorable tax attributes
        in
        future tax returns, the Company has recorded a valuation allowance against
        certain deferred tax assets at June 30, 2005. Management regularly evaluates
        the
        recoverability of the deferred tax asset and the level of the valuation
        allowance. At such time as it is determined that it is more likely than not
        that
        the deferred tax asset will be realizable, the valuation allowance will be
        reduced.
 
 The
        effective tax rate for the three months ended June 30, 2005 and 2004 were
        both 0
        %. The tax rate for each period is the result of the consolidation of the
        tax
        provisions for the US operations with that of the Taiwan operations of Global,
        and can vary substantially from period to period depending on the relative
        performance of each operation.
  18
 Table
            of Contents
  **Liquidity
        and Capital Resources**
 
 As
        of
        June 30, 2005, the Company had cash and cash equivalents of $2.8 million.
        In
        addition, the Company has $14.0 million invested in certificates of deposit
        and
        other marketable securities that in conformity with the requirements of
        generally accepted accounting principles were classified as marketable
        securities.
 
 The
        net
        cash provided by operating activities of $2.3 million for the three months
        ended
        June 30, 2005 resulted from non-cash adjustments of $1.6 million to the net
        loss
        of $0.6 million for the three months ended June 30 2005, a reduction of accounts
        receivable and inventories of 1.9 million. This cash inflow is partially
        offset
        by a decrease in accounts payable of $0.5 million. Net cash used by operations
        for the three months ended June 30, 2004 was $0.6 million. It was primarily
        attributable to non-cash adjustments of $2.5 million to the net loss of $2.8
        million for the three months ended June 30 2004. The cash outflow was further
        increased due to an increase of inventories of $0.9 million and a decrease
        in
        accounts payable and accrued liabilities of $0.2 million and was partially
        offset by a reduction of accounts receivables of $0.5 million and prepaid
        expenses of 0.3 million.
 
 The
        increase in cash flows from investing activities of $0.6 million for the
        three
        months ended June 30, 2005 was primarily due to an increase in net proceeds
        of
        $0.7 million from the sale and purchase of marketable securities offset by
        $0.1
        million in purchases of property, plant and equipment. Cash provided by
        investing activities of $1.7 million for the three months ended June 30,
        2004
        was primarily the result of an increase in net proceeds of $1.7 million from
        the
        sale and purchase of marketable securities.
 
 Cash
        used
        in financing activities increased to $1.9 million for the three months ended
        June 30, 2005 from $0.3 million provided by financing activities in the three
        months ended June 30, 2004. This change is primarily attributable to the
        net
        increase of repayments of mortgages
        and other debt .
 
 The
        Company financed, in part, a new corporate campus by obtaining a construction
        loan from a bank of $27.0 million on August 24, 2000. In November
        2001, the
        same bank refinanced the outstanding balance of the construction loan with
        a
        mortgage loan maturing on November 20, 2004, with an amortization schedule
        based
        on a 25-year loan. Interest on the mortgage loan is accrued at a variable
        interest rate based on changes in the lender’s prime rate as of the
        20 th of each
        month. Principal and interest are payable monthly. During the year ended
        March
        31, 2002, the Chairman, President and Chief Executive Officer of the institution
        with which the Company maintains the mortgage loan was appointed to the
        Company’s Board of Directors.
 
 On
        June
        28, 2004, the bank agreed to extend the maturity date of the mortgage loan
        to
        October 20, 2007, subject to additional terms and conditions requiring the
        Company to make additional principal repayments as follows: $1.5 million
        10 days
        after the date of execution of the loan extension agreement; $1.0 million
        on
        October 1, 2004; and seven installments each in the amount of $0.5 million
        on
        the first day of each calendar quarter, commencing on January 1, 2005 and
        ending
        on July 1, 2006.
 
 The
        Company was in compliance with the additional principal repayments requirement
        as of June 30, 2005. During the quarter ended June 30, 2005, the Company
        voluntarily prepaid four additional $0.5 million equal installments that
        were
        originally due on October 1, 2005, January 1, 2006, April 1, 2006 and July
        1,
        2006.  In
        addition, the Company voluntarily prepaid an additional $0.5 million  principal
        of the mortgage loan during the quarter ended June 30, 2005. Rates
        of
        interest on the borrowings ranged from 5.5% to 6.0% during the period. The
        balance of the mortgage loan as of June 30, 2005 was $18.3 million with an
        interest rate of 6.0%. Subsequent to June 30, 2005, the Company voluntarily
        prepaid additional $2.0 million principal of the mortgage loan.
 
 Global
        maintained a line of credit in Taiwan backed by commercial paper issued by
        Global for a maximum of 50 million New Taiwan Dollars (or approximately $1.6
        million as of June 30, 2005). The interest rate is based on a rate set by
        the
        bank at the time funds are drawn. The line of credit will mature on April
        7,
        2006. The outstanding balance of any commercial paper under this line of
        credit
        must be fully secured by either a cash deposit or bond fund certificate.
        As of
        June 30, 2005, there was no commercial paper outstanding.
 
 Global
        maintained its second line of credit of 80 million New Taiwan Dollars
        (or  approximately
        $2.5 million as of June 30, 2005) from a Taiwan bank. The line of credit
        will
        mature on September 30, 2005. The interest rate is based on a rate set by
        the
        bank at the time funds are drawn. Annual
        rate of interest on the borrowings was 3.35% during the period. The
        amount drawn as of June 30, 2005 was 62.0 million New Taiwan Dollars (or
        approximately $2.0 million as of June 30, 2005) with an interest rate of
        3.35%.
  19
 Table
            of Contents
  The
        Company believes its current cash and cash equivalents and marketable securities
        will be sufficient to meet its anticipated cash needs for working capital
        and
        capital expenditures for at least the next 12 months. There remains some
        possibility that the Company may need to raise additional capital. It might
        need
        additional capital in order to refinance its loans, finance unanticipated
        growth
        or to invest in new technology. There can be no certainty that the Company
        would
        be successful in raising the required capital or in raising capital at
        acceptable rates.
  **Commitments
        and Off Balance Sheet Arrangements**
 
 Global
        owns a condominium interest in the building in Kaohsiung, Taiwan. This facility
        is located on a ground lease that extends through 2011. The ground lease
        may be
        renewed indefinitely, and there is no penalty for early cancellation, except
        for
        forfeiture of the owned facility.
  As
        of
        June 30, 2005, the Company’s future gross commitment under all leases was $0.1
        million.
 
 Global
        maintained a line of credit in Taiwan backed by commercial paper issued by
        Global for a maximum of 50 million New Taiwan Dollars (or approximately $1.6
        million as of June 30, 2005). The interest rate is based on a rate set by
        the
        bank at the time funds are drawn. The line of credit will mature on April
        7,
        2006. The outstanding balance of any commercial paper under this line of
        credit
        must be fully secured by either a cash deposit or bond fund certificate.
        As of
        June 30, 2005, there was no commercial paper outstanding.
 
 Global
        maintained its second line of credit of 80 million New Taiwan Dollars
        (or  approximately
        $2.5 million as of June 30, 2005) from a Taiwan bank. The line of credit
        will
        mature on September 30, 2005. The interest rate is based on a rate set by
        the
        bank at the time funds are drawn. Annual
        rate of interest on the borrowings was 3.35% during the period. The
        amount drawn as of June 30, 2005 was 62.0 million New Taiwan Dollars (or
        approximately $2.0 million as of June 30, 2005) with an interest rate of
        3.35%..
 
 **Item
        3. Controls and Procedures.**
 
 *(a)*  *Evaluation
        of Disclosure Controls and Procedures* .
        The
        undersigned principal executive officer and principal financial officer of
        the
        Company conclude that the Company’s disclosure controls and procedures are
        effective as of June 30, 2005 based on the evaluation of these controls and
        procedures required by paragraph (b) of Exchange Act Rule 13a-15.
 
 *(b)*  *Changes
        in Internal Controls.* There
        has been no change in the Company’s internal control over financial reporting
        identified in connection with the evaluation required by paragraph (d) of
        Exchange Act Rule 13a-15 that occurred during the quarter ended June 30,
        2005,
        that has materially affected, or is reasonably likely to materially affect,
        the
        Company’s internal control over financial reporting.
  20
 Table
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 **PART
        II**
 
 **OTHER
        INFORMATION**
 
 **Item
        1. Legal Proceedings.**
 
 In
        May
        2005, Lucent Technologies Inc. (“Lucent”) filed an action against the Company in
        the United States District Court for the District of New Jersey. Lucent alleges
        that certain switches purchased by it under a contract with the Company entered
        into in 2000 were defective. The complaint asserts breach of contract and
        the
        implied duty of good faith and fair dealing by the Company and seeks damages,
        costs, expenses and other sums totaling in excess of $10 million. The Company
        intends to contest the case vigorously.
 
 **Item
        2. Unregistered Sales of Equity Securities and Use of
        Proceeds.**
 
 (a)
              Unregistered
                  Sales of Equity Securities by Small Business
                  Issuer.
 
 None.
 
 (b)
              Purchases
                  of Equity Securities by Small Business
                  Issuer.
 
 **Small
        Business Issuer Purchases of Equity Securities**
 
 Period
              
              Total
                  Number of Shares Purchased
                (1)
              
              Average
                  Price Paid per Share
              
              Total
                  Number of Shares Purchased as Part of Publicly Announced Plans
                  or
                  Programs
                (2)
              
              Maximum
                  Number of Shares that May yet be Purchased Under the Plans or
                  Programs
                (2)April
                  1, 2005 through April 30, 2005
              
              1,019
              
              $0.96
              
              --
              
              --May
                  1, 2005 through May 31, 2005
              
              5,904
              
              $0.96
              
              --
              
              --June
                  1, 2005 through June 30, 2005
              
              795
              
              $0.96
              
              --
              
              --Total
              
              7,718
              
              $0.96
              
              --
              
              --
 
 (1)  All
        of
        the shares purchased were issued under the Employee Stock Purchase
        Program.
 
 (2)  DiCon
        does not have any publicly announced plans or programs for the purchase of
        shares.
 
 **Item
        3. Defaults Upon Senior Securities.**
 
 None.
 
 **Item
        4. Submission of Matters to a Vote of Security
        Holders.**
 
 None.
  21
 Table
            of Contents
  **Item
        5. Other Information.**
 
 None.
 
 **Item
        6. Exhibits.**
 
 Exhibit
                  No.
              
              Description31.1
              
              Certificate
                  of President and Chief Executive Officer pursuant to Section 302
                  of the
                  Sarbanes - Oxley Act of 2002.31.2
              
              Certificate
                  of Vice President of Administration pursuant to Section 302 of
                  the
                  Sarbanes - Oxley Act of 2002.32.1
              
              Certificate
                  of President and Chief Executive Officer pursuant to Section 906
                  of the
                  Sarbanes - Oxley Act of 2002.32.2
              
              Certificate
                  of Vice President of Administration pursuant to Section 906 of
                  the
                  Sarbanes - Oxley Act of 2002.
 
  22
 Table
            of Contents
  
 **SIGNATURES**
 
 In
        accordance with the requirements of the Exchange Act, the registrant caused
        this
        report to be signed on its behalf by the undersigned, thereunto duly
        authorized.
  DICON
                  FIBEROPTICS, INC.(Registrant)Date:
              August
                  12, 2005
              By:
              /s/
                  Ho-Shang Lee(Signature)Name:
              Ho-Shang
                  Lee, Ph.D.Title:
              President
                  and Chief Executive Officer
                (principal
                  executive officer)Date:
              August
                  12, 2005
              By:
              /s/
                  Jannett Wang(Signature)Name:
              Jannett
                  WangTitle:
              Vice
                  President of Administration
                (principal
                  financial officer)
  23
 Table
            of Contents
  
 **Exhibit
        Index**
 
 Exhibit
                  No.
              
              Description31.1
              
              Certificate
                  of President and Chief Executive Officer pursuant to Section 302
                  of the
                  Sarbanes - Oxley Act of 2002.31.2
              
              Certificate
                  of Vice President of Administration pursuant to Section 302 of
                  the
                  Sarbanes - Oxley Act of 2002.32.1
              
              Certificate
                  of President and Chief Executive Officer pursuant to Section 906
                  of the
                  Sarbanes - Oxley Act of 2002.32.2
              
              Certificate
                  of Vice President of Administration pursuant to Section 906 of
                  the
                  Sarbanes - Oxley Act of 2002.
 
  24