**UNITED STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      DC 20549**





**FORM
      10-QSB**


_________________________





(Mark
      One)





x
            Quarterly
                report pursuant to Section 13 or 15(d) of the Securities Exchange
                Act of
                1934For
                the quarterly period ended June 30, 2006, oro
            Transition
                report pursuant to Section 13 or 15(d) of the Securities Exchange
                Act of
                1934For
                the transition period from ____________ to
                _____________Commission
                file number 0-49939





_________________________





**DICON
      FIBEROPTICS, INC.**


(Exact
      Name of Small Business Issuer as Specified in Its Charter)





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





**(510)
      620-5000**


(Issuer’s
      Telephone Number, Including Area Code)


_________________________





Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days.





Yes  x  No  o








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





Yes  o  No  x








The
      number of shares outstanding of the issuer’s common stock as of June 30, 2006,
      was 111,907,283





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





__________________________________________________________________________________________________________


1





**DICON
      FIBEROPTICS, INC.**





**Table
      of Contents**




**PART
                I**
            **FINANCIAL
                INFORMATION****Item
                1.**
            **Financial
                Statements.****Item
                2.**
            **Management’s
                Discussion and Analysis or Plan of Operation.****Item
                3.**
            **Controls
                and Procedures.****PART
                II**
            **OTHER
                INFORMATION****Item
                1.**
            **Legal
                Proceedings.****Item
                2.**
            **Unregistered
                Sales of Equity Securities and Use of Proceeds.****Item
                3.**
            **Defaults
                Upon Senior Securities.****Item
                4.**
            **Submission
                of Matters to a Vote of Security Holders.****Item
                5.**
            **Other
                Information.****Item
                6.**
            **Exhibits.****Signatures.****Exhibit
                Index.**





2





**PART
      I**





**FINANCIAL
      INFORMATION**





**Item
      1. Financial Statements.**


**DiCon
                Fiberoptics, Inc. and Subsidiary**
              **Unaudited
                Consolidated Balance Sheets**
              **(in
                thousands)****June
                30,**
            
            **March
                31,****2006**
            
            **200****5****6**
              **(1)****Assets**Current
                assets:Cash
                and cash equivalents
            
            $
            2,854
            
            $
            1,411Marketable
                securities
            
            
            18,965
            
            
            19,785Accounts
                receivable, net of allowance for doubtful accounts of $54
                and$188, respectively
            
            
            3,688
            
            
            2,379Inventories
            
            
            2,054
            
            
            2,246Interest
                receivables and prepaid expenses
            
            
            339
            
            
            423Total
                current assets
            
            
            27,900
            
            
            26,244Property,
                plant and equipment, net
            
            
            36,778
            
            
            37,225Other
                assets
            
            
            11
            
            
            12Total
                assets
            
            $
            64,689
            
            $
            63,481**Liabilities
                and Shareholders' Equity**Current
                liabilities:Accounts
                payable and accrued liabilities
            
            $
            1,901
            
            $
            1,569Advances
                received from customers
            
            
            3,676
            
            
            3,663Current
                portion of mortgage and other debt
            
            
            2,577
            
            
            2,319Total
                current liabilities
            
            
            8,154
            
            
            7,551Mortgage
                and other debt, net of current portion
            
            
            9,685
            
            
            9,332Total
                liabilities
            
            
            17,839
            
            
            16,883Commitments
                (Note 14)Shareholders'
                equity:Common
                stock: no par value; 200,000 shares authorized; 111,907 and 111,914
                shares
                issued and outstanding at June 30, 2006 and March 31, 2006,
                respectively
            
            
            22,196
            
            
            22,204Additional
                paid-in capital
            
            
            13,265
            
            
            13,265Deferred
                compensation
            
            
            (23
            )
            
            (28
            )Retained
                earnings
            
            
            11,854
            
            
            11,607Accumulated
                other comprehensive income/(loss)
            
            
            (442
            )
            
            (450
            )Total
                shareholders' equity
            
            
            46,850
            
            
            46,598Total
                liabilities and shareholders' equity
            
            $
            64,689
            
            $
            63,481





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





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





3





**DiCon
                Fiberoptics, Inc. and Subsidiary**
              **Unaudited
                Consolidated Statements of Operations and Comprehensive
                Income/(Loss)**
              **(in
                thousands, except per share data)****For
                the three months ended**
              **June
                30,****2006**
            
            **2005**Net
                sales
            
            $
            5,011
            
            $
            5,626Cost
                of goods sold
            
            
            2,573
            
            
            3,724Gross
                profit
            
            
            2,438
            
            
            1,902Selling,
                general and administrative expenses
            
            
            1,231
            
            
            1,197Research
                and development expenses
            
            
            1,274
            
            
            1,1372,505
            
            
            2,334Gain/(Loss)
                from operations
            
            
            (67
            )
            
            (432
            )Other
                (expense) income:Interest
                expense
            
            
            (185
            )
            
            (315
            )Interest
                income
            
            
            248
            
            
            121Gain
                on disposal of fixed assets
            
            
            4
            
            
            56Other
                income, net
            
            
            259
            
            
            18Income/(Loss)
                before income taxes
            
            
            259
            
            
            (552
            )Income
                tax expense
            
            
            12
            
            
            -Net
                Income/(loss)
            
            $
            247
            
            $
            (552
            )Other
                comprehensive income (loss):Foreign
                currency translation adjustment
            
            
            -8
            
            
            157Comprehensive
                income/(loss)
            
            $
            255
            
            $
            (395
            )Net
                income/(loss) per share - Basic
            
            
            nil
            
            
            nilNet
                income/(loss) per share - Diluted
            
            
            nil
            
            
            nilAverage
                shares used in computing net income/(loss) per share - basic
            
            
            111,912
            
            
            111,947Average
                shares used in computing net income/(loss) per share -
                diluted
            
            
            111,967
            
            
            111,947





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





4





**DiCon
                Fiberoptics, Inc. and Subsidiary**
              **Unaudited
                Consolidated Statement of Cash Flows**
              **(in
                thousands)****Three
                Months Ended****June
                30,****2006**
            
            **2005****Cash
                flows from operating activities:**Net
                income/(loss)
            
            $
            247
            
            $
            (552
            )Adjustments
                to reconcile net income/(loss) to net cash provided by (used in)
                operating
                activities:Depreciation
            
            
            610
            
            
            1,572Write
                down excess and obsolete inventories
            
            
            (30
            )
            
            -Provision
                for bad debts
            
            
            (2
            )
            
            8(Gain)
                loss on disposal of property, plant and equipment
            
            
            (4
            )
            
            (56
            )Stock
                compensation expense
            
            
            5
            
            
            33Changes
                in assets and liabilities:Accounts
                receivable
            
            
            (1,306
            )
            
            1,535Inventories
            
            
            228
            
            
            337Prepaid
                expenses and other current assets
            
            
            84
            
            
            (31
            )Other
                assets
            
            
            0
            
            
            27Accounts
                payable and accrued liabilities
            
            
            333
            
            
            (524
            )Net
                cash provided by (used in) operating activities
            
            
            165
            
            
            2,349**Cash
                flows from investing activities:**Purchases
                of marketable securities
            
            
            (6,158
            )
            
            (6,297
            )Sales
                of marketable securities
            
            
            6,986
            
            
            6,979Sale
                of property, plant and equipment
            
            
            4
            
            
            60Purchases
                of property, plant and equipment
            
            
            (146
            )
            
            (102
            )Net
                cash provided by investing activities
            
            
            686
            
            
            640**Cash
                flows from financing activities:**Borrowings
                under mortgages and other debt
            
            
            1,507
            
            
            669Repayment
                of mortgages and other debt
            
            
            (897
            )
            
            (2,588
            )Repurchases
                of common stock
            
            
            (8
            )
            
            (8
            )Net
                cash (used in) provided by financing activities
            
            
            602
            
            
            (1,927
            )Effect
                of exchange rate changes on cash and cash equivalents
            
            
            (10
            )
            
            2Net
                change in cash and cash equivalents
            
            
            1,443
            
            
            1,064Cash
                and cash equivalents, beginning of period
            
            
            1,411
            
            
            1,784Cash
                and cash equivalents, end of period
            
            $
            2,854
            
            $
            2,848**Supplemental
                disclosures of cash flow information:**Cash
                paid for interest
            
            $
            185
            
            $
            301





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





5





**DiCon
      Fiberoptics, Inc. and Subsidiary**


**Notes
      to Unaudited Consolidated Financial Statements**


**(in
      thousands)**


**_________________________________________________________________________________________________________**





**1.**
            **Nature
                of operations**





The
      business of DiCon Fiberoptics, Inc. and Subsidiary (the “Company”) is
      developing, manufacturing, and marketing optical components, modules, and test
      instruments for optical communications markets. DiCon Fiberoptics, Inc.
      (“DiCon”) , is
      incorporated in California. The Company has its
      headquarters and a
      domestic manufacturing facility and
      headquarters in
      California. The Company, through Global Fiberoptics Inc. (“Global”), its wholly
      owned Taiwanese subsidiary, formed in December 1999, also operates a
      manufacturing and sales facility in Kaohsiung, Taiwan, and conducts
      manufacturing and Asian marketing , and
      sales activities there.





**2.**
            **Basis
                of presentation**





The
      Company operates and reports based on a fiscal year that ends on March 31st.
      The
      accompanying unaudited consolidated financial statements have been prepared
      in
      accordance with generally accepted accounting principles in the United States
      of
      America for interim financial information and on the same basis of presentation
      as the audited financial statements included in the Company’s Annual Report on
      Form 10-KSB/A-1 as filed with the Securities and Exchange Commission (SEC)
      on
      June 28, 2006 (the “Company’s 10-KSB/A-1”).  Accordingly,
      they do not include all of the information and footnotes required by generally
      accepted accounting principles for audited financial statements. In the opinion
      of the Company’s management, the interim information includes all adjustments,
      consisting only of normal recurring adjustments, necessary for a fair
      presentation of the results for the interim periods. Footnote disclosures
      related to the interim financial information included herein are also unaudited.
      Such financial information should be read in conjunction with the audited
      consolidated financial statements and related notes thereto for the year ended
      March 31, 2006 included in the Company’s Form 10-KSB.





The
      preparation of financial statements in accordance with generally accepted
      accounting principles in the United States requires management to make estimates
      and assumptions that affect the reported amount of assets and liabilities and
      disclosures of contingent assets and liabilities at the date of the financial
      statements and the reported amount of revenues and expenses during the reporting
      period. Actual results could differ from these estimates.





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





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




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







6





**DiCon
      Fiberoptics, Inc. and Subsidiary**


**Notes
      to Unaudited Consolidated Financial Statements**


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


**__________________________________________________________________________________________________________**
















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




In
      June
      2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
      No. 48, “Accounting for Uncertainty in Income Taxes.” Interpretation No. 48
      creates a single model to address uncertainty in tax positions and clarifies
      the
      accounting for income taxes by prescribing the minimum recognition threshold
      a
      tax position is required to meet before being recognized in the financial
      statements. Under the Interpretation, a tax position can the recognized in
      the
      financial statements if it is more likely than not that the position will be
      sustained upon examination by the taxing authorities who have full knowledge
      of
      all relevant information. A tax position that meets the more-likely-than-not
      recognition threshold is measured at the largest amount of benefit that is
      greater the 50 percent likely of being realized upon settlement. Interpretation
      No. 48 also provides guidance on derecognition, classification, interest and
      penalties, accounting in interim periods, disclosure and transition.
      Interpretation No. 48 is effective beginning in 2007. We have not yet determined
      the impact of adopting Interpretation No. 48 on our consolidated financial
      statements.








7


**DiCon
      Fiberoptics, Inc. and Subsidiary**


**Notes
      to Unaudited Consolidated Financial Statements**


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


**___________________________________________________________________________________________________________**





**5.**
            **Liquidity**





As
      of
      June 30, 2006, the Company had cash and cash equivalents of $2.9 million. In
      addition, in conformity with the requirements of generally accepted accounting
      principles, $19.0 million was invested in certificates of deposit and other
      marketable securities that were classified as marketable securities. The Company
      invests cash in excess of short-term needs in these investments to attempt
      to
      improve yields on its total investment portfolio.





The
      Company believes its current cash and cash equivalents and marketable securities
      will be sufficient to meet its anticipated cash needs for working capital and
      capital expenditures for at least the next 12 months. There remains some
      possibility that the Company may need to raise additional capital. For instance,
      it might need additional capital in order to refinance its loans, finance
      unanticipated growth or to invest in new technology. There can be no certainty
      that the Company would be successful in raising the required capital or in
      raising capital at acceptable rates.





**6.**
            **Basic
                net income/(loss) per
                share**





Basic
      income/(loss) per share is computed by dividing the net income or loss
      (numerator) by the weighted average number of common shares outstanding
      (denominator) during the periods presented, excluding the dilutive effect of
      stock options. Diluted net income or loss per share gives effect to all
      potentially dilutive common stock equivalents outstanding during the period.
      In
      computing diluted net income or loss per share, the average stock price for
      the
      period is used in determining the number of shares assumed to be purchased
      from
      the proceeds of stock option exercises.





The
      following is a reconciliation of the numerators and denominators of the basic
      and diluted net income/(loss) per share computations for the periods presented
      below:


**For
                the three months ended****June
                30,****2006**
            
            
            **2005**Numerator:Net
                income/(loss)
            
            $
            247
            
            $
            (552
            )Denominators:Basic
                shares
            
            
            111,912
            
            
            111,947Diluted
                shares
            
            
            111,967
            
            
            111,947Net
                income/(loss) per share-Basic
            
            
            nil
            
            
            nilNet
                income/(loss) per share-Diluted
            
            
            nil
            
            
            nil





Stock
      options totaling 4,129 for the three months ended June 30, 2005, were not
      included in the diluted earnings per share amounts as their effect would have
      been anti-dilutive.





8


**DiCon
      Fiberoptics, Inc. and Subsidiary**


**Notes
      to Unaudited Consolidated Financial Statements**


**(in
      thousands)**


**__________________________________________________________________________________________________________**





**7.**
            **Marketable
                Securities**





The
      value
      of the Company’s investments by major security type is as follows:





**Cost**
            
            **Unrealized**
            
            **Unrealized**
            
            **Fair****Gain**
            
            **Losses**
            
            **Value****June
                30, 2006**Certificate
                of Deposit
            $18,965
            
            $-
            
            $-
            
            $18,965**March
                31, 2006**Certificate
                of Deposit
            $18,783
            
            $-
            
            $-
            
            $18,783Foreign
                Mutual Fund
            1,001
            
            1
            
            
            
            1,002





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





**8.**
            **Inventories**





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




**June
                30****,**
            
            **March
                31,****2006**
            
            **2006**Raw
                materials
            $634
            
            $634Work-in-process
            1,420
            
            1,612Total
            $2,054
            
            $2,246





During
      the three months period ended June 30, 2006, the Company recovered $.03 million
      of inventory previously written off. During the fiscal year ended March 31,
      2006, the Company wrote off approximately $0.3 million of obsolete
      inventory.





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





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





**June
                30,**
            
            **March
                31,****2006**
            
            **2006**Land
            $5,944
            
            $5,944Building
                and improvements
            33,294
            
            33,281Machinery,
                equipment and fixtures
            39,446
            
            39,295Property,
                plant and equipment
            78,684
            
            78,520Less:
                Accumulated depreciation
            (41,906)
            
            (41,295)Property,
                plant and equipment, net
            $36,778
            
            $37,225





Depreciation
      expense was $610 and $4,498 for the three months ended June 30, 2006 and for
      the
      year ended March 31, 2006.





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


During
      the year ended March 31, 2005, the Company consolidated its research &
development (“R&D”) projects to better align its business needs with
      existing operations and to provide more efficient use of its facilities. As
      a
      result, certain R&D projects were discontinued and it was
      determined that related support equipment had no alternative use within the
      Company. Accordingly the equipment was either abandoned or scrapped. The loss
      on
      the disposal of fixed assets was $1,935 for the year ended March 31, 2005.
      In
      addition the Company wrote off excess and idle equipment with a net book value
      of $796 in the year ended March 31, 2005.







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


9





**DiCon
      Fiberoptics, Inc. and Subsidiary**


**Notes
      to Unaudited Consolidated Financial Statements**


**(in
      thousands)**


_________________________________________________________________________________________________________





**10.**
            **Accounts
                Payable and Accrued
                Liabilities**





Accounts
      payable and accrued liabilities consist of the following as of June 30, 2006
      and
      March 31, 2006:


**June
                30,**
            
            **March
                31,****2006**
            
            **2006**Accounts
                payable
            $563
            
            $428Accrued
                payroll
            562
            
            527Temporary
                receipts
            178
            
            2Accrued
                liabilities
            598
            
            612$1,901
            
            $1,569





**11.**
            **Mortgage
                and Other Debt******





The
      Company financed, in part, a new corporate campus by obtaining a construction
      loan from a bank of $27.0 million on August 24, 2000. In November 2001, the
      same bank refinanced the outstanding balance of the construction loan with
      a
      mortgage loan maturing on November 20, 2004, with an amortization schedule
      based
      on a 25-year loan. Interest on the mortgage loan is accrued at a variable
      interest rate based on changes in the lender’s prime rate as of the
      20 th of each
      month. Principal and interest are payable monthly. During the year ended March
      31, 2002, the Chairman, President and Chief Executive Officer of the institution
      with which the Company maintains the mortgage loan was appointed to the
      Company’s Board of Directors.





On
      June
      28, 2004, the bank agreed to extend the maturity date of the mortgage loan
      to
      October 20, 2007, subject to additional terms and conditions requiring the
      Company to make additional principal repayments as follows: $1.5 million 10
      days
      after the date of execution of the loan extension agreement; $1.0 million on
      October 1, 2004; and seven installments each in the amount of $0.5 million
      on
      the first day of each calendar quarter, commencing on January 1, 2005 and ending
      on July 1, 2006.





The
      Company was in compliance with the additional principal repayments requirement
      as of June 30, 2006. During the year ended March 31, 2006, the Company
      voluntarily prepaid three additional $0.5 million equal installments that were
      originally due on January 1, 2006, April 1, 2006 and July 1, 2006. In addition,
      the Company voluntarily prepaid an additional $8.5 million  principal
      of the mortgage loan during the year ended March 31, 2006. This included $5.5
      million from the proceeds of land sale. The balance of the mortgage loan as
      of
      March 31, 2006 was $10.0 million with an interest rate of 7.5%.





On
      April
      10, 2006, the bank agreed to extend the final payment date of the mortgage
      loan
      from October 20, 2007, to October 20, 2017,
      and
      decrease the interest rate on the  mortgage loan from the Index to the
      Index minus 1%





Global
      maintained its line of credit of 80 million New Taiwan Dollars (or  approximately
      $2.5 million as of June 30, 2006) from a Taiwan bank. The line of credit will
      mature on September 30, 2006. The interest rate is based on a rate set by the
      bank at the time funds are drawn. Annual
      rate of interest on the borrowings was 3.47% during the period. The
      amount drawn as of June 30, 2006 was 78.5 million New Taiwan Dollars (or
      approximately $2.4 million as of June 30, 2006) with an interest rate of
      3.47%.





10


**DiCon
      Fiberoptics, Inc. and Subsidiary**


**Notes
      to Unaudited Consolidated Financial Statements**


**(in
      thousands)**


__________________________________________________________________________________________________________





**12.**
            **Stock
                Plans and Deferred Compensation Liability**





As
      an
      incentive for employees to assist in growing the Company, prior to March 31,
      2001 the Company maintained a phantom stock plan (the “Phantom Stock Plan”)
      under which it granted eligible employees phantom stock units that entitled
      the
      employees to participate in the current and future value of the Company. In
      addition, the Company made contingent commitments to eligible employees to
      grant
      stock units in the future (the “Contingently Promised Stock Units”). The shares
      under the plan were valued semiannually, typically in May and December. These
      stock units vested 50 percent upon receipt and 50 percent on the first
      anniversary of the grant date and had an exercise price of zero. During the
      service period of one-year following the date of the grant, the vested units
      could be redeemed for cash on a net basis by forfeiting additional units equal
      to the number of units redeemed. Thereafter, a maximum of 60 percent of the
      units could be redeemed while the holder was still an employee of the Company.
      The Company recorded a liability for the value of the unredeemed vested shares
      at the current value as of the financial statement date.





On
      March
      31, 2001, the Company offered its employees two new equity incentive plans,
      an
      Employee Stock Option Plan (the “Option Plan”) and an Employee Stock Purchase
      Plan (the “Purchase Plan”). Grants under the Phantom Stock Plan have been
      discontinued. Under both the Option Plan and the Purchase Plan, the exercise
      or
      purchase price is not to be less than 85 percent of the fair value of Company’s
      common stock at the time of grant under the Option Plan or purchase under the
      Purchase Plan. New options granted under the Option Plan generally vest over
      five years and expire after ten years.





Under
      the
      terms of the Option Plan, employees who were participants in the Phantom Stock
      Plan could convert their awarded phantom stock units and their Contingently
      Promised Stock Units into (1) options with an exercise price of $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.





The
      Company did not declare a regular dividend on its common stock during the fiscal
      years ended March 31, 2006, or 2005, or in any subsequent period for which
      financial information is required, except that on January 6, 2006, the Company
      declared a special dividend of $0.02 per share of common stock to shareholders
      of record as of January 6, 2006, payable on or before January 31,
      2006.





Cash
      payments related to the conversion are payable in four annual installments
      beginning on March 31, 2002. As of March 31, 2001, the Company
      anticipated making four annual payments of $5,930 each commencing March 31,
      2002 for those employees who elected to receive a cash payout in lieu of
      additional options. The present value of the cash payments related to the
      conversion of vested phantom stock units of $15,131 was recorded as a liability
      as of March 31, 2001. The cash payments related to the conversion of the
      Contingently Promised Units are subject to continuing employment and,
      accordingly, the related expense and liability are accrued as earned by the
      employees. The first annual installment of $5,812 to those employees electing
      to
      receive cash in lieu of additional options was paid on March 28, 2002.





As
      of
      December 31, 2002, the total remaining undiscounted future cash payments related
      to the conversion of the Company’s Phantom Stock Plan to its Option Plan totaled
      $7,645, payable in three equal annual installments beginning March 31, 2003.
      In
      order to reduce this liability, the Company offered the participants an
      opportunity to receive an early payment in January 2003. As a result, under
      the
      terms of the early payment program, the Company paid $1,979 on January 10,
      2003
      and reduced the future liability for Contingently Promised Units by $2,058.





The
      second, third and final annual installments of $416, $347 and $197 to those
      employees electing to receive cash in lieu of additional options but
      not
      electing the early payment program was were paid
      on
      March 31, 2003, 2004 and 2005.





The
      Purchase Plan was available to all eligible employees who meet certain service
      requirements. Effective April 1, 2001, employees participating in the Purchase
      Plan could elect to deduct up to 10 percent of gross pay to purchase stock
      in
      the Company. Stock transactions pursuant to the Purchase Plan occurred
      semiannually on December 31 and March 31. The Company could sell up to
      3,230 shares of stock under the Purchase Plan. Employees purchased 70 shares
      at
      a price of $3.85 per share on December 31, 2001 and 174 shares at a price of
      $2.10 on March 31, 2002. In May 2002, the Company issued 659 additional shares
      of common stock to employees under the Purchase Plan for aggregate cash
      consideration of $1,384 at a price of $2.10. In September 2002, the Company
      suspended the sale of shares to employees under the Purchase Plan.







11


**DiCon
      Fiberoptics, Inc. and Subsidiary**


**Notes
      to Unaudited Consolidated Financial Statements**


**(in
      thousands)**


**___________________________________________________________________________________________________________**





Compensation
      expense related to the Company’s stock compensation plans and conversion of the
      Contingently Promised Units has been reflected in the Unaudited Consolidated
      Statements of Operations and Comprehensive Income/(Loss) for the three months
      ended June 30, 2006 and 2005 as follows:





**For
                the three months ended****June
                30,****2006**
            
            **2005**Cost
                of goods sold
            
            
            
            
            $1
            
            $11Selling,
                general and administrative expenses
            
            
            
            
            2
            
            17Research
                and development expenses
            
            
            
            
            1
            
            5$4
            
            $33





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





The
      Company has substantial net operating loss carryforwards. For the year ended
      March 31, 2006, the Company recorded a tax provision of $191 related to the
      90%
      alternative minimum tax limitation with respect to utilization of the net
      operating loss carry forwards. Due to uncertainty surrounding the realization
      of
      the favorable tax attributes in future tax returns, the Company has recorded
      a
      valuation allowance against certain deferred tax assets at March 31, 2006 and
      2005. Management regularly evaluates the recoverability of the deferred tax
      asset and the level of the valuation allowance. At such time as it is determined
      that it is more likely than not that the deferred tax asset will be realizable,
      the valuation allowance will be reduced.





During
      the fiscal year ended March 31, 2005, the Company’s federal income tax returns
      for fiscal years ended in 2000 to 2003 have been examined by the Internal
      Revenue Service. As a result of this review, certain tax credits previously
      claimed were considered to be excessive and therefore additional tax assessment
      was required. In the fiscal year ended March 31, 2005, the Company paid $281
      for
      the tax assessments that may result. The
      total
      related interest payable assessed was $59. After the payment of $28 during
      the
      quarter, t T he net
      related remaining
      balance of $31 interest
      payable  of
      $31 was
      included in accounts payable and accrued liabilities in the unaudited consolidated
      balance sheets after
      deducting the payment of $28 during the three months ended as
      of June 30,
      2005.





The
      Company was granted a five-year tax holiday in Taiwan, which will expire in
      2006. There was no net impact of this tax holiday for the quarter ended June
      30,
      2005 and year ended March 31, 2005.





The
      Company’s investment in its Taiwan subsidiary is essentially permanent in
      duration and undistributed foreign earnings on June 30, 2005 amounted to $5.3
      million. In accordance with the Taiwan Company Law and Global’s Articles of
      Incorporation, 10% of annual earnings shall be appropriated as legal reserve
      until the accumulated reserve equals the total capital of Global.





There
      is
      no plan to distribute these earnings to DiCon. If at some future date all or
      portions of these foreign earnings are distributed as dividends to DiCon,
      substantial additional taxes would be due. On October 22, 2004, the
      American Jobs Creation Act of 2004 (the “Act”) was signed into law. The Act
      creates a temporary incentive for U.S. companies to repatriate accumulated
      foreign earnings by providing a one-time deduction of 85% for certain dividends
      from controlled foreign corporations. The deduction is subject to certain
      limitations and numerous provisions of the Act contain uncertainties that
      require interpretation and evaluation. The Company has not accrued income taxes
      on the accumulated undistributed earnings of the Company’s Taiwan subsidiary, as
      these earnings are currently expected to be reinvested
      indefinitely.





As
      of
      March 31, 2005, the Company had federal and state net operating loss
      carryforwards of approximately $11.8 million and $42.0 million, respectively,
      and federal and state tax credit carryforwards of approximately $0.8 million
      and
      $2.2 million, respectively. The net operating loss will expire at various dates
      beginning in 2013, if not utilized. The tax credit can be carried forward
      indefinitely. The Company also has foreign net operating loss carry-forward
      of
      119.0 million New Taiwan Dollars (or approximately $3.8 million as of March
      31,
      2005), which expire beginning in the year 2008.





During
      the period ending June 30, 2006, the Company recorded a tax provision of $12,
      which is related to the 90% alternative minimum tax limitation with respect
      to
      utilization of the net operating loss carry forwards.





12





**DiCon
      Fiberoptics, Inc. and Subsidiary**


**Notes
      to Unaudited Consolidated Financial Statements**


**(in
      thousands)**


**___________________________________________________________________________________________________________**





**14.**
            **Commitments
                and contingencies**





The
      Company normally provides warranties for its products for one year. The Company
      provides reserves for the estimated cost of product warranties at the time
      revenue is recognized. Estimates of the costs of warranty obligations are based
      on the Company’s historical experience of known project failure rates, use of
      materials and service delivery costs incurred in correcting product failures.
      In
      addition, from time to time, specific warranty accruals may be made if
      unforeseen technical problems arise. Should the Company’s accrual experience
      relative to these factors differ from estimates, the Company may be required
      to
      record additional warranty reserves. Alternatively, if the Company provides
      more
      reserves than needed, the Company may reverse a portion of such provision in
      future periods.





Changes
      in the Company’s warranty reserve during the three months ended June 30, 2006
      and 2005 were as follows:





**Three
                months ended June 30,****2006**
            
            **2005**Beginning
                balance
            $20
            
            $24Provision
                for warranty
            14
            
            10Utilization
                of reserve
            (13)
            
            (5)Ending
                balance
            $21
            
            $29








Global
      owns a condominium interest in the building in Kaohsiung, Taiwan. This facility
      is located on a ground lease that extends through 2011. The ground lease may
      be
      renewed indefinitely, and there is no penalty for early cancellation, except
      for
      forfeiture of the owned facility.




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





Global
      maintained its line of credit of 80 million New Taiwan Dollars (or  approximately
      $2.5 million as of June 30, 2006) from a Taiwan bank. The line of credit will
      mature on September 30, 2006. The interest rate is based on a rate set by the
      bank at the time funds are drawn. Annual
      rate of interest on the borrowings was 3.47% during the period. The
      amount drawn as of June 30, 2006 was 78.5 million New Taiwan Dollars (or
      approximately $2.4 million as of June 30, 2006) with an interest rate of
      3.47%.














13





**Item
      2. Management’s Discussion and Analysis or Plan of
      Operation.**





*Certain
      statements contained in this report on Form 10-QSB that are not purely
      historical are “forward-looking statements” within the meaning of the federal
      securities laws, including, without limitation, statements regarding the
      Company’s expectations, beliefs, anticipations, commitments, intentions and
      strategies regarding the future. Actual results could differ from those
      projected in any forward-looking statements. Factors that could contribute
      to
      such differences include, but are not limited to, those specific points
      discussed under “Risk Factors” in the Company’s 10-KSB/A-1.*




**Overview**





The
      Company designs and manufactures passive optical components, modules and test
      instruments for current and next-generation optical communications markets.
      The
      Company designs and manufactures a broad portfolio of technically advanced
      products that filter, split, combine, attenuate, and route light in optical
      networks. The Company also sells products used for testing optical devices
      and
      systems. The Company’s products are based on its proprietary technologies,
      including thin-film coating, micro-optic design, optical element finishing,
      Micro Electro-Mechanical Systems (“MEMS”), advanced packaging and process
      automation. The Company was founded in 1986 and first became profitable in
      1988.
      It remained profitable each fiscal year until the fiscal year ended March 31,
      2002.





The
      Company operates from its owned 200,000 square feet facility in Richmond,
      California, which contains all of the Company’s domestic manufacturing, R&D,
      sales and administration operations. The Company has overseas manufacturing
      operations at its 88,000 square foot facility in Kaohsiung, Taiwan. Although
      the
      Company owns a condominium interest in the building, it is located on a ground
      lease that extends through 2011. The ground lease may be renewed indefinitely,
      and there is no penalty for early cancellation, except for forfeiture of the
      owned facility.





The
      Company’s communications products include Wavelength Division Multiplexers
      (“WDMs”), amplifier components, switches and attenuators, MEMS devices and
      modules. Its measurement products include variable attenuators, tunable filters,
      and test instruments for telecommunication applications. The Company markets
      and
      sells its products worldwide through its direct sales force, its subsidiary
      Global and through selected distributors.





The
      optical networking industry is rapidly changing and the volume and timing of
      orders are difficult to predict. Since the fourth quarter of 2000, the
      fiberoptics industry has gone through a significant period of consolidation
      following a dramatic curtailment of capital spending by most carriers faced
      with
      substantial excess bandwidth capacity and very high levels of corporate debt.
      The Company’s customers are manufacturers of telecommunications equipment. The
      Company believes its customers generally view the purchase of the Company’s
      products as a significant and strategic decision. As a result, customers
      typically commit substantial effort in evaluating the Company’s technology, and
      testing and qualifying its products and manufacturing processes. This customer
      evaluation and qualification process frequently results in a lengthy initial
      sales cycle of nine months or longer.





The
      Company’s cost of goods sold consists primarily of the cost of direct materials,
      labor and manufacturing overhead, scrap and rework associated with products
      sold, as well as production start up costs. As demand changes, the Company
      attempts to manage its manufacturing capacity to meet demand for existing and
      new products; however, certain portions of its costs are fixed and as volumes
      decrease, these expenses are difficult to reduce proportionately, if at all.
      The
      Company assesses its inventory position on a monthly and quarterly basis with
      its then current forecasts. During the three months ended June 30, 2006, $.03
      million of previously written down inventory was sold. During the fiscal year
      ended March 31, 2006, the Company wrote off approximately $0.3 million of
      obsolete inventory.





Research
      and development expenses consist primarily of salaries and related personnel
      expenses, fees paid to consultants and outside service providers, material
      and
      equipment costs, and other expenses related to the design, development, testing
      and enhancement of the Company’s products. The Company expenses all of its
      research and development costs as incurred and does not capitalize any research
      and development expenditures except for equipment with a useful life longer
      than
      one year and useful for purposes other than the current research and development
      project. The Company believes that research and development is critical to
      strategic product development and expects to continue to devote significant
      resources to product research and development. The Company expects its research
      and development expenses to fluctuate both in absolute dollars and as a
      percentage of sales based on its perceived need for, and expected return from,
      its research and development efforts.





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


14





Selling,
      general and administrative expenses include salaries, benefits, commissions,
      product promotion and administrative expenses. The Company expects these
      expenses to continue to be substantial as the Company strives to sustain its
      market share in the fiberoptic component manufacturing business.





During
      the fiscal year 2005, the Company consolidated its R&D projects to better
      align its business needs with existing operations and to provide a more
      efficient use of its facilities. As a result, certain R&D projects were
      discontinued and it was determined that related support equipment had no
      alternative use within the Company. Accordingly the equipment was either
      abandoned or scrapped, and a loss on the disposal of fixed assets of $1.9
      million was recorded in the year ended March 31, 2005 in the consolidated
      statements of operations and comprehensive loss. The Company incurred a
      $ 56,000 0.1
      million gain on
      disposal of fixed assets for the quarter ended June 30, 2005.





Excess
      and idle equipment with a net book value of $796,000 had been written off in
      the
      year ended March 31, 2005. No additional excess and idle equipment s were
      written off in the three months ended June 30, 2005.





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





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





**Critical
      Accounting Policies and Estimates**





The
      preparation of the Company’s consolidated financial statements in conformity
      with accounting principles generally accepted in the United States of America
      requires estimates and judgments that affect the reported amounts of assets
      and
      liabilities, disclosures of contingent assets and liabilities, net sales and
      expenses, and the related disclosures. Estimates are based on historical
      experience, knowledge of economic and market factors and various other
      assumptions that the Company believes to be reasonable under the circumstances.
      Actual results may differ from these estimates under different assumptions
      or
      conditions. The following critical accounting policies are affected by
      significant estimates, assumptions and judgments used in the preparation of
      the
      Company’s consolidated financial statements.





*Revenue
      recognition*





The
      Company derives its revenue from the sale of fiberoptic networking components.
      Revenue from product sales is recognized upon shipment of the product, provided
      that persuasive evidence of an arrangement exists, delivery has occurred and
      no
      significant obligations remain, the fee is fixed or determinable and
      collectibility is reasonably assured. Sales to distributors do not include
      the
      right to return or exchange products or price protection. A provision for
      returns and allowances is recorded at the time revenue is recognized based
      on
      the Company’s historical experience.





*Allowances
      for doubtful accounts*





The
      Company performs ongoing credit evaluations of its customers. Allowances for
      doubtful accounts for estimated losses are maintained resulting from the
      inability or unwillingness of customers to make required payments. When the
      Company becomes aware that a specific customer is unable to meet its financial
      obligations, such as the filing of a bankruptcy or deterioration in the
      customer’s operating results or financial position, the Company records a
      specific allowance to reflect the level of credit risk in the customer’s
      outstanding receivable balance. The Company is not able to predict changes
      in
      the financial condition of customers, and if circumstances related to the
      Company’s customers deteriorate, estimates of the recoverability of trade
      receivables could be materially affected and the Company may be required to
      record additional allowances. Alternatively, if the Company provides allowances
      on receivables that are ultimately collected, the Company will reverse such
      provisions in future periods based on actual collection
      experience.


15


*Warranty
      accrual*





The
      Company generally provides warranties for its products for one year. The Company
      provides reserves for the estimated cost of product warranties at the time
      revenue is recognized. Because the Company’s products are manufactured, in most
      cases, to customer specifications and their acceptance is based on meeting
      those
      specifications, the Company historically has experienced minimal warranty costs.
      Estimates of the costs of warranty obligations are based on the Company’s
      historical experience of known product failure rates and the use of materials
      and service delivery costs incurred in correcting product failures. In addition,
      from time to time, specific warranty accruals may be made if unforeseen
      technical problems arise. Should the Company’s actual experience relative to
      these factors differ from its original estimates, the Company may be required
      to
      record additional warranty reserves. Alternatively, if the Company provides
      more
      reserves that are in excess of its actual warranty costs, the Company will
      reverse a portion of such provisions in future periods.





*Fair
      value of financial instruments*





The
      Company has determined that the amounts reported for cash and cash equivalents,
      accounts receivable, short-term borrowings, accounts payable and accrued
      liabilities, mortgage and other debt approximate fair value because of their
      short maturities and/or variable interest rates. Marketable securities are
      reported at their fair market value based on quoted market prices.





*Inventories*





Inventories
      are valued at the lower of cost or market using the first-in, first-out (FIFO)
      method. Cost is determined using standard cost, which approximates actual cost.
      The inventory of the Company is subject to rapid technological changes and
      obsolescence that could have an adverse affect on its utilization in future
      periods. Accordingly, the Company writes down excess and obsolete inventory
      based on the Company’s estimates of inventory to be sold or
      consumed.





*Property,
      plant and equipment*





The
      Company evaluates the recoverability of the net carrying value of its property,
      plant and equipment whenever events or changes in circumstances indicate
      impairment may exist, by comparing the carrying values to the estimated future
      undiscounted cash flows. A deficiency in these cash flows relative to the
      carrying values is an indication of the need for a write-down due to impairment.
      The impairment write-down would then be the difference between the carrying
      values and the fair value of these assets. A loss on impairment would be
      recognized by a charge to earnings. Changes in these estimates could have a
      material adverse effect on the assessment of property, plant and equipment,
      thereby requiring the Company to write down its assets.





*Deferred
      taxes*





Deferred
      income tax assets and liabilities represent the expected future tax consequences
      attributable to temporary differences between corresponding amounts stated
      on
      the Unaudited Consolidated Balance Sheets and their respective tax bases.
      Deferred tax assets and liabilities are measured using the enacted tax rates
      expected to apply to taxable income in the years in which those temporary
      differences are expected to be reversed. Valuation allowances are recognized
      as
      necessary to reduce the deferred tax assets to the amount that is more likely
      than not to be realized.


16


**Financial
      Results**





Three
      Months Ended June 30, 2006 Compared with Three Months Ended June 30,
      2005





*Net
      Sales*





Net
      sales
      decreased by 10.9% to $5.0 million for the quarter ended June 30, 2006 from
      $5.6
      million for the quarter ended June 30, 2005. The decrease was primarily due
      to a
      decrease in the demand for fiberoptic components and test equipment by
      telecommunications equipment vendors.





The
      fiberoptic communications industry is characterized by dynamic technological
      changes. Specific products may have a relatively short product life, even though
      basic product designs may have a substantial life. Generally, customers expect
      prices to decline steadily. During the current period of significant excess
      capacity, the pressure to reduce average selling prices may be even greater.
      The
      Company seeks to offset this trend through aggressive programs to improve
      manufacturing yields and cost reductions. There is no certainty that these
      programs will be successful to offset the pricing pressure from customers in
      the
      future.





Sales
      to
      different geographic areas may fluctuate from period to period depending on
      various factors such as new system development, purchase cycle and price. Net
      sales to customers in the United States accounted for $1.4 million and
      $1.8 million of total net sales, or 28.6% and 32.1%, for the three months
      ended June 30, 2006 and 2005, respectively.





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





**Three
                months ended****June
                30,****2006**
            
            **2005**Percentage
                of revenue for 3 largest customers
            52.5%
            
            58.4%No.
                of customers accounting for over 10% of net sales
            3
            
            4





Sales
      to
      the Company’s leading customers vary significantly from year to year and the
      Company does not have the ability to predict future sales to these customers.





*Cost
      of Goods Sold and Gross Margin*





Costs
      of
      goods sold declined 30.9% to $2.6 million in the quarter ended June 30, 2006
      from $3.7 million in the quarter ended June 30, 2005. Gross margin as a
      percentage of net sales was 48.6% in the quarter
      ended June 30, 2006, compared to 33.8% in the quarter ended June 30, 2005.





The
      improvement in gross margin in the quarter ended June 30, 2006 is mainly due
      to
      expense and cost reductions. During the quarter ended June 30, 2006, no excess
      and obsolete inventory has been written off.





Gross
      margin can be affected by a number of factors, including product mix, customer
      mix, applications mix, product demand, pricing pressures, manufacturing
      constraints, higher costs resulting from new production facilities, and product
      yield. Considering these factors, gross margin fluctuations are difficult to
      predict and there can be no assurance that the Company will achieve or maintain
      gross margin percentages at historical levels in future periods.





*Selling,
      General and Administrative Expenses*





Selling,
      general and administrative (“SG&A”) expense was $1.2 million in the quarter
      ended June 30, 2006, compared to $1.2 million in the quarter ended June 30,
      2005.





17





*Research
      and Development Expenses*





Research
      and development (“R&D”) expense was $1.3 million in the quarter ended
      June 30, 2006, compared to $1.1 million in the quarter ended June 30, 2005.
      The decrease in R&D spending reflects the cost reductions resulting from the
      elimination of certain product development programs and workforce reductions.
      Future expenditures are expected to fluctuate both in absolute dollars and
      as a
      percentage of revenue based on the need to invest in new research and
      development in order to remain competitive in this rapidly changing industry.





*Other
      (Expense) Income*





Other
      (expense) ** income
      for the quarters ended June 30, 2006 and 2005 are as follows:





**Three
                months ended****June
                30,****(in
                thousands)**
            **2006**
            
            **2005**Other
                (expense) income:Interest
                expense
            $(185)
            
            $(315)Interest
                income
            248
            
            121Gain
                (loss) on disposal of fixed assets
            4
            
            56Gain/(Loss)
                on currency exchange
            35
            
            (163)Gain
                on disposal of expensed items
            223
            
            103Other
                (expense) income, net
            1
            
            78$326
            
            $(120)





Interest
      expense primarily represents the costs of borrowing by DiCon for its mortgage
      loan on the facility
      in Richmond,
      California . ,  facility
      and its equipment loan. In the
      quarter ended June 30, 2006, the Company sold certain expensed precious metals
      used in the production process for total proceeds of $223.





*Income/(Loss)
      Before Income Tax*





The
      Company reported a net income before income tax of $0.2 million for the current
      quarter compared to a loss of $0.6 million for the same quarter in the prior
      year. This is primarily due the sale of expensed items as explained above,
      for a
      gain of $0.2 million and an improvement in gross margin during the
      quarter.





*Income
      Tax (Expense) Benefit*





Due
      to the uncertainty
      surrounding the realization of the favorable tax attributes in future tax
      returns, the Company has recorded a valuation allowance against certain deferred
      tax assets at June 30, 2005. Management regularly evaluates the recoverability
      of the deferred tax asset and the level of the valuation allowance. At such
      time
      as it is determined that it is more likely than not that the deferred tax asset
      will be realizable, the valuation allowance will be reduced.





The
      effective tax rate for the three months ended June 30, 2006 was 4.6% compared
      to
      0% for the three months ended June 30, 2005. The tax rate for each period is
      the
      result of the consolidation of the tax provisions for the US operations with
      that of the Taiwan operations of Global, and can vary substantially from period
      to period depending on the relative performance of each operation.





18





**Liquidity
      and Capital Resources**





As
      of
      June 30, 2006, the Company had cash and cash equivalents of $2.8 million. In
      addition, the Company has $19.0 million invested in certificates of deposit
      and
      other marketable securities that in conformity with the requirements of
      generally accepted accounting principles were classified as marketable
      securities.





The
      net
      cash provided by operating activities of $0.2 million for the three months
      ended
      June 30, 2006 resulted from non-cash adjustments of $0.6 million to the net
      income of $0.2 million for the three months ended June 30 2006, a reduction
      of
      accounts receivable and inventories of 1.1 million. This cash inflow is
      partially offset by an increase in accounts payable of $0.3 million.


The
      net
      cash provided by operating activities of $2.3 million for the three months
      ended
      June 30, 2005 resulted from non-cash adjustments of $1.6 million to the net
      loss
      of $0.6 million for the three months ended June 30 2005, a reduction of accounts
      receivable and inventories of 1.9 million. This cash inflow is partially offset
      by a decrease in accounts payable of $0.5 million.





The
      increase in cash flows from investing activities of $0.7 million for the three
      months ended June 30, 2006 was primarily due to an increase in net proceeds
      of
      $0.8 million from the sale and purchase of marketable securities offset by
      $0.1
      million in purchases of properties property,
      plant and equipment .
      The
      increase in cash flows from investing activities of $0.6 million for the three
      months ended June 30, 2005 was primarily due to an increase in net proceeds
      of
      $0.7 million from the sale and purchase of marketable securities offset by
      $0.1
      million in purchases of properties property,
      plant and equipment .





Cash
      used
      in financing activities decreased to $0.6 million for the three months ended
      June 30, 2006 from $1.9 million provided by financing activities in the three
      months ended June 30, 2005. This change is primarily attributable to the net
      increase of borrowing under the line of credit.





The
      Company financed, in part, a new corporate campus by obtaining a construction
      loan from a bank of $27.0 million on August 24, 2000. In November 2001, the
      same bank refinanced the outstanding balance of the construction loan with
      a
      mortgage loan maturing on November 20, 2004, with an amortization schedule
      based
      on a 25-year loan. Interest on the mortgage loan is accrued at a variable
      interest rate based on changes in the lender’s prime rate as of the
      20 th of each
      month. Principal and interest are payable monthly. During the year ended March
      31, 2002, the Chairman, President and Chief Executive Officer of the institution
      with which the Company maintains the mortgage loan was appointed to the
      Company’s Board of Directors.





On
      June
      28, 2004, the bank agreed to extend the maturity date of the mortgage loan
      to
      October 20, 2007, subject to additional terms and conditions requiring the
      Company to make additional principal repayments as follows: $1.5 million 10
      days
      after the date of execution of the loan extension agreement; $1.0 million on
      October 1, 2004; and seven installments each in the amount of $0.5 million
      on
      the first day of each calendar quarter, commencing on January 1, 2005 and ending
      on July 1, 2006.





The
      Company was in compliance with the additional principal repayments requirement
      as of March 31, 2006. During the year ended March 31, 2006, the Company
      voluntarily prepaid three additional $0.5 million equal installments that were
      originally due on January 1, 2006, April 1, 2006 and July 1, 2006 (see Note
      18
      ). In addition, the Company voluntarily prepaid an additional $8.5
      million  principal
      of the mortgage loan during the year ended March 31, 2006. This included $5.5
      million from the proceeds of land sale. The balance of the mortgage loan as
      of
      March 31, 2006 was $10.0 million with an interest rate of 7.5%.





Global
      maintained its line of credit of 80 million New Taiwan Dollars (or  approximately
      $2.5 million as of June 30, 2006) from a Taiwan bank. The line of credit will
      mature on September 30, 2006. The interest rate is based on a rate set by the
      bank at the time funds are drawn. Annual
      rate of interest on the borrowings was 3.47% during the period. The
      amount drawn as of June 30, 2006 was 78.5 million New Taiwan Dollars (or
      approximately $2.4 million as of June 30, 2006) with an interest rate of
      3.47%.














19







The
      Company believes its current cash and cash equivalents and marketable securities
      will be sufficient to meet its anticipated cash needs for working capital and
      capital expenditures for at least the next 12 months. There remains some
      possibility that the Company may need to raise additional capital. It might
      need
      additional capital in order to refinance its loans, finance unanticipated growth
      or to invest in new technology. There can be no certainty that the Company
      would
      be successful in raising the required capital or in raising capital at
      acceptable rates.




**Commitments
      and Off Balance Sheet Arrangements**





Global
      owns a condominium interest in the building in Kaohsiung, Taiwan. This facility
      is located on a ground lease that extends through 2011. The ground lease may
      be
      renewed indefinitely, and there is no penalty for early cancellation, except
      for
      forfeiture of the owned facility.




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





Global
      maintained its line of credit of 80 million New Taiwan Dollars (or  approximately
      $2.5 million as of June 30, 2006) from a Taiwan bank. The line of credit will
      mature on September 30, 2006. The interest rate is based on a rate set by the
      bank at the time funds are drawn. Annual
      rate of interest on the borrowings was 3.47% during the period. The
      amount drawn as of June 30, 2006 was 78.5 million New Taiwan Dollars (or
      approximately $2.4 million as of June 30, 2006) with an interest rate of
      3.47%.








**Item
      3. Controls and Procedures.**





*(a)*  *Evaluation
      of Disclosure Controls and Procedures* .
      The
      undersigned principal executive and financial officer of DiCon the
      Company concludes
      that DiCon’s the
      Company’s disclosure
      controls and procedures are effective as of June 30, 2006 based on the
      evaluation of these controls and procedures required by paragraph (b) of
      Exchange Act Rule 13a-15.





*(b)*  *Changes
      in Internal Controls.* There
      has been no change in the Company’s internal control over financial reporting
      identified in connection with the evaluation required by paragraph (d) of
      Exchange Act Rule 13a-15 that occurred during the quarter ended June 30, 2006,
      that has materially affected, or is reasonably likely to materially affect,
      the
      Company’s internal control over financial reporting.


20





**PART
      II**





**OTHER
      INFORMATION**





**Item
      1. Legal Proceedings.**





In
      May
      2005, Lucent Technologies Inc. (“Lucent”) filed an action against the Company in
      the United States District Court for the District of New Jersey. Lucent alleges
      that certain switches purchased by it under a contract with the Company entered
      into in 2000 were defective. The complaint asserts breach of contract and the
      implied duty of good faith and fair dealing by the Company and seeks damages,
      costs, expenses and other sums totaling in excess of $10 million. The Company
      intends to contest the case vigorously.





**Item
      2. Unregistered Sales of Equity Securities and Use of
      Proceeds.**





(a)
            Unregistered
                Sales of Equity Securities by Small Business
                Issuer.





None.





(b)
            Purchases
                of Equity Securities by Small Business
                Issuer.





**Small
      Business Issuer Purchases of Equity Securities**





Period
            
            Total
                Number of Shares Purchased
              (1)
            
            Average
                Price Paid per Share
            
            Total
                Number of Shares Purchased as Part of Publicly Announced Plans or
                Programs
              (2)
            
            Maximum
                Number of Shares that May yet be Purchased Under the Plans or
                Programs
              (2)April
                1, 2006 through April 30, 2006
            
            2,383
            
            $0.96
            
            --
            
            --May
                1, 2006 through May 31, 2006
            
            0
            
            $0.96
            
            --
            
            --June
                1, 2006 through June 30, 2006
            
            4,744
            
            $1.00
            
            --
            
            --Total
            
            7,127
            
            $0.99
            
            --
            
            --





(1)  All
      of
      the shares purchased were issued under the Employee Stock Purchase
      Program.





(2)  DiCon
      does not have any publicly announced plans or programs for the purchase of
      shares.





**Item
      3. Defaults Upon Senior
      Securities.**





None.





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





None.





21





**Item
      5. Other Information.**





None.





**Item
      6. Exhibits.**





Exhibit
                No.
            
            Description31.1
            
            Certificate
                of President and Chief Executive Officer pursuant to Section 302
                of the
                Sarbanes - Oxley Act of 2002.32.1
            
            Certificate
                of President and Chief Executive Officer pursuant to Section 906
                of the
                Sarbanes - Oxley Act of 2002.





22





**SIGNATURES**





In
      accordance with the requirements of the Exchange Act, the registrant caused
      this
      report to be signed on its behalf by the undersigned, thereunto duly
      authorized.




DICON
                FIBEROPTICS, INC.(Registrant)Date:
            August
                10, 2006
            By:
            /s/
                Ho-Shang Lee(Signature)Name:
            Ho-Shang
                Lee, Ph.D.Title:
            President
                and Chief Executive Officer
              (principal
                executive and financial officer)


23





**Exhibit
      Index**





Exhibit
                No.
            
            Description31.1
            
            Certificate
                of President and Chief Executive Officer pursuant to Section 302
                of the
                Sarbanes - Oxley Act of 2002.32.1
            
            Certificate
                of President and Chief Executive Officer pursuant to Section 906
                of the
                Sarbanes - Oxley Act of 2002.





24