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UNITED STATES
SECURITIES AND EXCHANGE COMMISISSION

FORM 10-K

(Mark One)

DICON FIBEROPTICS, INC.

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

     Securities registered pursuant to Section 12(b) of the Act: None

     Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   x     No  o

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

Yes   o     No  x

     The registrant’s common stock is not traded on any market and accordingly no aggregate market value for the stock held by non-affiliates can be computed.

     The number of shares of the registrant’s common stock outstanding on March 31, 2003, was 112,039,831.

DOCUMENTS INCORPORATED BY REFERENCE

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PART I

Item 1. Business.

     This annual report on Form 10-K contains forward-looking statements, within the meaning of the Securities Exchange Act of 1934 and the Securities Act of 1933, that involve risks and uncertainties. In some cases, forward-looking statements are identified by words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “will,” “may” and similar expressions. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this report. All of these forward-looking statements are based on information available to DiCon Fiberoptics, Inc. (“DiCon” or the “Company”) at this time, and DiCon assumes no obligation to update any of these statements. Actual results could differ from those projected in these forward-looking statements as a result of many factors, including those identified in the section titled “Risk Factors” below, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere. Please review and consider the various disclosures made by DiCon in this report, and those detailed from time to time in DiCon’s filings with the Securities and Exchange Commission, that attempt to advise you of the risks and factors that may affect DiCon’s future results.

(a) Introduction.

     DiCon Fiberoptics, Inc. (“DiCon” or the “Company”) was incorporated in California in 1986. DiCon designs and manufactures passive components, modules, MEMS products, and test instruments for the fiberoptic communications industry. DiCon conducts research, development, manufacturing, and marketing at its headquarters in Richmond, California. DiCon, through Global Fiberoptics Inc. (“Global”), its wholly owned Taiwanese subsidiary formed in 1999, also operates a manufacturing and sales facility in Kaohsiung, Taiwan. DiCon’s website address is http://www.diconfiber.com.

(b) Description of Business.

1.

Optical Communications Industry Background.

     During the 1990s, the rapid escalation of voice traffic around the world, compounded by the proliferation of the Internet and the growing use of video and data transmission, created an urgent need for the expansion of existing communication capacity or bandwidth. In addition, deregulation of the telecommunications industry created heightened consumer demand for improvement in transmission quality.

     Communication service providers could not respond to the challenge with existing technology. The prevalent copper-wire circuit-switched networks, built to satisfy steady low-bandwidth voice traffic, could not adequately accommodate the additional requirements for signal transmission, which is characterized by large, relatively short-duration bursts of signals followed by relatively long periods of silence, and video, which is characterized by a sustained flow of vacillating data bursts with high bandwidth requirements. Communication service providers turned to optical communication for a cost-effective solution satisfying the need for more bandwidth, coupled with an increased demand for improved clarity, flexibility, scalability, and operating performance in transmitted signals.

     Optical communication is carried out by light-based signals, which transmit digitized information through a fiberoptic cable, a conduit of bundled glass fibers. Optical systems convert electrical signals generated by voice, data and video sources into specific wavelengths of laser-generated light, which carries the information through an optical network to its final destination where the optical signal is re-converted back to its original mode. Using multiplexing, a process which allows numerous wavelength channels to be aggregated onto a single optical fiber as a composite optical signal, the optical network can simultaneously, efficiently and with little external interference, transmit multitudes of optical signals. The multiplexing process enables the network system to transmit large bandwidths of information from variable sources, thus eliminating the need for bulky multi-cable copper-wired systems. The optical network can efficiently clean, amplify, isolate, and route optical signals to achieve high bandwidth communication capability without compromising transmission quality.

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2.

Optical Networking Industry.

     The fiberoptic communications has a three-layer networking hierarchy: service providers or carriers, Network Equipment Manufacturers (“NEMs”) and Optical Component Manufacturers (“OCMs”). Carriers are communication companies that own optical networks and provide communication services to their customers. In the United States, the principal carriers are AT&T, MCI, Sprint, BellSouth, Verizon, SBC Communications, and Qwest. Outside the United States, significant carriers include Deutsche Telekom, British Telecom, France Telecom, and Huawei.

     The carriers rely on NEMs who design, build and sell fiberoptic equipment that powers the optical networks. The NEMs in turn rely on the OCMs who produce individual components or modules to be integrated into the optical network.

3.

Market Conditions.

     After experiencing steady growth since the mid-1980s, demand for telecommunications equipment accelerated rapidly in the late 1990s and reached its peak in 2000. Increasing telecom revenues also spurred a rapid growth in equipment production, which by the end of the decade outpaced demand resulting in a build-up of telecom equipment inventories. The inventories reached their peak in early 2001. Subsequently, the demand for new equipment has fallen substantially due in part to telecommunications overcapacity, an overall economic slowdown, and the excessive debt load of the service providers, who had fewer capital resources to spend on infrastructure projects.

     The rapid increase and subsequent decrease in capital equipment spending resulted in a corresponding pattern of growth and decline in the NEMs’ and the OCMs’ revenues and earnings. Future telecom equipment demand will depend on a range of factors, including:

		Demand for bandwidth
		Financial condition of the carriers
		Successful development of new smaller and cost-efficient optical networks
		Degree of industry rationalization across the optical networking hierarchy
		Extent of penetration of competing technologies such as wireless communication
4.		DiCon and its Business.

     Optical components are broadly divided into two categories: active and passive. Active components are used in optical networks to generate, amplify and convert an optical signal. Transmitters, amplifiers and receivers are active components. Passive components are used to guide, mix, filter, route, adjust and stabilize optical signals transmitted through an optical network without the need for power generation. DiCon is a major OCM involved in the production of passive components and related value-added products, including optical network test and measurement devices, and cost effective modules and hybrids which combine several discrete components into an electronic operating unit. DiCon’s business has no distinct seasonality.

     Upon its formation in 1986, DiCon developed and began marketing its first-generation mechanical switch and in 1990 produced a range of test and measurement devices based on that technology. In 1992, DiCon started developing new dielectric thin-film-based components, which could multiplex and de-multiplex (aggregate and de-aggregate) optical signals onto an optical fiber.

     Beginning in 1996, the Company used its innovative thin-film technology to manufacture a broad range of products such as low-loss Wavelength Division Multiplexers (“WDMs”) and De-multiplexers to combine and divide optical signals of different wavelengths; Gain Flattening Filters (“GFFs”) designed to equalize the energy content of different wavelengths (channels) ahead of optical amplifiers; and isolators used to ensure unidirectional flow of optical signals. DiCon also leveraged its success in the application of the new thin-film technology to manufacture a series of advanced measurement and testing devices.

     In 2000, DiCon began production of modules and hybrids, which combined several components into cost-effective units. NEMs welcomed this new line of products as they faced increasing pressure from the carriers to achieve substantial capital and operating cost reduction. Recently introduced Tap/Isolator/Pump/Coupler, Reconfigurable Optical Add/Drop Multiplexer (“ROADM”), Variable Optical Attenuator (“VOA”) and MUX/DMUX are just a few examples of DiCon’s value-added modular products that have gained wide acceptance by major NEMs.

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     DiCon’s modular products also include its highly sophisticated Micro Electro-Mechanical Systems (“MEMS”) switch, which the Company developed internally and began marketing in 2001. DiCon’s current MEMS product line includes advanced products such as MEMS VOA, MEMS 1x2 and 1x4 switches as well as MEMS Tap/VOA and WDM/MEMS VOA hybrids.

     DiCon produces Gradient Index (“GRIN”) lenses, which are used to collimate and focus light. The Company is currently one of only three known suppliers of GRIN lenses in the world.

     DiCon continues to invest in new technology with substantial commercial application potential. It is currently developing integrated photonic electronic circuits, which are designed to miniaturize optical network elements, making them cheaper to build and operate.

5.

Products.

     DiCon’s current line of products is broadly divided into two categories: WDMs and Switches. The WDM line includes Dense Wave Division Multiplexers (“DWDMs”), amplifier components, power splitting and monitoring devices and some integrated modules and hybrids. The Switch line includes MEMS products, motorized attenuators for path switching and power control, components and measurement instruments.

6.

Revenue Breakdown.

     DiCon’s revenue breakdown over the last three fiscal years (“FY”) has been as follows:

7.

Marketing and Distribution.

     DiCon’s marketing activities are conducted primarily by its sales force located at the corporate headquarters in Richmond, California. DiCon focuses its direct sales efforts on major optical systems manufacturers worldwide. Besides two distributors located in France and Italy, DiCon also has sales account managers and field application engineers in Europe and Canada to provide more expedient service and support to its North American, Canadian and European customers. DiCon markets its products in Asia through Global, located in Kaohsiung, Taiwan. DiCon’s direct sales force works closely with each customer’s design group and in-house design engineers to resolve technical issues and provide dynamic design-in support.

8.

Customers.

     In the year ended March 31, 2003, DiCon had a broad customer base consisting of over 300 accounts, including major NEMs such as Agilent Technologies, ALCATEL, Cisco Systems, Lucent Technologies, Marconi, Nortel Networks and Tellabs. Despite the number of customers that DiCon had, there are a limited number of very large customers that account for the majority of purchases in the industry worldwide. The Company’s three largest customers accounted for approximately 33.4% during 2002.

9.

Back Orders and Payments Terms.

     DiCon’s back orders, which represents the aggregate of the sales price of orders received from customers but not yet recognized as revenue, was approximately $1.9 million and $3.9 million on March 31, 2003 and 2002, respectively. Currently, the Company is quoting lead times of three to four weeks for delivery of most of its products. Back orders are subject to possible changes by customers related to quantities of ordered products, their specification and delivery dates. While DiCon believes that its back orders are firm, there are certain circumstances under which orders may be cancelled by the customer. DiCon also may elect to permit cancellation of orders without penalty where management believes it is in the Company’s best long-term interest to do so. Considering that DiCon’s back orders are small in relation to its revenue, they are not expected to have a material impact on the Company’s future financial performance.

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     DiCon does not provide extended payment terms to its customers and does not carry significant amounts of finished goods for its customers. Its product return rate is low (approximately one percent, typically due to manufacturing defects occurring within the warranty period which is normally one year from the shipment date).

10.

Inventory.

     DiCon’s inventory consists of raw material, work in process and finished goods.

     Beginning in January 2001, as the industry entered its downturn and consolidation phase, various customers cancelled existing orders. In some cases, DiCon was able to recover a portion of its costs through subsequent transactions with these customers. However, the Company also incurred costs associated with obsolete inventory and cancelled orders. For the year ended March 31, 2003, DiCon has written off $4.1 million of surplus or obsolete inventory as compared to $9.2 million in the prior year. The Company assesses its inventory position on a monthly and quarterly basis based on its then current forecasts. DiCon attempts to mitigate the impact of such corrections by maintaining close, proactive relationships with its major customers to obtain as much information about each customer’s needs as possible.

11.

Sources and Availability of Raw Materials.

     DiCon has no critical raw materials available only from a single supplier. GRIN lenses constitute the most critical of raw materials and, until recently, were externally supplied. Historically, DiCon carried approximately six months of inventory of GRIN lenses. With the Company’s newly developed capability to manufacture GRIN lenses, DiCon is largely self sufficient in this product and is currently one of only three known suppliers of GRIN lenses in the world for other component manufacturers.

12.

Research and Development.

     Since its formation, DiCon has been active in the development of new, commercially viable technologies. As of March 31, 2003, the Company had 22 patents granted and 10 pending in the United States. In order to achieve its position in the marketplace, DiCon spends a substantial proportion of its financial resources on research and development (“R&D”). These expenditures are expensed as incurred. During the last three fiscal years, DiCon’s R&D expenses were as follows:

13.

Competition.

     The markets in which DiCon sells its products are highly competitive. The Company’s overall competitive position depends on a number of factors, including:

		Product features, specifications and reliability
		Strength of customer relationships
		Breadth of product lines
		Delivery times and manufacturing capacity
		Selling price
		Timing of new product introduction

     DiCon believes that its principal competitors are passive optical component manufacturers such as JDS Uniphase, Avanex and Corning, as well as the internal manufacturing divisions of some of its large customers.

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14.

Employment.

     As of March 31, 2003, DiCon had 221 employees in the US and Global had 157 employees in Taiwan.

15.

Financial Information by Geographic Areas.

     DiCon sold its products to customers within and outside the United States as indicated below:

     The majority of the Company’s long-lived assets are located in the United States. Long-lived assets consist primarily of long-term investment property, plant, and equipment, net of accumulated depreciation and deposits. The following represents the geographic location of long-lived assets:

16.

Protection of the Environment.

     DiCon’s compliance with federal, state and local provisions regulating the discharge of materials into the environment does not and is not expected to have a material effect on the Company’s capital expenditures, earnings and competitive position.

(c)

Risk Factors.

     Any investment in DiCon’s Common Stock involves a high degree of risk. The risks and uncertainties described below are not the only ones the Company faces. Additional risks and uncertainties not presently known to the Company or that it currently considers immaterial may also adversely affect its business. DiCon’s business condition, operations and prospects could be materially harmed by any of the following risks.

     Risks Related to Fiberoptics Industry

     DiCon is currently losing money, and DiCon’s future return to profitability requires growth in the demand for fiberoptic networks and additional capital spending by the service providers.

     DiCon’s primary business is to manufacture and sell components used in optical networking equipment. The sale of optical networking equipment depends not only on consumer demand for access but also on service providers’ ability to raise capital required to pay for the networks. After a period of over expansion by the service providers, almost all of the service providers worldwide have substantially reduced capital expenditures to allow excess capacity to be absorbed by the continuing growth in traffic, and for the service providers to restore their financial strength. This has resulted in a severe and unprecedented decline in demand for optical components supplied by DiCon and its competitors. DiCon has incurred net losses over the past two years due to these market conditions. Limits to the continued growth of traffic on the networks or to the carriers’ ability to restore their financial strength may restrict the market for DiCon’s components and for those of DiCon’s competitors. Furthermore, DiCon may not be able to reduce costs sufficiently at present levels of sales to return to profitability. If the market does not recover at some point in the future, DiCon may not be able to return to profitability and may suffer material adverse effects on its business condition, operations and prospects.

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     DiCon faces increasing competition in the fiberoptics markets that could adversely affect its revenues and gross margins, or cause it to lose market share.

     Several of DiCon’s larger customers also design and manufacture components similar to those the Company provides to them. It is possible that these customers will favor their own products over DiCon’s for their internal needs or compete with DiCon for sales to other customers.

     Over the past several years, strong demand for fiberoptics components by equipment manufacturers has encouraged a large number of new companies to compete with established components providers such as DiCon. The entry of these new competitors was facilitated by the fundamental changes in technology needed to produce many components as the desired characteristics of the components evolve. Such new technologies can eliminate the technological advantages of incumbent suppliers. In addition, before the downturn, the enthusiasm of investors for manufacturers of optical equipment for communications facilitated the access of considerable funds to many start-ups, which allows them to set pricing below manufacturing costs to gain market share as they try to gain a foothold in the industry. As a result, today there is a severe over capacity in the industry to produce components. This competition could adversely impact the Company’s future revenues and gross margins.

     The price of optical networking components declines steadily after their introduction. These decreases may cause a decline in DiCon’s revenues and gross margins.

     The optical networking equipment industry continues to experience declining average selling prices as a result of greater competition and a significant reduction in spending for infrastructure projects. DiCon anticipates that average selling prices will continue to decrease in the future in response to product introductions by competitors and price pressures from large customers. Unless DiCon is able to reduce its costs sufficiently, these decreases will contribute to a decline in DiCon’s total revenues and gross margins, which would adversely affect its results of operations.

     Risks Related to the Company’s Business

     DiCon faces challenges in remaining technologically competitive, hiring and managing qualified personnel, and planning for the future.

     The continued competitiveness of DiCon requires the successful design and manufacture of an ever increasing number of different components, either because new functions are sought or because the evolving specifications of existing components require changes in product design and manufacturing methods. Often these new products require the mastery of entirely new materials and processes as well as the integration of different types of processes.

     DiCon’s need to develop innovative new products requires that DiCon be able to attract and retain a sufficient number of specially qualified engineers.

     In addition to hiring, training and retaining its work force, there are a number of challenges faced by DiCon in managing its business. These challenges include the effective management of manufacturing facilities both in the U.S. and Taiwan, successful design and timely introduction of new products to the market, investments in research and development including material processing and engineering core technologies, and expansion of sales to different geographical areas and new customers. Failure to meet these challenges in any single area may impact the Company’s future operating activities.

     Finally, while DiCon remains a privately held corporation, many of its larger competitors are publicly traded and therefore may have greater access to capital. This capital may better allow them to survive the downturn or to acquire other companies and benefit rapidly from these acquired technologies and product lines. The Company’s inability to raise future capital may prevent it from remaining technologically competitive.

     DiCon depends on a small number of large customers for a significant portion of its revenues. The loss of, or a significant reduction in, sales to these customers may adversely affect its revenues and operating results.

     While the mix of these leading customers changes over time, the dominance of a few network equipment providers in their markets and DiCon’s success in securing important sales to them imply that an important fraction of DiCon’s revenues will continue to come from a relatively small number of customers. Any further severe reduction in sales to one of these customers could adversely affect DiCon’s revenues and cash flow.

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     Although the Company has not suffered material credit losses to date, it may do so in the future.

     The telecommunications industry is currently undergoing rapid downsizing. These changes may result in a lack of liquidity or bankruptcy of some of DiCon’s customers during this period of market adjustment. If one or more of these significant customers were to experience financial difficulties, or a significant number of smaller customers were to do so, revenues and operating activities of the Company would be adversely impacted.

     DiCon depends on key personnel to manage its business effectively in a rapidly changing market and if the Company is unable to retain these personnel, its ability to develop, manufacture and market its products could be harmed.

     DiCon’s future success depends on the continued services of its executive officers, particularly Dr. Ho-Shang Lee, and other key personnel. None of these employees are bound by an employment agreement for any specific term and these personnel may terminate their employment at any time. In addition, DiCon does not maintain “key person” life insurance on any of its employees.

     Although the Company is investing in research and development activities for the development of future products, these products may never make it to commercial production. DiCon may fail to commercialize new product lines, which would adversely affect its revenues and results of operations.

     These future products may never make it to commercial production due to:

			changes in customer demand;
			technological developments that make these products less competitive;
			evolving industry standards;
			allocation of its limited resources to other products or technologies; or
			lack of sufficient funding.

     If DiCon incurs significant expenses developing products that it does not produce commercially, or if it selects the wrong products or technologies for commercial production, its revenues and results of operations, business conditions and prospects could be adversely affected.

     Sales of DiCon’s products are subject to cancellation or deferment.

     Many of the Company’s customers purchase its products under individual purchase orders and may cancel or defer purchases on short notice without significant penalty. Decreases in purchases, cancellations of purchase orders or deferrals of purchases may have a material adverse effect on the Company’s financial condition and results of operations.

     From time to time the Company acquires raw materials in anticipation of future orders from existing customers in order to meet anticipated delivery requirements of those customers. Some of these materials may be unique to those customers and such orders may not materialize, or may not materialize in the quantity or at the time anticipated. The Company may therefore incur certain costs associated with excess raw materials from time to time.

     DiCon may have difficulty securing additional or adequate funds and loans for operating and capital needs.

     DiCon expects to finance its operations through current balances of liquid assets, internally generated funds, short or long-term borrowings from banks or other sources, potential additional equity issuances involving common or preferred stock, or a combination of these sources. DiCon is currently unprofitable. Therefore, DiCon cannot be sure that it will be able to secure funding from any of the above-referenced sources or, even if secured, that the proceeds will be sufficient to meet its operating and capital requirements. If adequate funds are not available, DiCon may not be able to execute its business plans and its ability to compete effectively may be substantially diminished. This would have material adverse consequences to DiCon and its shareholders.

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     Further, incremental borrowings will subject DiCon to additional risks, including the potential consequences of failing to make required payments or to comply with affirmative or negative covenants. Interest payments associated with any borrowings will reduce earnings and the amount of internally generated funds available for capital requirements.

     Issuance of additional equity securities may result in dilution of existing stockholders’ interest in DiCon. Issuance of any preferred class of equity may also give rise to additional risks comparable to those associated with borrowings as described above.

     The Company’s headquarters in Richmond, California, is financed with a mortgage loan with a balloon payment due in November 2004. The Company expects to refinance the mortgage loan at that time. It may not be possible to do so, especially if the Company continues to be unprofitable. If the Company cannot refinance the mortgage loan, it may suffer substantial economic loss.

     If DiCon does not maintain acceptable manufacturing yields, product delivery schedules and product reliability, its operating results could suffer.

     The manufacture of DiCon’s products involves highly complex and precise processes, requiring production in highly controlled and clean environments. Changes in the Company’s manufacturing processes or those of its suppliers could significantly reduce the Company’s manufacturing yields and product reliability. Because the majority of DiCon’s manufacturing costs are relatively fixed, manufacturing yields are critical to the Company’s results of operations. Lower than expected production yields could delay product shipments and impact gross margins.

     DiCon’s products are complex and new products may take longer to develop than originally anticipated. If the Company does not introduce new products in a timely manner, it will not obtain incremental revenues from these products or be able to replace more mature products with declining revenues or gross margins.

     In order to adjust to declining demands for its products, the Company has made continuous efforts to reduce its workforce and trim back its operating expenses. If the Company is not successful in managing the necessary changes in its processes to adjust for the loss of this workforce, its manufacturing yields, product delivery schedules and/or product reliability could suffer.

     The Company’s operations could be disrupted by natural disasters that would seriously harm its operations.

     The Company’s facilities are susceptible to damage from natural disasters such as earthquakes and typhoons as well as from fire, floods, loss of power or water supply, telecommunications failures and similar events. Its research and development activities, manufacturing, corporate headquarters and other critical business operations are located in California and Taiwan. Any loss of its facilities could disrupt its operations, delay production and shipments and result in significant expense to repair and replace its facilities.

     DiCon may incur costs and experience disruptions complying with environmental regulations.

     The Company handles minor amounts of hazardous materials as part of its manufacturing activities. Although DiCon believes that it has complied with all applicable environmental regulations in connection with its operations, it may be required to incur environmental remediation costs to comply with current or future environmental laws.

     Risks Related to Intellectual Property

     DiCon may become involved in intellectual property disputes and litigation that could subject it to litigation, divert time and attention of its management and prevent it from selling its products, which could adversely affect its business and operating activities.

     DiCon may from time to time become involved in various lawsuits and legal proceedings concerning invasion of intellectual property, including patents. These disputes are protracted and expensive when they occur and their outcome is unpredictable. The Company intends to protect its intellectual property aggressively and from time to time it may file lawsuits against parties that it believes are infringing its intellectual property rights. Even if favorable results are obtained, any litigation that the Company initiates, or to which it is subject, could result in significant expenses for DiCon and require significant involvement of its senior management. It may divert management’s attention from its business and operations and could subject the Company to counterclaims. Litigation is subject to inherent uncertainties, and adverse results may negatively affect DiCon’s operating results, financial condition or reputation.

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     It is possible, based in part on the size and sophistication of the Company’s competitors and the history of rapid technological advances in its industry, that several competitors may have patent applications in progress in the United States or in foreign countries that, if issued, could relate to the technologies or processes used in DiCon’s products. If such patents were to be issued, the patent holders or licensees may assert infringement claims against DiCon or claim that the Company has violated other intellectual property rights. In addition, DiCon may have failed to discover existing domestic or international patents that could apply to its product design or manufacturing process. These claims and any resulting lawsuits, regardless of their merits, could be time consuming and expensive to resolve and would divert management time and attention. If DiCon is unsuccessful in defending a lawsuit, it could be forced to do one or more of the following, any of which could adversely affect its business:

	stop selling, incorporating or using its products that use the disputed intellectual property;
	obtain from third parties a license to sell or use the disputed technology, which license may not be available on reasonable terms, or at all; or
	redesign its products that use the disputed intellectual property.

     DiCon may not be able to protect its proprietary technology, which could adversely affect its ability to generate revenues.

     DiCon regards substantial elements of its technology as proprietary and attempts to protect these elements by relying on patent, trademark, service mark, copyright and trade secret laws. It cannot be certain that its pending patent applications will be approved, that any patents that may be issued will protect its intellectual property or that any issued patents will not be challenged by third parties. Other parties may independently develop similar or competing technology or design around patents that may be issued to DiCon. Additionally, the Company cannot be certain that the steps it has taken will prevent the misappropriation of its intellectual property, particularly in foreign countries where the laws may not protect the Company’s proprietary rights as fully as in the United States. Such misappropriations could adversely affect the Company’s business and its ability to generate revenues.

     Necessary licenses of third-party technology may not be available to the Company or may be very expensive, which could adversely affect DiCon’s ability to develop, manufacture and sell new products or product enhancements.

     While the Company to date has not been required to license technology from third parties to manufacture its products, it may in the future introduce new products or product enhancements that require such licenses. The Company cannot be certain that third-party licenses will be available to it on commercially reasonable terms, or at all. The inability to obtain third-party licenses required to develop new products and product enhancements could require the Company to obtain substitute technology of lower quality or performance standards or at greater cost, which in either case could adversely affect its ability to develop, manufacture and sell these products.

     Risks Related to DiCon Common Stock

     DiCon may remain a private company, which could adversely affect the Common Stock.

     There is no public market for DiCon’s common stock. Accordingly, shareholders should be prepared to hold their investment in a private company with no liquidity. Unless DiCon becomes a publicly traded company at some future date, the marketability of its common stock is extremely limited and governed by the terms of the Buy-Sell Agreement.

     There will be state and federal securities law restrictions on transfer of the Common Stock.

     The Company’s common stock has not been registered under the Securities Act of 1933 or any state securities laws and, unless so registered, may not be offered or sold except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act of 1933 and applicable state securities laws.

     Risks Relating to Arthur Andersen LLP

     Arthur Andersen LLP, which audited DiCon’s financial statements for the year ended March 31, 2001, was convicted on June 15, 2002, of federal obstruction of justice arising from the government’s investigation of Enron Corp. Due to the publicly announced troubles of Arthur Andersen LLP, the Company selected PricewaterhouseCoopers LLP as the Company’s independent accountants as of and for the year ended March 31, 2002. Subsequent to the issuance of the consolidated financial statements for the year ended

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March 31, 2001, the Company identified certain adjustments that were necessary in order to correct errors in the financial statements as of March 31, 2001. The errors related to the conversion and settlement of the phantom stock plan and the introduction of two new equity incentive plans. Details of the restatement of previously reported results (unaudited) can be found in Note 3 of the consolidated financial statements presented herein. The errors identified do not impact previously reported net income for the year ended March 31, 2001. The consolidated financial statements for the year ended March 31, 2001, have been restated to reflect the correcting adjustments and reclassifications.

     Management of the Company requested Arthur Andersen LLP to reissue their opinion on the consolidated financial statements as of and for the year ended March 31, 2001, to include the correcting adjustments; however, they were unable to reissue their opinion since the personnel assigned to this audit were no longer employed by Arthur Andersen LLP as of the date of the proposed reissuance. Due to the inability of Arthur Andersen LLP to reissue their opinion on the consolidated financial statements as of and for the year ended March 31, 2001, the consolidated financial statements as restated and presented herein are unaudited.

     DiCon may have no effective remedy against Arthur Andersen LLP in connection with a material misstatement or omission in these financial statements.

     DiCon’s inability to include in future registration statements financial statements as of and for the year ended March 31, 2001, which were audited by Arthur Andersen LLP or to obtain Arthur Andersen LLP’s consent to the inclusion of their previously issued report on the Company’s financial statements may impede the Company’s access to the capital markets.

     Should DiCon seek to access the public capital markets, SEC rules will require DiCon to include or incorporate by reference in any prospectus three years of audited financial statements. This means that DiCon would be unable to access the public capital markets until DiCon’s audited financial statements for the fiscal year ending March 31, 2004, become available, unless PricewaterhouseCoopers LLP, DiCon’s current independent accounting firm, or another independent accounting firm, is able to audit the financial statements originally audited by Arthur Andersen LLP.

     The preparation of the Company’s consolidated financial statements requires estimates and judgments by management of the Company. Actual results may differ from these estimates which could impact operating results.

     The consolidated financial statements of the Company contain estimates associated with reserves and allowances that are based on management’s judgment at the time of preparation of the consolidated financial statements. These reserves and allowances could differ from those estimated by management based on actual results that could negatively impact the Company’s operating results in future periods. Accounts affected by these estimates include inventory (for anticipated excess and obsolete inventory), estimate for losses on future rent (for buildings abandoned by the Company for which it is obligated under long term leases), allowances for bad debt, and gains (losses) on dissolution of joint venture. The Company also reported a valuation allowance for deferred tax assets due to the reduction in the Company’s forecasts of future taxable income. The Company has recorded total net deferred tax assets as of March 31, 2003, only to the extent of recoverable income taxes.

     DiCon is controlled by certain shareholders who could delay or prevent a change in its corporate control.

     Management and director shareholders beneficially own a majority of the outstanding shares of DiCon’s common stock. Accordingly, management has effective control of DiCon, with the ability to approve certain fundamental corporate transactions, including mergers, consolidations and sales of assets, public offerings and to elect a majority of its Board of Directors.

Item 2. Properties.

     DiCon conducts research, development, manufacturing and direct marketing at its headquarters in Richmond, California. DiCon owns the 200,000 square-foot facility in Richmond located on a 28-acre parcel of land. DiCon can build an additional 200,000 square-feet of buildings on the site under the approved development plan.

     DiCon, through its subsidiary, Global, also operates a manufacturing and sales facility in Kaohsiung, Taiwan. Global owns the 88,000 square-foot facility. This facility consists of two floors in a seven-story building. Additional space may be readily available if expansion is required. The facility is located in an industrial park on land leased from the Government of Taiwan. The existing 10-year land lease expires in 2011, and is renewable. The annual rental is 5% of the prorata share of the value of the land. For the year ending March 31, 2003, the rental is expected to be approximately $13,000.

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     In mid 2001, DiCon moved from its leased facilities in Berkeley, California, to its newly owned facility in Richmond, California. At the time of the move, DiCon leased 93,000 square feet of space in Berkeley with remaining terms of one to four years. As of March 31, 2002, the Company had terminated one lease and reserved an estimated liability for remaining costs, net of estimated sublease income, in the amount of $1.8 million.

     Prior to the end of the 2002 fiscal year, the Company terminated four of the leases for leased facilities and vacated another 50,000 square feet of leased space in Richmond, California. As a result, an additional charge of $512,000 related to the consolidation of existing excess leased space was generated. The Company’s estimate of the liability for the remaining costs of these leases is subject to change depending on the length of time required to sublease the properties and the rates at which the properties may be subleased. As of March 31, 2003, the reserve for future lease expenses, net of expected sublease income, is $519,000, and is included in accounts payable and accrued liabilities in the Consolidated Balance Sheets.

     As of March 31, 2003, DiCon’s future (gross) commitments under all leases are as follows:

     While DiCon is making a concerted effort to obtain subleases for these facilities, there can be no certainty that DiCon will be able to sublease any of the remaining space under current market conditions for rental space in the Northern California Bay Area.

Item 3. Legal Proceedings.

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

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

     No matters were submitted to a vote of DiCon’s security holders during the fourth quarter of the fiscal year ended March 31, 2003.

PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters.

(a) Market Information.

     There is no established public trading market for DiCon common stock. In the absence of a public market, the fair value of DiCon common stock is determined by DiCon’s Board of Directors.

(b) Holders of DiCon Common Stock.

     There are approximately 412 holders of DiCon common stock as of March 31, 2003.

(c) Dividends.

     DiCon declared a dividend of $0.00743 per share on its common stock on June 10, 2000. DiCon has not declared a dividend since June 2000. DiCon does not currently intend to pay dividends on its common stock in the foreseeable future.

(d) Securities Authorized for Issuance under Equity Compensation Plans.

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Equity Compensation Plan Information

(1)		DiCon has no equity compensation plans that are not approved by shareholders.
(2)		The maximum number of shares that may be issued pursuant to options granted under the ESOP is 11,840,000. As of March 31, 2003, 11,052,306 options were granted, 800 options were exercised and 6,280,563 options terminated under the ESOP.
(3)		The maximum number of shares that may be issued under the ESPP is 3,230,000 which includes shares issued pursuant to the Global Fiberoptics Profit Distribution Sharing Plan Alternative. As of March 31, 2003, 1,242,579 shares were issued under the ESPP and DiCon exercised the option to repurchase 239,761 shares upon employment termination.

Item 6. Selected Financial Data.

     The following selected condensed consolidated statement of operations data for each of the two fiscal years ended March 31, 1999 and 2000, are derived from DiCon’s unaudited financial statements. The data for the fiscal year ended March 31, 2001, are derived from DiCon’s unaudited and restated financial statements. The data for the fiscal years ended March 31, 2002 and 2003, are derived from DiCon’s financial statements audited by PricewaterhouseCoopers LLP. The historical selected financial information may not be indicative of DiCon’s future performance and should be read in conjunction with the information contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes included elsewhere in this document.

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(1)  Subsequent to the issuance of the consolidated financial statements as of and for the year ended March 31, 2001, the Company identified certain adjustments that were necessary in order to correct errors in those consolidated financial statements. The errors related to the conversion and settlement of the phantom stock plan and the introduction of two new equity incentive plans. Neither the errors identified nor the reclassifications impact previously reported net income for the year ended March 31, 2001. These consolidated financial statements for the year ended March 31, 2001, have been restated to reflect the correcting adjustments and reclassifications. See Note 3 of the Consolidated Financial Statements presented herein for the detail of the impact of the correcting adjustments to the Consolidated Balance Sheet as of March 31, 2001.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

     Overview

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

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

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

     Beginning in January 2001, as the industry entered its downturn and consolidation phase, various customers cancelled existing orders. In some cases, DiCon was able to recover a portion of its costs through subsequent transactions with these customers. However, the Company also incurred substantial costs associated with obsolete inventory and cancelled orders. During the fiscal year ended March 31, 2003, DiCon has written off $4.1 million of obsolete inventory as compared to $9.2 million in the prior year.

     In 2001, DiCon relocated its operations from leased facilities in Berkeley, California, to a newly owned 200,000 square feet facility in Richmond, California, which currently contains all of DiCon’s domestic manufacturing, R&D, sales and administration operations. DiCon has continued its efforts to consolidate its operations from different facilities in Berkeley and Richmond, California. The Company has terminated four of its leased facilities. The Company has reduced the reserve for future lease expenses for unused premises, net of estimated sublease income, from $1.8 million as of March 31, 2002, to $519,000 as of March 31, 2003.

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     DiCon began its overseas manufacturing operations at its 44,000 square foot WDM product assembly facility in Kaohsiung, Taiwan in January 2000. This facility subsequently has been expanded through the purchase of an additional 44,000 square feet of space adjacent to the original facility. Although DiCon owns a condominium interest in the building, it is located on a ground lease that extends through 2011. The ground lease may be renewed indefinitely, and there is no penalty for early cancellation, except for forfeiture of the owned facility.

     DiCon’s cost of goods sold consists primarily of the cost of direct materials, labor and manufacturing overhead associated with products sold, as well as production start up costs. As demand changes, DiCon attempts to manage its manufacturing capacity to meet demand for existing and new products; however, a certain portion of its costs are fixed and as volumes decrease, these expenses are difficult to reduce proportionately, if at all.

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

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

     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. See Note 11 of the Consolidated Financial Statements presented herein for more information regarding these plans. In September 2002, DiCon suspended the sale of DiCon shares to employees under the Employee Stock Purchase Plan.

     Critical Accounting Policies and Estimates

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

     Revenue recognition

     The Company recognizes revenue upon shipment of the product provided that persuasive evidence of a final agreement exists, delivery has occurred, the selling price is fixed or determinable and collectibility is reasonably assured. Revenue associated with contract-related cancellation payments from customers is not recognized until a formal agreement is signed or a purchase order issued by the customer covering such payments and the collectibility of the cancellation payments is determined to be probable. The Company records provisions against gross revenue for estimated product returns and allowances in the period when the related revenue is recorded. Should actual product returns and allowances exceed the Company’s estimates, additional reductions to revenue would result.

     Allowances for doubtful accounts

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

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     Warranty accrual

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

     Inventory valuation

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

     Property, plant and equipment

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

     Deferred taxes

     The Company regularly assesses the likelihood that deferred tax assets will be recovered from future taxable income. If necessary, the Company records a valuation allowance to reduce deferred tax assets to the amount that the Company believes to be realizable. The Company considers projected future taxable income and ongoing tax planning strategies in assessing the amount of the valuation allowance. If it is determined that the Company will not realize all or part of deferred tax assets, an adjustment to the deferred tax asset will be charged to earnings in the period such determination is made.

     Recent Accounting Pronouncements

     In August 2001, the Financial Accounting Standards Board (the “FASB”) issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which was effective for years beginning after December 15, 2001. SFAS No. 144 supersedes FASB Statement No. 121 and parts of APB Opinion No. 30, “Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions Relating to Extraordinary Items.” However, SFAS No. 144 retains the requirement of APB Opinion No. 30 to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of (by sale, by abandonment, or in a distribution to owners) or is classified as held for sale. SFAS No. 144 addresses financial accounting and reporting for the impairment of certain long-lived assets and for long-lived assets to be disposed of. The implementation of this standard did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

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     In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS No. 146 requires that a liability for costs associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS No. 146 did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

     In November 2002, the FASB issued Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 requires that a liability be recorded in the guarantor’s balance sheet upon issuance of a guarantee. In addition, FIN 45 requires disclosures about guarantees that an entity has issued, including a rollforward of the entity’s product warranty liabilities. The Company will apply the recognition provisions of FIN 45 prospectively to guarantees issued or modified after December 31, 2002. The Company has included additional disclosure in accordance with FIN 45 in Note 16 to the Company’s audited consolidated financial statements included elsewhere in this report. The Company believes the adoption of this standard will not have a material impact on its consolidated financial position, results of operations or cash flows.

     In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure - an amendment of FASB Statement No. 123.” SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company is required to follow the prescribed format and provide the additional disclosures required by SFAS No. 148 in its annual financial statements for the year ended March 31, 2003 and must also provide the disclosures in its quarterly reports containing condensed financial statements for interim periods beginning with the quarterly period ended June 30, 2003. The Company did not elect to adopt the fair value method of accounting for stock-based employee compensation and, accordingly, the adoption of this standard had no material impact on its consolidated financial position, results of operations or cash flows. The Company has included such additional disclosures in accordance with SFAS No. 148 in Note 2 to the Company’s audited consolidated financial statements included elsewhere in this report.

     In January 2003, the EITF issued Issue No. 00-21 “Accounting for Revenue Arrangements with Multiple Deliverables”. This EITF establishes the criteria for recognizing revenue in arrangements when several items are bundled into one agreement. EITF 00-21 does not allow revenue recognition unless the fair value of the undelivered element is available and the element has stand-alone value to the customer. EITF 00- 21 also provides guidance on allocating the total contract revenue to the individual elements based upon the available fair value of each deliverable. The Company does not expect the implementation of this statement to have a material impact on its consolidated financial position, results of operations or cash flows.

     In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity, if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The Company believes the adoption of FIN 46 will not have a material impact on its consolidated financial position, results of operations or cash flows.

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     Results of Operations

     Financial Results

     Net Sales

     During the fiscal year ended March 31, 2003, the Company reported $20.7 million of net sales, a 70.7% reduction from the previous year. Also, net sales declined 43.1% from $163.8 million in the fiscal year ended March 31, 2001, to $70.6 million in the fiscal year ended March 31, 2002. These declines reflected the overall decline in the demand for fiberoptics components and test equipment by telecommunications equipment vendors, the Company’s primary customers, as well as increased competition for the remaining business opportunities.

     In the fiscal year ended March 31, 2003, the Company recorded revenue from cancellation of prior supply agreements with customers of $1.2 million compared with $7.5 million in cancellation revenue from this source in the same period of the prior year. This revenue represents actual cash payments received during the periods.

     In the fiberoptic communications industry, the pace of technological change is dramatic. Specific products have a relatively short product life, although basic product designs may have a substantial life. Generally, customers expect that prices will decline 10% to 25% per year for comparable products from DiCon and from its competitors. In 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 reduce costs. There is no certainty that these programs will be successful to offset the pricing pressure from customers in the future. Historically, DiCon’s increased revenues were mainly due to increased volumes of production rather than increases in average selling prices. For the fiscal year ended March 31, 2003, the declining revenues were due both to a decline in selling prices and to a significant decline in the volume of goods shipped.

     Net sales to customers in the United States accounted for $13.7 million, $46.3 million and $117.9 million of total net sales, or 66%, 65% and 72%, for the years ended March 31, 2003, 2002 and 2001, respectively.

     Despite the fact that the Company had over 300 customers in the year ended March 31, 2003, there are a limited number of very large customers that account for the majority of purchases in the industry worldwide. As of and for the years ended March 31, the Company experienced the following concentrations with sales and accounts receivables.

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     Sales to DiCon’s leading customers vary significantly from year to year and DiCon does not have the ability to predict future sales to these customers. However, if the downturn in the telecommunications industry continues, DiCon expects telecommunications carriers to continue their current levels of capital spending, which will further affect DiCon’s sales.

     Cost of Goods Sold and Gross Margin

     Costs of goods sold declined 47% from $45.8 million in the fiscal year ended March 31, 2002, to $24.3 million in the fiscal year ended March 31, 2003. Gross margin as a percentage of net sales was negative 17.3% in the fiscal year ended March 31, 2003, compared to 35.1% in the fiscal year ended March 31, 2002, and 65.3% in the fiscal year ended March 31, 2001.

     The decrease in gross margin in the fiscal year ended March 31, 2003, from the fiscal year ended March 31, 2002, was primarily attributable to reductions in sales volume coupled with a continued decline in average selling prices, a lower margin product mix due to lower sales of high-margin components, and $4.1 million of write-downs of excess and obsolete inventories in fiscal year ended March 31, 2003, or 19.8% of total net sales, compared to $9.2 million, or 13% of total net sales, in the fiscal year ended March 31, 2002.

     Gross margin decreased in the fiscal year ended March 31, 2002, from the fiscal year ended March 31, 2001, primarily due to inventory write-downs, and reductions in sales volume along with a continued decline in average selling prices.

     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 we will achieve or maintain gross margin percentages at historical levels in future periods.

     Compensation expense related to the Company’s stock compensation plans has been reflected in the Statement of Operations and Comprehensive Income (Loss) for the years ended March 31, 2003, 2002 and 2001 as follows:

     Operating Expenses

     Selling, general and administrative.

     Selling, general and administrative (“SG&A”) expense was $9.2 million in the fiscal year ended March 31, 2003, compared to $14.8 million in the fiscal year ended March 31, 2002, and $31.2 million in fiscal year ended March 31, 2001. The decrease in SG&A was primarily due to lower personnel-related expenses resulting from the reductions of workforce, and lower commission expenses following the decline in sales.

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     The increase in SG&A expense as a percentage of total net sales in fiscal 2003 was due to the Company’s net sales declining more rapidly than its SG&A spending.

     Research and development.

     Research and development (“R&D”) expense was $13.2 million in the fiscal year ended March 31, 2003, compared to $16.7 million in fiscal year ended March 31, 2002, and $20.6 million in the fiscal year ended March 31, 2001. The decrease in R&D spending reflects the cost reductions resulting from the elimination of certain product development programs and workforce reductions. The increase in R&D expense as a percentage of total net sales was due to the Company’s net sales declining more rapidly than its R&D spending. 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.

     Loss (Gain) on Dissolved Joint Venture

     In February 2000, DiCon and Lucent Technologies Inc. (now Agere Systems Inc.) created a joint venture (LD Fiberoptics LLC) for the purpose of jointly developing advanced fiberoptic components. In December 2000, the parties mutually agreed to terminate the joint venture. In the fiscal year ended March 31, 2001, DiCon estimated its loss upon dissolution of the joint venture to potentially be $2.1 million. Subsequently, upon distribution of assets, it was determined that DiCon’s loss was only $1.6 million, resulting in a gain for the fiscal year ended March 31, 2002, of $0.5 million.

     Other Income (Expense)

     Other income (expense) was expense of $3.4 million in the fiscal year ended March 31, 2003, expense of $2.1 million in the fiscal year ended March 31, 2002, and income of $2.2 million in the fiscal year ended March 31, 2001 as follows:

     Interest expense, net, for the fiscal years ending March 31, 2003, 2002 and 2001, primarily represents the costs of borrowing by DiCon for its real estate loan for the Richmond, California, facility and its equipment loan, along with the imputed interest on the payments required under the terms of the conversion of its Phantom Stock Plan to the Employee Stock Option Plan.

     In the fiscal year ending March 31, 2001, DiCon recognized total gains of $2.4 million primarily from sales of certain marketable equity securities. In the fiscal year ending March 31, 2003, DiCon sold certain marketable equity securities for total proceeds of $2.8 million, resulting in a realized loss of $616,000.

     Income Tax Expense (Benefit):

     DiCon recorded $6.2 million and $5.2 million of income tax benefit in the fiscal years ended March 31, 2003 and 2002, respectively. In the fiscal year ended March 31, 2001, DiCon recorded $16.7 million of income tax expense.

     The Company has had sufficient income for federal income tax purposes in prior years to carryback the anticipated losses from this year, and to receive a refund of $15.2 million. The Company has thus accrued an income tax receivable of $15.2 million at March 31, 2003. California state income taxes may not be carried back to prior years. The losses for California purposes may result in lower taxes paid in the future, depending on the then current tax laws for California. During the fiscal year ended March 31, 2002, the Company received $9.2 million of federal income tax refunds.

     The Company’s effective tax rate varies from the statutory U.S. federal rate primarily due to the use of tax credits, the effect of state income taxes and the impact of foreign taxes on its Taiwanese subsidiary. The difference between the Company’s effective income tax rate and U.S. federal statutory rate is reconciled as follows:

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