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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549


FORM 10-Q



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(Mark One)

|  |  |                                                                                         
|- |  | ----------------------------------------------------------------------------------------
|x |  | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 
|  |  |                                                                                         
|  |  | For the quarterly period ended December 31, 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
(State or Other Jurisdiction of
Incorporation or Organization) |  | 94-3006185
(IRS Employer
Identification No.)

|                                                                                 |  |                 
|-------------------------------------------------------------------------------- |  | ----------------
|1689 Regatta Blvd.
Richmond, California
(Address of Principal Executive Offices) |  | 94804
(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



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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



Table of Contents

|        |  |                                                                                        |  |                |  |  |  | 
|------- |  | -------------------------------------------------------------------------------------- |  | -------------- |  |  |  | 
|PART I  |  | FINANCIAL INFORMATION                                                                 
|Item 1. |  | Unaudited Condensed Consolidated 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. |  |  |  | 

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##### Table of Contents






PART I

FINANCIAL INFORMATION




Item 1. Financial Statements.

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

|                                                      |                                                                                                                                    |                                            |              |        |              |        |           |        |         |         | 
|----------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------------ | ------ | ------------ | ------ | --------- | ------ | ------- | ------- | 
|                                                      |                                                                                                                                    |                                            |              |        |              |        | March 31,
|                                                      |                                                                                                                                    |                                            |              |        | December 31, |        | 2003     
|                                                      |                                                                                                                                    |                                            |              |        | 2003         |        | (1)      
|                                                      |                                                                                                                                    |                                            |              |        |              |        |          
|Assets                                                |                                                                                                                                    |                                            |              |        |              |        |           |       
|Current assets:                                       |                                                                                                                                    |                                            |              |        |              |        |           |       
|                                                      | Cash and cash equivalents                                                                                                          |                                            | $            | 931    |              |        | $         | 3,757  |        
|                                                      | Marketable securities                                                                                                              |                                            |              | 24,577 |              |        |           | 10,851 |        
|                                                      | Accounts receivable, net of allowance for doubtful accounts of $109 and $77,
respectively                                          |                                            |              | 3,250  |              |        |           | 2,203  |        
|                                                      | Inventories, net                                                                                                                   |                                            |              | 4,320  |              |        |           | 3,864  |        
|                                                      | Prepaid expenses and other current assets                                                                                          |                                            |              | 466    |              |        |           | 388    |        
|                                                      | Income tax receivable                                                                                                              |                                            |              |       |              |        |           | 15,262 |        
|                                                      |                                                                                                                                    |                                            |              |        |              |        |           |       
|                                                      |                                                                                                                                    | Total current assets                       |              |        | 33,544       |        |           |        | 36,325  |        
|Property, plant and equipment, net                    |                                                                                                                                    |                                            | 60,937       |        |              |        | 68,202    |       
|Other assets                                          |                                                                                                                                    |                                            | 588          |        |              |        | 608       |       
|                                                      |                                                                                                                                    |                                            |              |        |              |        |           |       
|                                                      |                                                                                                                                    |                                            | Total assets |        | $            | 95,069 |           |        | $       | 105,135 | 
|                                                      |                                                                                                                                    |                                            |              |        |              |        |           |       
|Liabilities and Shareholders Equity                  |                                                                                                                                    |                                            |              |        |              |        |           |       
|Current liabilities:                                  |                                                                                                                                    |                                            |              |        |              |        |           |       
|                                                      | Accounts payable and accrued liabilities                                                                                           |                                            | $            | 6,324  |              |        | $         | 7,185  |        
|                                                      | Mortgage and other debt                                                                                                            |                                            |              | 5,792  |              |        |           | 3,927  |        
|                                                      | Income taxes payable                                                                                                               |                                            |              |       |              |        |           | 23     |        
|                                                      | Deferred compensation payable                                                                                                      |                                            |              | 245    |              |        |           | 33     |        
|                                                      |                                                                                                                                    |                                            |              |        |              |        |           |       
|                                                      |                                                                                                                                    | Total current liabilities                  |              |        | 12,361       |        |           |        | 11,168  |        
|Deferred compensation payable, net of current portion |                                                                                                                                    |                                            | 197          |        |              |        | 36        |       
|Deferred income taxes                                 |                                                                                                                                    |                                            | 1,330        |        |              |        | 1,990     |       
|Mortgage and other debt, net of current portion       |                                                                                                                                    |                                            | 26,928       |        |              |        | 28,565    |       
|                                                      |                                                                                                                                    |                                            |              |        |              |        |           |       
|                                                      |                                                                                                                                    | Total liabilities                          |              |        | 40,816       |        |           |        | 41,759  |        
|                                                      |                                                                                                                                    |                                            |              |        |              |        |           |       
|Commitments                                           |                                                                                                                                    |                                            |              |        |              |        |           |       
|Shareholders equity:                                 |                                                                                                                                    |                                            |              |        |              |        |           |       
|                                                      | Common stock: no par value; 200,000,000 shares authorized; 112,006,341 and
112,039,831 shares issued and outstanding, respectively |                                            |              | 22,292 |              |        |           | 22,333 |        
|                                                      | Additional paid-in capital                                                                                                         |                                            |              | 13,259 |              |        |           | 13,199 |        
|                                                      | Deferred stock-based compensation                                                                                                  |                                            |              | (641   | )            |        |           | (970   | )      
|                                                      | Retained earnings                                                                                                                  |                                            |              | 20,944 |              |        |           | 30,838 |        
|                                                      | Other comprehensive loss                                                                                                           |                                            |              | (1,601 | )            |        |           | (2,024 | )      
|                                                      |                                                                                                                                    |                                            |              |        |              |        |           |       
|                                                      |                                                                                                                                    | Total shareholders equity                 |              |        | 54,253       |        |           |        | 63,376  |        
|                                                      |                                                                                                                                    |                                            |              |        |              |        |           |       
|                                                      |                                                                                                                                    | Total liabilities and shareholders equity |              | $      | 95,069       |        |           | $      | 105,135 |        
|                                                      |                                                                                                                                    |                                            |              |        |              |        |           |       

| |                                                                                                            
| | -----------------------------------------------------------------------------------------------------------
|
| | The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| |                                                                                                            
| | (1) Balances at March 31, 2003 are derived from the audited Financial Statements at that date.             

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##### Table of Contents



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

|                                                                      |  |                                                                                                                      |                          |   |                                 |        |                                |   |       |        |         |   |        |         |         |   |        |         |  
|--------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------- | ------------------------ | - | ------------------------------- | ------ | ------------------------------ | - | ----- | ------ | ------- | - | ------ | ------- | ------- | - | ------ | ------- | -
|                                                                      |  |                                                                                                                      |                          |   | Three Months Ended December 31, |        | Nine Months Ended December 31,
|                                                                      |  |                                                                                                                      |                          |   |                                 |        |                               
|                                                                      |  |                                                                                                                      |                          |   | 2003                            |        | 2002                           |   | 2003  |        | 2002   
|                                                                      |  |                                                                                                                      |                          |   |                                 |        |                                |   |       |        |        
|Net sales                                                             |  | $                                                                                                                    | 5,590                    |   |                                 | $      | 4,245                          |   |       | $      | 13,066  |   |        | $       | 16,192  |  
|Cost of goods sold                                                    |  |                                                                                                                      | 4,579                    |   |                                 |        | 5,544                          |   |       |        | 13,729  |   |        |         | 17,491  |  
|                                                                      |  |                                                                                                                      |                          |   |                                 |        |                                |   |       |        |         |   |        |         |         |  
|Gross profit/(loss)                                                   |  |                                                                                                                      | 1,011                    |   |                                 |        | (1,299                         | ) |       |        | (663    | ) |        |         | (1,299  | )
|                                                                      |  |                                                                                                                      |                          |   |                                 |        |                                |   |       |        |         |   |        |         |         |  
|Operating expenses:                                                   |  |                                                                                                                      |                          |   |                                 |        |                                |   |       |        |         |   |        |         |         |  
|                                                                      |  | Selling, general and administrative expenses                                                                         |                          |   | 1,258                           |        |                                |   | 1,959 |        |         |   | 4,059  |         |         |   | 6,808  |        
|                                                                      |  | Research and development expenses                                                                                    |                          |   | 1,479                           |        |                                |   | 2,086 |        |         |   | 4,831  |         |         |   | 11,053 |        
|                                                                      |  |                                                                                                                      |                          |   |                                 |        |                                |   |       |        |         |   |        |         |         |  
|                                                                      |  |                                                                                                                      | Total operating expenses |   |                                 | 2,737  |                                |   |       | 4,045  |         |   |        | 8,890   |         |   |        | 17,861  |  
|                                                                      |  |                                                                                                                      |                          |   |                                 |        |                                |   |       |        |         |   |        |         |         |  
|                                                                      |  |                                                                                                                      | Loss from operations     |   |                                 | (1,726 | )                              |   |       | (5,344 | )       |   |        | (9,553  | )       |   |        | (19,160 | )
|Other income (expense):                                               |  |                                                                                                                      |                          |   |                                 |        |                                |   |       |        |         |   |        |         |         |  
|                                                                      |  | Interest expense, net                                                                                                |                          |   | (322                            | )      |                                |   | (584  | )      |         |   | (1,016 | )       |         |   | (2,722 | )      
|                                                                      |  | Loss on disposal of fixed assets                                                                                     |                          |   | (386                            | )      |                                |   | (659  | )      |         |   | (400   | )       |         |   | (877   | )      
|                                                                      |  | Other income, net                                                                                                    |                          |   | 189                             |        |                                |   | 62    |        |         |   | 425    |         |         |   | 525    |        
|                                                                      |  |                                                                                                                      |                          |   |                                 |        |                                |   |       |        |         |   |        |         |         |  
|                                                                      |  |                                                                                                                      | Loss before income taxes |   |                                 | (2,245 | )                              |   |       | (6,525 | )       |   |        | (10,544 | )       |   |        | (22,234 | )
|Income tax benefit                                                    |  |                                                                                                                      | 77                       |   |                                 |        | 2,966                          |   |       |        | 650     |   |        |         | 9,489   |  
|                                                                      |  |                                                                                                                      |                          |   |                                 |        |                                |   |       |        |         |   |        |         |         |  
|Net loss                                                              |  | $                                                                                                                    | (2,168                   | ) |                                 | $      | (3,559                         | ) |       | $      | (9,894  | ) |        | $       | (12,745 | )
|                                                                      |  |                                                                                                                      |                          |   |                                 |        |                                |   |       |        |         |   |        |         |         |  
|Comprehensive loss:                                                   |  |                                                                                                                      |                          |   |                                 |        |                                |   |       |        |         |   |        |         |         |  
|                                                                      |  | Foreign currency translation adjustment                                                                              |                          |   | (124                            | )      |                                |   | 110   |        |         |   | 477    |         |         |   | 166    |        
|                                                                      |  | Unrealized holding gains (losses) on marketable securities
arising during the period, net of realized gains (losses) |                          |   | 10                              |        |                                |   | 237   |        |         |   | (54    | )       |         |   | (436   | )      
|                                                                      |  |                                                                                                                      |                          |   |                                 |        |                                |   |       |        |         |   |        |         |         |  
|Comprehensive loss                                                    |  | $                                                                                                                    | (2,282                   | ) |                                 | $      | (3,212                         | ) |       | $      | (9,471  | ) |        | $       | (13,015 | )
|                                                                      |  |                                                                                                                      |                          |   |                                 |        |                                |   |       |        |         |   |        |         |         |  
|Basic and diluted net loss per share                                  |  | $                                                                                                                    | (0.02                    | ) |                                 | $      | (0.03                          | ) |       | $      | (0.09   | ) |        | $       | (0.12   | )
|                                                                      |  |                                                                                                                      |                          |   |                                 |        |                                |   |       |        |         |   |        |         |         |  
|Average shares used in computing basic and diluted net loss
per share |  |                                                                                                                      | 112,007                  |   |                                 |        | 112,130                        |   |       |        | 112,017 |   |        |         | 110,736 |  
|                                                                      |  |                                                                                                                      |                          |   |                                 |        |                                |   |       |        |         |   |        |         |         |  

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

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##### Table of Contents



DiCon Fiberoptics, Inc. and Subsidiary
Unaudited Condensed Consolidated Statement of Cash Flows
(in thousands, except per share data )

|                                                             |                            |                                                                                           |                                                                                  |                                                     |         |                                |         |       |         |       |        |  
|------------------------------------------------------------ | -------------------------- | ----------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------- | --------------------------------------------------- | ------- | ------------------------------ | ------- | ----- | ------- | ----- | ------ | -
|                                                             |                            |                                                                                           |                                                                                  |                                                     |         |                                |         |       |         |       |        |  
|                                                             |                            |                                                                                           |                                                                                  |                                                     |         | Nine Months Ended December 31,
|                                                             |                            |                                                                                           |                                                                                  |                                                     |         | 2003                           |         | 2002 
|                                                             |                            |                                                                                           |                                                                                  |                                                     |         |                                |         |      
|Cash flows from operating activities:                        |                            |                                                                                           |                                                                                  |                                                     |         |                                |         |      
|                                                             |                            | Net loss                                                                                  |                                                                                  | $                                                   | (9,894  | )                              |         | $     | (12,745 | )    
|                                                             |                            | Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |                                                                                  |                                                     |         |                                |         |       |         |      
|                                                             |                            |                                                                                           | Depreciation                                                                     |                                                     |         | 6,982                          |         |       |         | 7,787 |       
|                                                             |                            |                                                                                           | Deferred incomes taxes                                                           |                                                     |         | (650                           | )       |       |         | 1,075 |       
|                                                             |                            |                                                                                           | Provision for excess and obsolete inventories                                    |                                                     |         | 343                            |         |       |         | 1,771 |       
|                                                             |                            |                                                                                           | Provision for doubtful accounts                                                  |                                                     |         | 32                             |         |       |         | (295  | )     
|                                                             |                            |                                                                                           | Provision for estimated losses due to vacated properties, net of sublease income |                                                     |         |                               |         |       |         | (563  | )     
|                                                             |                            |                                                                                           | Loss on disposal of property, plant and equipment                                |                                                     |         | 400                            |         |       |         | 877   |       
|                                                             |                            |                                                                                           | Realized gain on available-for-sale marketable securities                        |                                                     |         | (95                            | )       |       |         | (47   | )     
|                                                             |                            |                                                                                           | Interest accretion on deferred compensation liability                            |                                                     |         | 8                              |         |       |         | 1,511 |       
|                                                             |                            |                                                                                           | Stock compensation expense                                                       |                                                     |         | 855                            |         |       |         | 1,262 |       
|                                                             |                            |                                                                                           | Other                                                                            |                                                     |         | 12                             |         |       |         | 11    |       
|                                                             |                            |                                                                                           | Changes in assets and liabilities:                                               |                                                     |         |                                |         |       |         |       |       
|                                                             |                            |                                                                                           |                                                                                  | Accounts receivable                                 |         |                                | (1,080  | )     |         |       | 3,316  |  
|                                                             |                            |                                                                                           |                                                                                  | Inventories                                         |         |                                | (750    | )     |         |       | (836   | )
|                                                             |                            |                                                                                           |                                                                                  | Prepaid expenses and other current assets           |         |                                | (68     | )     |         |       | 2,938  |  
|                                                             |                            |                                                                                           |                                                                                  | Income tax receivable                               |         |                                | 15,284  |       |         |       | (1,510 | )
|                                                             |                            |                                                                                           |                                                                                  | Other assets                                        |         |                                | 20      |       |         |       | 139    |  
|                                                             |                            |                                                                                           |                                                                                  | Accounts payable and accrued liabilities            |         |                                | (697    | )     |         |       | (2,639 | )
|                                                             |                            |                                                                                           |                                                                                  | Income taxes payable                                |         |                                | (53     | )     |         |       | (1,219 | )
|                                                             |                            |                                                                                           |                                                                                  | Deferred compensation payable                       |         |                                | (103    | )     |         |       | (8,746 | )
|                                                             |                            |                                                                                           |                                                                                  |                                                     |         |                                |         |      
|                                                             |                            |                                                                                           |                                                                                  | Net cash provided by (used in) operating activities |         |                                | 10,546  |       |         |       | (7,913 | )
|                                                             |                            |                                                                                           |                                                                                  |                                                     |         |                                |         |      
|Cash flows from investing activities:                        |                            |                                                                                           |                                                                                  |                                                     |         |                                |         |      
|                                                             |                            | Purchases of marketable securities                                                        |                                                                                  |                                                     | (14,884 | )                              |         |       | (7,091  | )    
|                                                             |                            | Long-term investment                                                                      |                                                                                  |                                                     |        |                                |         |       | (507    | )    
|                                                             |                            | Sales of marketable securities                                                            |                                                                                  |                                                     | 1,237   |                                |         |       | 123     |      
|                                                             |                            | Proceeds from the sale of property, plant and equipment                                   |                                                                                  |                                                     | 187     |                                |         |       | 644     |      
|                                                             |                            | Purchases of property, plant and equipment                                                |                                                                                  |                                                     | (43     | )                              |         |       | (1,514  | )    
|                                                             |                            |                                                                                           |                                                                                  |                                                     |         |                                |         |      
|                                                             |                            |                                                                                           |                                                                                  | Net cash used in investing activities               |         |                                | (13,503 | )     |         |       | (8,345 | )
|                                                             |                            |                                                                                           |                                                                                  |                                                     |         |                                |         |      
|Cash flows from financing activities:                        |                            |                                                                                           |                                                                                  |                                                     |         |                                |         |      
|                                                             |                            | Borrowings under mortgages and other debt                                                 |                                                                                  |                                                     | 3,513   |                                |         |       | 799     |      
|                                                             |                            | Repayment of mortgages and other debt                                                     |                                                                                  |                                                     | (3,343  | )                              |         |       | (2,129  | )    
|                                                             |                            | Proceeds from issuance of common stock, net of repurchases                                |                                                                                  |                                                     | (41     | )                              |         |       | 9,598   |      
|                                                             |                            |                                                                                           |                                                                                  |                                                     |         |                                |         |      
|                                                             |                            |                                                                                           |                                                                                  | Net cash provided by financing activities           |         |                                | 129     |       |         |       | 8,268  |  
|                                                             |                            |                                                                                           |                                                                                  |                                                     |         |                                |         |      
|Effect of exchange rate changes on cash and cash equivalents |                            |                                                                                           | 2                                                                                |                                                     |         |                                | 27      |      
|                                                             |                            |                                                                                           |                                                                                  |                                                     |         |                                |         |      
|Net change in cash and cash equivalents                      |                            |                                                                                           | (2,826                                                                           | )                                                   |         |                                | (7,963  | )    
|Cash and cash equivalents, beginning of period               |                            |                                                                                           | 3,757                                                                            |                                                     |         |                                | 10,170  |      
|                                                             |                            |                                                                                           |                                                                                  |                                                     |         |                                |         |      
|Cash and cash equivalents, end of period                     |                            | $                                                                                         | 931                                                                              |                                                     |         | $                              | 2,207   |      
|                                                             |                            |                                                                                           |                                                                                  |                                                     |         |                                |         |      
|Supplemental disclosures of cash flow information:           |                            |                                                                                           |                                                                                  |                                                     |         |                                |         |      
|                                                             | Cash paid for income taxes |                                                                                           | $                                                                                | 53                                                  |         |                                | $       | 1,208 |        
|                                                             |                            |                                                                                           |                                                                                  |                                                     |         |                                |         |      
|                                                             | Cash paid for interest     |                                                                                           | $                                                                                | 1,008                                               |         |                                | $       | 1,418 |        
|                                                             |                            |                                                                                           |                                                                                  |                                                     |         |                                |         |      

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

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##### Table of Contents



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



|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
31st. The accompanying unaudited condensed consolidated financial statements
as of December 31, 2003 and for the three and nine months ended December 31,
2003 and December 31, 2002, respectively, 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-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. 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,
2003 as included in the Companys 10-K.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The preparation of financial statements in accordance with generally accepted
accounting principles in the US requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the
reporting period. Actual results could differ from these estimates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Certain prior year balances have been reclassified to conform to the current
year presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          



|3. |  | Stock-based compensation
|-- |  | ------------------------



| |  | The Company accounts for stock-based compensation issued to employees using
the intrinsic value method in accordance with 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.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents



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



| |  | Had compensation cost for the Companys stock option plans been determined
based on the fair value of such awards at the grant dates as prescribed by
SFAS No. 123, stock-based compensation costs would have impacted net (loss)
and net (loss) per share for the fiscal periods presented, as follows:
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                         |                                                |   |                            |       |                           |   |        |       |      |   |        |       |   |   |         |       |  
|---------------------------------------------------------------------------------------- | ---------------------------------------------- | - | -------------------------- | ----- | ------------------------- | - | ------ | ----- | ---- | - | ------ | ----- | - | - | ------- | ----- | -
|                                                                                         |                                                |   | For the three months ended |       | For the nine months ended
|                                                                                         |                                                |   | December 31,               |       | December 31,             
|                                                                                         |                                                |   |                            |       |                          
|                                                                                         |                                                |   | 2003                       |       | 2002                      |   | 2003   |       | 2002
|                                                                                         |                                                |   |                            |       |                           |   |        |       |      |   |        |       |   |   |         |       |  
|Net loss, as reported                                                                    |                                                | $ | (2,168                     | )     |                           | $ | (3,559 | )     |      | $ | (9,894 | )     |   | $ | (12,745 | )    
|Add: Stock-based employee compensation expense
included in reported net loss, net of tax |                                                |   | 105                        |       |                           |   | 349    |       |      |   | 561    |       |   |   | 1,803   |      
|Deduct: Compensation expense based on fair value
method, net of tax                      |                                                |   | (157                       | )     |                           |   | (248   | )     |      |   | (472   | )     |   |   | (739    | )    
|                                                                                         |                                                |   |                            |       |                           |   |        |       |      |   |        |       |   |   |         |      
|Pro forma net loss                                                                       |                                                | $ | (2,220                     | )     |                           | $ | (3,458 | )     |      | $ | (9,805 | )     |   | $ | (11,681 | )    
|                                                                                         |                                                |   |                            |       |                           |   |        |       |      |   |        |       |   |   |         |      
|                                                                                         | Reported net loss per sharebasic and diluted  |   | $                          | (0.02 | )                         |   | $      | (0.03 | )    |   | $      | (0.09 | ) |   | $       | (0.12 | )
|                                                                                         | Pro forma net loss per sharebasic and diluted |   | $                          | (0.02 | )                         |   | $      | (0.03 | )    |   | $      | (0.09 | ) |   | $       | (0.11 | )



|4. |  | Recent accounting pronouncements
|-- |  | --------------------------------



| |  | In January 2003, the Emerging Issues Task Force (EITF) of the Financial
Accounting Standards Board (FASB) 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 application 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. In December 2003, the FASB issued revised Interpretation No. 46 (FIN
46) , Consolidation of Variable Interest Entities, an Interpretation of ARB
No. 51. This Interpretation, which replaces FASB Interpretation No. 46,
Consolidation of Variable Interest Entities, clarifies the application of
Accounting Research Bulletin No. 51, Consolidated Financial Statements, to
certain entities in which equity investors 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. FIN 46 (revised) 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 does not expect the adoption of
FIN 46 to have a material impact on its consolidated financial position,
results of operations or cash flows.

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##### Table of Contents



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



| |  | 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. On November 5,
2003, the FASB deferred the effective date for certain financial instruments
for non-public companies. The Company does not expect the adoption of SFAS
No. 150 to have a material impact on the Companys consolidated financial
position, results of operations or cash flows.                       
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In December 2003 the FASB issued FASB Staff Position FSP No. FIN 46-8,
Evaluating Whether as a Group the Holders of the Equity Investment at Risk
Lack the Direct or Indirect Ability to Make Decisions about an Entitys
Activities through Voting Rights or Similar Rights under FIN 46. The
effective date and transition provisions for the guidance in this FSP are the
same as Interpretation 46 (Revised December 2003) for all arrangements to
which Interpretation 46 has been or will be applied. If the application of
the guidance in this FSP results in changes to previously reported
information, the cumulative effect of the accounting change should be
reported as of the beginning of the quarter which includes December 19, 2003.
The Company does not expect the adoption of FSP No. FIN 46-8 to have a
material impact on its consolidated financial position, results of operations
or cash flows.



|5. |  | Liquidity
|-- |  | ---------



| |  | As of December 31, 2003, DiCon had cash and cash equivalents of $0.9 million.
In addition, in conformity with the requirements of generally accepted
accounting principles, $24.6 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 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 for at least the next 12 months. 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.
There can be no certainty that DiCon would be successful in raising the
required capital or in raising capital at acceptable rates.



|6. |  | Basic net loss per share
|-- |  | ------------------------



| |  | Basic loss per share is computed by dividing the net loss (numerator) by the
weighted average number of common shares outstanding (denominator) during the
periods presented, excluding the dilutive effect of stock options. Diluted
net loss per share gives effect to all potentially dilutive common stock
equivalents outstanding during the period. In computing diluted net loss per
share, the average stock price for the period is used in determining the
number of shares assumed to be purchased from the proceeds of stock option
exercises.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The following is a reconciliation of the numerators and denominators of the
basic and diluted net loss per share computations for the periods presented
below:                                                                                                                                                                                                                                                                                                                                                                                            

|                                     |                                           |   |                            |         |                           |   |       |         |      |   |       |         |   |   |       |         |  
|------------------------------------ | ----------------------------------------- | - | -------------------------- | ------- | ------------------------- | - | ----- | ------- | ---- | - | ----- | ------- | - | - | ----- | ------- | -
|                                     |                                           |   | For the three months ended |         | For the nine months ended
|                                     |                                           |   | December 31,               |         | December 31,             
|                                     |                                           |   |                            |         |                          
|                                     |                                           |   | 2003                       |         | 2002                      |   | 2003  |         | 2002
|                                     |                                           |   |                            |         |                           |   |       |         |     
|Numerator:                           |                                           |   |                            |         |                           |   |       |         |      |   |       |         |   |   |       |        
|                                     | Net loss                                  |   | $                          | (2,168  | )                         |   | $     | (3,559  | )    |   | $     | (9,894  | ) |   | $     | (12,745 | )
|Denominator:                         |                                           |   |                            |         |                           |   |       |         |      |   |       |         |   |   |       |        
|                                     | Basic and diluted weighted
average shares |   |                            | 112,007 |                           |   |       | 112,130 |      |   |       | 112,017 |   |   |       | 110,736 |  
|Basic and diluted net loss per share |                                           | $ | (0.02                      | )       |                           | $ | (0.03 | )       |      | $ | (0.09 | )       |   | $ | (0.12 | )      



| |  | As a result of the losses incurred by the Company for the three months and
the nine months ended December 31, 2003, weighted average options to purchase
4,910 and 4,760 shares of common stock were anti-dilutive and excluded from
the net loss per share calculations. For the three and nine months ended
December 31, 2002, weighted average options to purchase 6,117 and 9,103
shares of common stock were anti-dilutive and excluded from the net loss per
share calculations.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents



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



|7. |  | Marketable Securities
|-- |  | ---------------------



| |  | Available for sale securities included in the consolidated balance sheets as
of December 31, 2003 and March 31, 2003 are as follows:
| |  | ------------------------------------------------------------------------------------------------------------------------------------

|                  |       |   |        |        |       |   |            |    |            |   |      |   |  |   |        |        | 
|----------------- | ----- | - | ------ | ------ | ----- | - | ---------- | -- | ---------- | - | ---- | - |  | - | ------ | ------ | 
|                  |       |   |        |        |       |   | Unrealized |    | Unrealized |   | Fair
|                  |       |   | Cost   |        | Gains |   | Losses     |    | Value     
|December 31, 2003 |       |   |        |        |       |   |            |    |            |   |      |   |  |   |        |       
|Equity securities |       | $ |       |        |       | $ |           |    |            | $ |     |   |  | $ |       |       
|Debt securities   |       |   | 24,550 |        |       |   | 27         |    |            |   |     |   |  |   | 24,577 |       
|                  |       |   |        |        |       |   |            |    |            |   |      |   |  |   |        |       
|                  | Total |   | $      | 24,550 |       |   | $          | 27 |            |   | $    |  |  |   | $      | 24,577 | 
|                  |       |   |        |        |       |   |            |    |            |   |      |   |  |   |        |       
|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.
| |  | -------------------------------------------------------------------------------------------------



|8. |  | Inventories, net
|-- |  | ----------------



| |  | Inventories consist of the following as of December 31, 2003 and March 31,
2003:
| |  | --------------------------------------------------------------------------------

|                |       |   |              |       |           |   |       |       | 
|--------------- | ----- | - | ------------ | ----- | --------- | - | ----- | ----- | 
|                |       |   | December 31, |       | March 31,
|                |       |   | 2003         |       | 2003     
|                |       |   |              |       |          
|Raw materials   |       | $ | 1,554        |       |           | $ | 1,989 |      
|Work-in-process |       |   | 2,766        |       |           |   | 1,875 |      
|                |       |   |              |       |           |   |       |      
|                | Total |   | $            | 4,320 |           |   | $     | 3,864 | 
|                |       |   |              |       |           |   |       |      



|9. |  | Property, Plant and Equipment, net
|-- |  | ----------------------------------



| |  | Property, plant and equipment consist of the following as of December 31,
2003 and March 31, 2003:
| |  | --------------------------------------------------------------------------------------------------

|                                   |  |              |         |           |  |   |         |  
|---------------------------------- |  | ------------ | ------- | --------- |  | - | ------- | -
|                                   |  | December 31, |         | March 31,
|                                   |  | 2003         |         | 2003     
|                                   |  |              |         |          
|Land                               |  | $            | 10,000  |           |  | $ | 10,000  |  
|Building and improvements          |  |              | 37,612  |           |  |   | 37,492  |  
|Machinery, equipment and fixtures  |  |              | 48,789  |           |  |   | 52,191  |  
|                                   |  |              |         |           |  |   |         |  
|Property, plant and equipment      |  |              | 96,401  |           |  |   | 99,683  |  
|Less: Accumulated depreciation     |  |              | (35,464 | )         |  |   | (31,481 | )
|                                   |  |              |         |           |  |   |         |  
|Property, plant and equipment, net |  | $            | 60,937  |           |  | $ | 68,202  |  
|                                   |  |              |         |           |  |   |         |  



| |  | Depreciation expense was $6,982 and $10,245 for the nine months period ended
December 31, 2003 and for the year ended March 31, 2003.              
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | During the nine months ended December 31, 2003, the Company disposed of
equipment and furniture with a net book value of $587 for proceeds of $187.

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##### Table of Contents



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



|10. |  | Accounts Payable and Accrued Liabilities
|--- |  | ----------------------------------------



| |  | Accounts payable and accrued liabilities consist of the following as of
December 31, 2003 and March 31, 2003:
| |  | -------------------------------------------------------------------------------------------------------------

|                                |  |              |       |           |  |   |       | 
|------------------------------- |  | ------------ | ----- | --------- |  | - | ----- | 
|                                |  | December 31, |       | March 31,
|                                |  | 2003         |       | 2003     
|                                |  |              |       |          
|Accounts payable                |  | $            | 757   |           |  | $ | 2,151 | 
|Accrued payroll                 |  |              | 873   |           |  |   | 325   | 
|Accrual for vacated properties  |  |              | 296   |           |  |   | 519   | 
|Accrued liabilities             |  |              | 740   |           |  |   | 519   | 
|Advance payments from customers |  |              | 3,658 |           |  |   | 3,671 | 
|                                |  |              |       |           |  |   |       | 
|                                |  | $            | 6,324 |           |  | $ | 7,185 | 
|                                |  |              |       |           |  |   |       | 



|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. On January 13, 2004, the bank
agreed to extend the maturity date of the mortgage loan to June 20, 2005,
subject to additional terms and conditions requiring the Company to maintain
a balance of cash and marketable securities of $10.0 million and a loan to
value ratio not to exceed 70 percent of the improved
administrative/production premises plus 50 percent of the currently vacant
land.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | 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 (4.0 percent
at December 31, 2003). Principal and interest are payable monthly. The
balance of the mortgage loan as of December 31, 2003 was $25,687 and the
balance of the loan at maturity is estimated to be $24,638 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 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 December 31, 2003, the loan balance
was $3,383. Effective April 30, 2002 and annually on April 30th 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 December 31, 2003,
the Company had not elected the fixed rate option and the loan bore an
interest rate of prime plus 0.5 percent (4.5 percent on December 31, 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
December 31, 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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##### Table of Contents



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



| |  | In December 2002, Global Fiberoptics obtained a line of credit in Taiwan
backed by commercial paper issued by Global Fiberoptics for a maximum of
220,000 New Taiwan Dollars (or US$6,476 as of December 31, 2003). In January
2004, Global Fiberoptics renewed and reduced its line of credit to 100,000
New Taiwan Dollars (or US$2,944 as of December 31, 2003). The interest rate
is based on a rate set by the bank at the time funds are drawn. The line of
credit will mature on January 28, 2005. The outstanding balance of any
commercial paper under this line of credit must be fully secured by either a
cash deposit or bond fund certificate. As of December 31, 2003, Global
Fiberoptics had issued commercial paper in the amount of 27,500 New Taiwan
Dollars (or US$810 as of December 31, 2003) and 60,000 New Taiwan Dollars (or
US$1,766 as of December 31, 2003) both with interest rate of 1.00 %.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In September 2003, Global Fiberoptics renewed its line of credit of 100,000
New Taiwan Dollars (or US$2,944 as of December 31, 2003) from a Taiwan bank,
with interest based on a rate set by the bank at the time funds are drawn.
36,500 New Taiwan Dollars (or US$1,074) was drawn as of December 31, 2003
with the interest rate of 3.0%. The loan will mature on January 06, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   



|12. |  | Stock Plans and Deferred Compensation Liability
|--- |  | -----------------------------------------------



| |  | As an incentive for employees to assist in growing the Company, prior to
March 31, 2001 the Company maintained a phantom stock plan (the Phantom
Stock Plan) under which it granted eligible employees phantom stock units
that entitled the employees to participate in the current and future value of
the Company. In addition, the Company made contingent commitments to eligible
employees to grant stock units in the future (the Contingently Promised
Stock Units). The shares under the plan were valued semiannually, typically
in May and December. These stock units vested 50 percent upon receipt and 50
percent on the first anniversary of the grant date and had an exercise price
of zero. During the service period of one-year following the date of the
grant, the vested units could be redeemed for cash on a net basis by
forfeiting additional units equal to the number of units redeemed.
Thereafter, a maximum of 60 percent of the units could be redeemed while the
holder was still an employee of the Company. The Company recorded a
liability for the value of the unredeemed vested shares at the current value
as of the financial statement date.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | On March 31, 2001, the Company offered its employees two new equity incentive
plans, an Employee Stock Option Plan (the Option Plan) and an Employee
Stock Purchase Plan (the Purchase Plan). Grants under the Phantom Stock
Plan have been discontinued. Under both the Option Plan and the Purchase
Plan, the exercise or purchase price is not to be less than 85 percent of the
fair value of Companys common stock at the time of grant under the Option
Plan or purchase under the Purchase Plan. New options granted under the
Option Plan generally vest over five years and expire after ten years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Under the terms of the Option Plan, employees who were participants in the
Phantom Stock Plan could convert their awarded phantom stock units and their
Contingently Promised Stock Units into (1) options with an exercise price of
$4.11 per share and cash payments of $4.11 per share (paid over four years);
(2) additional options with an exercise price of $4.11; or (3) a combination
of both (1) and (2). The cash payments and the options that were converted
from vested stock units vested immediately. The cash payments and the
options that were converted from Contingently Promised Units will vest in
accordance with the original vesting schedule, but not less than 20 percent
per year. At March 31, 2001, all phantom stock units for current employees
under the Phantom Stock Plan were converted to options or options and cash
payments pursuant to one of the alternatives noted above.                                                                                                                                                                                                                                                                      
|
| |  | Cash payments related to the conversion are payable in four annual
installments beginning on March 31, 2002. As of March 31, 2001, the Company
anticipated making four annual payments of $5,930 each commencing March 31,
2002 for those employees whom 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.                                                                                                                                                                                                                                                                                                                                          

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##### Table of Contents



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



| |  | 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 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.
|
| |  | 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 and nine months ended December 31, 2003
and 2002 as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

|                                             |  |                            |     |                           |  |      |     |      |  |   |     |  |  |   |       | 
|-------------------------------------------- |  | -------------------------- | --- | ------------------------- |  | ---- | --- | ---- |  | - | --- |  |  | - | ----- | 
|                                             |  | For the three months ended |     | For the nine months ended
|                                             |  | December 31,               |     | December 31,             
|                                             |  |                            |     |                          
|                                             |  | 2003                       |     | 2002                      |  | 2003 |     | 2002
|                                             |  |                            |     |                           |  |      |     |     
|Cost of goods sold                           |  | $                          | 14  |                           |  | $    | 52  |      |  | $ | 73  |  |  | $ | 192   | 
|Selling, general and administrative expenses |  |                            | 48  |                           |  |      | 189 |      |  |   | 251 |  |  |   | 701   | 
|Research and development expenses            |  |                            | 100 |                           |  |      | 100 |      |  |   | 531 |  |  |   | 369   | 
|                                             |  |                            |     |                           |  |      |     |      |  |   |     |  |  |   |       | 
|                                             |  | $                          | 162 |                           |  | $    | 341 |      |  | $ | 855 |  |  | $ | 1,262 | 
|                                             |  |                            |     |                           |  |      |     |      |  |   |     |  |  |   |       | 



|13. |  | Income Taxes
|--- |  | ------------



| |  | The Companys income tax benefit of $650 for the nine months ended December
31, 2003 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 of $6,178 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.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | DiCon considers its investment in its Taiwanese subsidiary to be
essentially permanent in duration. At December 31, 2003, the undistributed
foreign earnings amounted to approximately $10.2 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.                                                                                                                                                                                                                                                                                                                    

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



|14. |  | Product Warranties
|--- |  | ------------------



| |  | 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. 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:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

|                                             |  |              |      |           |  |   |      |  
|-------------------------------------------- |  | ------------ | ---- | --------- |  | - | ---- | -
|                                             |  | December 31, |      | March 31,
|                                             |  | 2003         |      | 2003     
|                                             |  |              |      |          
|Balance at beginning of period               |  | $            | 56   |           |  | $ | 247  |  
|Accruals for warranties during the period    |  |              | 95   |           |  |   | 22   |  
|Settlements made (in cash) during the period |  |              | (131 | )         |  |   | (213 | )
|                                             |  |              |      |           |  |   |      |  
|Balance at closing of period                 |  | $            | 20   |           |  | $ | 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 During the nine months ended December 31, 2003,
DiCon wrote off approximately $0.3 million of obsolete inventory and wrote
down to fair value an additional $0.8 million of 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 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 terminating six of its leased facilities. The
balance of this reserve is approximately $0.3 million as of December 31,
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, 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 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 collection 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 collection of the
cancellation payments is determined to be reasonably assured. 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 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.

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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,
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.

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. 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.

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 December 31, 2003 Compared with Three Months Ended December 31, 2002

Net Sales

Net sales increased by 31.68% from $4.2 million for the quarter ended
December 31, 2002 to $5.6 million for the quarter ended December 31, 2003.
The increase was primarily due to an increase in the demand for fiberoptic
components and test equipment by telecommunications equipment vendors, the
Companys primary customers. The increase in net sales associated with
increased unit shipments was partially offset by decreases in the average
selling prices of our products.

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In the quarter ended December 31, 2002 and 2003, the Company recorded no
revenue from cancellations of prior supply agreements with customers.

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.

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 58% of
total net sales for the quarter ended December 31, 2003, as compared to 47%
for the quarter ended December 31, 2002, respectively.

As of December 31, 2003 and 2002, the Company experienced the following
concentrations with sales.

|                                                      |  |                    |      |      |  |  |      |  
|----------------------------------------------------- |  | ------------------ | ---- | ---- |  |  | ---- | -
|                                                      |  | Three months ended
|                                                      |  | December 31,      
|                                                      |  |                   
|                                                      |  | 2003               |      | 2002
|                                                      |  |                    |      |     
|Percentage of revenue for 3 largest customers         |  |                    | 49.6 | %    |  |  | 27.8 | %
|No. of customers accounting for over 10% of net sales |  |                    | 3    |      |  |  | 1    |  

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.

Cost of Goods Sold and Gross Margin

Costs of goods sold declined 17.4% from $5.5 million in the quarter ended
December 31, 2002, to $4.6 million in the quarter ended December 31, 2003.
Gross margin as a percentage of net sales was 18.1% in the quarter ended
December 31, 2003, compared to negative 30.6% in the quarter ended December
31, 2002. The increase in gross margin was due to increased sales absorbing
fixed overheads costs and the cost savings associated with the workforce
reduction and decreases in other expenses. Gross margin also increased as a
result of greater sales revenue. The Company scrapped $0.9 million of
materials for the quarter ended December 31, 2002. For the quarter ended
December 31, 2003, the Company wrote down to fair value an additional $0.2
million of inventory.

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. DiCon anticipates the slight improvement in gross margin
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 $1.3 million in the
quarter ended December 31, 2003, compared to $2.0 million in the quarter
ended December 31, 2002. The decrease in SG&A was the result of reduction in
personnel expenses.

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##### Table of Contents



Research and Development Expenses

Research and development (R&D) expense was $1.5 million in the quarter
ended December 31, 2003, compared to $2.1 million in quarter ended December
31, 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, loss on disposal of
fixed assets and others, was $0.5 million in expenses in the quarter ended December 31,
2003, compared to expenses of $1.2 million for the quarter ended December 31,
2002. The reduction of expenses is primarily attributable to decreased
interest expenses associated with DiCons real estate loan and equipment loan
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.
Loss on disposal of fixed assets was $0.4 million in the quarter ended
December 31, 2003, compared to $0.7 million in the quarter ended December 31,
2002.

Loss Before Income Tax Benefit

The Company reported a net loss before income tax benefit of $2.2 million for
the current quarter compared to $6.5 million for the same quarter in the
prior year.

Income Tax Benefit

For the quarter ended December 31, 2002, the Company recorded $3.0 million of
income tax benefit. The Company 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 accrued an income tax receivable
for this amount which was received in full in June 2003. 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.

Due to uncertainty surrounding the realization of favorable tax attributes in
future tax returns, the Company recorded a valuation allowance against its
net operating losses and credits at March 31, 2003. The Companys income tax
benefit at December 31, 2003 of approximately $0.1 million 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.
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.

For the three months ended December 31, 2003, the effective tax rate was
(3.4)% compared to (45.5)% for the same period in the prior year. The tax
rate for each period is the result of the consolidation of tax provision of
the US operations with that of the Taiwan operations of Global Fiberoptics,
and can vary substantially from period to period depending on the relative
performance of each operation.

Nine Months Ended December 31, 2003 Compared with Nine Months Ended December 31, 2002

Net Sales

Net sales declined 19.3% from $16.2 million for the nine months ended
December 31, 2002 to $13.1 million for the nine months ended December 31,
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.

In the nine months ended December 31, 2003, the Company recorded no revenue
from cancellations of prior supply agreements with customers compared with
$1.2 million in cancellation revenue from this source in the same period of
the prior year. This revenue represents actual cash payments received during
that period.

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

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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 nine months ended December 31,
2003, the declining revenues were due both to a decline in selling prices and
to a decline in the volume of goods shipped compared to the same period of
the prior year.

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 53% of
total net sales for the nine months ended December 31, 2003, as compared to
32% for the nine months ended December 31, 2002, respectively.

As of December 31, 2003 and 2002, the Company experienced the following
concentrations with sales.

|                                                      |  |                   |      |      |  |  |      |  
|----------------------------------------------------- |  | ----------------- | ---- | ---- |  |  | ---- | -
|                                                      |  | Nine months ended
|                                                      |  | December 31,     
|                                                      |  |                  
|                                                      |  | 2003              |      | 2002
|                                                      |  |                   |      |     
|Percentage of revenue for 3 largest customers         |  |                   | 40.4 | %    |  |  | 36.2 | %
|No. of customers accounting for over 10% of net sales |  |                   | 2    |      |  |  | 1    |  

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.

Cost of Goods Sold and Gross Margin

Costs of goods sold declined 21.5% from $17.5 million in the nine months
ended December 31, 2002, to $13.8 million in the nine months ended December
31, 2003. Gross margin as a percentage of net sales was negative 5.1% in the
nine months ended December 31, 2003, compared to negative 8.0% in the nine
months ended December 31, 2002. The increase in gross margin was due to
increased sales absorbing fixed overheads costs and the cost savings
associated with the workforce reduction and decreases in other expenses. The
Company scrapped $0.3 million and $1.7 million of materials for the nine
months ended December 31, 2003 and 2002 respectively. For the nine months
ended December 31, 2003, the Company wrote down to fair value an additional
$0.8 million of inventory.

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. DiCon anticipates the slight improvement in gross margin
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 $4.1 million for the
nine months ended December 31, 2003, compared to $6.8 million for the nine
months ended December 31, 2002. The decrease in SG&A was the result of
reduction in personnel expenses.

Research and Development Expenses

Research and development (R&D) expense was $4.8 million for the nine months
ended December 31, 2003, compared to $11.1 million for nine months ended
December 31, 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.

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Other Income (Expense)

Other income (expense) composed of interest expense, net, loss on disposal of
fixed assets and others, was approximately $1.0 million in
expenses for the nine months
ended December 31, 2003, compared to expenses of $3.1 million for the nine
months ended December 31, 2002. The reduction of expenses is primarily
attributable to decreased interest expenses associated with DiCons real
estate loan and equipment loan 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. Loss on disposal of fixed assets was $0.4
million for the nine months ended December 31, 2003, compared to $0.9 million
for the nine months ended December 31, 2002.

Loss Before Income Tax Benefit

The Company reported loss before income tax benefit for the nine months ended
December 31, 2003 has been reduced to $10.5 million compared to $22.2
million for the same nine months in the prior year.

Income Tax Benefit

For the nine months ended December 31, 2002, the Company recorded $9.5
million of income tax benefit. The Company 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 accrued an income tax
receivable for this amount which was received in full in June 2003.
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.

Due to uncertainty surrounding the realization of favorable tax attributes in
future tax returns, the Company recorded a valuation allowance against its
net operating losses and credits at March 31, 2003. The Companys income tax
benefit at December 31, 2003 of approximately $0.7 million 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.
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.

For the nine months ended December 31, 2003, the effective tax rate was
(6.2)% compared to (42.7)% for the same period in the prior year. The tax
rate for each period is the result of the consolidation of tax provision of
the US operations with that of the Taiwan operations 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 $10.5 million increased for the nine
months ended December 31, 2003 from a cash outflow of $7.9 million for the
nine months ended December 31, 2002. Cash provided by operating activities
was primarily attributable to depreciation expense of $7.0 million and an
income tax refund of $15.3 million. These amounts were partially offset by an
increase in accounts receivable of $1.1 million and inventories
of $0.8 million, and a decrease in accounts payable and accrued liabilities
of $0.7 million and the net loss for the nine
months ended December 31, 2003. Accounts receivable increased in the nine
months ended December 31, 2003, due to a increase in net sales. Inventory
levels were higher primarily as a result of higher purchase and production
volumes.

Cash used in investing activities increased from $8.3 million for the nine
months ended December 31, 2002 to $13.5 million in the current period. This
is primarily the result of efforts to increase earnings on working capital by
investing in certificates of deposits with maturities in excess of 90 days
and mutual funds of $14.9 million during the nine months ended December 31,
2003 as compared to $7.1 million for the nine months ended December 31, 2002.
All certificates mature in one year or less. Additionally, the Company sold
approximately $1.2 million of marketable securities during the current
period.

For the nine months ended December 31, 2002, the Company made a long-term
investment of $0.5 million for a minority interest in a firm in Taiwan.
Purchases of equipment declined from $1.5 million in the nine months ended
December 31, 2002 to approximately $43,000 in the same nine months this year.

Cash flows from financing activities declined from $8.3 million for the nine
months ended December 31, 2002 to a $0.1 million in the current period. This
change is primarily attributable to the sale of common stock for $9.6 million
for the nine months ended December 31, 2002 offset by borrowings and repayments under the line of
credit, mortgages and other debt.

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The Company is required to comply with various operating and financial
covenants under its an equipment loan 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 December 31, 2003.

On January 13, 2004, the Bank agreed to extend the maturity date of the
mortgage loan to June 20, 2005, subject to additional terms and conditions
requiring the Company to maintain a balance of cash and marketable securities
of $10.0 million and a loan to value ratio not to exceed 70 percent of the
improved administrative/production premises plus 50 percent of the currently
vacant land.

As of December 31, 2003, DiCon had cash and cash equivalents of $0.9 million.
In addition, in conformity with the requirements of generally accepted
accounting principles, $24.6 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 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 for at least the next 12 months. 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.
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 December 31, 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 approximately $0.3 million 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
December 31, 2003, the Company had no marketable equity securities and as of
March 31, 2003, the Company had marketable equity securities with an original
cost of approximately 0.2 million that had an unrealized gain of $81,000.

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.

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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. DiCon
does not have any derivative financial instruments as of December 31, 2003.
As of December 31, 2003 the accumulated currency translation loss resulting
from the translation of the financial position of Global Fiberoptics were
$1.6 million compared to a loss of $2.1 million as of March 31, 2003.

DiCon considers its investment in its Taiwanese subsidiary to be essentially
permanent in duration. At December 31, 2003, the undistributed foreign
earnings amounted to approximately $10.2 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 December
31, 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 December 31, 2003, that has materially
affected, or is reasonably likely to materially affect, DiCons internal
control over financial reporting.

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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.




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 2002.
|        |  |                                                                                                                  
|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: February 11, 2004 |  | By:                     | /s/ Ho-Shang Lee                     
|                        |  |                         |                                      
|                        |  |                         | (Signature)                          
|                        |  |                         |                                       |                                 
|                        |  | Name:                   | Ho-Shang Lee, Ph.D.                  
|                        |  | Title:                  | President and Chief Executive Officer
|                        |  |                         | (principal executive officer)        
|                        |  |                         |                                      
|Date: February 11, 2004 |  | 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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