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SECURITIES AND EXCHANGE COMMISISSION

WASHINGTON, DC 20549


FORM 10-Q




(Mark One)

|  |  |                                                                                         
|- |  | ----------------------------------------------------------------------------------------
|x |  | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 
|  |  |                                                                                         
|  |  | For the quarterly period ended June 30, 2003, or                                        
|  |  |                                                                                         
|o |  | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|  |  |                                                                                         
|  |  | For the transition period from ____________ to __________                               
|  |  |                                                                                         
|  |  | Commission file number 0-49939                                                          



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DICON FIBEROPTICS, INC.

(Exact Name of Registrant as Specified in Its Charter)


|                                         |  |                    
|---------------------------------------- |  | -------------------
|California                               |  | 94-3006185         
|(State or Other Jurisdiction of          |  | (IRS Employer      
|Incorporation or Organization)           |  | Identification No.)
|                                         |  |                    
|1689 Regatta Blvd                        |  |                    
|Richmond, California                     |  | 94804              
|(Address of Principal Executive Offices) |  | (Zip Code)         

(510) 620-5000
(Registrants Telephone Number, Including Area Code)



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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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


TABLE OF CONTENTS



|                             |                                                                                                |  |  |  |  |  |  | 
|---------------------------- | ---------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I FINANCIAL INFORMATION
|                             | Item 1. Financial Statements.                                                                 
|                             | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
|                             | Item 3. Quantitative and Qualitative Disclosures about Market Risk.                           
|                             | Item 4. Controls and Procedures.                                                              
|PART II OTHER INFORMATION   
|                             | Item 1. Legal Proceedings.                                                                    
|                             | Item 2. Changes in 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 and Reports on Form 8-K.                                                     
|SIGNATURES                  
|Exhibit Index               
|Exhibit 31.1                
|Exhibit 31.2                
|Exhibit 32.1                
|Exhibit 32.2                



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Table of Contents

|        |  |                                                                                        |  |   
|------- |  | -------------------------------------------------------------------------------------- |  | --
|PART I  |  | FINANCIAL INFORMATION                                                                  |  | 3 
|Item 1. |  | Condensed Consolidated Financial Statements.                                           |  | 3 
|Item 2. |  | Managements Discussion and Analysis of Financial Condition
and Results of Operations. |  | 14
|Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk.                            |  | 19
|Item 4. |  | Controls and Procedures.                                                               |  | 20
|PART II |  | OTHER INFORMATION                                                                      |  | 20
|Item 1. |  | Legal Proceedings.                                                                     |  | 20
|Item 2. |  | Changes in Securities and Use of Proceeds.                                             |  | 20
|Item 3. |  | Defaults Upon Senior Securities.                                                       |  | 20
|Item 4. |  | Submission of Matters to a Vote of Security Holders.                                   |  | 21
|Item 5. |  | Other Information.                                                                     |  | 21
|Item 6. |  | Exhibits and Reports on Form 8-K.                                                      |  | 21
|        |  | Signatures.                                                                            |  | 22
|        |  | Exhibit Index.                                                                         |  | 23

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PART I

FINANCIAL INFORMATION




Item 1. Financial Statements.

DiCon Fiberoptics, Inc. and Subsidiary
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)

|                                                      |                                                                                                                                    |                                            |              |        |             |         |           |        |         |         | 
|----------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------------ | ------ | ----------- | ------- | --------- | ------ | ------- | ------- | 
|                                                      |                                                                                                                                    |                                            |              |        | June 30,    |         | March 31,
|                                                      |                                                                                                                                    |                                            |              |        | 2003        |         | 2003     
|                                                      |                                                                                                                                    |                                            |              |        | (unaudited) |         | (1)      
|                                                      |                                                                                                                                    |                                            |              |        |             |         |          
|Assets                                                |                                                                                                                                    |                                            |              |        |             |         |           |       
|Current assets:                                       |                                                                                                                                    |                                            |              |        |             |         |           |       
|                                                      | Cash and cash equivalents                                                                                                          |                                            | $            | 3,205  |             |         | $         | 3,757  |        
|                                                      | Marketable securities                                                                                                              |                                            |              | 24,678 |             |         |           | 10,851 |        
|                                                      | Accounts receivable, net of allowance for doubtful accounts of $135 and $77, respectively                                          |                                            |              | 2,307  |             |         |           | 2,203  |        
|                                                      | Inventories, net                                                                                                                   |                                            |              | 3,893  |             |         |           | 3,864  |        
|                                                      | Prepaid expenses and other current assets                                                                                          |                                            |              | 293    |             |         |           | 388    |        
|                                                      | Income tax receivable                                                                                                              |                                            |              | 15     |             |         |           | 15,262 |        
|                                                      | Deferred income taxes                                                                                                              |                                            |              | 387    |             |         |           | 268    |        
|                                                      |                                                                                                                                    |                                            |              |        |             |         |           |       
|                                                      |                                                                                                                                    | Total current assets                       |              |        | 34,778      |         |           |        | 36,593  |        
|Property, plant and equipment, net                    |                                                                                                                                    |                                            | 65,810       |        |             |         | 68,202    |       
|Deferred income taxes                                 |                                                                                                                                    |                                            | 813          |        |             |         | 739       |       
|Other assets                                          |                                                                                                                                    |                                            | 596          |        |             |         | 608       |       
|                                                      |                                                                                                                                    |                                            |              |        |             |         |           |       
|                                                      |                                                                                                                                    |                                            | Total assets |        | $           | 101,997 |           |        | $       | 106,142 | 
|                                                      |                                                                                                                                    |                                            |              |        |             |         |           |       
|Liabilities and Shareholders Equity                  |                                                                                                                                    |                                            |              |        |             |         |           |       
|Current liabilities:                                  |                                                                                                                                    |                                            |              |        |             |         |           |       
|                                                      | Accounts payable and accrued liabilities                                                                                           |                                            | $            | 6,465  |             |         | $         | 7,185  |        
|                                                      | Mortgage and other debt                                                                                                            |                                            |              | 4,634  |             |         |           | 3,927  |        
|                                                      | Income taxes payable                                                                                                               |                                            |              | 52     |             |         |           | 23     |        
|                                                      | Deferred compensation payable                                                                                                      |                                            |              | 153    |             |         |           | 33     |        
|                                                      |                                                                                                                                    |                                            |              |        |             |         |           |       
|                                                      |                                                                                                                                    | Total current liabilities                  |              |        | 11,304      |         |           |        | 11,168  |        
|Deferred compensation payable, net of current portion |                                                                                                                                    |                                            | 140          |        |             |         | 36        |       
|Deferred income taxes                                 |                                                                                                                                    |                                            | 2,925        |        |             |         | 2,997     |       
|Mortgage and other debt, net of current portion       |                                                                                                                                    |                                            | 28,038       |        |             |         | 28,565    |       
|                                                      |                                                                                                                                    |                                            |              |        |             |         |           |        |        
|                                                      |                                                                                                                                    | Total liabilities                          |              |        | 42,407      |         |           |        | 42,766  |        
|                                                      |                                                                                                                                    |                                            |              |        |             |         |           |       
|Commitments                                           |                                                                                                                                    |                                            |              |        |             |         |           |       
|Shareholders equity:                                 |                                                                                                                                    |                                            |              |        |             |         |           |       
|                                                      | Common stock: no par value; 200,000,000 shares authorized; 112,016,766 and 112,039,831 shares issued
and outstanding, respectively |                                            |              | 22,305 |             |         |           | 22,333 |        
|                                                      | Additional paid-in capital                                                                                                         |                                            |              | 13,199 |             |         |           | 13,199 |        
|                                                      | Deferred compensation                                                                                                              |                                            |              | (848   | )           |         |           | (970   | )      
|                                                      | Retained earnings                                                                                                                  |                                            |              | 26,954 |             |         |           | 30,838 |        
|                                                      | Accumulated other comprehensive loss                                                                                               |                                            |              | (2,020 | )           |         |           | (2,024 | )      
|                                                      |                                                                                                                                    |                                            |              |        |             |         |           |        |        
|                                                      |                                                                                                                                    | Total shareholders equity                 |              |        | 59,590      |         |           |        | 63,376  |        
|                                                      |                                                                                                                                    |                                            |              |        |             |         |           |       
|                                                      |                                                                                                                                    | Total liabilities and shareholders equity |              | $      | 101,997     |         |           | $      | 106,142 |        
|                                                      |                                                                                                                                    |                                            |              |        |             |         |           |       

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

(1) Balances at March 31, 2003 are derived from the audited Financial Statements at that date.

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DiCon Fiberoptics, Inc. and Subsidiary
Condensed Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except share and per share data)

|                                                                      |                                                                                                                                           |                          |         |                    |        |             |         |      |        |  
|--------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------- | ------------------------ | ------- | ------------------ | ------ | ----------- | ------- | ---- | ------ | -
|                                                                      |                                                                                                                                           |                          |         | Three Months Ended
|                                                                      |                                                                                                                                           |                          |         | June 30,          
|                                                                      |                                                                                                                                           |                          |         | 2003               |        | 2002       
|                                                                      |                                                                                                                                           |                          |         | (unaudited)        |        | (unaudited)
|                                                                      |                                                                                                                                           |                          |         |                    |        |            
|Net sales                                                             |                                                                                                                                           | $                        | 3,768   |                    |        | $           | 6,579   |     
|Cost of goods sold                                                    |                                                                                                                                           |                          | 4,584   |                    |        |             | 6,527   |     
|                                                                      |                                                                                                                                           |                          |         |                    |        |             |         |     
|Gross (loss) profit                                                   |                                                                                                                                           |                          | (816    | )                  |        |             | 52      |     
|Selling, general and administrative expenses                          |                                                                                                                                           |                          | 1,454   |                    |        |             | 3,013   |     
|Research and development expenses                                     |                                                                                                                                           |                          | 1,738   |                    |        |             | 5,542   |     
|                                                                      |                                                                                                                                           |                          |         |                    |        |             |         |     
|                                                                      |                                                                                                                                           |                          | 3,192   |                    |        |             | 8,555   |     
|                                                                      |                                                                                                                                           |                          |         |                    |        |             |         |     
|                                                                      |                                                                                                                                           | Loss from operations     |         |                    | (4,008 | )           |         |      | (8,503 | )
|Other income (expense):                                               |                                                                                                                                           |                          |         |                    |        |             |         |     
|                                                                      | Realized (losses) gains on sales of marketable securities                                                                                 |                          |         | 95                 |        |             |         | 47   |       
|                                                                      | Interest expense, net                                                                                                                     |                          |         | (364               | )      |             |         | (653 | )     
|                                                                      | Loss on disposal of property, plant and equipment                                                                                         |                          |         | (14                | )      |             |         | (8   | )     
|                                                                      | Others                                                                                                                                    |                          |         | 143                |        |             |         | (177 | )     
|                                                                      |                                                                                                                                           |                          |         |                    |        |             |         |     
|                                                                      |                                                                                                                                           | Loss before income taxes |         |                    | (4,148 | )           |         |      | (9,294 | )
|Income tax benefit                                                    |                                                                                                                                           |                          | 264     |                    |        |             | 3,038   |     
|                                                                      |                                                                                                                                           |                          |         |                    |        |             |         |     
|Net loss                                                              |                                                                                                                                           | $                        | (3,884  | )                  |        | $           | (6,256  | )   
|                                                                      |                                                                                                                                           |                          |         |                    |        |             |         |     
|Other comprehensive loss:                                             |                                                                                                                                           |                          |         |                    |        |             |         |     
|                                                                      | Foreign currency translation adjustment                                                                                                   |                          | $       | 85                 |        |             | $       | 917  |       
|                                                                      | Unrealized holding gains (losses) on marketable securities
arising during the period, net of realized gains (losses)
included in net loss |                          |         | (81                | )      |             |         | (502 | )     
|                                                                      |                                                                                                                                           |                          |         |                    |        |             |         |     
|Comprehensive loss                                                    |                                                                                                                                           | $                        | (3,880  | )                  |        | $           | (5,841  | )   
|                                                                      |                                                                                                                                           |                          |         |                    |        |             |         |     
|Basic and diluted net loss per share                                  |                                                                                                                                           | $                        | (0.03   | )                  |        | $           | (0.06   | )   
|                                                                      |                                                                                                                                           |                          |         |                    |        |             |         |     
|Average shares used in computing basic and diluted net loss
per share |                                                                                                                                           |                          | 112,032 |                    |        |             | 109,666 |     
|                                                                      |                                                                                                                                           |                          |         |                    |        |             |         |     

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

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DiCon Fiberoptics, Inc. and Subsidiary
Condensed Consolidated Statement of Cash Flows
(in thousands )

|                                                             |                        |                                                                                           |                                                           |                                                     |         |                             |         |             |        |       |        |  
|------------------------------------------------------------ | ---------------------- | ----------------------------------------------------------------------------------------- | --------------------------------------------------------- | --------------------------------------------------- | ------- | --------------------------- | ------- | ----------- | ------ | ----- | ------ | -
|                                                             |                        |                                                                                           |                                                           |                                                     |         | Three Months Ended June 30,
|                                                             |                        |                                                                                           |                                                           |                                                     |         | 2003                        |         | 2002       
|                                                             |                        |                                                                                           |                                                           |                                                     |         | (unaudited)                 |         | (unaudited)
|                                                             |                        |                                                                                           |                                                           |                                                     |         |                             |         |            
|Cash flows from operating activities:                        |                        |                                                                                           |                                                           |                                                     |         |                             |         |            
|                                                             |                        | Net loss                                                                                  |                                                           | $                                                   | (3,884  | )                           |         | $           | (6,256 | )    
|                                                             |                        | Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |                                                           |                                                     |         |                             |         |             |        |      
|                                                             |                        |                                                                                           | Depreciation                                              |                                                     |         | 2,401                       |         |             |        | 2,603 |       
|                                                             |                        |                                                                                           | Deferred incomes taxes                                    |                                                     |         | (265                        | )       |             |        | 856   |       
|                                                             |                        |                                                                                           | Provision for excess and obsolete inventories             |                                                     |         | 306                         |         |             |        | 165   |       
|                                                             |                        |                                                                                           | Provision for bad debts                                   |                                                     |         | 57                          |         |             |        |      |       
|                                                             |                        |                                                                                           | Loss on disposal of property, plant and equipment         |                                                     |         | 14                          |         |             |        | 8     |       
|                                                             |                        |                                                                                           | Realized gain on available-for-sale marketable securities |                                                     |         | (95                         | )       |             |        | (48   | )     
|                                                             |                        |                                                                                           | Interest accretion on deferred compensation liability     |                                                     |         | 328                         |         |             |        | 235   |       
|                                                             |                        |                                                                                           | Stock compensation expense                                |                                                     |         | 121                         |         |             |        | 488   |       
|                                                             |                        |                                                                                           | Changes in assets and liabilities:                        |                                                     |         |                             |         |             |        |       |       
|                                                             |                        |                                                                                           |                                                           | Accounts receivable                                 |         |                             | (162    | )           |        |       | 2,246  |  
|                                                             |                        |                                                                                           |                                                           | Inventories                                         |         |                             | (327    | )           |        |       | 385    |  
|                                                             |                        |                                                                                           |                                                           | Prepaid expenses and other current assets           |         |                             | 103     |             |        |       | 2,830  |  
|                                                             |                        |                                                                                           |                                                           | Income tax receivable                               |         |                             | 15,269  |             |        |       | (3,894 | )
|                                                             |                        |                                                                                           |                                                           | Other assets                                        |         |                             | 14      |             |        |       | 15     |  
|                                                             |                        |                                                                                           |                                                           | Accounts payable and accrued liabilities            |         |                             | (697    | )           |        |       | 67     |  
|                                                             |                        |                                                                                           |                                                           | Deferred compensation payable                       |         |                             | (103    | )           |        |       | (249   | )
|                                                             |                        |                                                                                           |                                                           |                                                     |         |                             |         |             |        |      
|                                                             |                        |                                                                                           |                                                           | Net cash provided by (used in) operating activities |         |                             | 13,080  |             |        |       | (549   | )
|                                                             |                        |                                                                                           |                                                           |                                                     |         |                             |         |            
|Cash flows from investing activities:                        |                        |                                                                                           |                                                           |                                                     |         |                             |         |            
|                                                             |                        | Purchases of marketable securities                                                        |                                                           |                                                     | (14,462 | )                           |         |             | (7,407 | )    
|                                                             |                        | Sales of marketable securities                                                            |                                                           |                                                     | 660     |                             |         |             | 123    |      
|                                                             |                        | Sales of property, plant and equipment                                                    |                                                           |                                                     | 18      |                             |         |             | 129    |      
|                                                             |                        | Purchases of property, plant and equipment                                                |                                                           |                                                     | 9       |                             |         |             | (1,037 | )    
|                                                             |                        |                                                                                           |                                                           |                                                     |         |                             |         |             |        |      
|                                                             |                        |                                                                                           |                                                           | Net cash used in investing activities               |         |                             | (13,775 | )           |        |       | (8,192 | )
|                                                             |                        |                                                                                           |                                                           |                                                     |         |                             |         |            
|Cash flows from financing activities:                        |                        |                                                                                           |                                                           |                                                     |         |                             |         |            
|                                                             |                        | Borrowings under mortgages and other debt                                                 |                                                           |                                                     | 691     |                             |         |             | 1,452  |      
|                                                             |                        | Repayment of mortgages and other debt                                                     |                                                           |                                                     | (520    | )                           |         |             | (1,093 | )    
|                                                             |                        | Proceeds from issuance of common stock, net of repurchases                                |                                                           |                                                     | (29     | )                           |         |             | 3,687  |      
|                                                             |                        | Stock purchase subscription                                                               |                                                           |                                                     |        |                             |         |             | 6,245  |      
|                                                             |                        |                                                                                           |                                                           |                                                     |         |                             |         |             |        |      
|                                                             |                        |                                                                                           |                                                           | Net cash provided by financing activities           |         |                             | 142     |             |        |       | 10,291 |  
|                                                             |                        |                                                                                           |                                                           |                                                     |         |                             |         |            
|Effect of exchange rate changes on cash and cash equivalents |                        |                                                                                           | 1                                                         |                                                     |         |                             | 32      |            
|                                                             |                        |                                                                                           |                                                           |                                                     |         |                             |         |            
|Net change in cash and cash equivalents                      |                        |                                                                                           | (552                                                      | )                                                   |         |                             | 1,582   |            
|Cash and cash equivalents, beginning of period               |                        |                                                                                           | 3,757                                                     |                                                     |         |                             | 10,170  |            
|                                                             |                        |                                                                                           |                                                           |                                                     |         |                             |         |            
|Cash and cash equivalents, end of period                     |                        | $                                                                                         | 3,205                                                     |                                                     |         | $                           | 11,752  |            
|                                                             |                        |                                                                                           |                                                           |                                                     |         |                             |         |            
|Supplemental disclosures of cash flow information:           |                        |                                                                                           |                                                           |                                                     |         |                             |         |            
|                                                             | Cash paid for interest |                                                                                           | $                                                         | 364                                                 |         |                             | $       | 418         |       
|                                                             |                        |                                                                                           |                                                           |                                                     |         |                             |         |             |        |      

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

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DiCon Fiberoptics, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(amounts in thousands, except share and per share amounts)



|1. |  | Nature of Operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | DiCon Fiberoptics, Inc. and Subsidiary (DiCon or the Company) develops,
manufactures and markets optical components, modules, and test instruments
for the optical communications markets. The Company is incorporated in
California and has a domestic manufacturing facility and headquarters in
California. The Company, through Global Fiberoptics Inc. (Global
Fiberoptics), its wholly owned Taiwanese subsidiary, formed in December
1999, also operates a manufacturing and sales facility in Kaohsiung, Taiwan,
and conducts manufacturing, marketing and sales activities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|2. |  | Basis of presentation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|   |  | The company operates and reports based on a fiscal year that ends on March
31. The accompanying unaudited condensed consolidated financial statements as
of June 30, 2003 and for the three months ended June 30, 2003 and June 30,
2002, respectively, have been prepared in accordance with generally accepted
accounting principles 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-K as filed with the Securities and Exchange
Commission (SEC) on June 27, 2003 (the Companys 10-K). 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. Certain part of
the footnote disclosures related to the interim financial information
included herein is also unaudited. Such financial information should be read
in conjunction with the condensed consolidated financial statements and
related notes thereto for the year ended March 31, 2003 as included in the
Companys 10-K.
|  
|   |  | The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amount of 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. |  | Recent accounting pronouncements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|   |  | In August 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, which was effective for
years beginning after December 15, 2001. SFAS No. 144 supersedes FASB
Statement No. 121 and parts of APB Opinion No. 30, Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions
Relating to Extraordinary Items. However, SFAS No. 144 retains the
requirement of APB Opinion No. 30 to report discontinued operations
separately from continuing operations and extends that reporting to a
component of an entity that either has been disposed of (by sale, by
abandonment, or in a distribution to owners) or is classified as held for
sale. SFAS No. 144 addresses financial accounting and reporting for the
impairment of certain long-lived assets and for long-lived assets to be
disposed of. The implementation of this standard did not have a material
impact on the Companys consolidated financial position, results of
operations or cash flows.                                                                                                         
|  
|   |  | In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). SFAS No. 146 requires that a liability for costs associated
with an exit or disposal activity be recognized and measured initially at
fair value only when the liability is incurred. The provisions of this
statement are effective for exit or disposal activities that are initiated
after December 31, 2002. The adoption of SFAS No. 146 did not have a material
impact on the Companys consolidated financial position, results of
operations or cash flows.                                                                                                                                                                                                                                                                                                                                                                                                     

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| |  | DiCon Fiberoptics, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(amounts in thousands, except share and per share amounts)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45 requires that a
liability be recorded in the guarantors balance sheet upon issuance of a
guarantee. In addition, FIN 45 requires disclosures about guarantees that an
entity has issued, including a rollforward of the entitys product warranty
liabilities. The Company will apply the recognition provisions of FIN 45
prospectively to guarantees issued or modified after December 31, 2002. The
Company believes the adoption of this standard will not have a significant
impact on its consolidated financial position, results of operations or cash
flows.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure  an amendment of FASB Statement No.
123. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements
of SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
Company is required to follow the prescribed format and provide the
additional disclosures required by SFAS No. 148 in its annual financial
statements for the year ended March 31, 2003 and must also provide the
disclosures in its quarterly reports containing condensed financial
statements for interim periods beginning with the quarterly period ended June
30, 2003. The Company did not elect to adopt the fair value method of
accounting for stock-based employee compensation and, accordingly, the
adoption of this standard had no material impact on its consolidated
financial position, results of operations or cash flows.
|
| |  | The Company accounts for stock-based compensation issued to employees using
the intrinsic value method of Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued to Employees, and, accordingly, presents
disclosure of pro forma information required under Statement of Financial
Accounting Standard (SFAS) No. 123, Accounting for Stock-Based
Compensation, as amended by SFAS No. 148, Accounting for Stock-Based
Compensation, Transition and Disclosure. Stock and other equity instruments
issued to non-employees are accounted for in accordance with SFAS No. 123 and
Emerging Issues Task Force Issue No. 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling Goods or Services, and recorded at their fair
value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Had compensation cost for the Companys stock option plans been determined
based on the fair value of such awards at the grant dates as prescribed by
SFAS No. 123, stock-based compensation costs would have impacted net (loss)
income and (loss) income per common share for the fiscal years ended June 30,
as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

|                                                                                         |                                                |   |                             |       |             |   |        |       |  
|---------------------------------------------------------------------------------------- | ---------------------------------------------- | - | --------------------------- | ----- | ----------- | - | ------ | ----- | -
|                                                                                         |                                                |   | Three Months Ended June 30,
|                                                                                         |                                                |   | 2003                        |       | 2002       
|                                                                                         |                                                |   | (unaudited)                 |       | (unaudited)
|                                                                                         |                                                |   |                             |       |            
|Net loss, as reported                                                                    |                                                | $ | (3,884                      | )     |             | $ | (6,256 | )    
|Add: Stock-based employee compensation expense
included in reported net loss, net of tax |                                                |   | 292                         |       |             |   | 470    |      
|Deduct: Compensation expense based on fair value
method, net of tax                      |                                                |   | (141                        | )     |             |   | (243   | )    
|                                                                                         |                                                |   |                             |       |             |   |        |      
|Pro forma net loss                                                                       |                                                | $ | (3,733                      | )     |             | $ | (6,029 | )    
|                                                                                         |                                                |   |                             |       |             |   |        |      
|                                                                                         | Reported net loss per share-basic and diluted  |   |                             | (0.03 | )           |   |        | (0.06 | )
|                                                                                         | Pro forma net loss per share-basic and diluted |   |                             | (0.03 | )           |   |        | (0.05 | )

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|   |  | DiCon Fiberoptics, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(amounts in thousand, except share and per share amounts)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | In January 2003, the EITF issued Issue No. 00-21 Accounting for Revenue
Arrangements with Multiple Deliverables. This EITF establishes the criteria
for recognizing revenue in arrangements when several items are bundled into
one agreement. EITF 00-21 does not allow revenue recognition unless the fair
value of the undelivered element is available and the element has stand-alone
value to the customer. EITF 00- 21 also provides guidance on allocating the
total contract revenue to the individual elements based upon the available
fair value of each deliverable. The Company does not expect the
implementation of this statement to have a material impact on its
consolidated financial position, results of operations or cash flows.                                                                                                                                                                                                                                      
|  
|   |  | In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an Interpretation of ARB No.
51. FIN 46 requires certain variable interest entities to be consolidated
by the primary beneficiary of the entity, if the equity investors in the
entity do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other
parties. FIN 46 is effective for all new variable interest entities created
or acquired after January 31, 2003. For variable interest entities created
or acquired prior to February 1, 2003, the provisions of FIN 46 must be
applied for the first interim or annual period beginning after June 15, 2003.
The Company believes the adoption of FIN 46 will not have a material impact
on its consolidated financial position, results of operations or cash flows.
|  
|   |  | In May 2003, the FASB has issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
The Statement improves the accounting for certain financial instruments that,
under previous guidance, issuers could account for as equity. It requires
that those instruments be classified as liabilities in balance sheets. Most
of the guidance in SFAS 150 is effective for all financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at
the beginning of the Companys third quarter of fiscal 2003. Management
anticipates that the adoption of SFAS No. 150 will not have a material impact
on the Companys consolidated financial statements.                                                                                                                                                                                                                                               
|  
|4. |  | Basic net loss per share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|   |  | Basic (loss) earnings per share is computed by dividing the net (loss) income
(numerator) by the weighted average number of common shares outstanding
(denominator) during the periods, excluding the dilutive effect of stock
options. Diluted net (loss) income per share gives effect to all potentially
dilutive common stock equivalents outstanding during the period. In
computing diluted net (loss) income per share, the average stock price for
the period is used in determining the number of shares assumed to be
purchased from the proceeds of stock option exercises.                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|   |  | The following is a reconciliation of the numerators and denominators of the
basic and diluted net (loss) income per share computations for the periods
presented below:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

|                                     |                                           |   |                             |         |             |   |       |         |  
|------------------------------------ | ----------------------------------------- | - | --------------------------- | ------- | ----------- | - | ----- | ------- | -
|                                     |                                           |   | Three Months Ended June 30,
|                                     |                                           |   | 2003                        |         | 2002       
|                                     |                                           |   | (unaudited)                 |         | (unaudited)
|                                     |                                           |   |                             |         |            
|Numerator:                           |                                           |   |                             |         |             |   |       |        
|                                     | Net loss                                  |   | $                           | (3,884  | )           |   | $     | (6,256  | )
|Denominator:                         |                                           |   |                             |         |             |   |       |        
|                                     | Basic and diluted weighted average shares |   |                             | 112,032 |             |   |       | 109,666 |  
|Basic and diluted net loss per share |                                           | $ | (0.03                       | )       |             | $ | (0.06 | )      



| |  | As a result of the losses incurred by the Company for the three months ended
June 30, 2003, weighted average options to purchase 4,707 shares of common
stock were anti-dilutive and excluded from the net loss per share
calculations.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|   |  | DiCon Fiberoptics, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(amounts in thousand, except share and per share amounts)
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
|  
|5. |  | Marketable Securities                                                                                                                                
|  
|   |  | Available for sale securities included in the consolidated balance sheets
as of June 30, 2003 and March 31, 2003 are as follows:                     

|                          |       |   |        |        |       |   |            |    |            |   |      |   |  |   |        |        | 
|------------------------- | ----- | - | ------ | ------ | ----- | - | ---------- | -- | ---------- | - | ---- | - |  | - | ------ | ------ | 
|                          |       |   |        |        |       |   | Unrealized |    | Unrealized |   | Fair
|                          |       |   | Cost   |        | Gains |   | Losses     |    | Value     
|                          |       |   |        |        |       |   |            |    |           
|June 30, 2003 (unaudited) |       |   |        |        |       |   |            |    |            |   |      |   |  |   |        |       
|Equity securities         |       | $ |       |        |       | $ |           |    |            | $ |     |   |  | $ |       |       
|Debt securities           |       |   | 24,678 |        |       |   |           |    |            |   |     |   |  |   | 24,678 |       
|                          |       |   |        |        |       |   |            |    |            |   |      |   |  |   |        |       
|                          | Total |   | $      | 24,678 |       |   | $          |   |            |   | $    |  |  |   |        |       | 
|                          |       |   |        |        |       |   |            |    |            |   |      |   |  |   |        |       
|March 31, 2003            |       |   |        |        |       |   |            |    |            |   |      |   |  |   |        |       
|Equity securities         |       | $ | 174    |        |       | $ | 81         |    |            | $ |     |   |  | $ | 255    |       
|Debt securities           |       |   | 10,596 |        |       |   |           |    |            |   |     |   |  |   | 10,596 |       
|                          |       |   |        |        |       |   |            |    |            |   |      |   |  |   |        |       
|                          | Total |   | $      | 10,770 |       |   | $          | 81 |            |   | $    |  |  |   | $      | 10,851 | 
|                          |       |   |        |        |       |   |            |    |            |   |      |   |  |   |        |       



|   |  | Debt securities include certificates of deposit with original maturities
of greater than 90 days.
|-- |  | -------------------------------------------------------------------------------------------------
|  
|6. |  | Inventories, net                                                                                 
|  
|   |  | Inventories consist of the following as of June 30, 2003 and March 31,
2003:                     

|                |       |   |             |       |           |   |       |       | 
|--------------- | ----- | - | ----------- | ----- | --------- | - | ----- | ----- | 
|                |       |   | June 30,    |       | March 31,
|                |       |   | 2003        |       | 2003     
|                |       |   |             |       |          
|                |       |   | (unaudited) |       |           |   |      
|Raw materials   |       | $ | 1,358       |       |           | $ | 1,989 |      
|Work-in-process |       |   | 1,874       |       |           |   | 1,409 |      
|Finished goods  |       |   | 661         |       |           |   | 466   |      
|                |       |   |             |       |           |   |       |      
|                | Total |   | $           | 3,893 |           |   | $     | 3,864 | 
|                |       |   |             |       |           |   |       |      



|7. |  | Property, Plant and Equipment, net                                                  
|-- |  | ------------------------------------------------------------------------------------
|  
|   |  | Property, plant and equipment consist of the following as of June 30, 2003
and 2002:

|                                    |  |             |         |           |  |   |         |  
|----------------------------------- |  | ----------- | ------- | --------- |  | - | ------- | -
|                                    |  | June 30,    |         | March 31,
|                                    |  | 2003        |         | 2003     
|                                    |  |             |         |          
|                                    |  | (unaudited) |         |           |  |  
|Land                                |  | $           | 10,000  |           |  | $ | 10,000  |  
|Building and leasehold improvements |  |             | 37,504  |           |  |   | 37,492  |  
|Machinery, equipment and fixtures   |  |             | 51,615  |           |  |   | 52,191  |  
|                                    |  |             |         |           |  |   |         |  
|Property, plant and equipment       |  |             | 99,119  |           |  |   | 99,683  |  
|Less: Accumulated depreciation      |  |             | (33,309 | )         |  |   | (31,481 | )
|                                    |  |             |         |           |  |   |         |  
|Property, plant and equipment, net  |  | $           | 65,810  |           |  | $ | 68,202  |  
|                                    |  |             |         |           |  |   |         |  



| |  | Depreciation expense was $2,401 and $10,245 for the quarter ended June 30,
2003 and for the year ended March 31, 2003.                 
| |  | ---------------------------------------------------------------------------------------------------------------------------------------
|
| |  | During the quarter ended June 30, 2003, the Company disposed of equipment and
furniture with a net book value of $7 for proceeds of $1.

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|   |  | DiCon Fiberoptics, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(amounts in thousand, except share and per share amounts)
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
|  
|8. |  | Accounts Payable and Accrued Liabilities                                                                                                             
|  
|   |  | Accounts payable and accrued liabilities consist of the following as of June
30, 2003 and March 31, 2003:                                            

|                               |  |          |       |           |  |   |       | 
|------------------------------ |  | -------- | ----- | --------- |  | - | ----- | 
|                               |  | June 30, |       | March 31,
|                               |  | 2003     |       | 2003     
|                               |  |          |       |          
|Accounts payable               |  | $        | 857   |           |  | $ | 2,151 | 
|Accrued payroll                |  |          | 882   |           |  |   | 325   | 
|Accrual for vacated properties |  |          | 431   |           |  |   | 519   | 
|Accrued liabilities            |  |          | 605   |           |  |   | 519   | 
|Advance payments               |  |          | 3,690 |           |  |   | 3,671 | 
|                               |  |          |       |           |  |   |       | 
|                               |  | $        | 6,465 |           |  | $ | 7,185 | 
|                               |  |          |       |           |  |   |       | 



|9. |  | Mortgage and Other Debt                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Company financed, in part, a new corporate campus by borrowing from a
bank a construction loan of $27,000 on August 24, 2000. In November 2001,
the same lender refinanced the outstanding balance of the construction loan
with a mortgage loan maturing 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
20th of each month (4.25 percent at June 30, 2003). Principal and interest
are payable monthly. The balance of the mortgage loan as of June 30, 2003 was
$26,035 and the balance of the loan at maturity is estimated to be $25,154 at
the current interest rate. 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.                                                                                                                                                                                                                                                                                                     
|  
|   |  | In June 2002, Global Fiberoptics renewed its line of credit of 200,000 New
Taiwan Dollars (or approximately $5,780 as June 30, 2003) from a Taiwan bank,
with interest based on a rate set by the bank at the time funds are drawn.
The line matures on June 30, 2003. The amount drawn as of June 30, 2003 was
$1,734 and was subsequently repaid in full during July 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|   |  | In April 2001, the Company obtained an equipment loan from a bank in the
amount of $7,250. The loan is secured by specific pieces of equipment. The
loan is repayable in equal monthly installments of principal and interest
over 60 months beginning May 30, 2001. On June 30, 2003, the loan balance was
$4,108. Effective April 30, 2002 and annually on April 30 of each year
thereafter, the Company may elect to fix the interest rate on the equipment
loan for a twelve month period at a rate of one-half of one percentage point
(0.5 percent) per annum in excess of the prime rate. As of June 30, 2003, the
Company had not elected the fixed rate option and the loan bore an interest
rate of prime plus 0.5 percent (4.50 percent on June 30, 2003). On March 31,
2003, the Company was in violation of two of the financial covenants under
this loan agreement. The bank agreed to waive the covenants, but added an
additional covenant requiring the Company to maintain a balance of cash and
marketable securities (excluding equity securities) of at least two times the
outstanding loan balance. The waiver was extended through March 31, 2004.
The Company was in compliance with the additional covenant as of June 30,
2003.
|  
|   |  | In December 2001, Global Fiberoptics issued commercial paper in the amount of
20,000 New Taiwan Dollars. Proceeds were used to repay borrowings under the
bank line of credit for Global Fiberoptics. This loan was repaid in April
2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

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|    |  | DiCon Fiberoptics, Inc. and Subsidiary
Notes to the Condensed Consolidated Financial Statements
(amounts in thousands, except share and per share amounts)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | In December 2002, Global Fiberoptics renewed its line of credit in Taiwan
backed by commercial paper issued by Global Fiberoptics for a maximum of
220,000 New Taiwan Dollars (or approximately $6,357 as of June 30, 2003).
The outstanding balance of any commercial paper under this line must be fully
secured by either cash deposit or bond fund certificate. As of June 30,
2003, Global Fiberoptics had issued commercial paper in the amount of 27,500
New Taiwan Dollars (or approximately $795 as of June 30, 2003) under this
line which will mature on December 24, 2003. The interest rate at June 30,
2003 was 1.12% and was based on a rate set by the bank at the time funds were
drawn.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|10. |  | 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 less than 85 percent of the
stocks fair value at the time of grant under the Option Plan or purchase
under the Purchase Plan. New options granted under the Option Plan generally
vest over five years and expire after ten years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|    |  | Under the terms of the Option Plan, employees who were participants in the
Phantom Stock Plan could convert their awarded phantom stock units and their
Contingently Promised Stock Units into (1) options with an exercise price of
$4.11 per share and cash payments of $4.11 per share (paid over four years);
(2) additional options with an exercise price of $4.11; or (3) a combination
of both (1) and (2). The cash payments and the options that were converted
from vested stock units vested immediately. The cash payments and the
options that were converted from Contingently Promised Units will vest in
accordance with the original vesting schedule, but not less than 20 percent
per year. At March 31, 2001, all phantom stock units for current employees
under the Phantom Stock Plan were converted to options or options and cash
payments pursuant to one of the alternatives noted above.                                                                                                                                                                                                                                                                      
|   
|    |  | Cash payments related to the conversion are payable in four annual
installments beginning on March 31, 2002. As of March 31, 2001, the Company
anticipated making four annual payments of $5,930 each commencing March 31,
2002 for those employees who elected to receive a cash payout in lieu of
additional options. The present value of the cash payments related to the
conversion of vested phantom stock units of $15,131 was recorded as a
liability as of March 31, 2001. The cash payments related to the conversion
of the Contingently Promised Units are subject to continuing employment and,
accordingly, the related expense and liability is accrued as it is 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.                                                                                                                                                                                                                                                                                                                                      

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| |  | DiCon Fiberoptics, Inc. and Subsidiary
Notes to the Condensed Consolidated Financial Statements
(amounts in thousands, except share and per share amounts)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | As of December 31, 2002, the total remaining undiscounted future 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 annual installment of $416 to those employees electing to receive
cash in lieu of additional options was paid on March 31, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | 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 September 30 and March 31. The Company could sell
up to 3,230 shares of stock under the Purchase Plan. Employees purchased 70
shares at a price of $3.85 per share on September 30, 2001 and 174 shares at
a price of $2.10 on March 31, 2002. In May 2002, the Company issued 659
additional shares of common stock to employees under the Purchase Plan for
aggregate cash consideration of $1,384 at a price of $2.10. In September
2002, the Company suspended the sale of shares to employees under the
Purchase Plan.
|
| |  | Compensation expense related to the Companys stock compensation plans has
been reflected in the Consolidated Statement of Operations and Comprehensive
Income (Loss) for the three months ended June 30, 2003 and 2002 as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

|                                             |  |                                     |     |             |  |   |     | 
|-------------------------------------------- |  | ----------------------------------- | --- | ----------- |  | - | --- | 
|                                             |  | For the three months ended June 30,
|                                             |  | 2003                                |     | 2002       
|                                             |  | (unaudited)                         |     | (unaudited)
|                                             |  |                                     |     |            
|Cost of goods sold                           |  | $                                   | 38  |             |  | $ | 73  | 
|Selling,
general and administrative expenses |  |                                     | 129 |             |  |   | 273 | 
|Research and development expenses            |  |                                     | 274 |             |  |   | 141 | 
|                                             |  |                                     |     |             |  |   |     | 
|                                             |  | $                                   | 441 |             |  | $ | 487 | 
|                                             |  |                                     |     |             |  |   |     | 



|11. |  | Income Tax Expense (Benefit)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The Companys income tax
benefit at June 30, 2003 of $264,000 is composed of a decrease
in the net deferred tax liability arising from temporary differences
between the financial reporting and tax bases of assets and
liabilities. Due to uncertainty surrounding the realization of the
favorable tax attributes in future tax returns, the Company recorded
a valuation allowance against its net operating losses and credits at
March 31, 2003. 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.

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|    |  | DiCon Fiberoptics, Inc. and Subsidiary
Notes to the Consolidated Financial Statements
(amounts in thousands, except share and per share amounts)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|12. |  | Product Warranties                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|    |  | 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 accrual, which is included as a component
of accounts payable and accrued liabilities on the Consolidated Balance
Sheets, are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

|                                           |  |             |     |           |  |   |      |  
|------------------------------------------ |  | ----------- | --- | --------- |  | - | ---- | -
|                                           |  | June 30,    |     | March 31,
|                                           |  | 2003        |     | 2003     
|                                           |  |             |     |          
|                                           |  | (unaudited) |     |           |  |  
|Balance at beginning of period             |  | $           | 56  |           |  | $ | 247  |  
|Accruals for warranties during the period  |  |             | 56  |           |  |   | 22   |  
|Settlements made (in cash) during the year |  |             | (66 | )         |  |   | (213 | )
|                                           |  |             |     |           |  |   |      |  
|Balance at closing of period               |  | $           | 46  |           |  | $ | 56   |  
|                                           |  |             |     |           |  |   |      |  

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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.



| |  | Certain statements contained in this report on Form 10-Q that are not purely
historical are forward-looking statements within the meaning of the federal
securities laws, including, without limitation, statements regarding DiCon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 Annual Report Form 10-K filed by DiCon with the SEC on June
27, 2003.                                                                                                                                                                                                                                                                                      
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Overview                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | DiCon designs and manufactures passive optical components, modules and test
instruments for current and next-generation optical communications markets.
DiCon designs and manufactures a broad portfolio of technically advanced
products that filter, split, combine and route light in optical networks.
DiCon also sells products used for testing optical devices and systems.
DiCon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. DiCon was founded in 1986 and first became profitable in 1988.
It remained profitable each fiscal year until the fiscal year ended March 31,
2002.                                                                                                                                                                      
|
| |  | DiCon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. DiCon markets and sells its products
worldwide through its direct sales force, its subsidiary Global Fiberoptics
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 been in 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. DiCon believes its customers, who typically are manufacturers of
telecommunications equipment, generally view the purchase of DiCons products
as a significant and strategic decision. As a result, customers typically
expend substantial effort in evaluating, testing and qualifying DiCon, its
products and its manufacturing processes. This customer evaluation and
qualification process frequently results in a lengthy initial sales cycle of
nine months or longer.                                                             
|
| |  | Beginning in January 2001, as the industry entered its downturn and
consolidation phase, various customers cancelled existing orders. In some
cases, DiCon was able to recover a portion of its costs through subsequent
transactions with these customers. However, the Company also incurred
substantial costs associated with obsolete inventory and cancelled orders.
During the fiscal year ended March 31, 2003, DiCon wrote off $4.1 million of
obsolete inventory as compared to $9.2 million in the prior year. The
Company assesses its inventory position on a monthly and quarterly basis with
its then current forecasts. The Company attempts to mitigate the impact of
such corrections by maintaining close, proactive relationships with its major
customers to obtain as much information about each customers needs as
possible. During the quarter ended June 30, 2003, DiCon wrote off $260,000
obsolete inventory.
|
| |  | In 2001, DiCon relocated its operations from leased facilities in Berkeley,
California, to a newly owned 200,000 square feet facility in Richmond,
California, which currently contains all of DiCons domestic manufacturing,
R&D, sales and administration operations. DiCon has continued its efforts to
consolidate its operations from different facilities in Berkeley and
Richmond, California. The Company has terminated four of its leased
facilities. The remaining lease obligations for the unutilized facilities,
net of expected sublease income, have been accrued as a liability in the
consolidated financial statements. The Company has reduced this reserve from
$1.8 million as of March 31, 2002, to $0.5 million as of March 31, 2003 as a
result of those terminations. The balance of this reserve is $431,000 as of
June 30, 2003.                                                                            
|
| |  | DiCon began its overseas manufacturing operations at its 44,000 square foot
WDM product assembly facility in Kaohsiung, Taiwan in January 2000. This
facility subsequently has been expanded through the purchase of an additional
44,000 square feet of space adjacent to the original facility. Although
DiCon 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.                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | DiCon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,
DiCon attempts to manage its manufacturing capacity to meet demand for
existing and new products; however, a certain portion of its costs are fixed
and as volumes decrease, these expenses are difficult to reduce
proportionately, if at all.                                                                                                                                                                                                                                                                                                                                                                                                                                                                

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| |  | 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 DiCons fiberoptic products. DiCon
expenses all of its research and development costs as incurred and does not
capitalize any research and development expenditures except for equipment
which has a useful life longer than one year and is useful for purposes other
than the current research and development project. DiCon believes that
research and development is critical to strategic product development and
expects to continue to devote significant resources to product research and
development, even in the face of decreased demand and a slow economy. DiCon
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.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Selling, general and administrative expenses include salaries, benefits,
commissions, product promotion and administrative expenses. DiCon expects
these expenses to continue to be substantial as the Company strives to
sustain its market share in the fiberoptic component manufacturing business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Other income (expenses), net consists primarily of interest and dividend
income, offset by interest expense, plus realized gains or losses on
investments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | DiCon maintains an Employee Stock Option Plan and an Employee Stock Purchase
Plan as a means of motivating its employees to make a tangible contribution
towards achieving its corporate objectives. In September 2002, DiCon
suspended the sale of DiCon shares to employees under the Employee Stock
Purchase Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | Critical Accounting Policies and Estimates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | The preparation of the Companys consolidated financial statements in
conformity with accounting principles generally accepted in the United States
of America requires estimates and judgments that affect the reported amounts
of assets and liabilities, 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 recognizes revenue upon shipment of the product provided that
persuasive evidence of a final agreement exists, delivery has occurred, the
selling price is fixed or determinable and collectibility is reasonably
assured. Revenue associated with contract-related cancellation payments from
customers is not recognized until a formal agreement is signed or a purchase
order issued by the customer covering such payments and the collectibility of
the cancellation payments is determined to be probable. The Company records
provisions against gross revenue for estimated product returns and allowances
in the period when the related revenue is recorded. Should actual product
returns and allowances exceed the Companys estimates, additional reductions
to revenue would result.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 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 for more
allowances than needed, the Company may reverse a portion of such provisions
in future periods based on actual collection experience.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  |  | Warranty accrual
| |  |  | ----------------



| |  | The Company normally provides warranties for its products for one year. The
Company provides reserves for the estimated costs 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, 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
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 provisions in future periods.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Inventory valuation
| |  |  | -------------------



| |  | The Company regularly assesses the valuation of inventories and writes down
those inventories that are obsolete or in excess of forecasted usage to their
estimated realizable value. Estimates of realizable value are based upon the
Companys analyses and assumptions including, but not limited to, forecasted
sales levels by product, expected product lifecycle, product development
plans and future demand requirements. If market conditions are less favorable
than the Companys forecast or actual demand from customers is lower than the
Companys estimates, the Company may be required to record additional
inventory write-downs. If demand is higher than expected, the Company may
sell inventories that had previously been written down.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Property, plant and equipment
| |  |  | -----------------------------



| |  | The Company evaluates the carrying value of property, plant and equipment
whenever certain events or changes in circumstances indicate that the
carrying amount may not be recoverable. Such events or circumstances include,
but are not limited to, a prolonged industry downturn, a significant decline
in the Companys market value, or significant reductions in projected future
cash flows. In assessing the recoverability of property, plant and equipment,
the Company compares the carrying value to the undiscounted future cash flows
the assets are expected to generate. If the total of the undiscounted future
cash flows is less than the carrying amount of the assets, the Company writes
down such assets based on the excess of the carrying amount over the fair
value of the assets. Fair value is generally determined by calculating the
discounted future cash flows using a discount rate based upon the Companys
weighted average cost of capital. Significant judgments and assumptions are
required in the forecast of future operating results used in the preparation
of the estimated future cash flows, including long-term forecasts of the
amounts and timing of overall market growth and the Companys percentage of
that market, groupings of assets, discount rate and terminal growth rates.
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 the assets.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Deferred taxes
| |  |  | --------------



| |  | The Company regularly assesses the likelihood that deferred tax assets will
be recovered from future taxable income. If necessary, the Company records a
valuation allowance to reduce deferred tax assets to the amount that the
Company believes to be realizable. The Company considers projected future
taxable income and ongoing tax planning strategies in assessing the amount of
the valuation allowance. If it is determined that the Company will not
realize all or part of deferred tax assets, an adjustment to the deferred tax
asset will be charged to earnings in the period such determination is made.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Financial Results                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Three Months Ended June 30, 2003 Compared with Three Months Ended June 30,
2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Net Sales                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Net sales declined 42.7% from $6.6 million for the quarter ended June 30,
2002 to $3.8 million for the quarter ended June 30, 2003. This decline
reflects the overall decline in the demand for fiberoptic components and test
equipment by telecommunications equipment vendors, the Companys primary
customers, as well as increased competition for the remaining business
opportunities. It is still unclear when an upturn in demand might occur.                                                                                                                                                                   

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| |  | In the quarter ended June 30, 2003, the Company recorded no revenue from
cancellations of prior supply agreements with customers compared with
$105,000 in cancellation revenue from this source in the same period of the
prior year. This revenue represents actual cash payments received during
that quarter.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | 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 even be greater. DiCon seeks to offset this trend through new
product introductions with higher average selling prices and 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. For the quarter ended June 30,
2003, the declining revenues were due both to a decline in selling prices and
to a significant decline in the volume of goods shipped.
|
| |  | 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 outside North America represented 52% of
total net sales in the quarter ended June 30,2003, as compared to 33% in the
quarter ended June 30, 2002, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | As of June 30, 2003 and 2002, the Company experienced the following
concentrations with sales.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

|                                                      |  |                    |      |      |  |  |      |  
|----------------------------------------------------- |  | ------------------ | ---- | ---- |  |  | ---- | -
|                                                      |  | Three months ended
|                                                      |  | June 30,           |     
|                                                      |  | 2003               |      | 2002
|                                                      |  |                    |      |     
|Percentage of revenue for 3 largest customers         |  |                    | 40.6 | %    |  |  | 36.6 | %
|No. of customers accounting for over 10% of net sales |  |                    | 2    |      |  |  | 2    |  



| |  | Sales to DiCons leading customers vary significantly from year to year and
DiCon does not have the ability to predict future sales to these customers.
However, if the downturn in the telecommunications industry continues, DiCon
expects telecommunications carriers to continue their current levels of
capital spending, which may further affect DiCons sales.                                                                                                                                                                                                                                                                                                                                 
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Cost of Goods Sold and Gross Margin                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | Costs of goods sold declined 29.8% from $6.5 million in the quarter ended
June 30, 2002, to $4.6 million in the quarter ended June 30, 2003. Gross
margin as a percentage of net sales was negative 21.7% in the quarter ended
June 30, 2003, compared to 0.8% in the quarter ended June 30, 2002. The
decrease in gross margin in the quarter ended June 30, 2003, from the quarter
ended June 30, 2002, was primarily attributable to reductions in sales volume
together with a continued decline in average selling prices, a lower margin
product mix due to lower sales of high-margin components, a write
down of inventory to lower of cost or market, and excess and obsolescence
of $506,000.
|
| |  | 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
DiCon will achieve or maintain gross margin percentages at historical levels
in future periods and DiCon expects losses to continue in future periods if
market demand stays at the current level.                                                                                                                                
|
| |  | Operating Expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Selling, General and Administrative Expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Selling, general and administrative (SG&A) expense was $1.4 million in the
quarter ended June 30, 2003, compared to $3.0 million in the quarter ended
June 30, 2002. The decrease in SG&A was the result of reduction in personnel
and other expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                               

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| |  | Research and Development Expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Research and development (R&D) expense was $1.7 million in the quarter
ended June 30, 2003, compared to $5.5 million in quarter ended June 30, 2002.
The decrease in R&D spending reflects the cost reductions resulting from
further consolidation of product development programs and workforce
reductions. Future expenditures are expected to fluctuate both in absolute
dollars and as a percentage of revenue based on the need to invest in new R &
D in order to remain competitive in this rapidly changing industry.                                                                                                                                                                                            
|
| |  | Other Income (Expense)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Other income (expense) composed of interest expense, net, realized (losses)
gains on sales of marketable securities, loss on disposal of fixed assets and
others. The reduction of other expense as compared to the same quarter of
the previous year is primarily attributable to decreased interest expenses
associated with DiCons real estate loan and equipment lease as well as
reduced imputed interest on required payments under the terms of the
conversion of the Phantom Stock Plan to the Employee Stock Option Plan.
Additionally, the Company received higher dividend and interest income at
June 30, 2003 than at June 30, 2002.                                                                          
|
| |  | For the quarter ended
June 30, 2003, others included dividends, interest and
rent income of $127,000, and net
currency exchange loss of $32,000. For the same quarter ended June 30,
2002, others was composed primarily of net currency exchange losses
of $375,000, offset by dividends, interest and rent income of $191,000.                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Loss Before Income Tax Benefit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | The Company reported a net loss
before income tax benefit of $4.1 million for
the current quarter compared to $9.3 million for the same quarter in the
prior year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Income Tax Benefit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | For the quarter ended June 30, 2002, the Company recorded $3.0 million of
income tax benefit. The Company has had sufficient income for federal income
tax purposes in prior years to carryback the anticipated losses from that
year, and to receive a refund. Thus, the Company has accrued an income tax
receivable for this amount. California state income taxes may not be carried
back to prior years. The losses for California purposes may result in lower
taxes paid in the future, depending on the then current tax laws for
California.                                                                                                                                                                       
|
| |  | The Companys income tax
benefit at June 30, 2003 of $264,000 is composed of a decrease
in the net deferred tax liability arising from temporary differences
between the financial reporting and tax bases of assets and
liabilities. Due to uncertainty surrounding the realization of the
favorable tax attributes in future tax returns, the Company recorded
a valuation allowance against its net operating losses and credits at
March 31, 2003. Management 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.
|
| |  | For the three months ended
June 30, 2003, the effective tax rate was 6.7%
compared to 32.7% for the same period in the prior year. The tax rate for
each period is the result of the consolidation of the tax provisions of the US
operation with that of the Taiwan operation of Global Fiberoptics, and can
vary substantially from period to period depending on the relative
performance of each operation.                                                                                                                                                                                                                                                                                                             
|
| |  | Liquidity and Capital Resources                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Net cash provided by operations of $13.0 million increased at June 30, 2003
from a cash outflow of $549,000 for the three months ended June 30, 2002.
The increase is primarily due to an income tax refund of $15.3 million offset
by the net loss for the three months ended June 30, 2003. Accounts
receivable were lower in the quarter ended June 30, 2003, due to a decline in
net sales. Inventory levels were lower primarily as a result of lower
purchase and production volumes, a write down of inventory to the
lower of cost or market, and due to the excess and obsolence inventory
provision.                                                                                                              

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| |  | Net cash from operations may continue to be negative unless the business
climate for the Company improves or the Company is able to substantially
reduce operating costs. If sales remain at current levels or decline further
and the Company is unable to reduce its spending rates substantially, the
Company will continue to use cash for operating expenses and may suffer
adverse consequences at some future date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Cash used in investing activities reflected new investments in certificates
of deposits with maturities in excess of 90 days of $14.5 million during the
quarter ended June 30, 2003. This is primarily the result of efforts to
increase earnings on working capital by lengthening the maturity of the
portfolio. All certificates mature in one year or less. Additionally, the
Company sold $660,000 of marketable securities during the current quarter.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Cash flows from financing activities declined from $10.3 million for the
quarter ended June 30, 2002 to $142,000 in the current quarter. This change
is primarily attributable to the sale of common stock for $3.7 million and a
stock subscription associated with accredited investors (which closed in the
second fiscal quarter of the prior year) for $6.2 million. Additionally,
cash flows from financing activities were impacted during the current quarter
from the decrease in borrowing under the line of credit and repayments of
mortgages and other debt.                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | The Company is required to comply with various operating and financial
covenants under its various borrowings. Operating covenants include
restrictions on (i) any change in business activities from those DiCon is
presently engaged in, (ii) certain types of investments and (iii) disposal of
assets. Financial covenants include minimum profitability requirements,
minimum tangible net worth requirements, minimum debt service requirements,
minimum debt service coverage ratios, minimum quick ratios, and maximum debt
to tangible net worth ratios. At March 31, 2003, the Company was in
violation of two of the financial covenants. These covenants were waived by
the lender, but the lender added an additional covenant requiring the Company
to maintain a balance of cash and marketable securities (excluding equity
securities) of at least two times the outstanding loan balance. The waiver
was extended through March 31, 2004. The Company was in compliance with the
additional covenant at June 30, 2003.
|
| |  | As of June 30, 2003, DiCon had cash and cash equivalents of $3.2 million. In
addition, in conformity with the requirements of generally accepted
accounting principles $24.7 million invested in certificates of deposit and
other marketable securities was 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 investable portfolio.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | DiCon 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. There remains some possibility that DiCon
may need to raise additional capital. For instance, it might need additional
capital in order to refinance the mortgage loans, finance unanticipated
growth or to invest in new technology or the payment of remaining
undiscounted future payments related to the conversion of the Companys
Phantom Stock Plan to its Option Plan. The remaining undiscounted future
payments were $565,000 as of June 30, 2003. There can be no certainty that
DiCon would be successful in raising the required capital or in raising
capital at acceptable rates.                                                                                                                                                                                                                                                    






| |  | Item 3. Quantitative and Qualitative Disclosures about Market Risk.                                                                                                                                                                                                                                      
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Interest Rate Sensitivity                                                                                                                                                                                                                                                                                
|
| |  | DiCon maintain its cash and cash equivalents primarily in money market funds
or other short-term marketable securities. DiCon does not have any
derivative financial instruments as of June 30, 2003. Accordingly, it does
not believe that its investments have material exposure to interest rate
risk.
|
| |  | Because its loans are variable rate, DiCon is subject to interest rate risk
for these liabilities. A 1% change in the prime rate would result in a change
in interest expense of up to $310,000 per year at the maximum level of loan
commitments DiCon has secured.                                     
|
| |  | The book value of the Companys debt approximates fair value due to the
short-term maturities and/or variable interest rates of the debt.                                                                                                                                                                
|
| |  | Market Risk                                                                                                                                                                                                                                                                                              
|
| |  | DiCon has limited investments in marketable equity securities. As of June
30, 2003, the Company had no marketable equity securities and as of June 30,
2002, the Company had marketable equity securities with an original cost of
$1.2 million that had an unrealized loss of $587,000.                 

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| |  | The Company invests its funds in excess of short-term working capital in
certificates of deposit and investment funds. These investments are placed
in several different financial institutions to minimize market risk. Some of
these investments are subject to market risks as interest rates change.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Exchange Rate Sensitivity                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | DiCons international business is subject to normal international business
risks including, but not limited to, differing economic conditions, changes
in political climate, differing tax structures, other regulations and
restrictions, and foreign exchange rate volatility. Accordingly, DiCons
future results could be materially adversely affected by changes in these or
other factors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | DiCon generates a portion of its sales from sales to customers located
outside the United States and from sales by its foreign subsidiary.
International sales are typically denominated in U.S. dollars.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | DiCons foreign subsidiary incurs most of its expenses in New Taiwan Dollars,
and therefore it uses New Taiwan Dollars as its functional currency.
Accordingly, DiCon has material exposure to foreign currency fluctuations
between the U.S. Dollar and the New Taiwan Dollar for (1) sales to its
subsidiary, (2) purchases from its subsidiary, and (3) revaluation of
monetary assets held by its subsidiary. In order to mitigate the Company#s
exposure to foreign currency exchange risks, the Company has entered into a
number of foreign currency forward contracts and options. Gains or losses on
these contracts are recognized as other income (expense) and have not been
significant. The Company does not use derivatives for trading purposes. As
of June 30, 2003 the accumulated currency translation loss resulting from the
translation of the financial position of Global Fiberoptics were $2 million
compared to a loss of $2.1 million as of the end of the previous quarter at
March 31, 2003.
|
| |  | DiCon considers its investment in its Taiwanese subsidiary to be essentially
permanent in duration. At June 30, 2003 the undistributed foreign earnings
amounted to approximately $11.2 million. 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 in Taiwan and in the United States.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           






|    |  | Item 4. Controls and Procedures.                                                                                                                                                                                                                                                                                                                                                                  
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(a) |  | Evaluation of Disclosure Controls and Procedures. The undersigned
principal executive officer and principal financial officer of DiCon conclude
that DiCons disclosure controls and procedures are effective as of June 30,
2003 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 DiCons
internal control over financial reporting identified in connection with the
evaluation required by paragraph (d) of Exchange Act Rule 13a-15 that
occurred during the quarter ended June 30, 2003, that has materially
affected, or is reasonably likely to materially affect, DiCons internal
control over financial reporting.




PART II

OTHER INFORMATION




Item 1. Legal Proceedings.



| |  | DiCon is not a party to any material pending legal proceedings, other than
ordinary routine litigation incidental to its business.
| |  | ----------------------------------------------------------------------------------------------------------------------------------




Item 2. Changes in Securities and Use of Proceeds.



| |  | None.
| |  | -----




Item 3. Defaults Upon Senior Securities.



| |  | None.
| |  | -----

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Item 4. Submission of Matters to a Vote of Security Holders.



| |  | No matters were submitted to a vote of DiCons security holders during the
period covered by this report.
| |  | ---------------------------------------------------------------------------------------------------------




Item 5. Other Information.



| |  | None.
| |  | -----




Item 6. Exhibits and Reports on Form 8-K.



| | (a) |  | Exhibits.
| | --- |  | ---------

|            |  |                                                                                                                  
|----------- |  | -----------------------------------------------------------------------------------------------------------------
|            |  |                                                                                                                  
|Exhibit No. |  | Description                                                                                                      
|            |  |                                                                                                                  
|31.1        |  | Certificate of President and Chief Executive Officer pursuant to
Section 302 of the Sarbanes  Oxley
Act of 2002.
|            |  |                                                                                                                  
|31.2        |  | Certificate of Vice President of Administration pursuant to
Section 302 of the Sarbanes  Oxley Act
of 2002.     
|            |  |                                                                                                                  
|32.1        |  | Certificate of President and Chief Executive Officer pursuant to
Section 906 of the Sarbanes  Oxley
Act of      
|            |  |                                                                                                                  
|32.2        |  | Certificate of Vice President of Administration pursuant to
Section 906 of the Sarbanes  Oxley Act
of 2002.     



| | (b) |  | Reports on Form 8-K.
| | --- |  | --------------------
|
| |     |  | None.               

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

|                      |  |                         |  |                                      
|--------------------- |  | ----------------------- |  | -------------------------------------
|                      |  | DICON FIBEROPTICS, INC.
|                      |  | (Registrant)           
|                      |  |                         |  |                                      
|Date: August 13, 2003 |  | By:                     |  | /s/ Ho-Shang Lee                     
|                      |  |                         |  |                                      
|                      |  |                         |  | (Signature)                          
|                      |  | Name:                   |  | Ho-Shang Lee, Ph.D.                  
|                      |  | Title:                  |  | President and Chief Executive Officer
|                      |  |                         |  | (principal executive officer)        
|Date: August 13, 2003 |  | By:                     |  | /s/ Jannett Wang                     
|                      |  |                         |  |                                      
|                      |  |                         |  | (Signature)                          
|                      |  | Name:                   |  | Jannett Wang                         
|                      |  | Title:                  |  | Vice President of Administration     
|                      |  |                         |  | (principal financial
officer)        

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Exhibit Index

|            |  |                                                                                                                  
|----------- |  | -----------------------------------------------------------------------------------------------------------------
|            |  |                                                                                                                  
|Exhibit No. |  | Description                                                                                                      
|            |  |                                                                                                                  
|31.1        |  | Certificate of President and Chief Executive Officer pursuant to
Section 302 of the Sarbanes  Oxley Act
of 2002.
|            |  |                                                                                                                  
|31.2        |  | Certificate of Vice President of Administration pursuant to
Section 302 of the Sarbanes  Oxley Act of
2002.     
|            |  |                                                                                                                  
|32.1        |  | Certificate of President and Chief Executive Officer pursuant to
Section 906 of the Sarbanes  Oxley Act
of 2002.
|            |  |                                                                                                                  
|32.2        |  | Certificate of Vice President of Administration pursuant to
Section 906 of the Sarbanes  Oxley Act of
2002.     

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