DICON 10-QSB 12-31-2004

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 December 31, 2004, 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

Pages

PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements.	3

Item 2.	Management’s Discussion and Analysis or Plan of Operation.	14

Item 3.	Controls and Procedures.	23

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings.	24

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	24

Item 3.	Defaults Upon Senior Securities.	24

Item 4.	Submission of Matters to a Vote of Security Holders.	24

Item 5.	Other Information.	25

Item 6.	Exhibits.	25

	Signatures.	26

	Exhibit Index.	27

Table of Contents

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements.

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

	December 31,			March 31,
	2004			2004 (1)
Assets
Current assets:
Cash and cash equivalents	$	1,765		$	1,359
Marketable securities		14,643			20,250
Accounts receivable, net of allowance for doubtful accounts of $162 and $78, respectively		3,896			3,155
Inventories		4,703			4,506
Prepaid expenses and other current assets		233			521
Income tax receivable		16			16

Total current assets		25,256			29,807
Property, plant and equipment, net		51,181			58,750
Other assets		41			64

Total assets	$	76,478		$	88,621

Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities	$	2,290		$	2,914
Advances received from customers		3,543			3,549
Mortgage and other debt		3,443			6,059
Income tax payable		281			-
Deferred compensation payable		121			120

Total current liabilities		9,678			12,642
Mortgage and other debt, net of current portion		20,061			23,310

Total liabilities		29,739			35,952

Commitments

Shareholders' equity:
Common stock: no par value; 200,000 shares authorized; 111,961 and 111,992 shares issued and outstanding, respectively		22,249			22,279
Additional paid-in capital		13,375			13,217
Deferred compensation		(376	)		(550	)
Retained earnings		12,094			18,812
Accumulated other comprehensive loss		(603	)		(1,089	)
Total shareholders' equity		46,739			52,669

Total liabilities and shareholders' equity	$	76,478		$	88,621

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

(1) Balances at March 31, 2004 are derived from the audited Financial Statements at that date.

Table of Contents

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

	For the three months ended December 31,						For the nine months ended December 31,
	2004			2003			2004			2003

Net sales	$	6,699		$	5,590		$	17,970		$	13,066

Cost of goods sold		4,855			4,579			13,123			13,729

Gross profit/(loss)		1,844			1,011			4,847			(663	)

Selling, general and administrative expenses		1,323			1,258			4,339			4,059
Research and development expenses		1,299			1,479			4,380			4,831
Loss on disposal of fixed assets		1,935			386			1,953			400
		4,557			3,123			10,672			9,290

Loss from operations		(2,713	)		(2,112	)		(5,825	)		(9,953	)

Other (expense) income:
Interest expense		(332	)		(322	)		(936	)		(1,016	)
Other income, net		107			189			325			425

Loss before income taxes		(2,938	)		(2,245	)		(6,436	)		(10,544	)

Income tax (expense) benefit		(281	)		77			(282	)		650

Net loss	$	(3,219	)	$	(2,168	)	$	(6,718	)	$	(9,894	)
Other Comprehensive loss:
Foreign currency translation adjustment		759			(124	)		503			477
Unrealized holding (losses) gains on marketable securities arising during the period, net of realized (losses) gains		-			10			(17	)		(54	)


Comprehensive loss	$	(2,460	)	$	(2,282	)	$	(6,232	)	$	(9,471	)

Net loss per share - Basic and diluted	$	(0.03	)	$	(0.02	)	$	(0.06	)	$	(0.09	)

Average shares used in computing net loss per share - basic and diluted		111,964			112,007			111,976			112,017

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

Table of Contents

DiCon Fiberoptics, Inc. and Subsidiary Unaudited Consolidated Statement of Cash Flows (in thousands)
	Nine Months Ended December 31,
		2004			2003
Cash flows from operating activities:
Net loss		$	(6,718	)	$	(9,894	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation			6,164			6,982
Deferred incomes taxes			-			(650	)
Write down excess and obsolete inventories			890			343
Provision for bad debts			87			32
Provision for estimated losses due to vacated properties, net of sublease income			(121	)		-
Loss on disposal of property, plant and equipment			1,953			400
Realized gain on available-for-sale marketable securities			(22	)		(95	)
Interest accretion on deferred compensation liability			-			8
Stock compensation expense			332			387
Changes in assets and liabilities:
Accounts receivable			(823	)		(1,080	)
Inventories			(972	)		(750	)
Prepaid expenses and other current assets			287			(68	)
Income tax receivable			-			15,284
Other assets			24			32
Accounts payable and accrued liabilities			(434	)		(697	)
Income tax payable			281			(53	)
Deferred compensation payable			2			365
Net cash provided by operating activities			930			10,546

Cash flows from investing activities:
Purchases of marketable securities			(14,068	)		(14,884	)
Sales of marketable securities			19,670			1,237
Sale of property, plant and equipment			12			187
Purchases of property, plant and equipment			(209	)		(43	)
Net cash provided by (used in) investing activities			5,405			(13,503	)

Cash flows from financing activities:
Borrowings under mortgages and other debt			2,513			3,513
Repayment of mortgages and other debt			(8,469	)		(3,343	)
Repurchases of common stock			(30	)		(41	)
Net cash (used in) provided by financing activities			(5,986	)		129

Effect of exchange rate changes on cash and cash equivalents			57			2

Net change in cash and cash equivalents			406			(2,826	)
Cash and cash equivalents, beginning of period			1,359			3,757
Cash and cash equivalents, end of period		$	1,765		$	931

Supplemental disclosures of cash flow information:
Cash paid for income taxes		$	1		$	53
Cash paid for interest		$	871		$	1,008

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

Table of Contents

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 (“DiCon” or the “Company”) is developing, manufacturing and marketing optical components, modules, and test instruments for optical communications markets. DiCon Fiberoptics, Inc. is incorporated in California. The Company has a domestic manufacturing facility and headquarters in Richmond, 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 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 2, 2004 (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, 2004 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 are 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:

Table of Contents

DiCon Fiberoptics, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

(in thousands, except per share data)

__________________________________________________________________________________________________________

	For the three months ended,						For the nine months ended
	December 31,						December 31,
	2004			2003			2004			2003

Net loss, as reported	$	(3,219	)	$	(2,168	)	$	(6,718	)	$	(9,894	)

Add: Stock-based employee compensation expense included in reported net loss, net of tax		110			138			332			387

Deduct: Compensation expense based on fair value method, net of tax		(132	)		(157	)		(405	)		(472	)
Pro forma net loss	$	(3,241	)	$	(2,187	)	$	(6,791	)	$	(9,979	)

Reported net loss per share—basic and diluted	$	(0.03	)	$	(0.02	)	$	(0.06	)	$	(0.09	)
Pro forma net loss per share—basic and diluted	$	(0.03	)	$	(0.02	)	$	(0.06	)	$	(0.09	)

4.	Recent accounting pronouncements

In December 2004, the Financial Accounting Standards Board (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. The Company is currently evaluating the impact of adoption of SFAS No. 151 on its financial position and results of operations.

In March 2004, the FASB approved the consensus reached on the Emerging Issues Task Force (EITF) Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“EITF 03-1”). The objective of this Issue is to provide guidance for identifying impaired investments. EITF 03-1 also provides new disclosure requirements for investments that are deemed to be temporarily impaired. The accounting provisions of EITF 03-1 are effective for all reporting periods beginning after June 15, 2004, while the disclosure requirements are effective only for annual periods ending after June 15, 2004. The adoption of this standard did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

Table of Contents

DiCon Fiberoptics, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

(in thousands, except per share data)

___________________________________________________________________________________________________________I

In December 2003, the Financial Accounting Standards Board (“FASB”) issued a revised Statement of Financial Accounting Standards (“SFAS”) No. 132, or SFAS 132R, “Employers’ Disclosures about Pensions and Other Post-retirement Benefits, an Amendment of FASB Statements No. 87, 88, and 106, and a Revision of FASB Statement No. 132.” This statement revises employers’ disclosures about pension plans and other post-retirement benefit plans. It does not change the measurement or recognition of those plans required by FASB Statements No. 87, “Employers’ Accounting for Pensions,” No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits” and No. 106, “Employers’ Accounting for Post-retirement Benefits Other Than Pensions.” The adoption of this standard did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In December 2003, the FASB issued a revised Interpretation No. 46, or FIN 46R, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,” replacing the original interpretation issued in January 2003. FIN 46R requires certain entities to be consolidated by enterprises that lack majority voting interest when equity investors of those entities have insignificant capital at risk or they lack voting rights, the obligation to absorb expected losses, or the right to receive expected returns. Entities identified with these characteristics are called variable interest entities and the interests that enterprises have in these entities are called variable interests. These interests can derive from certain guarantees, leases, loans or other arrangements that result in risks and rewards that are disproportionate to the voting interests in the entities. The adoption of this standard did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

5.	Liquidity

As of December 31, 2004, DiCon had cash and cash equivalents of $1.8 million. In addition, the Company has $14.6 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 held available for sale.

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 its 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,
	2004			2003			2004			2003
Numerator:
Net loss	$	(3,219	)	$	(2,168	)	$	(6,718	)	$	(9,894	)

Denominator:
Basic and diluted weighted average shares		111,964			112,007			111,976			112,017

Basic and diluted net loss per share	$	(0.03	)	$	(0.02	)	$	(0.06	)	$	(0.09	)

Table of Contents

DiCon Fiberoptics, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

(in thousands)

__________________________________________________________________________________________________________

As a result of the losses incurred by the Company for the three months and the nine months ended December 31, 2004, weighted average options to purchase 4,499 and 4,640 shares of common stock were anti-dilutive and excluded from the net loss per share calculations. 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.

7.	Marketable Securities

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

	Cost		Unrealized		Unrealized		Fair
			Gain		Losses		Value
December 31, 2004
Certificate of Deposit	$	14,643	$	-	$	-	$	14,643
March 31, 2004
Foreign Mutual Fund	$	833	$	17	$	-	$	850
Certificate of Deposit		19,400		-		-		19,400
Total	$	20,233	$	17	$	-	$	20,250

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

8.	Inventories

Inventories consist of the following as of December 31, 2004 and March 31, 2004:

	December 31,		March 31,
	2004		2004

Raw materials	$	1,219	$	1,813
Work-in-process		3,484		2,693
Total	$	4,703	$	4,506

During the nine months period ended December 31, 2004, DiCon wrote off approximately $0.9 million of obsolete inventory. During the fiscal year ended March 31, 2004, DiCon wrote off approximately $1.1 million of obsolete inventory and wrote down to fair value an additional $1.1 million of inventory.

9.	Property, Plant and Equipment, net

Property, plant and equipment consist of the following as of December 31, 2004 and March 31, 2004:

	December 31,			March 31,
	2004			2004
Land	$	10,000		$	10,000
Building and improvements		36,253			37,764
Machinery, equipment and fixtures		45,430			47,993
Property, plant and equipment		91,683			95,757
Less: Accumulated depreciation		(40,502	)		(37,007	)
Property, plant and equipment, net	$	51,181		$	58,750

Depreciation expense was $6,164 and $9,219 for the nine months ended December 31, 2004 and for the year ended March 31, 2004, respectively. In the nine months ended December31, 2004, the Company was in the process of consolidating its 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 the fixed assets was $1,953 and $670 for the nine months ended December 31, 2004 and for the year ended March 31, 2004, respectively.

Table of Contents

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 December 31, 2004 and March 31, 2004:

	December 31,		March 31,
	2004		2004

Accounts payable	$	562	$	1,053
Accrued payroll		470		900
Accrual for vacated properties		-		250
Accrued liabilities		1,258		711
	$	2,290	$	2,914

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 (5.0 percent at December 31, 2004). 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 December 31, 2004. In addition, the Company voluntarily prepaid the first two $0.5 million equal installments during the quarter ended December 31, 2004. The balance of the mortgage loan as of December 31, 2004 was $21.5 million.

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 Fiberoptics maintained a line of credit in Taiwan backed by commercial paper issued by Global Fiberoptics for a maximum of 100 million New Taiwan Dollars (or approximately $3.2 million as of December 31, 2004). 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. Global Fiberoptics is currently negotiating the renewal of the line of credit. 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, 2004, there was no commercial paper outstanding.

Global Fiberoptics maintained its second line of credit of 80 million New Taiwan Dollars (or approximately $2.5 million as of December 31, 2004) 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. The amount drawn as of December 31, 2004 was 63.0 million New Taiwan Dollars (or approximately $2.0 million as of December 31, 2004) with an interest rate of 3.35%.

Table of Contents

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 and third annual installments of $416 and $347 to those employees electing to receive cash in lieu of additional options was paid on March 31, 2003 and 2004.

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.

Table of Contents

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 and nine months ended December 31, 2004 and 2003 as follows:

	For the three months ended				For the nine months ended
	December 31,				December 31,
	2004		2003		2004		2003
Cost of goods sold	$	11	$	14	$	33	$	73
Selling, general and administrative expenses		37		48		113		251
Research and development expenses		78		100		238		531
	$	126	$	162	$	384	$	855

13.

Income Taxes

The Company had cummulative net operating loss carryforwards and tax credit carryforwards of approximately $46.0 million as of December 31, 2004.

The Company’s federal income tax returns for fiscal years ending in 2000 to 2003 are currently being examined by the Internal Revenue Service. The timing of the settlement of these examinations is uncertain. The Company recorded a provision of $281 for the tax assessments that may result. As of December 31, 2004, the Company's estimated related interest payment of $45 was included in accounts payable and accrued liabilities in the Unaudited Consolidated Balance Sheets. The Company believes that adequate amounts have been provided for any final tax assessment that may result.

The Company’s investment in its Taiwan subsidiary is essentially permanent in duration and undistributed foreign earnings on December 31, 2004 amounted to $7.2 million. The Company was granted a five-year tax holiday in Taiwan, which will expire in 2006. 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.

Due to uncertainty surrounding the realization of the favorable tax attributes in future tax returns, the Company has recorded a valuation allowance against certain deferred tax assets at December 31, 2004. 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.

14.

Commitments and contingencies

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.

Table of Contents

DiCon Fiberoptics, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

(in thousands)

___________________________________________________________________________________________________________

Changes in the Company’s warranty reserve during the nine months ended December 31, 2004 and 2003 were as follows:

	Nine months ended December 31,
	2004			2003
Beginning balance	$	16		$	56
Provision for warranty		72			95
Utilization of reserve		(53	)		(131	)
Ending balance	$	35		$	20

The Company moved to its new facilities in Richmond, California during the 2001 fiscal year. Accordingly, certain of the leased properties, primarily in the U.S., were no longer used for operating purposes and are available for sublease. The Company estimated the cost of exiting and terminating the facility leases based on the contractual terms of the agreements and real estate market conditions. The mutual settlement agreement and release for the last non-cancelable operating lease was executed on November 23, 2004, and the excessive estimate of the remaining costs of the lease, net of expected sublease income of $0.1 million, was adjusted as of December 31, 2004. Lease expense net of sublease income for the nine months ended December 31, 2004 and for the year ended March 31, 2004 was $97 and $82, respectively.

Global Fiberoptics 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 December 31, 2004, DiCon’s future gross commitments under all leases was $0.1 million.

Global Fiberoptics maintained a line of credit in Taiwan backed by commercial paper issued by Global Fiberoptics for a maximum of 100 million New Taiwan Dollars (or approximately $3.2 million as of December 31, 2004). As of December 31, 2004, there was no commercial paper outstanding. 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. Global Fiberoptics is currently negotiating the renewal of the line of credit.

Global Fiberoptics maintained a second line of credit of 80 million New Taiwan Dollars (or approximately $2.5 million) from a Taiwan bank, of which 63.0 million New Taiwan Dollars (or approximately $2.0 million as of December 31, 2004) were drawn. These letters of credit primarily support workers’ compensation, merchandise import and payment obligations. 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 September 30, 2005.

Table of Contents

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 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 Company’s 10-KSB/A-1.

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, attenuate, 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 operates from its owned 200,000 square feet facility in Richmond, California, which contains all of DiCon’s domestic manufacturing, R&D, sales and administration operations. DiCon has overseas manufacturing operations at its 88,000 square foot facility in Kaohsiung, Taiwan. 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 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. DiCon 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 fiber optics 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. DiCon’s customers are manufacturers of telecommunications equipment. DiCon believes its customers generally view the purchase of DiCon’s products as a significant and strategic decision. As a result, customers typically commit substantial effort in evaluating DiCon’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.

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, 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 nine months ended December 31, 2004, DiCon wrote off approximately $0.9 million of obsolete inventory. During the fiscal year ended March 31, 2004, DiCon wrote off approximately $1.1 million of obsolete inventory and wrote down to fair value an additional $1.1 million of inventory.

Table of Contents

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 products. DiCon 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. 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. 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) consists primarily of interest income, offset by interest expense, plus realized gains or losses on sales of investments and fixed assets.

DiCon has invested $0.5 million for a 5.45% minority interest in a private company in Taiwan engaged in the optical coating business. This investment is held for investment purposes and is accounted for on the cost basis of accounting. The investment value has been fully impaired as of March 31, 2004.

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 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.

Table of Contents

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.

Other long-term investments

Long-term investments are accounted for at historical cost and are subject to a periodic impairment review; however, for non-marketable equity securities classified under the other long-term investments of the Company, the impairment analysis requires significant judgment to identify events or circumstances that would likely have a significant adverse effect on the fair value of the investment. The indicators the Company uses to identify those events and circumstances include the investment’s revenue and earnings trends relative to predefined milestones and overall business prospects; the technological feasibility of the investment’s products and technologies; the general market conditions in the investment’s industry; and the investment’s liquidity, debt ratios and the rate at which the investment is using cash. Investments identified as having an indicator of impairment are subject to further analysis to determine if the investment is other than temporarily impaired, in which case the investment is written down to its impaired value. When an investment is not considered viable from a financial or technological point of view, the entire investment is written down, since the estimated fair market value is considered to be nominal. Impairment of non-marketable equity securities is recorded in impairment of other long-term investments in the Consolidated Statements of Operations.

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, accrued expenses, equipment loan and mortgage loan 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.

Table of Contents

Financial Results

Three Months Ended December 31, 2004 Compared with Three Months Ended December 31, 2003

Net Sales

Net sales increased by 19.8% to $6.7 million for the quarter ended December 31, 2004 from $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.

In the quarter ended December 31, 2004 and 2003, the Company recorded no revenue from cancellations of prior purchase agreements with customers.

The fiber optic 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 in offsetting 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 42% of total net sales for the quarter ended December 31, 2004, as compared to 58% for the quarter ended December 31, 2003.

As of December 31, 2004 and 2003, the Company experienced the following concentrations in sales to customers.


	Three months ended
	December 31,
	2004	2003

Percentage of revenue for 3 largest customers	51.7%	49.6%

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

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

Cost of goods sold increased 6.0% to $4.9 million in the quarter ended December 31, 2004 from $4.6 million in the quarter ended December 31, 2003. Gross margin as a percentage of net sales was 27.5% in the quarter ended December 31, 2004, compared to 18.1% in the quarter ended December 31, 2003. The improvement in gross margin in the quarter ended December 31, 2004 is mainly due to expense and cost reductions. During the quarter ended December 31, 2004, DiCon wrote off a total of $0.4 million or 5.0% of total net sales as compared to the quarter ended December 31, 2003 that an approximately $0.2 million write down of obsolete inventory and inventory impairment, or 4.0% 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 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.

Table of Contents

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expense was $1.3 million in the quarter ended December 31, 2004 and 2003.

Research and Development Expenses

Research and development (“R&D”) expense was $1.3 million in the quarter ended December 31, 2004, compared to $1.5 million in the quarter ended December 31, 2003. DiCon believes that R&D is critical to strategic product development and expects to continue to devote significant resources to product R&D. 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.

Loss on disposal of fixed assets

Loss on disposal of fixed assets was $1.9 million in the quarter ended December 31, 2004, compared to $0.4 million in the quarter ended December 31, 2003. In the quarter ended December 31, 2004, the Company was in the process of consolidating its 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, and a loss on the disposal of the fixed assets of $1.9 million was recorded in the third quarter ended December 31, 2005 in the Unaudited Condensed Consolidated Statements of Operations.

Other (Expense) Income

Other (expense) income for the quarters ended December 31, 2004 and 2003 are as follows:

	Three months ended
	December 31,
(in thousands)	2004			2003

Other (expense) income:
Interest expense	$	(332	)	$	(322	)
Interest income		89			109
Gain (losses) on currency exchange		(41	)		42
Other (expense) income, net		59			38
	$	(225	)	$	(133	)

Interest expense primarily represents the costs of borrowing by DiCon for its mortgage loan on the Richmond, California, facility and its equipment loan. For the quarter ended December 31, 2004, the Company has accrued an interest payment of $45 for additional tax that may result from the examination of the Company’s federal income tax returns for fiscal years ending in 2000 to 2003.

Loss Before Income Tax

DiCon reported a net loss before income tax of $2.9 million for the current quarter compared to $2.2 million for the same quarter in the prior year. This is primarily due to the loss on disposal of fixed assets during the quarter ended December 31, 2004.

Income Tax (Expense) Benefit

The Company’s federal income tax returns for fiscal years ending in 2000 to 2003 are currently examined by the Internal Revenue Service. The timing of the settlement of these examinations is uncertain. The Company recorded a provision of $281 for the tax assessments that may result. As of December 31, 2004, the Company's estimated related interest payment of $45 was included in accounts payable and accrued liabilities in the Unaudited Consolidated Balance Sheets. The Company believes that adequate amounts have been provided for any tax final assessment that may result.

Table of Contents

For the three months ended December 31, 2004, the effective tax rate was (9.6) % compared to (3.4)% for the same period in last year. 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 Fiberoptics, and can vary substantially from period to period depending on the relative performance of each operation. For the three months ended December 31, 2004, the Company recorded a provision for income taxes of $281 for the additional tax assessments that may result from the examination of federal income tax returns for fiscal years ending in 2000 to 2003.

Nine Months Ended December 31, 2004 Compared with nine Months Ended December 31, 2003

Net Sales

Net sales increased by 37.5% to $18.0 million for the nine months ended December 31, 2004 from $13.1 million for the nine months 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.

For the nine months ended December 31, 2004, the Company recorded $0.15 million revenue from cancellations of prior purchase agreements with customers. For the nine months ended December 31, 2003, the Company recorded no revenue from cancellations of prior purchase agreements with customers.

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 48% of total net sales for the nine months ended December 31, 2004, as compared to 53% for the nine months ended December 31, 2003, respectively.

As of December 31, 2004 and 2003, the Company experienced the following concentrations in sales to customers.

	Nine months ended
	December 31,
	2004	2003

Percentage of revenue for 3 largest customers	44.3%	40.4%

No. of customers accounting for over 10% of net sales	4	2

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

Cost of Goods Sold and Gross Margin

Costs of goods sold declined 4.4% to $13.1 million in the nine months ended December 31, 2004 from $13.7 million in the nine months ended December 31, 2003. Gross margin as a percentage of net sales was 27.0% in nine months ended December 31, 2004, compared to a negative 5.1% in the nine months ended December 31, 2003. The improvement in gross margin in the nine months ended December 31, 2004 is mainly due to expense and cost reductions. During the nine months ended December 31, 2004, DiCon wrote off a total of $0.9 million or 5.0% of total net sales as compared to the nine months ended December 31, 2003 that an approximately $1.1 million write down of obsolete inventory and inventory impairment, or 8.4% of total net sales.

Table of Contents

Operating Expenses

Selling, General and Administrative Expenses

SG&A expense was $4.3 million for the nine months ended December 31, 2004, compared to $4.1 million for the nine months ended December 31, 2003. The increase in SG&A expenses primarily reflects unutilized Company surplus facility resources in Richmond due to increase in production volume in Global Fiberoptics in Taiwan.

Research and Development Expenses

R&D expense was $4.4 million for the nine months ended December 31, 2004, compared to $4.8 million for the nine months ended December 31, 2003. DiCon believes that R&D is critical to strategic product development and expects to continue to devote significant resources to product R&D. 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.

Loss on disposal of fixed assets

Loss on disposal of fixed assets was $1.9 million for the nine months ended December 31, 2004, compared to $0.4 million for the nine months ended December 31, 2003. In the nine months ended December31, 2004, the Company was in the process of consolidating its 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, and a loss on the disposal of the fixed assets of $1.9 million was recorded in the nine months ended December 31, 2005 in the Unaudited Condensed Consolidated Statements of Operations.

Other (Expense) Income

Other (expense) income for the nine months ended December 31, 2004 and 2003 are as follows:

	Nine months ended
	December 31,
(in thousands)	2004			2003

Other (expense) income:
Interest expense	$	(936	)	$	(1,016	)
Interest income		261			302
Realized gain (losses) on sales of marketable securities		22			95
Gain (losses) on currency exchange		(125	)		(141	)
Other (expense) income, net		167			169
	$	(611	)	$	(591	)

Interest expense primarily represents the costs of borrowing by DiCon for its mortgage loan on the Richmond, California, facility and its equipment loan. For the nine months ended December 31, 2004, the Company has accrued an interest payment of $45 for additional tax that may result from the examination of the Company’s federal income tax returns for fiscal years ending in 2000 to 2003.

Loss Before Income Tax

The Company reported loss before income tax of $6.4 million for the nine months ended December 31, 2004 compared to $10.5 million for the same nine months in the prior year.

Table of Contents

Income Tax (Expense) Benefit

For the nine months ended December 31, 2004, the effective tax rate was (4.4) % compared to (6.2)% for the same period in last year. 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 Fiberoptics, and can vary substantially from period to period depending on the relative performance of each operation For the nine months ended December 31, 2004,the Company recorded a provision for income taxes of $281 for the additional tax assessments that may result from the examination of federal income tax returns for fiscal years ending in 2000 to 2003.

Liquidity and Capital Resources

The net cash provided by operating activities of $0.9 million for the nine months ended December 31, 2004 resulted from non-cash adjustments of $9.3 million to the net loss of $6.7 million for the nine months ended December 31, 2004, a reduction of prepaid expenses and other current assets of 0.3 million, and an increase in income tax payable of $0.3 million. This cash inflow is partially offset by an increase of inventories of $1.0 million and accounts receivables of $0.8 million due to an increase in sales and a 0.4 million decrease in accounts payable. Net cash provided by operations for the nine months ended December 31, 2003 was $10.5 million. It was primarily attributable to an income tax refund of $15.3 million. These amounts were partially offset by an increase of inventories of $0.8 million and accounts receivables of $1.1 million due to an increase in sales and by a decrease in accounts payable and accrued liabilities of $0.7 million.

The increase in cash flows from investing activities for the nine months ended December 31, 2004 was primarily due to an increase in net proceeds of $5.6 million from the sale and purchase of marketable securities offset by $0.2 million in purchases of properties.

Cash used in investing activities of $13.5 million for the nine months ended December 31, 2003 was primarily the result of the 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. All certificates mature in one year or less. Additionally, the Company sold approximately $1.2 million of marketable securities during the nine months ended December 31, 2003.

Cash used in financing activities increased to $6.0 million for the nine months ended December 31, 2004 from $0.1 million in the nine months ended December 31, 2003. This change is primarily attributable to the net increase of repayments of mortgages and other debt.

Table of Contents

Global Fiberoptics maintained a line of credit in Taiwan backed by commercial paper issued by Global Fiberoptics for a maximum of 100 million New Taiwan Dollars (or approximately $3.2 million as of December 31, 2004). The line of credit will mature on January 28, 2005. Global Fiberoptics is currently negotiating the renewal of the line of credit. 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, 2004, there was no commercial paper outstanding.

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. 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 DiCon would be successful in raising the required capital or in raising capital at acceptable rates.

Commitments and Off Balance Sheet Arrangements

The Company moved to its new facilities in Richmond, California during the 2001 fiscal year. Accordingly, certain of the leased properties, primarily in the U.S., were no longer used for operating purposes and are available for sublease. The Company estimated the cost of exiting and terminating the facility leases based on the contractual terms of the agreements and real estate market conditions. The mutual settlement agreement and release for the last non-cancelable operating lease was executed on November 23, 2004, and the excessive estimate of the remaining costs of the lease, net of expected sublease income of $0.1 million was adjusted as of December 31, 2004. Lease expense net of sublease income for the nine months ended December 31, 2004 and for the year ended March 31, 2004 was $97 and $82, respectively.

As of December 31, 2004, DiCon’s future gross commitment under all leases was $0.1 million.

Global Fiberoptics maintained a line of credit in Taiwan backed by commercial paper issued by Global Fiberoptics for a maximum of 100 million New Taiwan Dollars (or approximately $3.2 million as of December 31, 2004). As of December 31, 2004, there was no commercial paper outstanding. 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. Global Fiberoptics is currently negotiating the renewal of the line of credit.

Table of Contents

Item 3. 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, 2004 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, 2004, that has materially affected, or is reasonably likely to materially affect, DiCon’s internal control over financial reporting.

Table of Contents

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. 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)
October 1, 2004 through October 31, 2004	2,447	$0.96	--	--
November 1, 2004 through November 30, 2004	2,414	$0.96	--	--
December 1, 2004 through December 31, 2004	580	$0.96	--	--
Total	5,441	--	--	--

(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.

Table of Contents

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.

Table of Contents

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:	February 11, 2005	By:	/s/ Ho-Shang Lee
			(Signature)

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

Date:	February 11, 2005	By:	/s/ Jannett Wang
			(Signature)

		Name:		Jannett Wang
		Title:		Vice President of Administration (principal financial officer)

Table of Contents

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.