**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**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 September 30, 2006, 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








Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).





Yes  o  No  x








As
      of
      October 26, 2006, there were 22,381,457 shares outstanding. The number of shares
      outstanding reflects a 5-for-1 reverse stock split effected by the registrant
      on
      October 26, 2006.





Transitional
      Small Business Disclosure Format (check one):  Yes  o  No  x





__________________________________________________________________________________________________________


1





**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





**PART
      I**





**FINANCIAL
      INFORMATION**





**Item
      1. Financial Statements.**


**DiCon
                Fiberoptics, Inc. and Subsidiary**
              **Unaudited
                Consolidated Balance Sheets**
              **(in
                thousands)****September
                30,**
            
            **March
                31,****2006**
            
            **200****5****6**
              **(1)****Assets**Current
                assets:Cash
                and cash equivalents
            $2,316
            
            $1,411Marketable
                securities
            19,123
            
            19,785Accounts
                receivable, net of allowance for doubtful accounts of $133
                and$56, respectively
            3,958
            
            2,379Inventories
            1,851
            
            2,246Interest
                receivables and prepaid expenses
            843
            
            423Income
                tax receivable
            3,132
            
            -Total
                current assets
            31,223
            
            26,244Property,
                plant and equipment, net
            36,127
            
            37,225Other
                assets
            9
            
            12Total
                assets
            $67,359
            
            $63,481**Liabilities
                and Shareholders' Equity**Current
                liabilities:Accounts
                payable and accrued liabilities
            $2,081
            
            $1,569Advances
                received from customers
            3,796
            
            3,663Current
                portion of mortgage and other debt
            2,029
            
            2,319Total
                current liabilities
            7,906
            
            7,551Mortgage
                and other debt, net of current portion
            8,591
            
            9,332Total
                liabilities
            16,497
            
            16,883Commitments
                (Note 14)Shareholders'
                equity:Common
                stock: no par value; 40,000 shares authorized; 22,381 and 22,382
                shares
                issued and outstanding at September 30, 2006 and March 31, 2006,
                respectively
            22,197
            
            22,204Additional
                paid-in capital
            13,245
            
            13,265Deferred
                compensation
            -
            
            (28)Retained
                earnings
            16,040
            
            11,607Accumulated
                other comprehensive income/(loss)
            (620)
            
            (450)Total
                shareholders' equity
            50,862
            
            46,598Total
                liabilities and shareholders' equity
            $67,359
            
            $63,481





The
      accompanying notes are an integral part of these unaudited consolidated
      financial statements.





(1)
      Balances at March 31, 2006 are derived from the audited Financial Statements
      at
      that date.





3





**DiCon
                Fiberoptics, Inc. and Subsidiary**
              **Unaudited
                Consolidated Statements of Operations and Comprehensive
                Income/(Loss)**
              **(in
                thousands, except per share data)****For
                the three months ended**
              **September
                30,**
            
            **For
                the six months ended**
              **September
                30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Net
                sales
            $5,647
            
            $4,774
            
            $10,658
            
            $10,400Cost
                of goods sold
            2,750
            
            3,291
            
            5,323
            
            7,014Gross
                profit
            2,897
            
            1,483
            
            5,335
            
            3,386Selling,
                general and administrative expenses
            1,149
            
            1,108
            
            2,380
            
            2,304Research
                and development expenses
            1,240
            
            1,136
            
            2,514
            
            2,2732,389
            
            2,244
            
            4,894
            
            4,577Gain/(Loss)
                from operations
            508
            
            (761)
            
            441
            
            (1,191)Other
                (expense) income:Interest
                expense
            (180)
            
            (283)
            
            (365)
            
            (599)Interest
                income
            677
            
            133
            
            925
            
            254Gain
                on disposal of fixed assets
            43
            
            118
            
            47
            
            174Other
                income, net
            449
            
            185
            
            708
            
            203Income/(Loss)
                before income taxes
            1,497
            
            (608)
            
            1,756
            
            (1,159)Income
                tax expense (benefit)
            (2,689)
            
            -
            
            (2,677)
            
            1Net
                Income/(loss)
            4,186
            
            (608)
            
            $4,433
            
            $(1,160)Other
                comprehensive income (loss):Foreign
                currency translation adjustment
            (178)
            
            (307)
            
            -(170)
            
            (150)Comprehensive
                income/(loss)
            4,008
            
            (915)
            
            $4,263
            
            $(1,310)Net
                income/(loss) per share - Basic
            .19
            
            (.03)
            
            .20
            
            (.05)Net
                income/(loss) per share - Diluted
            .19
            
            (.03)
            
            .20
            
            (.05)Average
                shares used in computing net income/(loss) per share - basic
            22,381
            
            22,388
            
            22,382
            
            22,389Average
                shares used in computing net income/(loss) per share -
                diluted
            22,392
            
            22,388
            
            22,393
            
            22,389





The
      accompanying notes are an integral part of these unaudited consolidated
      financial statements.





4





**DiCon
                Fiberoptics, Inc. and Subsidiary**
              **Unaudited
                Consolidated Statement of Cash Flows**
              **(in
                thousands)****Six
                Months Ended****September
                30,****2006**
            
            **2005****Cash
                flows from operating activities:**Net
                income/(loss)
            $4,433
            
            $(1,160)Adjustments
                to reconcile net income/(loss) to net cash provided by (used in)
                operating
                activities:Depreciation
            1,170
            
            2,784Write
                down excess and obsolete inventories
            11
            
            -Provision
                for bad debts
            77
            
            (99)(Gain)
                loss on disposal of property, plant and equipment
            (82)
            
            (174)Stock
                compensation expense
            9
            
            65Changes
                in assets and liabilities:Accounts
                receivable
            (1,658)
            
            1,570Inventories
            395
            
            782Prepaid
                expenses and other current assets
            (421)
            
            (34)Other
                assets
            4
            
            28Accounts
                payable and accrued liabilities
            585
            
            (18)Income
                tax receivable
            (3,132)
            
            -Income
                tax payable
            25
            
            -Net
                cash provided by (used in) operating activities
            1,416
            
            3,744**Cash
                flows from investing activities:**Purchases
                of marketable securities
            (6,842)
            
            (6,876)Sales
                of marketable securities
            7,504
            
            7,479Sale
                of property, plant and equipment
            56
            
            190Purchases
                of property, plant and equipment
            (178)
            
            (102)Net
                cash provided by investing activities
            540
            
            691**Cash
                flows from financing activities:**Borrowings
                under mortgages and other debt
            2,355
            
            1,224Repayment
                of mortgages and other debt
            (3,377)
            
            (5,326)Repurchases
                of common stock
            (8)
            
            (19)Net
                cash (used in) provided by financing activities
            (1,030)
            
            (4,121)Effect
                of exchange rate changes on cash and cash equivalents
            (21)
            
            (48)Net
                change in cash and cash equivalents
            905
            
            266Cash
                and cash equivalents, beginning of period
            1,411
            
            1,784Cash
                and cash equivalents, end of period
            $2,316
            
            $2,050**Supplemental
                disclosures of cash flow information:**Cash
                paid for interest
            $367
            
            $648Cash
                paid for income taxes
            13
            
            1





The
      accompanying notes are an integral part of these unaudited consolidated
      financial statements.





5





**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 and
      headquarters 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 as filed with the Securities and Exchange Commission (SEC) on June
      28, 2006 (the “Company’s 10-KSB”).  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, 2006 included in the Company’s Form 10-KSB.





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.





**3.**
            **Stock-based
                compensation**





On April 1, 2006, the Company adopted Statement of Financial Accounting
      Standards ( “ SFAS ” )
      No.
      123R, “ Share-Based
      Payment ” ,
      using
      the prospective application method prescribed by SFAS No. 123R.  Prior to
      the adoption of SFAS No. 123R, we accounted for stock option awards to employees
      in accordance with Accounting Principles Board Opinion No. 25, “ Accounting
      for Stock Issued to Employees ” (the
      intrinsic value method) and, accordingly, recognized no compensation expense
      for
      stock option awards to employees. Prior to adoption of FAS123R, the company
      disclosed proforma net income/(loss) in accordance with FAS123 and FAS148 “ Accounting
      for Stock-Based Compensation-Transition and Disclosure-An Amendment of FASB
      Statement No. 123 ” estimating
      the value of its employee option awards using the minimum value method.




Under the prospective application method, the Company is required to record
      compensation expense prospectively for all employee stock options awarded during
      the reporting period based upon the fair-value-based method prescribed by SFAS
      No. 123R.  The Company estimates the fair value of each stock option award
      on the date of grant using the Black-Scholes option pricing model. The estimated
      fair value of employee stock option awards is amortized over the
      award ’ s
      vesting
      period on a straight-line basis.  Compensation expense related to stock
      options awarded in the quarter ended September 30, 2006 was
      immaterial.







6





**DiCon
      Fiberoptics, Inc. and Subsidiary**


**Notes
      to Unaudited Consolidated Financial Statements**


**(in
      thousands,**  **except
      per share data)**


**__________________________________________________________________________________________________________**
















**4.**  **Recent
      accounting pronouncements**




In
      July
      2006, the FASB issued FASB Interpretation (“FIN”) No. 48, “Accounting for
      Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109”. FIN
      No. 48 clarifies the accounting for uncertainty in income taxes recognizes
      in
      financial statements in accordance with SFAS No. 109, “Accounting for Income
      Taxes”. FIN No. 48 prescribes a recognition threshold and measurement attribute
      for the financial statement recognition and measurement of a tax position taken
      or expected to be taken in a tax return and provides guidance on derecognition,
      classification, interest and penalties, accounting in interim periods,
      disclosure and transition. Under FIN No. 48, the evaluation of a tax position
      is
      a two-step process. The first step is a recognition process where we are
      required to determine whether it is more likely than not that a tax position
      will be sustained upon examination, including resolution of any related appeals
      or litigation processes, based on the technical merits of the position. In
      evaluating whether a tax position has met the more-likely-than-not recognition
      threshold, it is presumed that the position will be examined by the appropriate
      taxing authority that has full knowledge of all relevant information. The second
      step is a measurement process whereby a tax position that meets the
      more-likely-than-not recognition threshold is calculated to determine the amount
      of benefit to recognize in the financial statements. FIN No. 48 also requires
      tabular reconciliation of the total amounts of unrecognized tax benefits at
      the
      beginning and end of the reporting period. The provisions of FIN No. 48 are
      effective for fiscal years beginning after December 15, 2006. As such, we are
      required to adopt it in our first quarter of fiscal year 2008. Any changes
      to
      our income taxes due to the adoption of FIN No. 48 are treated as a cumulative
      effect of a change in accounting principle. We do not expect the adoption of
      FIN
      No. 48 to have a material impact on our Consolidated Financial
      Statements.





In
      September 2006, the SEC issued SAB No. 108, “Financial Statements - Considering
      the Effects of Prior Year Misstatements when Quantifying Misstatements in
      Current Year Financial Statements”. SAB No. 108 provides guidance on how prior
      year misstatements should be taken into consideration when quantifying
      misstatements in current year financial statements for purposes of determining
      whether the current year’s financial statements are materially misstated. The
      impact of correcting all misstatements, including both the carryover and
      reversing effects of prior year misstatements, must be quantified on the current
      year financial statements. When a current year misstatement has been quantified,
      SAB No. 99, “Financial Statements Materiality” should be applied to determine
      whether the misstatement is material and should result in an adjustment to
      the
      financial statements. SAB No. 108 also discusses the implication of
      misstatements uncovered upon the application of SAB No. 108 in situations when
      a
      registrant has historically been using the iron curtain approach or the rollover
      approach as described in the SAB. Registrants electing not to restate prior
      periods should reflect the effects of initially applying the guidance in Topic
      1N in their annual financial statements covering the first fiscal year ending
      after November 15, 2006. We are evaluating what impact the adoption of SAB
      No.
      108 will have on our Consolidated Financial Statements.





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. SFAS
      No. 157 defines fair value, establishes a framework for measuring fair value
      in
      generally accepted accounting principles and expands disclosures about fair
      value measurements. Fair value refers to the price that would be received to
      sell an asset or paid to transfer a liability in an orderly transaction between
      market participants in the market in which the reporting entity transacts.
      SFAS
      No. 157 establishes a fair value hierarchy that prioritizes the information
      used
      to develop those assumptions. Fair value measurements would be separately
      disclosed by level within the fair value hierarchy. The provisions of SFAS
      No.
      157 are effective for financial statements issued for fiscal years beginning
      after November 15, 2007, and interim periods within those fiscal years. We
      do
      not expect the adoption of SFAS No. 157 to have a material impact on our
      Consolidated Financial Statements.








7


**DiCon
      Fiberoptics, Inc. and Subsidiary**


**Notes
      to Unaudited Consolidated Financial Statements**


**(in
      thousands,**  **except
      per share data)**


**___________________________________________________________________________________________________________**





**5.**
            **Liquidity**





As
      of
      September 30, 2006, the Company had cash and cash equivalents of $2.3 million.
      In addition, in conformity with the requirements of generally accepted
      accounting principles, $19.1 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 income/(loss) per
                share**





Basic
      income/(loss) per share is computed by dividing the net income or 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 income or loss per share gives effect to all
      potentially dilutive common stock equivalents outstanding during the period.
      In
      computing diluted net income or 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 income/(loss) per share computations for the periods presented
      below:


**For
                the three months ended**
            
            **For
                the six months ended****September
                30,**
            
            **September
                30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Numerator:Net income/(loss)
            $4,186
            
            (608)
            
            $4,433
            
            $(1,160)Denominators:Basic shares
            22,381
            
            22,388
            
            22,382
            
            22,389Diluted shares
            22,392
            
            22,388
            
            22,393
            
            22,389Net
                income/(loss) per share-Basic
            .19
            
            (.03)
            
            .20
            
            (.05)Net
                income/(loss) per share-Diluted
            .19
            
            (.03)
            
            .20
            
            (.05)





Stock
      options totaling 798 for the six months ended September 30, 2005, were not
      included in the diluted earnings per share amounts as their effect would have
      been anti-dilutive.





8


**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****September 30, 2006**Certificate of Deposit
            $19,123
            
            $-
            
            $-
            
            $19,123**March 31, 2006**Certificate of Deposit
            $18,783
            
            $-
            
            $-
            
            $18,783Foreign Mutual Fund
            1,001
            
            1
            
            
            
            1,002Total
            19,784
            
            1
            
            -
            
            19,785





Debt
      securities include certificates of deposit with original maturities of greater
      than 90 days .





**8.**
            **Inventories**





Inventories
      consist of the following as of September 30, 2006 and March 31,
      2006:




**September
                30****,**
            
            **March
                31,****2006**
            
            **2006**Raw materials
            $687
            
            $634Work-in-process
            1,164
            
            1,612Total
            $1,851
            
            $2,246





During
      the six months period ended September 30, 2006, the Company sold $.01 million
      of
      obsolete inventory previously written off. During the fiscal year ended March
      31, 2006, the Company wrote off approximately $0.3 million of obsolete
      inventory.





**9.**
            **Property,
                Plant and Equipment, net**





Property,
      plant and equipment consist of the following as of September 30, 2006 and March
      31, 2006:





**September
                30,**
            
            **March
                31,****2006**
            
            **2006**Land
            $5,944
            
            $5,944Building and improvements
            33,198
            
            33,281Machinery, equipment and fixtures
            38,917
            
            39,295Property, plant and equipment
            78,059
            
            78,520Less: Accumulated depreciation
            (41,932)
            
            (41,295)Property, plant and equipment, net
            $36,127
            
            $37,225





Depreciation
      expense was $1,170 and $4,498 for the six months ended September 30, 2006 and
      for the year ended March 31, 2006.





The
      Company impaired the value of its Taiwan building by $841 based on market value
      in the year ended March 31, 2006.


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.







During
      the fiscal year ended March 31, 2006, the Company generated a gain on sale
      of
      land and fixed assets of $8.0 million. Of this gain, $7.1 million stemmed from
      the sale of a parcel of land with a net book value of $5.8 million and proceeds
      from the sale of $12.9 million. The remaining $0.9 gain stemmed from the sale
      of
      fixed assets with a net book value of less than $0.1.


9





**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 September 30,
      2006 and March 31, 2006:


**September
                30,**
            
            **March
                31,****2006**
            
            **2006**Accounts payable
            $808
            
            $428Accrued payroll
            630
            
            527Temporary receipts
            6
            
            2Accrued liabilities
            637
            
            612$2,081
            
            $1,569





**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 September 30, 2006. During the year ended March 31, 2006, the Company
      voluntarily prepaid three additional $0.5 million equal installments that were
      originally due on January 1, 2006, April 1, 2006 and July 1, 2006. In addition,
      the Company voluntarily prepaid an additional $8.5 million  principal
      of the mortgage loan during the year ended March 31, 2006. This included $5.5
      million from the proceeds of land sale. The balance of the mortgage loan as
      of
      September 30, 2006 was $8.8 million with an interest rate of 7.25%.





On April 10, 2006, the bank agreed to extend the final payment date of the
      mortgage loan from October 20, 2007, to October 20, 2017,
      and
      decrease the interest rate on
      the


mortgage loan from the Index to the Index minus 1%





In August of 2006, the Company voluntarily prepaid an additional $1.0 million
      of
      principal on the mortgage loan.





Global
      renewed its line of credit of 78 million New Taiwan Dollars (or  approximately
      $2.4 million as of September 30, 2006) from a Taiwan bank. The line of credit
      will mature on October 31, 2007. 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 3.64% during the period. The
      amount drawn as of September 30, 2006 was 59.5 million New Taiwan Dollars (or
      approximately $1.8 million as of September 30, 2006) with an interest rate
      of
      3.64%.





10


**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 $20.55 per
      share
      and cash payments of $20.55 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.





The
      Company did not declare a regular dividend on its common stock during the fiscal
      years ended March 31, 2006, or 2005, or in any subsequent period for which
      financial information is required, except that on January 6, 2006, the Company
      declared a special dividend of $0.10 per share of common stock to shareholders
      of record as of January 6, 2006, payable on or before January 31,
      2006.





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 was 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 646
      shares of stock under the Purchase Plan. Employees purchased 14 shares at a
      price of $19.25 per share on December 31, 2001 and 35 shares at a price of
      $10.50 on March 31, 2002. In May 2002, the Company issued 132 additional shares
      of common stock to employees under the Purchase Plan for aggregate cash
      consideration of $1,384 at a price of $10.50. In September 2002, the Company
      suspended the sale of shares to employees under the Purchase Plan.







11


**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 Income/(Loss) for the three months
      ended September 30, 2006 and 2005 as follows:





**For
                the three months ended**
            
            **For
                the six months ended****September
                30,**
            
            **September
                30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Cost of goods sold
            $2
            
            $11
            
            $3
            
            $22Selling, general and administrative expenses
            2
            
            16
            
            4
            
            33Research and development expenses
            0
            
            5
            
            2
            
            10$4
            
            $32
            
            $9
            
            $65





**13.**
            **Income
                Taxes**





The
      Company has substantial net operating loss carryforwards. For the year ended
      March 31, 2006, the Company recorded a tax provision of $191 related to the
      90%
      alternative minimum tax limitation with respect to utilization of the net
      operating loss carry forwards. 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 at March 31, 2006 and
      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 were 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 $ 28,
      which
      was paid in June of 2005 .





The
      Company was granted a five-year tax holiday in Taiwan on the WDM product line,
      which expired on February 21, 2006. On April 1, 2006, the Company was granted
      a
      five-year tax holiday on the MEMS product line, which will expire on March
      31,
      2011. There was no net impact of this tax holiday for the quarter ended
      September 30, 2006 and year ended March 31, 2006.





The
      Company’s investment in its Taiwan subsidiary is essentially permanent in
      duration and undistributed foreign earnings on September 30, 2005 amounted
      to
      $4.9 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, 2006, the Company had federal and state net operating loss
      carryforwards of approximately $6.0 million and $42.0 million, respectively,
      and
      federal and state tax credit carryforwards of approximately $0.6 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.





During
      the period ending September 30, 2006, the Company recorded a tax provision
      of
      $0.03 million, which is related to the 90% alternative minimum tax limitation
      with respect to utilization of the net operating loss carry forwards. This
      was
      offset by a notice of a refund due for $3.1 million (including $0.4 million
      in
      interest) from the State of California stemming from an Enterprise Zone tax
      credit for the 2001 tax year.





12





**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, which is part of “Accrued expenses” on the
      balance sheet, during the six months ended September 30, 2006 and 2005 were
      as
      follows:





**Six
                months ended September 30,****2006**
            
            **2005**Beginning balance
            $20
            
            $24Provision for warranty
            62
            
            24Utilization of reserve
            (52)
            
            (22)Ending balance
            $30
            
            $26








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
      September 30, 2006,the Company’s future gross commitments under all leases was
      $0.1 million.





Global
      maintained its line of credit of 80 million New Taiwan Dollars (or  approximately
      $2.4 million as of September 30, 2006) from a Taiwan bank. The line of credit
      will mature on October 30, 2006. 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 3.64% during the period. The
      amount drawn as of September 30, 2006 was 59.5 million New Taiwan Dollars (or
      approximately $1.8 million as of September 30, 2006) with an interest rate
      of
      3.64%.





**15.
      Subsequent Events**








On
      October 2, 2006, Global voluntarily repaid 34.0 million Taiwan dollars
      (approximately $1.03 million as of September 30, 2006) on the line of
      credit.





On
      October 26, 2006, the Company effected a 1-for-5 reverse stock split. The share
      and per share amounts have been retroactively adjusted to reflect the 1-for-5
      split.





On
      October 27, 2006, the Company voluntarily prepaid an additional $0.8 million
      of
      principal on the mortgage loan.





On
      October 27, 2006, the Company received a tax refund from the State of California
      in the amount of $3.1 million as a result of an amended tax return from the
      year
      ending March 31, 2001.














13





**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 six months ended September 30, 2006,
      $.01
      million of previously written down inventory was sold. During the fiscal year
      ended March 31, 2006, the Company wrote off approximately $0.3 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.





The
      Company operates in one segment, the design and manufacture of passive optical
      components, modules and test instruments.


14





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 ended March 31, 2006, the Company generated a gain on sale
      of
      land and fixed assets of $8.0 million. Of this gain, $7.1 million stemmed from
      the sale of a parcel of land with a net book value of $5.8 million and proceeds
      from the sale of $12.9 million. The remaining $0.9 gain stemmed from the sale
      of
      fixed assets with a net book value of less than $0.1. No additional excess
      and
      idle equipment s were
      written off in the six months ended September 30, 2006. There were no
      significant sales of fixed assets during the six months ended September 30,
      2006.





Other
      income (expenses) consists primarily of interest income, offset by interest
      expense.





On
      October 26, 2006, the Company effected a 1-for-5 reverse stock split. The share
      numbers in this report reflect the 5-for-5 reverse stock split.





**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


*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.





The
      majority of the Company’s long-lived assets are located in the United States.
      Long-lived assets consist primarily of property, plant and equipment, net of
      accumulated depreciation and deposits. The following represents the geographic
      location of long-lived assets:





Amounts (in 000’s)
            September 30, 2006
            
            March 31, 2006Within the US
            $31,237
            
            $31,759Outside the US
            4,890
            
            5,478Total
            $36,127
            
            $37,237








*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


**Financial
      Results**





**Three
      Months Ended September 30, 2006 Compared with Three Months Ended September
      30,
      2005**





*Net
      Sales*





Net
      sales
      increased by 19% to $5.7 million for the quarter ended September 30, 2006 from
      $4.8 million for the quarter ended September 30, 2005. 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 $1.9 million and
      $1.6 million of total net sales, or 32.6% and 33.6%, for the three months
      ended September 30, 2006 and 2005, respectively.





As
      of
      September 30, 2006 and 2005, the Company experienced the following
      concentrations in sales to customers.





**Three
                months ended****September
                30,****2006**
            
            **2005**Percentage of revenue for 3 largest customers
            53.1%
            
            54.2%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 16.4% to $2.8 million in the quarter ended September 30,
      2006 from $3.3 million in the quarter ended September 30, 2005. Gross margin
      as
      a percentage of net sales was 51.3% in the quarter
      ended September 30, 2006, compared
      to 31.1% in the quarter ended September 30, 2005.





The
      improvement in gross margin in the quarter ended September 30, 2006 is due
      to
      expense and cost reductions and a higher percentage of higher margin switches
      being sold. During the quarter ended September 30, 2006, no excess and obsolete
      inventory has been written off.





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 $1.1 million in the quarter
      ended September 30, 2006, compared to $1.1 million in the quarter ended
      September 30, 2005.





17





*Research
      and Development Expenses*





Research
      and development (“R&D”) expense was $1.2 million for the three month
      period ended September 30, 2006, compared to $1.1 million for the three
      month period ended September 30, 2005. The increase in R&D spending reflects
      the increased overhead associated with the purchase of new machinery. 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 September 30, 2006 and 2005 are as follows:





**Three
                months ended****September
                30,****(in thousands)**
            **2006**
            
            **2005**Other (expense) income:Interest expense
            $(180)
            
            $(283)Interest income
            677
            
            133Gain (loss) on disposal of fixed assets
            43
            
            118Gain/(Loss) on currency exchange
            73
            
            (41)Gain on disposal of expensed items
            375
            
            75Non-refundable extension payments
            
            
            150Other (expense) income, net
            1
            
            1$989
            
            $153





Interest
      expense primarily represents the costs of borrowing by DiCon for its mortgage
      loan on the facility
      in Richmond,
      California . ,  facility
      and its equipment loan. In the
      quarter ended September 30, 2006, the Company sold certain expensed precious
      metals used in the production process for total proceeds of $363. During
      September of 2006, the Company received a notice from the State of California
      that it was due a tax refund of $3.1 million which included interest of $0.4
      million.





*Income/(Loss)
      Before Income Tax*





The
      Company reported a net income before income tax of $1.5 million for the current
      quarter compared to a loss of $0.6 million for the same six months in the prior
      year. This is primarily due the sale of expensed items as explained above,
      for a
      gain of $0.6 million and an improvement in gross margin during the
      quarter.





*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 September 30, 2006 .
      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
      Company has substantial net operating loss carryforwards. The loss carryforwards
      can be applied to 90% of the current year income for Alternative Minimum Tax
      purposes. As a result, the effective tax rate for the three months (excluding
      the tax refund) ended September 30, 2006 was 1.7% compared to 0% for the three
      months ended September 30, 2005. The effective tax rate for the six months
      (excluding the tax refund) ended September 30, 2006 was 1.9% compared to 0%
      for
      the six months ended September 30, 2005. 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


**Six
      Months Ended September 30, 2006 Compared with Six Months Ended September 30,
      2005**





*Net
      Sales*





Net
      sales
      increased by 3% to $10.7 million for the six months ended September 30, 2006
      from $10.4 million for the six months ended September 30, 2005. 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 $3.3 million and
      $3.2 million of total net sales, or 30.8% and 31.2%, for the six months
      ended September 30, 2006 and 2005, respectively.





As
      of
      September 30, 2006 and 2005, the Company experienced the following
      concentrations in sales to customers.





**Six
                months ended****September
                30,****2006**
            
            **2005**Percentage of revenue for 3 largest customers
            54.1%
            
            56.3%No.
                of customers accounting for over 10% of net sales
            3
            
            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.
      For the six month period ended September 30, 2006 the three largest customers
      exceeding 10% of revenue were Marconi at 24%, Alcatel at 15% and Celestica
      at
      15%.





The
      Company sold it’s products to customers within and outside the United States as
      indicated below:







Revenues (in 000’s)
            **Six months
                ended                                     
                    Six months ended****September
                30                                                September
                30****2006**
            
            **2005**Within the US
            $3,270
            
            $3,155Outside the US
            7,388
            
            6,966Total
            $10,658
            
            $10,121








*Cost
      of Goods Sold and Gross Margin*





Costs
      of
      goods sold declined 24.1% to $5.3 million in the six months ended September
      30,
      2006 from $7.0 million in the six months ended September 30, 2005. Gross margin
      as a percentage of net sales was 50.1% in the six
      months ended September 30, 2006, compared to 32.6% in the six months ended
      September 30, 2005.





The
      improvement in gross margin in the six months ended September 30, 2006 is due
      to
      expense and cost reductions and a higher percentage of higher margin switches
      being sold. During the six months ended September 30, 2006, a nominal amount
      of
      excess and obsolete inventory has been written off.





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 $2.4 million in the six
      months ended September 30, 2006, compared to $2.3 million in the six months
      ended September 30, 2005.





19





*Research
      and Development Expenses*





Research
      and development (“R&D”) expense was $2.5 million for the six month
      period ended September 30, 2006, compared to $2.3 million for the six month
      period ended September 30, 2005. 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 six months ended September 30, 2006 and 2005 are as
      follows:





**Six
                months ended****September
                30,****(in thousands)**
            **2006**
            
            **2005**Other (expense) income:Interest expense
            $(365)
            
            $(599)Interest income
            925
            
            254Gain (loss) on disposal of fixed assets
            47
            
            174Gain/(Loss) on currency exchange
            109
            
            (204)Gain on disposal of expensed items
            598
            
            178Non-refundable extension payments
            
            
            225Other (expense) income, net
            1
            
            4$1,315
            
            $32





Interest
      expense primarily represents the costs of borrowing by DiCon for its mortgage
      loan on the facility
      in Richmond,
      California . ,  facility
      and its equipment loan. Interest
      income included $417 relating to an income tax refund from the State of
      California. In the six months ended September 30, 2006, the Company sold certain
      expensed precious metals used in the production process for total proceeds
      of
      $586.





*Income/(Loss)
      Before Income Tax*





The
      Company reported a net income before income tax of $1.8 million for the six
      months ended September 30, 2006 compared to a loss of $1.2 million for the
      same
      six months in the prior year. This is primarily due the sale of expensed items
      as explained above, for a gain of $0.6 million and an improvement in gross
      margin during the last six month period.





*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 September 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 September 30, 2006 was 2.6%
      (excluding the tax refund) compared to 0% for the six months ended September
      30,
      2005. 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.





20





**Liquidity
      and Capital Resources**





As
      of
      September 30, 2006, the Company had cash and cash equivalents of $2.3 million.
      In addition, the Company has $19.1 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 $1.4 million for the six months ended
      September 30, 2006 resulted from non-cash adjustments of $0.02 million to the
      net income of $1.4 million for the six months ended September 30 2006, a
      reduction of accounts receivable and inventories of 1.3 million. This cash
      inflow is partially offset by an increase in accounts payable of $0.5 million.
      The net cash provided by operating activities of $3.7 million for the six months
      ended September 30, 2005 resulted from non-cash adjustments of $2.6 million
      to
      the net loss of $1.2 million for the six months ended September 30 2005, a
      reduction of accounts receivable and inventories of 2.3 million.





The
      increase in cash flows from investing activities of $0.5 million for the six
      months ended September 30, 2006 was primarily due to an increase in net proceeds
      of $0.7 million from the sale and purchase of marketable securities offset
      by
      $0.2 million in purchases of properties property,
      plant and equipment .
      The
      increase in cash flows from investing activities of $0.7 million for the six
      months ended September 30, 2005 was primarily due to an increase in net proceeds
      of $0.6 million from the sale and purchase of marketable
      securities.





Cash
      used
      in financing activities decreased to $1.0 million for the six months ended
      September 30, 2006 from $4.1 million provided by financing activities in the
      six
      months ended September 30, 2005. This change is primarily attributable to the
      repayment of the mortgage loan.





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 September 30, 2006. During the year ended March 31, 2006, the Company
      voluntarily prepaid three additional $0.5 million equal installments that were
      originally due on January 1, 2006, April 1, 2006 and July 1, 2006 (see Note
      18
      ). In addition, the Company voluntarily prepaid an additional $8.5
      million  principal
      of the mortgage loan during the year ended March 31, 2006. This included $5.5
      million from the proceeds of land sale. The balance of the mortgage loan as
      of
      September 30, 2006 was $8.8 million with an interest rate of 7.25%.





Global
      maintained its line of credit of 80 million New Taiwan Dollars (or  approximately
      $2.5 million as of September 30, 2006) from a Taiwan bank. The line of credit
      will mature on October 31, 2006. 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 3.64% during the period. The
      amount drawn as of September 30, 2006 was 59.5 million New Taiwan Dollars (or
      approximately $1.8 million as of September 30, 2006) with an interest rate
      of
      3.64%.














21







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
      September 30, 2006, the Company’s future gross commitment under all leases was
      $0.1 million.


Global
      renewed its line of credit of 78 million New Taiwan Dollars (or  approximately
      $2.4 million as of September 30, 2006) from a Taiwan bank. The line of credit
      will mature on October 31, 2007. 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 3.64% during the period. The
      amount drawn as of September 30, 2006 was 59.5 million New Taiwan Dollars (or
      approximately $1.8 million as of September 30, 2006) with an interest rate
      of
      3.64%.













**Item
      3. Controls and Procedures.**





*(a)*  *Evaluation
      of Disclosure Controls and Procedures* .
      The
      undersigned principal executive and financial officer of DiCon the
      Company concludes
      that DiCon’s the
      Company’s disclosure
      controls and procedures are effective as of September 30, 2006, 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 September 30,
      2006, that has materially affected, or is reasonably likely to materially
      affect, the Company’s internal control over financial
      reporting.


22





**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.





**** None








(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.





23





**Item
      5.Other Information.**





None.





**Item
      6. Exhibits.**





Exhibit
                No.
            
            Description3.1
            
            Articles
                of Incorporation of DiCon Fiberoptics, Inc., filed June 2,
                1986.3.1.1
            
            Certificate
                of Amendment of the Articles of Incorporation of DiCon Fiberoptics,
                Inc.,
                filed November 9, 1988.3.1.2
            
            Certificate
                of Amendment of the Articles of Incorporation of DiCon Fiberoptics,
                Inc.,
                filed April 12, 2000.3.1.3
            
            Certificate
                of Amendment of the Articles of Incorporation of DiCon Fiberoptics,
                Inc.,
                filed January 24, 2001.3.1.4
            
            Certificate
                of Amendment of the Articles of Incorporation of DiCon Fiberoptics,
                Inc.,
                filed June 26, 2002.3.1.5
            
            Certificate
                of Amendment of the Articles of Incorporation of DiCon Fiberoptics,
                Inc.,
                filed October 26, 200631.1
            
            Certificate
                of President and Chief Executive Officer 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.





24





**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:
            November
                14, 2006
            By:
            /s/
                Ho-Shang Lee(Signature)Name:
            Ho-Shang
                Lee, Ph.D.Title:
            President
                and Chief Executive Officer
              (principal
                executive and financial officer)


25





**Exhibit
      Index**





Exhibit
                No.
            
            Description3.1
            
            Articles
                of Incorporation of DiCon Fiberoptics, Inc., filed June 2,
                1986.3.1.1
            
            Certificate
                of Amendment of the Articles of Incorporation of DiCon Fiberoptics,
                Inc.,
                filed November 9, 1988.3.1.2
            
            Certificate
                of Amendment of the Articles of Incorporation of DiCon Fiberoptics,
                Inc.,
                filed April 12, 2000.3.1.3
            
            Certificate
                of Amendment of the Articles of Incorporation of DiCon Fiberoptics,
                Inc.,
                filed January 24, 2001.3.1.4
            
            Certificate
                of Amendment of the Articles of Incorporation of DiCon Fiberoptics,
                Inc.,
                filed June 26, 2002.3.1.5
            
            Certificate
                of Amendment of the Articles of Incorporation of DiCon Fiberoptics,
                Inc.,
                filed October 26, 200631.1
            
            Certificate
                of President and Chief Executive Officer 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.





26