<PAGE> 
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                    FORM 10-Q

             X   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                      OF THE SECURITIES EXCHANGE ACT OF 1934


                  For the quarterly period ended March 31, 1999
                  ---------------------------------------------

                                       OR

              TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                          Commission File Number 1-8086
                                                 ------

                        GENERAL DATACOMM INDUSTRIES, INC.
              ----------------------------------------------------
             (Exact name of registrant as specified in its charter)


           Delaware                                     06-0853856
-------------------------------            -----------------------------------
(State or other jurisdiction of            (I.R.S. Employer Identification No.)
 incorporation or organization)

       Middlebury, Connecticut                        06762-1299
---------------------------------------               ----------
(Address of principal executive offices)              (Zip Code)

         Registrant's phone number, including area code: (203) 574-1118
                                                         --------------

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
                               --

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the latest practicable date:

                                                Number of Shares Outstanding
         Title of Each Class                         at March 31, 1999
         -------------------                    ---------------------------- 
    Common Stock, $.10 par value                        19,821,621
    Class B Stock, $.10 par value                        2,093,083

                   Total Number of Pages in this Document is 24.
  
<PAGE>


                        GENERAL DATACOMM INDUSTRIES, INC.
                                AND SUBSIDIARIES
                                      INDEX




                                                                     Page No.
                                                                     --------
Part I.   Financial Information
          ---------------------

          Consolidated Balance Sheets - March 31, 1999 and
          September 30, 1998                                               3

          Consolidated Statements of Operations and Accumulated
          Deficit - For the Three and Six Months Ended
          March 31, 1999 and 1998                                          4

          Consolidated Statements of Cash Flows - For the Six
          Months Ended March 31, 1999 and 1998                             5

          Notes to Consolidated Financial Statements                       6

          Management's Discussion and Analysis of Financial
          Condition and Results of Operations                             12


Part II.  Other Information
          -----------------

          Item 4.  Submission of Matters to a Vote of Security-Holders    23

          Item 6.  Exhibits and Reports on Form 8-K                       23


                                      - 2 -

<PAGE>

                          PART I. FINANCIAL INFORMATION

               GENERAL DATACOMM INDUSTRIES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS


                                                   (Unaudited)
                                                    March 31,     September 30,
In thousands, except shares                           1998            1998
-------------------------------------------------------------------------------
ASSETS:                                           
Current assets:
  Cash and cash equivalents                           $4,208          $3,757
  Restricted cash                                      1,000               -
  Accounts receivable, less allowance for doubtful
    doubtful receivables of $1,501 in March and
    $1,442 in September                               23,883          30,013
  Inventories                                         30,240          30,574
  Deferred income taxes                                1,675           1,675
  Other current assets                                 8,296           7,030
-------------------------------------------------------------------------------
Total current assets                                  69,302          73,049
===============================================================================
Property, plant and equipment, net                    38,815          40,553
Capitalized software development costs, net           21,815          24,286
Other assets                                          10,907          11,650
-------------------------------------------------------------------------------
                                                    $140,839        $149,538
===============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
  Current portion of long-term debt                  $7,111           $8,133
  Accounts payable, trade                            13,108           12,763
  Accrued payroll and payroll-related costs           4,861            5,896
  Deferred income                                     4,799            6,034
  Other current liabilities                          19,056           15,122
-------------------------------------------------------------------------------
Total current liabilities                            48,935           47,948
===============================================================================
Long-term debt, less current portion                 55,047           52,679
Deferred income taxes                                 2,561            2,589
Other liabilities                                     1,165              364
-------------------------------------------------------------------------------
Total liabilities                                   107,708          103,580
===============================================================================
Commitments and contingent liabilities                    -                -
Stockholders' equity:
  Preferred  stock,  par value  $1.00 per share,
    3,000,000  shares  authorized; issued  and
    outstanding:   800,000  shares  of  9%
    cumulative  convertible exchangeable
    preferred stock with a $20 million
    liquidation preference                              800              800
  Class B stock, par value $.10 per share,
    35,000,000 shares authorized; issued
    and outstanding: 2,093,083 in March
    and September                                       209              209
  Common stock, par value $.10 per share,
    35,000,000 shares authorized; issued
    and outstanding: 20,152,003 in March
    and 19,968,280 in September                       2,015            1,997
  Capital in excess of par value                    151,402          151,052
  Accumulated deficit                              (115,593)        (103,066)
  Cumulative foreign currency translation
    adjustment                                       (3,253)          (2,589)
  Common stock held in treasury, at cost:
    330,382 shares in March and September            (2,449)          (2,445)
 ------------------------------------------------------------------------------
 Total stockholders' equity                          33,131           45,958
 ------------------------------------------------------------------------------
                                                   $140,839         $149,538
 ==============================================================================
The  accompanying  notes are an integral  part of these  consolidated  financial
statements.

                                      -3-

<PAGE>


               GENERAL DATACOMM INDUSTRIES, INC. AND SUBSIDIARIES
                    CONSOLIDATED STATEMENTS OF OPERATIONS AND
                               ACCUMULATED DEFICIT
                                   (Unaudited)


                                          Three Months Ended  Six Months Ended
                                              March 31,           March 31,
------------------------------------------------------------  -----------------
In thousands, except per share data       1999          1998    1999      1998
------------------------------------------------------------  -----------------
Revenues:
  Net product sales                     $25,779     $35,362   $53,616   $71,735
  Service revenue                        11,471       9,704    23,453    19,185
  Other revenue                           1,527       3,265     4,127     5,630
------------------------------------------------------------  -----------------
                                         38,777      48,331    81,196    96,550
------------------------------------------------------------  -----------------

Costs and expenses:
  Cost of product sales                  13,068      17,802    27,458    36,638
  Amortization of capitalized
   software development costs             3,010       2,972     6,172     5,972
  Cost of service revenue                 7,791       6,647    16,012    13,410
  Cost of other revenue                     124         110       609       247
  Selling, general and administrative    14,617      18,178    31,453    38,420
  Research and product development        7,135       8,173    14,821    17,107
  Restructuring of operations                 -           -     2,000     2,500
-----------------------------------------------------------   -----------------
                                         45,745      53,882    98,525   114,294
-----------------------------------------------------------   -----------------
Operating loss                           (6,968)     (5,551)  (17,329)  (17,744)
-----------------------------------------------------------   -----------------

Other income (expense):
  Gain on sale of assets                     -           -      9,001         -
  Interest, net                          (1,536)     (1,415)   (3,198)   (2,811)
  Other, net                                165         207       399       136
-----------------------------------------------------------   -----------------
                                         (1,371)     (1,208)    6,202    (2,675)
-----------------------------------------------------------   -----------------
Loss before income taxes                 (8,339)     (6,759)  (11,127)  (20,419)
Income tax provision                        200         300       500       500
-----------------------------------------------------------   -----------------
Net loss                                ($8,539)   ($7,059)  ($11,627) ($20,919)
===========================================================   =================
Basic and diluted loss per share         ($0.41)    ($0.35)    ($0.58)   ($1.02)
===========================================================   =================
Weighted average number of common and
 common equivalent shares outstanding    21,803     21,389     21,769    21,389
===========================================================   =================

Accumulated deficit at beginning of
 period                               ($106,604)  ($82,184) ($103,066) ($67,874)
Net loss                                 (8,539)    (7,059)   (11,627)  (20,919)
Payment of preferred stock dividends       (450)      (450)      (900)     (900)
-----------------------------------------------------------  ------------------
Accumulated deficit at end of period  ($115,593)  ($89,693) ($115,593) ($89,693)
===========================================================  ==================
The accompanying notes are an integral part of these consolidated financial
statements.

                                      - 4 -

<PAGE>


               GENERAL DATACOMM INDUSTRIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)


                                                   Increase (Decrease) in Cash
                                                       and Cash Equivalents
                                                  -----------------------------
                                                        Six Months Ended
                                                            March 31,
                                                  -----------------------------
In thousands                                          1999              1998
-------------------------------------------------------------------------------
Cash flows from operating activities:
  Net loss                                           ($11,627)       ($20,919)
  Adjustments to reconcile net loss to net cash
    used in operating activities:
      Depreciation and amortization                     12,874          13,661
      Gain on sale of assets                            (9,001)             --
      Changes in:
        Accounts receivable                              5,993           1,726
        Inventories                                        386           4,422
        Accounts payable and accrued expenses            2,074          (2,743)
        Other net current assets                        (2,110)            925
        Other net long-term assets                         391             874
-------------------------------------------------------------------------------
Net cash used in operating activities                   (1,020)         (2,054)
-------------------------------------------------------------------------------
Cash flows from investing activities:
  Acquisition of property, plant and equipment, net     (4,892)         (3,694)
  Capitalized software development costs                (6,534)         (6,013)
-------------------------------------------------------------------------------
Net cash used in investing activities                  (11,426)         (9,707)
-------------------------------------------------------------------------------
Cash flows from financing activities:
  Proceeds from revolver borrowings                     85,043              --
  Payments on revolver borrowings                      (75,690)         (4,799)
  Proceeds from sale of assets, net                     12,013              --
  Proceeds from notes and mortgages                        279          15,094
  Principal payments on notes and mortgages             (8,159)         (4,475)
  Proceeds from issuing common stock                       368             748
  Payment of preferred stock dividends                    (900)           (900)
-------------------------------------------------------------------------------
Net cash provided by financing activities               12,954           5,668
-------------------------------------------------------------------------------
Effect of exchange rates on cash                           (57)            (14)
-------------------------------------------------------------------------------
Net increase in cash and cash equivalents                  451          (6,107)
Cash and cash equivalents at beginning of period - (1)   3,757          21,526
-------------------------------------------------------------------------------
Cash and cash equivalents at end of period - (1)        $4,208         $15,419
===============================================================================
(1) - The Corporation  considers all highly liquid investments purchased with
      a maturity of three months or less to be cash equivalents.

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


                                       -5-

<PAGE>

                        GENERAL DATACOMM INDUSTRIES, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


NOTE 1.   BASIS OF PRESENTATION

In the opinion of management,  the accompanying unaudited consolidated financial
statements contain all adjustments  necessary to fairly present the consolidated
financial  position of General DataComm  Industries,  Inc. and subsidiaries (the
"Corporation"  or "Company") as of March 31, 1999, the  consolidated  results of
their operations for the three and six months ended March 31, 1999 and 1998, and
their  cash  flows  for the six  months  ended  March 31,  1999 and  1998.  Such
adjustments are generally of a normal recurring  nature and include  adjustments
to certain accruals and asset reserves to appropriate levels.

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent  assets and  liabilities at the date of the financial  statements and
the  reported  amounts of revenues  and expenses  during the  reporting  periods
presented.  Actual results could differ from those estimates.  In addition,  the
markets for the Company's  products are  characterized  by intense  competition,
rapid technological development, and frequent new product introductions,  all of
which could  impact the future  value of the  Company's  inventory,  capitalized
software, and certain other assets.

The  consolidated  financial  statements  contained  herein  should  be  read in
conjunction with the consolidated financial statements and related notes thereto
filed with Form 10-K for the year ended September 30, 1998.

Certain  reclassifications  were made to the prior years' consolidated financial
statements to conform to the current year's presentation.

NOTE 2.   INVENTORIES

Inventories consist of (in thousands):

                                   March 31, 1999     September 30, 1998
                                   --------------     ------------------
       Raw materials                   $ 9,669              $10,945
       Work-in-process                   4,020                3,611
       Finished goods                   16,551               16,018
                                       -------              -------
                                       $30,240              $30,574
                                       =======              =======


                                      - 6 -


<PAGE>

                        GENERAL DATACOMM INDUSTRIES, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


NOTE 3.   PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of (in thousands):

                                  March 31, 1999      September 30, 1998
                                  --------------      ------------------
       Land                          $  1,770            $  1,784
       Buildings and improvements      29,992              30,134
       Test equipment, fixtures
         and field spares              56,299              54,897
       Machinery and equipment         60,521              59,957
                                      -------             -------
                                      148,582             146,772
       Less:  accumulated
        depreciation and
        amortization                  109,767             106,219
                                     --------            --------
                                     $ 38,815            $ 40,553
                                     ========            ========


NOTE 4.   CAPITALIZED SOFTWARE DEVELOPMENT COSTS

The accumulated  amortization of capitalized software development costs amounted
to  $18,096,000  and  $17,972,000  at March 31,  1999 and  September  30,  1998,
respectively.

NOTE 5.  LONG-TERM DEBT

Long-term debt consists of (in thousands):

                                   March 31, 1999      September 30, 1998
                                   --------------      ------------------

       Revolving credit facility      $10,940              $ 1,587
       Notes payable                   15,512               23,173
       7-3/4% convertible senior
         subordinated debentures       25,000               25,000
       Mortgages payable               10,706               11,052
                                      -------              -------
                                       62,158               60,812
       Less:  current portion           7,111                8,133
                                      -------              -------
                                      $55,047              $52,679
                                      =======              =======


                                      - 7 -


<PAGE>

                        GENERAL DATACOMM INDUSTRIES, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

NOTE 5. LONG-TERM DEBT (continued)

Revolving  Credit Facility

On October 22, 1997, the Company  entered into a $40.0 million loan and security
agreement (the "Loan  Agreement")  which provided the Company with $15.0 million
in proceeds from a five-year term loan and an additional  $25.0 million (maximum
value) revolving line of credit for a three-year  period ending in October 2000,
subject to  extension.  Availability  of the  revolving  line of credit funds is
subject to  satisfying  a borrowing  base  formula  related to levels of certain
accounts  receivable and  inventories  and the  satisfaction  of other financial
covenants.

Maximum  funds  available  for borrowing  under the  revolving  credit  facility
amounted to  $19,913,000  and  $25,000,000  at March 31, 1999 and  September 30,
1998, respectively.

Terms of the Loan  Agreement  required that the Company raise a minimum of $10.0
million in net  proceeds on or before  March 31, 1999 through the sale of assets
or execution of an equity  offering.  The Company  satisfied  this $10.0 million
covenant  requirement  on  December  31,  1998 (see Note 8, "Sale of  Technology
Alliance Group Division," for further  discussion of the transaction  involved).
In  accordance  with terms of the Loan  Agreement,  $4.3 million of the proceeds
received  from the  transaction  were applied to reduce  borrowings  outstanding
(under the term loan portion of the Loan Agreement) in January 1999.

Reference is made to the Company's consolidated financial statements and related
notes thereto and exhibits filed with Form 10-K for the year ended September 30,
1998 for further disclosures applicable to the Loan Agreement, including related
financial covenant requirements,  and all other outstanding  indebtedness of the
Corporation.


NOTE 6. VITAL NETWORK SERVICES, L.L.C. EXPANDED PARTNERSHIP WITH OLICOM, INC.

On October 15, 1998, the Company's  VITAL Network  Services  ("VITAL")  business
unit  entered  into  an  agreement  with  Olicom,  Inc.  whereby  VITAL  assumed
responsibility  for Olicom's service  operations in Marlborough,  Massachusetts,
and Olicom  assigned  or  transferred  its  service  contract  business in North
America to VITAL.  In addition to the  assumption  of  obligations  for a leased
facility,  VITAL  will pay  Olicom a  percentage  (25% in the  first  year,  20%
thereafter) of revenues derived from Olicom's business over a three-year period,
not to exceed $3.8 million. As part of the agreement, VITAL acquired the capital
assets used in Olicom's service  business.  VITAL recorded the acquisition using
the purchase  method of  accounting,  and due to the  conditional  nature of the
payments  owing to Olicom,  no  liability  or  corresponding  assets  (including
goodwill)  were  recorded  for  these  payments  at  the  date  of  acquisition.
Subsequent to the acquisition,  VITAL is recording the assets and  corresponding
liabilities as such amounts become unconditional.

                                      - 8 -

<PAGE>

                        GENERAL DATACOMM INDUSTRIES, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


NOTE 7. RESTRUCTURING OF OPERATIONS

In December 1998, the Company  restructured  its operations  into three distinct
business  units  to  increase  product  line  focus  and move  toward  operating
autonomy.  Two new business  units resulted from the  reorganization:  Broadband
Systems  Division  and Network  Access  Division.  The new  business  units will
supplement the existing VITAL Network Services business unit, which was launched
in October  1997 to provide  professional  services on  multi-vendor  networking
equipment on a worldwide basis.


The reorganization  resulted  in a work force  reduction  of  approximately  200
persons.  The net loss for the six months ended March 31, 1999 includes a charge
of $2.0  million,  or $0.09 per share,  primarily for  post-employment  benefits
under the Company's  severance  plan, of which  $905,000 was unpaid at March 31,
1999; the Company expects to pay such unpaid amounts during fiscal 1999.

The net loss for the six months  ended March 31, 1998  includes a charge of $2.5
million,  or $0.12 per share, which is comprised of a $1.0 million provision for
post-employment  benefits  under the  Company's  severance  plan  related to the
elimination of  approximately  200 full-time  positions and $1.5 million for the
write-off of intangible  assets and other costs  associated with the elimination
of low-volume product lines.


NOTE 8. SALE OF TECHNOLOGY ALLIANCE GROUP ("TAG") DIVISION

In December 1998, the Company reported the sale of its TAG division. The Company
had  been  actively  pursuing  the  sale of its  TAG  division  since  it is not
strategic to the  reorganized  business  units  described  in Note 7 above.  The
division,  which  developed,  patented  and licensed  advanced  modem and access
technologies, was principally comprised of scientists and engineers and held the
rights to certain technologies patented by the division.  The sale resulted in a
pre-tax gain of $9.0 million and generated  cash proceeds,  net of expenses,  of
approximately  $12.0  million in the six months  ended March 31,  1999.  Of such
$12.0 million,  $1.0 million was being held in escrow and reported as restricted
cash at March 31,  1999.  The Company  expects to receive such funds on or about
June 30, 1999.

The  Company's  primary loan  agreement  provided that a portion of the proceeds
(approximately  $4.3 million) be used to reduce  outstanding  indebtedness under
this agreement, and this occurred in January 1999.

                                      - 9 -

<PAGE>

                        GENERAL DATACOMM INDUSTRIES, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


NOTE 9. EARNINGS (LOSS) PER SHARE

The  following  table sets forth the  computation  of basic and diluted loss per
share (in thousands, except per share amounts):

                                     Three Months Ended        Six Months Ended
                                          March 31,                March 31,
                                     ------------------        ----------------
                                       1999       1998         1999       1998
                                       ----       ----         ----       ----
Numerator:
  Net loss                          $(8,539)   $(7,059)    $(11,627)   $(20,919)
  Preferred stock dividends             450        450          900         900
  Numerator for basic and diluted   --------   -------     ---------   --------
   loss per share - loss applicable
   to common stockholders           $(8,989)   $(7,509)    $(12,527)   $(21,819)
                                    ========   ========    =========   ========
Denominator:
  Denominator for basic and diluted
   loss per share - weighted
   average shares outstanding        21,803     21,389      21,769       21,389
                                     ------     ------      -------      ------
Basic and diluted loss per share     $(0.41)    $(0.35)     $(0.58)      $(1.02)
                                     =======    =======     =======      ======

The net loss  reported for the  six-month  periods ended March 31, 1999 and 1998
includes restructuring  charges  of $2.0  million  (or $0.09 per share) and $2.5
million (or $0.12 per share),  respectively.  Refer to Note 7, "Restructuring of
Operations," for further discussion.

Outstanding  securities (not included in the above computations because of their
dilutive  impact on  reported  loss per share)  which could  potentially  dilute
earnings per share in the future  include  convertible  debentures,  convertible
preferred  stock  and  employee  stock  options  and  warrants.  For  additional
disclosure information,  including conversion terms, refer to Notes 6, 9 and 11,
respectively, in the Company's consolidated financial statements filed with Form
10-K for the year ended  September 30, 1998.  Weighted  average  employee  stock
options  outstanding  during the six months  ended March 31,  1999  approximated
3,578,112  shares,  of which  3,430,667  would not have been included in diluted
earnings per share  calculations for the six months ended March 31, 1999 (if the
Company reported net income for the referenced  period) because the effect would
be antidilutive.

                                     - 10 -
<PAGE>

                        GENERAL DATACOMM INDUSTRIES, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)



NOTE 10. COMPREHENSIVE INCOME (LOSS)

Statement of Financial  Accounting  Standards No. 130, "Reporting  Comprehensive
Income," ("SFAS No. 130") establishes standards for the reporting and display of
"comprehensive  income," and becomes  effective  for the Company in fiscal 1999.
Comprehensive income is defined as "all changes in equity during a period except
those resulting from  investments by owners and  distributions to owners." Under
various accounting pronouncements, certain changes in assets and liabilities are
not  reported  in a  statement  of  operations  for the period in which they are
recognized,  but instead are included in balances within a separate component of
stockholders'  equity in a  statement  of  financial  position.  The sum of such
changes,  along with other  activity  reported  in the  Company's  statement  of
operations, in effect represents comprehensive income as defined by SFAS No.
130.

The following table sets forth the computation of comprehensive income (loss):

                                   Three Months Ended         Six Months Ended
                                        March 31,                  March 31,
                                   ------------------       ------------------
                                    1999        1998         1999       1998
                                    ----        ----         ----       ----
Net loss                           $(8,539)    $(7,059)    $(11,627)  $(20,919)
Other comprehensive income
 (loss), net of tax:
Foreign currency translation
 adjustments                          (251)        (71)        (664)       (34)
                                   --------    --------    ---------  ---------
Comprehensive loss                 $(8,790)    $(7,130)    $(12,291)  $(20,953)
                                   ========    ========    =========  =========


                                     - 11 -

<PAGE>
                        GENERAL DATACOMM INDUSTRIES, INC.
                                AND SUBSIDIARIES
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

Results of Operations
---------------------

The following table sets forth selected consolidated  financial data stated as a
percentage of total revenues (unaudited):

                                     Three months ended       Six months ended
                                          March 31,                March 31,
                                     ------------------       -----------------
                                      1999       1998         1999        1998
                                      ----       ----         ----        ----
Revenues:
  Net product sales                   66.5%      73.2%        66.0%       74.3%
  Service revenue                     29.6       20.1         28.9        19.9
  Other revenue                        3.9        6.7          5.1         5.8
                                     -----      -----        -----       -----
                                     100.0      100.0        100.0       100.0
Costs and expenses:
  Cost of revenues                    54.1       50.8         54.3        52.1
  Amortization of capitalized
    software development costs         7.8        6.2          7.5         6.2
  Selling, general and 
    administrative                    37.7       37.6         38.7        39.8
  Research and product development    18.4       16.9         18.3        17.7
  Restructuring of operations            -          -          2.5         2.6
                                     -----       -----       ------      ------ 
Operating loss                       (18.0)     (11.5)       (21.3)      (18.4)
                                     ------     -----        ------      ------
Net loss                             (22.0)%    (14.6)%      (14.3)%     (21.7)%
                                     =======    =======      ======      ======

Summary  comments are as follows:  (1) quarter and  year-to-date  product  sales
declined,  offset in part with growth in service revenue (see "Revenues" caption
below for further discussion); as a result, product revenue represents a reduced
percentage  of total  revenue,  while  service  revenue  represents an increased
percentage  of  total  revenue;  (2)  other  revenue  also  represents  a  lower
percentage  of  total  revenue   reflecting  a  reduction  in  royalty   revenue
attributable to the Company's TAG division being sold in December 1998 (see Note
8 for  details);  (3) quarter and  year-to-date  cost of revenue,  measured as a
percent  of  revenue,  increased  from the prior year  reflecting  the impact of
(lower margin) service revenue representing a higher percentage of total revenue
and a reduced level of high margin royalty revenue;  (4) year-to-date  operating
expenses (excluding  restructuring charges) are down slightly when measured as a
percent of revenue,  despite a lower revenue base in fiscal 1999;  this reflects
the impact of the Company's cost reduction actions, which have reduced operating
expenses  by $9.3  million,  or 16.7%,  as  compared  to the first six months of
fiscal 1998; (5) the year-to-date net loss was reduced reflecting the net impact
of reduced  revenues,  the positive results of implemented cost reductions and a
gain of $9.0 million from the sale of a division.

                                     - 12 -

<PAGE>

Revenues
--------
                                     Three months ended       Six months ended
                                         March 31,               March 31,
                                     ------------------       ----------------
                                     1999          1998       1999       1998
                                     ----          ----       ----       ----
   Revenues                        $38,777      $48,331     $81,196   $96,550
   Percent change                  (19.8)%            -      (15.9)%        -


Revenues in the quarter ended March 31, 1999 decreased  $9.6 million,  or 19.8%,
compared  to the prior  year,  reflecting  a  product  revenue  decline  of $9.6
million,  or 27.1%,  offset in part with service revenue growth of $1.8 million,
or 18.2%; other revenue was down $1.8 million from the prior year,  reflecting a
reduction in royalty revenue  attributable to the TAG division which was sold in
December 1998 (refer to Note 8 for details).  Both the Network  Access  Division
(down  $2.3  million,  or 14%) and the  Broadband  Systems  Division  (down $7.3
million,  or 39%)  contributed  to the product  revenue  shortfall.  The Network
Access  business  unit  experienced a reduction in domestic  Telco  business and
weakness in other  international  markets,  partially  offset with growth in its
domestic  distribution  business and the  Canadian  marketplace.  The  Broadband
Systems  business unit experienced a downturn in the  international  marketplace
(principally Latin America).

In December 1998, the Company announced a restructuring of operations into three
distinct and separately managed business units. The Network Access and Broadband
Systems  business  units  spent   considerable   time  defining  their  business
strategies,  organizational  structures  and  operating  procedures  during  the
quarter  ended March 31, 1999.  The Company  attributes a portion of the product
revenue  decline in the quarter  ended  March 31,  1999 to a diversion  of sales
efforts as each business unit defined and executed such plans.

The VITAL Network  Services  business unit's revenue growth reflects  success in
its efforts to procure new third party service  business,  including VITAL's new
partnership with Olicom, Inc. (refer to Note 6 for details).

Geographically,  international   revenues  accounted  for  46%  of  total
consolidated  revenues for the  quarter  ended March 31, 1999 as compared to 49%
for the comparable period one year ago.

The above trends and discussion also apply to year-to-date  revenue performance.
Revenues for the six months ended March 31, 1999  decreased  $15.3  million,  or
15.9%,  as compared to the prior year,  reflecting a product  revenue decline of
$18.1  million,  or 25.3%,  offset in part with service  revenue  growth of $4.3
million,  or 22.2%; other revenue was down $1.5 million from the prior year. The
Network Access  Division (down $5.3 million,  or 16%) and the Broadband  Systems
Division  (down  $12.9  million,  or 33%)  contributed  to the  product  revenue
shortfall.  A significant portion of the Broadband Systems business unit revenue
decline ($9.2 million) was attributable to the division's older  internetworking
products (TMS or  multiplexer).  The division's ATM revenue decline  amounted to
$3.7 million on a year-to-date basis.

Geographically,  international  revenues accounted for 47% and 52% of total
consolidated revenues for the six-month periods ended March 31, 1999 and
1998, respectively.

                                     - 13 -
<PAGE>

Cost of Revenues:
----------------

                                      Three months ended     Six months ended
                                           March 31,            March 31,
                                      ------------------     ----------------
                                        1999        1998       1999      1998
                                        ----        ----       ----      ----
  Cost of revenues                   $20,983     $24,559    $44,079   $50,295
  As a percent of revenues             54.1%       50.8%      54.3%     52.1%

  Amortization of capitalized
    software development costs        $3,010      $2,972     $6,172    $5,972
  As a percent of revenues              7.8%        6.1%       7.6%      6.2%

Cost of revenues,  measured as a percent of  revenues,  increased by 3.3 and 2.2
percentage  points,  respectively,  for the three- and  six-month  periods ended
March 31, 1999 as compared to the  corresponding  periods one year ago.  Product
cost (measured as a percent of revenue) was relatively  unchanged.  The increase
in total cost is principally attributable to revenue mix. Service revenue, which
generates lower margin than product revenue,  represented a larger percentage of
the Company's total revenue in fiscal 1999  (approximately  30% and 29% of total
revenue for the three- and six-month periods ended March 31, 1999, respectively,
as  compared  to 20% for the same  periods  of  fiscal  1998).  In  addition,  a
reduction in high margin royalty revenue  (attributable to the sale of TAG) also
contributed to the margin decline.  These margin declines were partially  offset
with  improved  margins  from the  service  business  as a result of the  larger
revenue base.

Amortization of capitalized software development costs did not change materially
from the prior year. However, due to the lower revenues,  such costs represented
a higher  percentage of revenue in both the three and six months ended March 31,
1999 as compared to the corresponding periods of fiscal 1998.

High  technology  products in particular are subject to sales price pressures as
competition  grows and sales cycles  reach  maturity.  The Company  continues to
partially  offset the effect of such sales price  pressures with the negotiation
of reduced material  component prices,  improvements in manufacturing  costs and
efficiencies,  and the  introduction of new generation  products which generally
provide higher margins.

Selling, General and Administrative Expenses
--------------------------------------------

                                      Three months ended      Six months ended
                                           March 31,              March 31,
                                      ------------------      ----------------
                                       1999         1998        1999      1998
                                       ----         ----        ----      ----
  Selling, general, and
    administrative expenses         $14,617      $18,178     $31,453   $38,420
  Percent change                    (19.6)%           --     (18.1)%        --
  As a percent of revenues           37.7%         37.6%      38.7%      39.8%



                                     - 14 -
<PAGE>

The  Company's  cost  reduction  plans  (refer  to  Note  7,  "Restructuring  of
Operations") have been effective in reducing selling, general and administrative
expenses. Selling, general and administrative expenses are down $3.6 million, or
19.6%, for the quarter ended March 31, 1999 and $7.0 million,  or 18.1%, for the
six-month period ended March 31, 1999 as compared to the  corresponding  periods
of fiscal 1998. Cost reductions were achieved in both domestic and international
operations  despite  ongoing  salary  merit  increases  and  other  inflationary
increases.  The cost  reductions are comprised of reduced  compensation,  fringe
benefit and travel costs, a more effectively  managed  promotion and advertising
program,  and a reduced  level of  capital  spending  and  related  depreciation
expense resulting from effective  management of the Company's capital investment
program.  Despite a significantly  reduced revenue base,  year-to-date  selling,
general and  administrative  expenses were also down 1.1 percentage  points when
measured as a percent of revenue.

Research and Product Development Costs
--------------------------------------

                                Three months ended         Six months ended
                                     March 31,                  March 31,
                                ------------------         -----------------
                                1999        1998           1999         1998
                                ----        ----           ----         ----

  Gross expenditures           $10,324     $11,186        $21,355     $23,120
  Percent change                (7.7)%         --          (7.6)%          --
  As percent of revenues        26.6 %       23.1%         26.3 %        23.9%
  ----------------------------------------------------------------------------
  Capitalized software costs   $3,189      $3,013         $6,534       $6,013
  As a percent of gross
  expenditures                  30.9%        26.9%         30.6%        26.0%
  ----------------------------------------------------------------------------
  Net research and product
  development costs            $7,135      $8,173         $14,821     $17,107
  Percent change              (12.7)%          --         (13.4)%         --
  As a percent of revenues     18.4 %       16.9%          18.3 %       17.7%
  ----------------------------------------------------------------------------

The Company  continues  to invest  heavily in research  and product  development
during fiscal 1999,  with gross spending for the first six months  approximating
an annual rate of $43 million,  or 26% of revenue.  Such  spending is,  however,
being  closely  monitored  under  the  Company's  cost  reduction  program.  The
Company's cost reduction  program strategy has been to  significantly  reduce or
eliminate  development  activities  targeted at sustaining  legacy products and,
more importantly,  to limit the investment of new funds into projects considered
to have only the highest likelihood of success. As a result, the Company has not
been replacing non-critical positions as employee attrition occurs. Furthermore,
other  positions  were  eliminated  as part of the December  1998  restructuring
process.

The end result of the  Company's  cost  reduction  program has been more focused
development  effort and gradual  headcount  reduction.  Gross  spending  for the
quarter  ended March 31,  1999 was down $0.9  million,  or 7.7%,  as compared to
quarter  ended March 31, 1998.  Year-to-date  gross  spending  follows a similar
pattern,  down $1.8  million,  or 7.6%,  from the same period one year ago.  The
spending reductions

                                     - 15 -
<PAGE>

are principally  attributable to lower  compensation  costs  (resulting from the
reduction in worldwide engineering headcount), and were achieved despite ongoing
salary merit increases and other inflationary increases.

Spending in the ATM area by the Broadband  Systems  business unit  accounted for
73% and 54% of total product  development  spending for the quarters ended March
31, 1999 and 1998,  respectively,  and 69% and 54% of total product  development
spending for the six month periods ended March 31, 1999 and 1998,  respectively.
The complexity of the ATM technology has in the past demanded, and will continue
to demand, significant research and product development investment.

Capitalized  software  development  costs,  measured  as a  percentage  of gross
spending,  were higher than the previous  year for both the three- and six-month
periods ended March 31, 1999,  indicating that software  development  activities
represent  a  greater  proportion  of total  research  and  product  development
spending.

The  Company  conducts  research  and  product  development  activities  at four
locations, with the largest pool of resource located in Middlebury, Connecticut,
and remote facilities  located in Boston,  Montreal and England.  The Company is
currently  reviewing  options for strategic  partnering of certain  research and
development activities.

Restructuring of Operations
---------------------------

Results  for the  six-month  periods  ended  March  31,  1999 and  1998  include
restructuring charges of $2.0 million and $2.5 million,  respectively.  Refer to
Note 7,  "Restructuring  of  Operations,"  for  more  detailed  discussion.  The
restructuring  effort executed in December 1998 involved the creation of two new
and distinct  business  units,  the Network  Access  Division and the  Broadband
Systems  Division.  In an effort  to  improve  product  line  focus and  overall
operational productivity, each business unit is comprised of a dedicated general
manager and dedicated sales, marketing and product development functions. During
the quarter  ended  March 31,  1999,  the new  business  units made  significant
progress in defining their business  strategies,  organizational  structures and
operating  procedures.   As  a  result,  the  Company  anticipates  productivity
improvements across all operational areas from each business unit going forward.

Interest and Other Income and Expense
-------------------------------------

Net interest  expense amounted to $1.5 million and $1.4 million for the quarters
ended  March 31,  1999 and 1998,  respectively.  On a  year-to-date  basis,  net
interest  expense  amounted to $3.2 million and $2.8  million for the  six-month
periods  ended  March  31,  1999  and  1998,  respectively.  The  increases  are
principally attributable to a reduced level of cash available for investment and
a corresponding reduction in interest income.

The six months  ended March 31, 1999  includes a $9.0 million gain from the sale
of the Company's  Technology Alliance Group division.  Refer to Note 8, "Sale of
Technology Alliance Group Division," for further discussion.

Separately,  refer to "Foreign  Currency  Risk" below for  discussion of foreign
currency exchange activity included in other income and expense.

                                     - 16 -

<PAGE>

Income Tax Provisions
---------------------

Tax  provisions  recorded by the  Company,  principally  for foreign  income and
domestic  state taxes,  amounted to $200,000 and $300,000 in the quarters  ended
March 31, 1999 and 1998,  respectively,  and $500,000 for each of the  six-month
periods ended March 31, 1999 and 1998. The Company has  significant  federal net
operating loss carryforwards  available to offset future  liabilities.  However,
based  on the  Company's  past  financial  performance  and the  uncertainty  of
ultimate  realization  of such  carryforwards,  no net  deferred  tax  asset (or
related  deferred  tax  benefit) has been  recorded in the  Company's  financial
statements.

Foreign Currency Risk
---------------------

The Company's foreign  subsidiaries are exposed to foreign currency  fluctuation
since they are invoicing  customers in local  currencies  while  liabilities for
product  purchases from the parent Company are transacted in U.S.  dollars.  The
impact  of  foreign  currency  fluctuations  on  these  U.S.  dollar-denominated
liabilities  are  recorded as a component  of "Other  Income and Expense" in the
Company's  consolidated  statements of operations;  such activity  resulted in a
currency  exchange gain or (loss) of $42,000 and $38,000 for the quarters  ended
March 31, 1999 and 1998,  respectively,  and  $270,000  and  $(212,000)  for the
six-month periods ended March 31, 1999 and 1998, respectively.

The  introduction  of the Euro as a common  currency for members of the European
Monetary Union is scheduled to take place in the Company's fiscal year 1999. The
Company has not  determined  what impact,  if any, the Euro will have on foreign
exchange  exposure.  However,  no  individual  foreign  subsidiary  comprises 10
percent  or  more  of  consolidated  revenue  or  assets,  and  most  subsidiary
operations  represent less than 5 percent of consolidated revenue or assets. See
"Market Risk" below for further discussion of foreign currency risk.

As a result of lower inflation in Mexico, the Company was required to change its
method of  translating  the financial  statements  of its Mexican  subsidiary to
reflect the  designation  of Mexican peso as the functional  currency  effective
January 1, 1999.  Previously the U.S. dollar had been the designated  functional
currency.  This  change  did not  have a  material  impact  on  current  quarter
financial  results,  and the  Company  does not  expect  this  change  to have a
material impact on future financial results.

Market Risk
-----------

The  Company is exposed to various  market  risks,  including  potential  losses
arising  from  adverse  changes  in market  rates and  prices,  such as  foreign
currency  exchange and interest rates. The Company  historically has not entered
into derivatives,  forward exchange contacts or other financial  instruments for
trading, speculation or hedging purposes.

Interest Risk
-------------

For discussion applicable to interest risk, reference is made to Form 10-K filed
with the  Securities and Exchange  Commission  for the year ended  September 30,
1998, Item 7, Management's  Discussion and Analysis of Results of Operations and
Financial Condition, under the caption "Interest Risk."


                                     - 17 -
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

The Company's  cash and cash  equivalents  amounted to $4.2 million at March 31,
1999,  as  compared  to  $3.8  million  at  September  30,  1998.   Future  cash
requirements  are planned to be satisfied  from a  combination  of existing cash
balances,  additional  borrowings  under its  revolving  credit  facility  ($8.6
million of additional borrowings available at March 31, 1999) and from alternate
financing  sources.  These alternate sources are targeted to include the sale of
assets, technologies and/or interests in existing businesses or operations which
make sense from a  strategic  standpoint  (for  example,  in  December  1998 the
Company  completed  the  sale of its  Technology  Alliance  Group  division  for
approximately $16.3 million ($12.0 million of net proceeds after related selling
costs).  Refer to Note 8, "Sale of  Technology  Alliance  Group  Division,"  for
further discussion. Other alternative sources could also include the issuance of
new debt instruments, debt arrangements and/or equity securities.

In addition,  on December 18, 1998, the Company announced a restructuring of its
business  into three primary  operating  units and the intent to sell or partner
certain other  operations.  The Company  anticipates  annual  operating  expense
reductions to exceed $15.0 million when the plan is fully implemented.  Refer to
Note 7,  "Restructuring  of Operations," for further  discussion of the business
restructuring.

On October 22, 1997, the Company  entered into a $40.0 million loan and security
agreement (the "Loan  Agreement")  which provided the Company with $15.0 million
in proceeds from a five-year term loan and an additional  $25.0 million (maximum
value) revolving line of credit for a three-year  period ending in October 2000,
subject to  extension.  Availability  of such funds is subject to  satisfying  a
borrowing  base formula  related to levels of certain  accounts  receivable  and
inventories,  and  satisfaction of other financial  covenants.  Such formula and
covenants  were  amended on November  25,  1998,  along with changes in interest
rates and other items, as discussed below.

Maximum funds available for borrowing under the revolving line of credit portion
of the Loan  Agreement  amounted to $19.9 million and $25.0 million at March 31,
1999 and September 30, 1998, respectively.  Outstanding revolving line of credit
borrowings  amounted  to $11.0  million  and $1.6  million at March 31, 1999 and
September 30, 1998, respectively. Separately, letters of credit in the amount of
$284,000 and $763,000 were outstanding at March 31, 1999 and September 30, 1998,
respectively.  Most  assets  of  the  Company,  including  accounts  receivable,
inventories and property, plant and equipment, are pledged as collateral.

The Loan  Agreement's  covenants  may,  if  violated,  limit  access  to  future
borrowings and may accelerate  payment  requirements on outstanding  borrowings.
The most restrictive covenant requires the Company to maintain specified minimum
balances  consisting  of the  sum of  stockholders'  equity  (excluding  foreign
currency   translation   adjustments   subsequent  to  September  30,  1997  and
restructuring  charges  recorded in fiscal 1998 or thereafter not to exceed $4.5
million) and outstanding 7 3/4% convertible debentures  (hereinafter referred to
as "minimum equity balance"). Minimum equity balance requirements under the Loan
Agreement amount to $59.5 million,  $57.1 million and $57.0 million on March 31,
1999, June 30, 1999 and September 30, 1999, respectively,  and increases by $1.0
million per quarter beginning  December 31, 1999. As such minimum equity balance
at March 31, 1999 approximated $64.2 million,  this covenant  effectively limits
the sum of cumulative future losses and preferred stock dividend payments


                                     - 18 -
<PAGE>

to $7.2  million for the balance of the fiscal year ending  September  30, 1999.
Other  covenants  require that the Company  maintain a current ratio equal to or
greater than 1.4 and that annual capital  expenditures not exceed $15.0 million.
Separately,  terms of the Loan  Agreement  required  that  the  Company  raise a
minimum of $10.0  million in net  proceeds on or before  March 31, 1999 from the
sale of assets or execution of an equity  offering.  The Company  satisfied this
$10.0 million  covenant  requirement  on December 31, 1998 (see Note 8, "Sale of
Technology  Alliance Group Division," for further  discussion of the transaction
involved).  In accordance with terms of the Loan Agreement,  $4.3 million of the
proceeds  received  from the  transaction  were  applied  to  reduce  borrowings
outstanding under the term loan portion of the Loan Agreement in January 1999.

Since the Company  realized  losses of $33.4  million for total  fiscal 1998 and
$11.6  million for the six months ended March 31, 1999,  a  combination  of cost
reductions  and/or  revenue  growth will be required in the  remainder of fiscal
1999 to maintain compliance with the minimum equity balance covenant.  (Refer to
Note 7,  "Restructuring of Operations," for discussion of cost reduction efforts
executed in December  1998).  In the event of  non-compliance  with financial or
other covenants, the Company would have to obtain a waiver or amendment from the
lender,  and there is no assurance  that the lender would grant such a waiver or
amendment.  The Company's  inability to have access to the Loan Agreement and/or
alternative  financing  sources  would  have a  material  adverse  effect on the
Company's  financial  condition.  Management has implemented and is committed to
execute  further cost  reduction (or other)  actions as necessary to improve the
Company's operating results and maintain availability of the Loan Agreement.

In the past the  Company  has relied on its ability to offer for sale its common
stock,  preferred  stock,  convertible  debentures  and/or  warrants  as  viable
alternative  sources of financing.  The availability and terms of such offerings
in the  future  will  depend on such  items as the  Company's  future  financial
performance,  the Company's ability to authorize additional shares of its common
stock and/or market demand for the Company's  technologies.  As a result,  these
sources may not be available,  or may be available on less favorable  terms,  in
the future.  The Company's  inability to have access to the Loan Agreement funds
and/or alternative financing sources would have a material adverse effect on the
Company's financial condition.

Reference is made to the Company's consolidated financial statements and related
notes thereto and exhibits filed with Form 10-K for the year ended September 30,
1998 for further disclosures  applicable to the above-referenced  Loan Agreement
and all other outstanding indebtedness of the Corporation.

Total  outstanding debt amounted to $62.2 million at March 31, 1999, as compared
to $60.8  million at  September  30,  1998.  The net increase of $1.4 million is
comprised of $9.3 million of new (net)  borrowings  under the Company  revolving
line of credit and other  miscellaneous  borrowings of $0.3  million,  less $8.2
million of principal payments made to reduce other outstanding borrowings.

Operating
---------

Net cash used in  operating  activities  amounted  to $1.0  million and $2.0
million in the six months  ended March 31, 1999 and 1998, respectively.

Non-debt  working  capital,  excluding cash and cash  equivalents,  decreased
from $29.5 million at September 30, 1998 to $23.3 million at  March 31, 1999,
for  a  reduction  of  $6.2  million.   The  single


                                     - 19 -
<PAGE>

largest  factor  in  this  change  was a  $6.1  million  reduction  in  accounts
receivable,  reflecting both favorable collection activity and the reduced level
of business this quarter as compared to the quarter ended September 30, 1998.

Investing
---------

Investment in property,  plant and  equipment  amounted to $4.9 million and $3.7
million in the six-month  periods  ended March 31, 1999 and 1998,  respectively.
Approximately  $600,000  of the  fiscal  1999  capital  investment  activity  is
applicable  to VITAL  Network  Services  purchase of Olicom  assets,  for use in
servicing Olicom customers (see Note 6, "VITAL Network Services, L.L.C. Expanded
Partnership With Olicom, Inc." for further discussion). The Company continues to
closely  monitor  all capital  spending in an effort to preserve  cash and limit
such  investment  to  instances  which  appear to offer the  greatest  return on
investment.  Investments  in capitalized  software  amounted to $6.5 million and
$6.0  million  for  the  six-month  periods  ended  March  31,  1999  and  1998,
respectively,

Financing
---------

Net cash provided by financing  activities  in the six-month  period ended March
31,  1999  amounted to $13.0  million,  comprised  of $12.0  million of proceeds
received from the sale of TAG, $1.5 million of net debt borrowings, $0.4 million
of proceeds  received  from the  issuance of common  stock  pursuant to employee
stock  programs and the payment of $0.9 million in  preferred  stock  dividends.
This compares to $5.6 million of net cash  proceeds  generated in the six months
ended March 31,  1998,  reflecting  $5.8 million of net debt  borrowings  ($15.1
million in new borrowings less $9.3 million in debt repayments), $0.7 million of
proceeds  received from the issuance of common stock  pursuant to employee stock
programs and the payment of $0.9 million in preferred stock dividends.

Reference  is made to Note 5 on page 7 for a  condensed  summary of  outstanding
long-term  debt as of  March  31,  1999  and  September  30,  1998.  Separately,
reference is made to the consolidated financial statements, Notes 6 and 9, filed
with Form 10-K for the year ended  September  30, 1998 for  further  disclosures
applicable to outstanding  long-term debt and the conversion terms applicable to
$25.0 million of 7-3/4% convertible senior subordinated  debentures (Note 6) and
$20.0  million  of  convertible  preferred  stock  (Note 9),  both of which were
outstanding as of March 31, 1999 and September 30, 1998.

Future Adoption Of New Accounting Statements
--------------------------------------------

Reference is made to the consolidated  financial statements filed with Form 10-K
for the year ended September 30, 1998, Note 1, for discussion  regarding  future
adoption of new accounting pronouncements.

Year 2000 Compliance
--------------------

Reference is made to Form 10-K filed with the Securities and Exchange Commission
for the year ended  September  30, 1998,  Item 7,  Management's  Discussion  and
Analysis of Results of  Operations  and Financial  Condition,  under the caption
"Year  2000  Compliance"  for  year  2000  compliance  related  discussion.  The
referenced discussion remains current as of March 31, 1999.


                                     - 20 -

<PAGE>

CERTAIN RISK FACTORS

Continuing Losses: The Company has sustained net losses for the past 18 quarters
ended March 31,  1999.  There can be no  assurance  as to when the Company  will
achieve net income.

Credit  Availability:  As noted above,  the Company's  Loan  Agreement  requires
compliance  with specific  financial  covenants,  including  restricted net loss
performance,  maintenance  of a current  ratio  which  equals or exceeds 1.4 and
capital spending restrictions.  If the Company fails to comply with the required
covenants and a waiver or amendment is not  obtained,  the Company may be unable
to borrow funds under such agreement. In such case the Company would be required
to seek other  financing to fund its  operations,  and there can be no assurance
the Company  will be able to obtain such  financing  or, if  obtained,  on terms
deemed  favorable  by the  Company.  Furthermore,  in the event the Company does
default on its $40.0 million Loan Agreement obligation,  such default may result
in a requirement  to accelerate  the due dates and payment of other  outstanding
indebtedness.

Volatility of Stock Price:  The trading price of the Common Stock has fluctuated
widely in response to quarter-to-quarter operating results, industry conditions,
awards of orders to the  Company  or its  competitors,  new  product  or product
development  announcements  by the  Company or its  competitors,  and changes in
earnings  estimates  by  analysts.  Any  shortfall  in revenue or earnings  from
expected  levels could have an immediate and  significant  adverse effect on the
trading price of the Company's Common Stock in any given period.

Common Stock Availability:  The Company has in the past relied on its ability to
issue common stock, convertible debt and convertible preferred stock as a source
of funds for general operating purposes.  Additional shares of common stock need
to be  authorized  by a vote of a majority of  shareholders  at a  shareholders'
meeting in June 1999 in order to assure  availability  of common  stock for such
purposes.  If not approved,  the Company may be required to seek other financing
to fund its  operations,  and there can be no assurance the Company will be able
to obtain such  financing  or, if  obtained,  on terms  deemed  favorable by the
Company.


SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Portions of the  foregoing  discussion  include  descriptions  of the  Company's
expectations regarding future trends affecting its business. The forward-looking
statements  made  in  this  document,  as  well  as  all  other  forward-looking
statements  or  information  provided by the Company or its  employees,  whether
written or oral,  are made in reliance  upon the safe harbor  provisions  of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements and
future  results  are  subject  to, and should be  considered  in light of risks,
uncertainties,  and other factors which may affect future results including, but
not limited to, competition, rapid changing technology,  regulatory requirements
and  uncertainties of international  trade.  Examples of risks and uncertainties
include,  among other things:  (i) the Company's ability to maintain  compliance
with its Loan Agreement or other financing  arrangements,  including the ability
to achieve further amendments and/or waivers as required to maintain  compliance
with terms of the Loan Agreement and all other  outstanding  indebtedness;  (ii)
the possibility that the additional indebtedness

                                     - 21 -

<PAGE>

permitted to be incurred under the revolving credit facility portion of the Loan
Agreement may not be sufficient to maintain the Company's operations;  (iii) the
Company's ability to satisfy its financial  obligations and to obtain additional
indebtedness, if required; (iv) the Company's ability to effectively restructure
its operations and achieve  profitability;  (v) the Company's  ability to retain
customers;  (vi) the Company's ability to maintain existing supply  arrangements
and terms; and (vii) the Company's ability to retain key employees.

Readers  are  cautioned  not to place undue  reliance  on these  forward-looking
statements,  which reflect management's analysis only as of the date hereof. The
Company   undertakes  no  obligation   and  does  not  intend  to  update  these
forward-looking  statements to reflect events or circumstances  that arise after
the date hereof.

                                     - 22 -

<PAGE>

                        GENERAL DATACOMM INDUSTRIES, INC.
                                AND SUBSIDIARIES



Part II.  Other Information
          -----------------


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

          On February 4, 1999, at the Annual Meeting of  Stockholders of the
          Corporation, the stockholders:

          1. Elected Frederick R. Cronin as a director to the Corporation for a
             term of three years:

                  Number of votes cast for:            8,860,413
                  Number of votes withheld:            2,037,788

          2. Adopted an Amendment to the Corporation's 1979 Employee Stock
             Purchase Plan reserving an additional  600,000 shares of the
             Corporation's Common Stock for issuance thereunder:

                  Number of votes cast for:           14,171,847
                  Number of votes cast against:        5,129,807
                  Number of votes abstained:             366,779

           3. Added a by-law  which  prohibits  the  repricing of stock options
              already issued and outstanding to a lower strike price at any time
              during the terms of such option without prior approval of
              shareholders:

                  Number of votes cast for:            5,755,519
                  Number of votes cast against:        4,947,119
                  Number of votes abstained:             195,563

            
Item 6.  Exhibits and Reports on Form 8-K
         --------------------------------

         (a) Index of Exhibits

             3.1  Amended By-Laws of  the Corporation.

         (b) Reports on Form 8-K

             No reports  on Form 8-K were  filed  during the quarter for which
             this report is filed.


                                     - 23 -

<PAGE>

                                   SIGNATURES


Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.



                                             GENERAL DATACOMM INDUSTRIES, INC.
                                                         (Registrant)

                                             /S/  WILLIAM G. HENRY
                                             ---------------------------------
                                                  William G. Henry
                                                  Vice President, Finance and
                                                  Principal Financial Officer



Dated:  May 17, 1999

                                     - 24 -