Dicon Fiberoptics 10QSB Quarterly report (small business)

SECURITIES AND EXCHANGE COMMISISSION

WASHINGTON, DC 20549

FORM 10-QSB

_________________________

(Mark One)

x	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

	For the quarterly period ended June 30, 2005, 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

_________________________

DICON FIBEROPTICS, INC.

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

California		94-3006185
(State or Other Jurisdiction of		(IRS Employer
Incorporation or Organization)		Identification No.)

1689 Regatta Blvd.
Richmond, California		94804
(Address of Principal Executive Offices)		(Zip Code)

(510) 620-5000

(Issuer’s Telephone Number, Including Area Code)

_________________________

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

Yes x No o

The number of shares outstanding of the issuer’s common stock as of December 31, 2004, was 111,961,199.

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

__________________________________________________________________________________________________________

Table of Contents

DICON FIBEROPTICS, INC.

Table of Contents

PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements.

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

Item 3.	Controls and Procedures.

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings.

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

Item 3.	Defaults Upon Senior Securities.

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

Item 5.	Other Information.

Item 6.	Exhibits.

	Signatures.

	Exhibit Index.

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PART I

FINANCIAL INFORMATION

Item 1. Financial Statements.

DiCon Fiberoptics, Inc. and Subsidiary Unaudited Consolidated Balance Sheets (in thousands)

	June 30,			March 31,
	2005			2005 (1)
Assets
Current assets:
Cash and cash equivalents	$	2,848		$	1,784
Marketable securities		13,994			14,677
Accounts receivable, net of allowance for doubtful accounts of $188 and $180, respectively		2,561			4,104
Inventories		3,653			3,998
Interest receivables and prepaid expenses		263			232

Total current assets		23,319			24,795

Property, plant and equipment, net		46,976			48,465
Other assets		15			41
Total assets	$	70,310		$	73,301

Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities	$	2,374		$	3,110
Advances received from customers		3,636			3,594
Mortgage and other debt		2,382			2,685

Total current liabilities		8,392			9,389

Mortgage and other debt, net of current portion		17,904			19,528
Total liabilities		26,296			28,917

Commitments (Note 14)

Shareholders' equity:
Common stock: no par value; 200,000 shares authorized; 111,942 and 111,950 shares issued and outstanding at June 30, 2005 and March 31, 2005, respectively		22,230			22,238
Additional paid-in capital		13,273			13,285
Deferred compensation		(131	)		(176	)
Retained earnings		8,985			9,537
Accumulated other comprehensive loss		(343	)		(500	)
Total shareholders' equity		44,014			44,384

Total liabilities and shareholders' equity	$	70,310		$	73,301

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

(1) Balances at March 31, 2005 are derived from the audited Financial Statements at that date.

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

	For the three months ended June 30,
	2005			2004

Net sales	$	5,626		$	4,429

Cost of goods sold		3,724			4,347

Gross profit		1,902			82

Selling, general and administrative expenses		1,197			1,298
Research and development expenses		1,137			1,414

		2,334			2,712

Loss from operations		(432	)		(2,630	)

Other (expense) income:
Interest expense		(315	)		(300	)
Interest income		121			93
Gain (loss) on disposal of fixed assets		56			(19	)
Other income, net		18			58

Loss before income taxes		(552	)		(2,798	)

Income tax benefit		-			-

Net loss	$	(552	)	$	(2,798	)
Other comprehensive income (loss):
Foreign currency translation adjustment		157			(274	)
Unrealized holding (losses) gains on marketable securities arising during the period, net of realized (losses) gains		-			2


Comprehensive loss	$	(395	)	$	(3,070	)

Net loss per share - Basic and diluted	$	(0.01	)	$	(0.03	)

Average shares used in computing net loss per share - basic and diluted		111,947			111,988

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

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DiCon Fiberoptics, Inc. and Subsidiary Unaudited Consolidated Statement of Cash Flows (in thousands)
	Three Months Ended
	June 30,
	2005			2004
Cash flows from operating activities:
Net loss	$	(552	)	$	(2,798	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation		1,572			2,083
Write down excess and obsolete inventories		-			270
Provision for bad debts		8			5
(Gain) loss on disposal of property, plant and equipment		(56	)		19
Stock compensation expense		33			111
Changes in assets and liabilities:
Accounts receivable		1,535			455
Inventories		337			(891	)
Prepaid expenses and other current assets		(31	)		293
Other assets		27			12
Accounts payable and accrued liabilities		(524	)		(208	)
Deferred compensation payable		-			3
Net cash provided by (used in) operating activities		2,349			(646	)

Cash flows from investing activities:
Purchases of marketable securities		(6,297	)		(426	)
Sales of marketable securities		6,979			2,167
Sale of property, plant and equipment		60			-
Purchases of property, plant and equipment		(102	)		(10	)
Net cash provided by investing activities		640			1,731

Cash flows from financing activities:
Borrowings under mortgages and other debt		669			869
Repayment of mortgages and other debt		(2,588	)		(533	)
Repurchases of common stock		(8	)		(14	)
Net cash (used in) provided by financing activities		(1,927	)		322

Effect of exchange rate changes on cash and cash equivalents		2			2

Net change in cash and cash equivalents		1,064			1,409
Cash and cash equivalents, beginning of period		1,784			1,359
Cash and cash equivalents, end of period	$	2,848		$	2,768

Supplemental disclosures of cash flow information:

Cash paid for interest	$	301		$	298

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

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DiCon Fiberoptics, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

(in thousands)

_________________________________________________________________________________________________________

1.	Nature of operations

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

2.	Basis of presentation

The Company operates and reports based on a fiscal year that ends on March 31st. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and on the same basis of presentation as the audited financial statements included in the Company’s Annual Report on Form 10-KSB/A-1 as filed with the Securities and Exchange Commission (SEC) on July 11, 2005 (the “Company’s 10-KSB/A-1”). Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for audited financial statements. In the opinion of the Company’s management, the interim information includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods. Footnote disclosures related to the interim financial information included herein are also unaudited. Such financial information should be read in conjunction with the audited consolidated financial statements and related notes thereto for the year ended March 31, 2005 included in the Company’s 10-KSB/A-1.

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

Certain prior year balances have been reclassified to conform to the current year presentation.

3.	Stock-based compensation

The Company accounts for stock-based compensation issued to employees using the intrinsic value method of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and, accordingly, presents disclosure of pro forma information required under Statement of Financial Accounting Standard (“SFAS”) No. 123, “Accounting for Stock-Based Compensation”, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation, Transition and Disclosure.” Stock and other equity instruments issued to non-employees are accounted for in accordance with SFAS No. 123 and Emerging Issues Task Force Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or Services,” and recorded at their fair value. Expenses associated with stock-based compensation is amortized on a straight line basis over the vesting period of the individual award.

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

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DiCon Fiberoptics, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

(in thousands, except per share data)

__________________________________________________________________________________________________________

	For the three months ended
	June 30,
	2005			2004

Net loss, as reported	$	(552	)	$	(2,798	)

Add: Stock-based employee compensation expense included in reported net loss, net of tax		33			111

Deduct: Compensation expense based on fair value method, net of tax		(134	)		(135	)
Pro forma net loss	$	(653	)	$	(2,822	)

Reported net loss per share—basic and diluted	$	(0.01	)	$	(0.03	)
Pro forma net loss per share—basic and diluted	$	(0.01	)	$	(0.03	)

No tax effects were included in the determination of pro forma net loss because the deferred tax asset resulting from stock-based employee compensation would be offset by an additional valuation allowance for deferred tax assets.

4. Recent accounting pronouncements

In May 2005, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 154 ("SFAS No.154"), “Accounting Changes and Error Corrections.” This statement replaces APB 20 and SFAS 3 and changes the requirements for the accounting for and reporting of a change in accounting principle. APB 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. SFAS No.154 requires retrospective application to prior periods’ financial statements of changes in accounting principle. Adoption of this statement is not expected to have a material impact on its financial position and results of operations.

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123(R) ("SFAS No. 123(R)"), "Accounting for Stock-Based Compensation". SFAS No. 123(R) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123(R) requires that the fair value of such equity instruments be recognized as expense in the historical financial statements as services are performed. Prior to SFAS No. 123(R), only certain pro-forma disclosures of fair value were required. SFAS No. 123(R) shall be effective for nonpublic companies and small business issuers as of the beginning of the first annual reporting period that begins after December 15, 2005. The Company has historically provided pro forma disclosures reflecting the effects of such compensation costs on its results of operations and financial condition. See Note 3, Stock-Based Compensation. The Company is still evaluating the impact of the adoption of this standard.

In November 2004, the FASB issued Statement of Financial Accounting Standards No. 151 ("SFAS No. 151"), Inventory Costs, an amendment of ARB No. 43, Chapter 4. The amendments made by SFAS No. 151 will improve financial reporting by clarifying those abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) that should be recognized as current-period charges and by requiring the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted for inventory costs incurred during fiscal years beginning after November 24, 2004. Adoption of this statement is not expected to have a material impact on its financial position and results of operations.

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DiCon Fiberoptics, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

(in thousands, except per share data)

___________________________________________________________________________________________________________

5.	Liquidity

As of June 30, 2005, the Company had cash and cash equivalents of $2.8 million. In addition, in conformity with the requirements of generally accepted accounting principles, $14.0 million was invested in certificates of deposit and other marketable securities that were classified as marketable securities. The Company invests cash in excess of short-term needs in these investments to attempt to improve yields on its total investment portfolio.

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

6.	Basic net loss per share

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

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

	For the three months ended
	June 30,
	2005			2004
Numerator:
Net loss	$	(552	)	$	(2,798	)

Denominator:
Basic and diluted weighted average shares		111,947			111,988

Basic and diluted net loss per share	$	(0.01	)	$	(0.03	)

Stock options totaling 4,129 for the three months ended June 30, 2005, and stock options totaling 4,546 for the three months ended June 30, 2004, were not included in the diluted earnings per share amounts as their effect would have been anti-dilutive.

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DiCon Fiberoptics, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

(in thousands)

__________________________________________________________________________________________________________

7.	Marketable Securities

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

	Cost		Unrealized		Unrealized		Fair
			Gain		Losses		Value
June 30, 2005
Certificate of Deposit	$	13,994	$	-	$	-	$	13,994
March 31, 2005
Certificate of Deposit	$	14,677	$	-	$	-	$	14,677

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

8.	Inventories

Inventories consist of the following as of June 30, 2005 and March 31, 2005:

	June 30,		March 31,
	2005		2005

Raw materials	$	1,017	$	1,177
Work-in-process		2,636		2,821
Total	$	3,653	$	3,998

During the three months period ended June 30, 2005, no obsolete inventory was written off. During the fiscal year ended March 31, 2005, the Company wrote off approximately $1.3 million of obsolete inventory.

9.	Property, Plant and Equipment, net

Property, plant and equipment consist of the following as of June 30, 2005 and March 31, 2005:

	June 30,			March 31,
	2005			2005
Land	$	10,000		$	10,000
Building and improvements		36,268			36,281
Machinery, equipment and fixtures		41,509			41,571
Property, plant and equipment		87,777			87,852
Less: Accumulated depreciation		(40,801	)		(39,387	)
Property, plant and equipment, net	$	46,976		$	48,465

Depreciation expense was $1,572 and $8,090 for the three months ended June 30, 2005 and for the year ended March 31, 2005.

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

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DiCon Fiberoptics, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

(in thousands)

_________________________________________________________________________________________________________

10.

Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities consist of the following as of June 30, 2005 and March 31, 2005:

	June 30,		March 31,
	2005		2005

Accounts payable	$	562	$	1,186
Accrued payroll		532		723
Temporary receipts		608		510
Accrued liabilities		672		691
	$	2,374	$	3,110

11.

Mortgage and Other Debt

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

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

The Company was in compliance with the additional principal repayments requirement as of June 30, 2005. During the quarter ended June 30, 2005, the Company voluntarily prepaid four additional $0.5 million equal installments that were originally due on October 1, 2005, January 1, 2006, April 1, 2006 and July 1, 2006. In addition, the Company voluntarily prepaid an additional $0.5 million principal of the mortgage loan during the quarter ended June 30, 2005. Rates of interest on the borrowings ranged from 5.5% to 6.0% during the period. The balance of the mortgage loan as of June 30, 2005 was $18.3 million with an interest rate of 6.0%. Subsequent to June 30, 2005, the Company voluntarily prepaid additional $2.0 million principal of the mortgage loan. (See subsequent event on Note 15).

In April 2001, the Company obtained an equipment loan from a bank in the amount of $7.3 million. The loan was secured by specific pieces of equipment. The loan was voluntarily prepaid in full on October 12, 2004.

Global maintained a line of credit in Taiwan backed by commercial paper issued by Global for a maximum of 50 million New Taiwan Dollars (or approximately $1.6 million as of June 30, 2005). The interest rate is based on a rate set by the bank at the time funds are drawn. The line of credit will mature on April 7, 2006. The outstanding balance of any commercial paper under this line of credit must be fully secured by either a cash deposit or bond fund certificate. As of June 30, 2005, there was no commercial paper outstanding.

Global maintained its second line of credit of 80 million New Taiwan Dollars (or approximately $2.5 million as of June 30, 2005) from a Taiwan bank. The line of credit will mature on September 30, 2005. The interest rate is based on a rate set by the bank at the time funds are drawn. Annual rate of interest on the borrowings was 3.35% during the period. The amount drawn as of June 30, 2005 was 62.0 million New Taiwan Dollars (or approximately $2.0 million as of June 30, 2005) with an interest rate of 3.35%.

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DiCon Fiberoptics, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

(in thousands)

__________________________________________________________________________________________________________

12.

Stock Plans and Deferred Compensation Liability

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

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

Under the terms of the Option Plan, employees who were participants in the Phantom Stock Plan could convert their awarded phantom stock units and their Contingently Promised Stock Units into (1) options with an exercise price of $4.11 per share and cash payments of $4.11 per share (paid over four years); (2) additional options with an exercise price of $4.11; or (3) a combination of both (1) and (2). The cash payments and the options that were converted from vested stock units vested immediately. The cash payments and the options that were converted from Contingently Promised Units will vest in accordance with the original vesting schedule, but not less than 20 percent per year. At March 31, 2001, all phantom stock units for current employees under the Phantom Stock Plan were converted to options or options and cash payments pursuant to one of the alternatives noted above.

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

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

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

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

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DiCon Fiberoptics, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

(in thousands)

___________________________________________________________________________________________________________

Compensation expense related to the Company’s stock compensation plans and conversion of the Contingently Promised Units has been reflected in the Unaudited Consolidated Statements of Operations and Comprehensive Loss for the three months ended June 30, 2005 and 2004 as follows:

	For the three months ended
	June 30,
	2005		2004
Cost of goods sold	$	11	$	12
Selling, general and administrative expenses		17		41
Research and development expenses		5		88
	$	33	$	141

13.

Income Taxes

Due to uncertainty surrounding the realization of the favorable tax attributes in future tax returns, the Company has recorded a valuation allowance against certain deferred tax assets as of June 30, 2005 and March 31, 2005. Management regularly evaluates the recoverability of the deferred tax asset and the level of the valuation allowance. At such time as it is determined that it is more likely than not that the deferred tax asset will be realizable, the valuation allowance will be reduced.

During the fiscal year ended March 31, 2005, the Company’s federal income tax returns for fiscal years ended in 2000 to 2003 have been examined by the Internal Revenue Service. As a result of this review, certain tax credits previously claimed were considered to be excessive and therefore additional tax assessment was required. In the fiscal year ended March 31, 2005, the Company paid $281 for the tax assessments that may result. The total related interest payable assessed was $59. After the payment of $28 during the quarter, the remaining balance of $31 was included in accounts payable and accrued liabilities in the unaudited consolidated balance sheets as of June 30, 2005.

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

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

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

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

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DiCon Fiberoptics, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

(in thousands)

___________________________________________________________________________________________________________

14.

Commitments and contingencies

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

Changes in the Company’s warranty reserve during the three months ended June 30, 2005 and 2004 were as follows:

	Three months ended June 30,
	2005			2004
Beginning balance	$	24		$	16
Provision for warranty		10			11
Utilization of reserve		(5	)		(17	)
Ending balance	$	29		$	10

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

As of June 30, 2005,the Company’s future gross commitments under all leases was $0.1 million.

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

15.

Subsequent event

Subsequent to June 30, 2005, the Company voluntarily prepaid additional $2.0 million principal of the mortgage loan.

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

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

Overview

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

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

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

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

The Company’s cost of goods sold consists primarily of the cost of direct materials, labor and manufacturing overhead, scrap and rework associated with products sold, as well as production start up costs. As demand changes, the Company attempts to manage its manufacturing capacity to meet demand for existing and new products; however, certain portions of its costs are fixed and as volumes decrease, these expenses are difficult to reduce proportionately, if at all. The Company assesses its inventory position on a monthly and quarterly basis with its then current forecasts. During the three months ended June 30, 2005, no obsolete inventory was written off. During the fiscal year ended March 31, 2005, the Company wrote off approximately $1.3 million of obsolete inventory.

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

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

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

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

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

The Company maintains an Employee Stock Option Plan and an Employee Stock Purchase Plan as a means of motivating its employees to make a tangible contribution towards achieving its corporate objectives. In September 2002, DiCon suspended the sale of DiCon shares to employees under the Employee Stock Purchase Plan.

Critical Accounting Policies and Estimates

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

Revenue recognition

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

Allowances for doubtful accounts

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

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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 and the use of materials and service delivery costs incurred in correcting product failures. In addition, from time to time, specific warranty accruals may be made if unforeseen technical problems arise. Should the Company’s actual experience relative to these factors differ from its original estimates, the Company may be required to record additional warranty reserves. Alternatively, if the Company provides more reserves that are in excess of its actual warranty costs, the Company will reverse a portion of such provisions in future periods.

Fair value of financial instruments

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

Inventories

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

Property, plant and equipment

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

Deferred taxes

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

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Financial Results

Three Months Ended June 30, 2005 Compared with Three Months Ended June 30, 2004

Net Sales

Net sales increased by 27.3% to $5.6 million for the quarter ended June 30, 2005 from $4.4 million for the quarter ended June 30, 2004. The increase was primarily due to an increase in the demand for fiberoptic components and test equipment by telecommunications equipment vendors.

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

Sales to different geographic areas may fluctuate from period to period depending on various factors such as new system development, purchase cycle and price. Net sales to customers in the United States accounted for $1.8 million and $1.9 million of total net sales, or 32.1% and 43.8%, for the three months ended June 30, 2005 and 2004, respectively.

As of June 30, 2005 and 2004, the Company experienced the following concentrations in sales to customers.

	Three months ended
	June 30,
	2005	2004

Percentage of revenue for 3 largest customers	58.4%	36.9%

No. of customers accounting for over 10% of net sales	4	3

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

Cost of Goods Sold and Gross Margin

Costs of goods sold declined 14.0% to $3.7 million in the quarter ended June 30, 2005 from $4.3 million in the quarter ended June 30, 2004. Gross margin as a percentage of net sales was 33.8% in the quarter ended June 30, 2005, compared to 2.0% in the quarter ended June 30, 2004.

The improvement in gross margin in the quarter ended June 30, 2005 is mainly due to expense and cost reductions. During the quarter ended June 30, 2005, no excess and obsolete inventory has been written off. For the quarter ended June 30, 2004, the Company wrote off an approximately $0.3 million of obsolete inventory and inventory impairment, or 6.1% of total net sales.

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

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expense was $1.2 million in the quarter ended June 30, 2005, compared to $1.3 million in the quarter ended June 30, 2004.

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Research and Development Expenses

Research and development (“R&D”) expense was $1.1 million in the quarter ended June 30, 2005, compared to $1.4 million in the quarter ended June 30, 2004. The decrease in R&D spending reflects the cost reductions resulting from the elimination of certain product development programs and workforce reductions. Future expenditures are expected to fluctuate both in absolute dollars and as a percentage of revenue based on the need to invest in new research and development in order to remain competitive in this rapidly changing industry.

Other (Expense) Income

Other (expense) income for the quarters ended June 30, 2005 and 2004 are as follows:

	Three months ended
	June 30,
(in thousands)	2005			2004

Other (expense) income:
Interest expense	$	(315	)	$	(300	)
Interest income		121			93
Gain (loss) on disposal of fixed assets		56			(19	)
Loss on currency exchange		(163	)		-
Gain on disposal of expensed items		103			-
Other (expense) income, net		78			58
	$	(120	)	$	(168	)

Interest expense primarily represents the costs of borrowing by DiCon for its mortgage loan on the facility in Richmond, California. In the quarter ended June 30, 2005, the Company sold certain expensed tools and equipment for total proceeds of $103.

Loss Before Income Tax

The Company reported a net loss before income tax of $0.6 million for the current quarter compared to $2.8 million for the same quarter in the prior year. This is primarily due to increase in sales and improvement in gross margin during the quarter ended June 30, 2005.

Income Tax (Expense) Benefit

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

The effective tax rate for the three months ended June 30, 2005 and 2004 were both 0 %. The tax rate for each period is the result of the consolidation of the tax provisions for the US operations with that of the Taiwan operations of Global, and can vary substantially from period to period depending on the relative performance of each operation.

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Liquidity and Capital Resources

As of June 30, 2005, the Company had cash and cash equivalents of $2.8 million. In addition, the Company has $14.0 million invested in certificates of deposit and other marketable securities that in conformity with the requirements of generally accepted accounting principles were classified as marketable securities.

The net cash provided by operating activities of $2.3 million for the three months ended June 30, 2005 resulted from non-cash adjustments of $1.6 million to the net loss of $0.6 million for the three months ended June 30 2005, a reduction of accounts receivable and inventories of 1.9 million. This cash inflow is partially offset by a decrease in accounts payable of $0.5 million. Net cash used by operations for the three months ended June 30, 2004 was $0.6 million. It was primarily attributable to non-cash adjustments of $2.5 million to the net loss of $2.8 million for the three months ended June 30 2004. The cash outflow was further increased due to an increase of inventories of $0.9 million and a decrease in accounts payable and accrued liabilities of $0.2 million and was partially offset by a reduction of accounts receivables of $0.5 million and prepaid expenses of 0.3 million.

The increase in cash flows from investing activities of $0.6 million for the three months ended June 30, 2005 was primarily due to an increase in net proceeds of $0.7 million from the sale and purchase of marketable securities offset by $0.1 million in purchases of property, plant and equipment. Cash provided by investing activities of $1.7 million for the three months ended June 30, 2004 was primarily the result of an increase in net proceeds of $1.7 million from the sale and purchase of marketable securities.

Cash used in financing activities increased to $1.9 million for the three months ended June 30, 2005 from $0.3 million provided by financing activities in the three months ended June 30, 2004. This change is primarily attributable to the net increase of repayments of mortgages and other debt.

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

Commitments and Off Balance Sheet Arrangements

As of June 30, 2005, the Company’s future gross commitment under all leases was $0.1 million.

Item 3. Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures. The undersigned principal executive officer and principal financial officer of the Company conclude that the Company’s disclosure controls and procedures are effective as of June 30, 2005 based on the evaluation of these controls and procedures required by paragraph (b) of Exchange Act Rule 13a-15.

(b) Changes in Internal Controls. There has been no change in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rule 13a-15 that occurred during the quarter ended June 30, 2005, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II

OTHER INFORMATION

Item 1. Legal Proceedings.

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

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

None.

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

Small Business Issuer Purchases of Equity Securities

Period	Total Number of Shares Purchased (1)	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)	Maximum Number of Shares that May yet be Purchased Under the Plans or Programs (2)
April 1, 2005 through April 30, 2005	1,019	$0.96	--	--
May 1, 2005 through May 31, 2005	5,904	$0.96	--	--
June 1, 2005 through June 30, 2005	795	$0.96	--	--
Total	7,718	$0.96	--	--

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

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

Item 3. Defaults Upon Senior Securities.

None.

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

None.

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Item 5. Other Information.

None.

Item 6. 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.

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SIGNATURES

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

		DICON FIBEROPTICS, INC.
			(Registrant)

Date:	August 12, 2005	By:	/s/ Ho-Shang Lee
			(Signature)

		Name:		Ho-Shang Lee, Ph.D.
		Title:		President and Chief Executive Officer (principal executive officer)

Date:	August 12, 2005	By:	/s/ Jannett Wang
			(Signature)

		Name:		Jannett 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.

Dicon Fiberoptics Inactive 10QSBQuarterly report (small business)