**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**FORM
      10-QSB**





(Mark
      One)





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





For the
      quarterly period ended June
      30, 2006





o
      Transition report under
      Section 13 or 15(d) of the Exchange Act





For
      the
      transition period from__________to__________





Commission
      file number 1-8086




General
                DataComm Industries,
                Inc.(Exact
                Name of Small Business Issuer as
                Specified in its Charter)




Delaware
            
            06-0853856(State of Other Jurisdiction of
              Incorporation or Organization)
            
            I.R.S. employer
              Identification No.)




6
                Rubber Avenue, Naugatuck, CT
                06770(Address
                of Principal Executive
                Officers)203-729-0271(Issuer’s
                Telephone Number, Including Area
                Code)(Former
                Name, Former Address and Former Fiscal
                Year, if ChangedSince Last
                Report)




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


Yes
x  No
o





**APPLICABLE
      ONLY TO ISSUERS INVOLVED IN**


**BANKRUPTCY
      PROCEEDINGS DURING THE**


**PRECEDING
      FIVE YEARS**





**** Check
      whether the registrant filed all documents and reports required to be filed
      by
      Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities
      under a plan confirmed by a court.





Yes
xNo
o





**APPLICABLE
      ONLY TO CORPORATE ISSUER**





State
      the
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of July 31, 2006:





3,468,050
      shares of Common Stock


653,947
      shares of Class B Stock








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






1





**GENERAL
      DATACOMM INDUSTRIES, INC.**





**INDEX
      TO QUARTERLY REPORT ON FORM 10-QSB**







**PART
                  I**
              **FINANCIAL
                  INFORMATION**
              **Page****Item
                  1**.
              **Financial
                  Statements**(unaudited):Condensed
                  Consolidated Balance Sheets as ofJune
                    30, 2006 and September 30, 2005
              3Condensed
                  Consolidated Statements of Operations forthe
                  Three Months and Nine Months Ended June 30, 2006 and 2005
              4Condensed
                  Consolidated Statements of Cash Flows forthe
                  Nine Months Ended June 30, 2006 and 2005
              5Notes
                  to the Condensed Consolidated Financial Statements
              6**Item
                  2**.
              **Management’s
                  Discussion and Analysis or Plan of Operation**
              18**Item
                  3.**
              **Controls
                  and Procedures.**
              38**PART
                  II**
              **OTHER
                  INFORMATION****Item
                  1**.
              **Legal
                  Proceedings**
              38**Item
                  2**.
              **Unregistered
                  Sales of Equity Securities and Use of Proceeds**
              38**Item
                  3**.
              **Defaults
                  Upon Senior Securities**
              39**Item
                  4**.
              **Submission
                  of Matters of a Vote of Security Holders**
              39**Item
                  5**.
              **Other
                  Information**
              39**Item
                  6**.
              **Exhibits**
              39




2






**PART
      I. FINANCIAL INFORMATION**





**ITEM
      1. FINANCIAL STATEMENTS**





**General
      DataComm Industries, Inc.**


***Condensed
      Consolidated Balance Sheets***


***(in
      thousands except shares)***




**June
                30,**
              **2006**
              **(Unaudited)**
            
            **September
                30,**
              **2005*****Assets:***Current
                assets:*Cash
                and cash equivalents
            
            **$**
            **426**
            
            **$**
            **878**Accounts
                receivable, less allowance for doubtful accounts of
              $512
                at June 30, 2006 and $671 at September 30, 2005
            
            
            **2,220**
            
            
            **2,078**Inventories
            
            
            **2,625**
            
            
            **3,248**Other
                current assets
            
            
            **365**
            
            
            **261**Total
                current assets
            
            
            **5,636**
            
            
            **6,465**Property,
                plant and equipment, net
            
            
            **4,074**
            
            
            **4,233**Total
                Assets
            
            **$**
            **9,710**
            
            **$**
            **10,698****Liabilities
                and Stockholders’ Deficit:***Current
                liabilities:*Current
                portion of long-term debt ($2,003 at June 30, 2006 and
              $1,539
                at September 30, 2005 owed to related parties)
            
            **$**
            **29,792**
            
            **$**
            **31,194**Accounts
                payable
            
            
            **2,588**
            
            
            **1,444**Accrued
                payroll and payroll-related costs
            
            
            **315**
            
            
            **471**Accrued
                interest
            
            
            **7,199**
            
            
            **5,414**Other
                current liabilities
            
            
            **5,966**
            
            
            **5,885**Total
                current liabilities
            
            
            **45,860**
            
            
            **44,408**Other
                liabilities
            
            
            **829**
            
            
            **1,032**Total
                Liabilities
            
            
            **46,689**
            
            
            **45,440**Commitments
                and contingencies
            
            
            **-**
            
            
            **-**Stockholders’
                deficit:9%
                Preferred stock, par value $1.00 per share, 3,000,000 shares
              authorized,
                782,496 shares issued and outstanding at June 30, 2006 and
              787,800
                at September 30, 2005; $30.1 million liquidation preference
              at
                June 30, 2006
            
            
            **782**
            
            
            **788**Class
                B common stock, par value $.01 per share, 5,000,000 shares
              authorized;
                653,947 shares issued and outstanding
            
            
            **7**
            
            
            **7**Common
                stock, par value $.01 per share, 25,000,000 shares authorized;
              issued:
                3,468,050 shares at June 30, 2006 and 3,342,364 shares at
              September
                30, 2005
            
            
            **35**
            
            
            **33**Capital
                in excess of par value
            
            
            **198,751**
            
            
            **198,433**Accumulated
                deficit
            
            
            **(236,554**
            **)**
            
            **(233,858**
            **)**Common
                stock held in treasury, at cost; no shares at June 30, 2006
                and
              1,961
                shares at September 30, 2005
            
            
            **-**
            
            
            **(145**
            **)**Total
                Stockholders’ Deficit
            
            
            **(36,979**
            **)**
            
            **(34,742**
            **)**Total
                Liabilities and Stockholders’ Deficit
            
            **$**
            **9,710**
            
            **$**
            **10,698**





*
      Derived
      from the Company’s audited consolidated balance sheet at September 30,
      2005.








The
      accompanying notes are an integral part of these


condensed
      consolidated financial statements.






3







**General
      DataComm Industries, Inc.**


***Condensed
      Consolidated Statements of Operations (Unaudited)***


***(in
      thousands except share data)***




**Three
                Months Ended**
              **June
                30,**
            
            **Nine
                  Months Ended**
                **June
                  30,****2006**
            
            **2005**
            
            **2006**
            
            **2005****Revenues**Product
            
            **$**
            **2,597**
            
            **$**
            **3,490**
            
            **$**
            **9,416**
            
            **$**
            **10,269**Service
            
            
            **608**
            
            
            **117**
            
            
            **1,895**
            
            
            **565**Total
            
            **$**
            **3,205**
            
            **$**
            **3,607**
            
            **$**
            **11,311**
            
            **$**
            **10,834**Cost
                of revenues
            
            
            **1,331**
            
            
            **1,635**
            
            
            **4,672**
            
            
            **4,510****Gross
                margin**
            
            
            **1,874**
            
            
            **1,972**
            
            
            **6,639**
            
            
            **6,324*****Operating
                expenses:***Selling,
                general and administrative
            
            
            **1,493**
            
            
            **1,323**
            
            
            **4,589**
            
            
            **3,658**Research
                and product development
            
            
            **787**
            
            
            **553**
            
            
            **2,502**
            
            
            **1,633****2,280**
            
            
            **1,876**
            
            
            **7,091**
            
            
            **5,291****Operating
                income (loss)**
            
            
            **(406**
            **)**
            
            **96**
            
            
            **(452**
            **)**
            
            **1,033*****Other
                income (expense):***Interest
                expense
            
            
            **(813**
            **)**
            
            **(845**
            **)**
            
            **(2,448**
            **)**
            
            **(2,586**
            **)**Loss
                on extinguishment of debt
            
            
            **-**
            
            
            **-**
            
            
            **(389**
            **)**Recovery
                of lease receivable, net
            
            
            **-**
            
            
            **-**
            
            
            **425**
            
            
            **-**Gain
                on sale of minority interest
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **300**Recovery
                of note receivable
            
            
            **-**
            
            
            **1,989**
            
            
            **-**
            
            
            **4,737**Other,
                net
            
            
            **21**
            
            
            **61**
            
            
            **177**
            
            
            **157****(792**
            **)**
            
            **1,205**
            
            
            **(2,235**
            **)**
            
            **2,608****Income
                (loss) before reorganization items and income
                taxes**
            
            
            **(1,198**
            **)**
            
            **1,301**
            
            
            **(2,687**
            **)**
            
            **3,641**Reorganization
                items:Claim
                adjustments
            
            
            **-**
            
            
            **12**
            
            
            **-**
            
            
            **258****Income
                (loss) before income taxes**
            
            
            **(1,198**
            **)**
            
            **1,313**
            
            
            **(2,687**
            **)**
            
            **3,899**Income
                tax provision (benefit)
            
            
            **3**
            
            
            **(12**
            **)**
            
            **9**
            
            
            **(370**
            **)****Net
                income (loss)**
            
            
            **(1,201**
            **)**
            
            **1,325**
            
            
            **(2,696**
            **)**
            
            **4,269**Dividends
                applicable to preferred stock
            
            
            **(440**
            **)**
            
            **(443**
            **)**
            
            **(1,320**
            **)**
            
            **(1,329**
            **)****Net
                income (loss) applicable to common and Class B stock**
            
            **$**
            **(1,641**
            **)**
            **$**
            **882**
            
            **$**
            **(4,016**
            **)**
            **$**
            **2,940****Earnings
                (loss) per share:****Basic-common
                stock**
            
            **$**
            **(0.40**
            **)**
            **$**
            **0.22**
            
            **$**
            **(0.99**
            **)**
            **$**
            **0.75****Basic
                - Class B stock**
            
            **$**
            **(0.40**
            **)**
            **$**
            **0.20**
            
            **$**
            **(0.99**
            **)**
            **$**
            **0.68****Diluted-common
                stock**
            
            **$**
            **(0.40**
            **)**
            **$**
            **0.15**
            
            **$**
            **(0.99**
            **)**
            **$**
            **0.51****Diluted-Class
                B stock**
            
            **$**
            **(0.40**
            **)**
            **$**
            **0.14**
            
            **$**
            **(0.99**
            **)**
            **$**
            **0.47****Weighted
                average number of common and Class B shares
                outstanding:****Basic-common
                stock**
            
            
            **3,468,050**
            
            
            **3,329,295**
            
            
            **3,398,668**
            
            
            **3,317,017****Basic-Class
                B stock**
            
            
            **653,947**
            
            
            **664,978**
            
            
            **653,947**
            
            
            **664,978****Diluted-common
                stock**
            
            
            **3,468,050**
            
            
            **5,560,219**
            
            
            **3,398,668**
            
            
            **5,350,939****Diluted-Class
                B stock**
            
            
            **653,947**
            
            
            **664,978**
            
            
            **653,947**
            
            
            **664,978**





The
      accompanying notes are an integral part of these


condensed
      consolidated financial statements.





4







***General
      DataComm Industries, Inc.***


***Condensed
      Consolidated Statements of Cash Flows (Unaudited)***


(In
      thousands)




**Nine
                Months Ended**
              **June
                30,****2006**
            
            **2005***Cash
                flows from operating activities:*Net
                income (loss)
            
            **$**
            **(2,696**
            **)**
            **$**
            **4,269**Adjustments
                to reconcile net income (loss) to net cash
              provided
                by operating activities:Depreciation
                and amortization
            
            
            **286**
            
            
            **190**Gain
                on claim reductions
            
            
            **-**
            
            
            **(258**
            **)**Reduction
                in note receivable reserve
            
            
            **-**
            
            
            **(4,737**
            **)**Reduction
                in reserve for foreign income taxes
            
            
            **-**
            
            
            **(369**
            **)**Increase
                in inventory obsolescence reserve
            
            
            **-**
            
            
            **164**Loss
                on extinguishment of debt
            
            
            **389**
            
            
            **-**Changes
                in:Accounts
                receivable
            
            
            **(142**
            **)**
            
            **(250**
            **)**Inventories
            
            
            **623**
            
            
            **1,048**Accounts
                payable
            
            
            **1,144**
            
            
            **(85**
            **)**Accrued
                payroll and payroll-related costs
            
            
            **(156**
            **)**
            
            **190**Accrued
                interest
            
            
            **1,785**
            
            
            **1,960**Other
                net current liabilities
            
            
            **(30**
            **)**
            
            **202**Other
                net long-term assets
            
            
            **(202**
            **)**
            
            **(158**
            **)****Net
                cash provided by operating activities**
            
            
            **1,001**
            
            
            **2,166***Cash
                flows from investing activities:*Acquisition
                of property, plant and equipment, net
            
            
            **(75**
            **)**
            
            **(19**
            **)**Note
                receivable collections (including $835 of cash in company acquired
                in
              2005)
            
            
            **-**
            
            
            **3,594****Net
                cash (used) provided by investing activities**
            
            
            **(75**
            **)**
            
            **3,575***Cash
                flows from financing activities:*Proceeds
                from notes payable to related parties
            
            
            **250**
            
            
            **-**Proceeds
                from other notes payable
            
            
            **303**
            
            
            **214**Principal
                payments on notes payable
            
            
            **(189**
            **)**
            
            **(101**
            **)**Principal
                payments on term obligation
            
            
            **(1,742**
            **)**
            
            **(5,405**
            **)****Net
                cash used by financing activities**
            
            
            **(1,378**
            **)**
            
            **(5,292**
            **)****Net
                increase (decrease) in cash and cash equivalents**
            
            
            **(452**
            **)**
            
            **449**Cash
                and cash equivalents, beginning of period
            
            
            **878**
            
            
            **586****Cash
                and cash equivalents, end of period**
            
            **$**
            **426**
            
            **$**
            **1,035***Supplemental
                disclosures of cash flow information:*Cash
                paid during the period for:Interest
            
            **$**
            **330**
            
            **$**
            **597**Income
                taxes
            
            **$**
            **1**
            
            **$**
            **49**Reorganization
                items
            
            **$**
            **269**
            
            **$**
            **235**








The
      accompanying notes are an integral part of these


condensed
      consolidated financial statements.





5







**GENERAL
      DATACOMM INDUSTRIES, INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


(Unaudited)








**Note
      1 - Basis of Presentation and Liquidity**





**** The
      accompanying unaudited interim financial statements of General DataComm
      Industries, Inc. (the “Company”) have been prepared on a going concern basis, in
      accordance with generally accepted accounting principles in the United States
      for interim financial information, the instructions to Form 10-QSB and Article
      10 of Regulation S-X. Accordingly, they do not include all of the information
      and footnotes required by generally accepted accounting principles for year
      end
      financial statements. In the opinion of management, these statements include
      all
      adjustments, consisting of normal and recurring adjustments, considered
      necessary for a fair presentation of the results for the periods presented.
      The
      results of operations for the periods presented are not necessarily indicative
      of results which may be achieved for the entire fiscal year ending September
      30,
      2006. The unaudited interim financial statements should be read in conjunction
      with the consolidated financial statements and notes thereto contained in the
      Company’s annual report on Form 10-KSB/A for the fiscal year ended September 30,
      2005 as filed with the Securities and Exchange Commission.





On
      November 2, 2001, General DataComm Industries, Inc. and its domestic
      subsidiaries filed a voluntary petition for relief under Chapter 11 of the
      Bankruptcy Code in the United States Bankruptcy Court for the District of
      Delaware. The Company continued in possession of its properties and the
      management of its business as debtors in possession. The Company emerged from
      Chapter 11 effective on September 15, 2003 pursuant to a court-approved plan
      of
      reorganization. Under this plan, the Company was to pay all creditors 100%
      of
      their allowed claims based upon a five year business plan. However, the Company
      has not met its business plan objectives since emerging from Chapter 11 and
      cannot assure its investors that it will be able to obtain new customers or
      to
      generate the increase in revenues required to meet its business plan
      objectives.





The
      Company has no current ability to borrow additional funds. It must, therefore,
      fund operations from cash balances and cash generated from operating activities.
      The Company has significant short-term obligations including payment of accrued
      professional fees (approximately $1.8 million at June 30, 2006) and monthly
      payments of principal and interest under its senior loan agreement. The Company
      received an extension of payment terms for the amounts that had been due to
      its
      senior secured lenders on February 1, 2006 and from May 1, 2006 to February
      28,
      2007 and relief from compliance with a financial covenant for the periods ended
      September 30, 2004 and June 30, 2006 (see Notes 4 and 11). In fiscal 2004 the
      Company borrowed $1.6 million from related parties in order to meet its current
      payment obligations, which notes were extended in December 2005 (see Note 4).
      In
      February 2006 an additional $250,000 was borrowed from a related party.
      Furthermore, the Company has other significant future outstanding obligations
      as
      shown in the accompanying condensed consolidated balance sheet at June 30,
      2006.
      In order to meet these and other future payments the Company must achieve
      revenue growth while at the same time limiting investments in inventories and
      capital assets.





6






The
      Company’s failure to make required payments under the senior loan agreement, as
      amended, would constitute an event of default. In addition, the Company is
      required to maintain a minimum level of EBITDA (earnings before interest, taxes,
      depreciation and amortization) on a cumulative quarterly basis in order to
      avoid
      an event of default (see Note 4).





The
      Company’s quarterly operating results are subject to fluctuations due to a
      number of factors resulting in more variability and less predictability in
      the
      Company’s quarter-to-quarter sales and operating results. Such factors include
      (but are not limited to): dependence on a small number of customers, short
      delivery times, dependence on subcontract manufacturers, low order backlog,
      ability to timely develop new products and market acceptance of new products.
      While the Company was in compliance with the EBITDA financial covenant under
      its
      senior loan agreement at June 30, 2006 due to an amendment of compliance
      criteria granted by the senior lender, future compliance will require improved
      earnings. There can be no assurance that the Company will be able to avoid
      an
      event of default on the loan agreement. If there is such a default, the senior
      secured lenders may accelerate payment of the outstanding debt ($5.7 million
      at
      June 30, 2006) and exercise their security interests which likely would require
      the Company to again file for bankruptcy protection. An acceleration by the
      senior secured lenders would also result in a default and acceleration by the
      debenture holders ($21.9 million of principal balance outstanding at June 30,
      2006). Based on the uncertainty as to whether the Company will achieve
      sufficient cash flows from operations to meet its monthly loan payment
      obligations, and will be able to comply with the EBITDA financial covenant
      during the quarterly periods during fiscal 2006 and thereafter, and that the
      Company’s compliance with the payment and EBITDA provisions at June 30, 2006,
      was attributable to modifications of the agreement, the Company’s long-term debt
      and related accrued interest have been classified as current liabilities in
      the
      accompanying consolidated balance sheets at both June 30, 2006 and September
      30,
      2005.





At
      June
      30, 2006 the Company had a stockholders’ deficit of approximately $36.9 million.
      In addition, it had a working capital deficit of approximately $40.2 million,
      and the Company’s principal source of liquidity was cash and cash equivalents of
      $426,000. The large negative working capital reflects the classification of
      all
      long-term secured debt as current liabilities.





Because
      operating results can fluctuate significantly due to decreases in customer
      demand or decreases in the acceptance of future products, the Company may not
      be
      able to generate positive cash flow from operations in the future. Should the
      need arise, it may become necessary to borrow additional funds or otherwise
      raise additional capital. However, since the Company does not have any source
      of
      additional funds or capital in place, any such requirement could have a material
      adverse effect on the Company.





Management
      has responded to such risks as part of an ongoing strategy, by restructuring
      the
      sales force, increasing factory shutdown time, containing expenses, reducing
      employee salaries and wages and reducing the size of the employee workforce.
      In
      addition, the Company obtained $1.6 million and $250,000 in fiscal years 2004
      and 2006, respectively, from loans from related parties for replacement of
      senior indebtedness. The fiscal 2004 loans were extended in December 2005 (see
      Note 4). The Company also is actively marketing for sale or lease its
      headquarters land and building and is pursuing other asset recoveries, the
      proceeds of which would be used to reduce secured debt and related
      interest.






7





While
      the
      Company is aggressively pursuing opportunities and corrective actions, there
      can
      be no assurance that the Company will be successful in its efforts to generate
      sufficient cash from operations, remain in compliance with the provisions of
      the
      senior loan agreement or obtain additional funding sources. These risks raise
      substantial doubt about the Company’s ability to continue as a going concern.
      The Company’s independent auditors have expressed uncertainty about the
      Company’s ability to continue as a going concern in their opinion on the
      Company’s fiscal 2005 financial statements. The accompanying consolidated
      financial statements have been prepared assuming that the Company will continue
      as a going concern and do not include any adjustments that may result from
      the
      outcome of these uncertainties.







**Note
      2 - Earnings (Loss) Per Share**





Basic
      earnings per share is computed by allocating net income available to common
      stockholders and to Class B shares based on their contractual participation
      rights to share in such net income as if all the income for the year had been
      distributed. Such allocation reflects that common stock is entitled to cash
      dividends, if and when paid, 11.11% higher per share than Class B stock.
      However, a net loss is allocated evenly to all shares. The income (loss)
      allocated to each security is divided by the respective weighted average number
      of common and Class B shares outstanding during the period. Diluted earnings
      per
      share gives effect to all potential dilutive common shares outstanding during
      the period. In computing diluted earnings per share, which only applies in
      the
      event there is net income, the average price of the Company’s common stock for
      the period is used in determining the number of shares assumed to be purchased
      from exercise of stock options and warrants. Dividends applicable to preferred
      stock represent accumulating dividends that are not declared or accrued. The
      following table sets forth the computation of basic and diluted earnings (loss)
      applicable to common and Class B stock for the three and nine months ended
      June
      30, 2006 and 2005 (in thousands, except shares and per share data):






8







**Three
      Months Ended June 30,**


**2006**
            
            **2005**
            
            **2006**
            
            **2005****Common
                Stock**
            
            **Class
                B Stock**Numerator
                for basic earnings per share-net income (loss)
            
            
            (1,381
            )
            
            748
            
            
            (260
            )
            
            134Effect
                of dilutive securities:Reallocation
                of net income for potentialdilutive
                common shares
            
            
            -
            
            
            48
            
            
            -
            
            
            (48
            )Add
                back convertible note interest
            
            
            -
            
            
            27
            
            
            -
            
            
            6Numerator
                for diluted earningsper
                share - net income (loss)
            
            
            (1,381
            )
            
            823
            
            
            (260
            )
            
            92Denominator
                for basic earnings pershare
                - weighted average outstanding shares
            
            
            3,468,050
            
            
            3,329,295
            
            
            653,947
            
            
            664,978Effect
                of dilutive securities:Employee
                stock options
            
            
            -
            
            
            247,379
            
            
            -
            
            
            -Warrants
            
            
            -
            
            
            370,989
            
            
            -
            
            
            -Convertible
                notes payable
            
            
            -
            
            
            1,612,556
            
            
            -
            
            
            -Dilutive
                potential common shares
            
            
            -
            
            
            2,230,924
            
            
            -
            
            
            -Denominator
                for diluted earnings per share - shares
            
            
            3,468,050
            
            
            5,560,219
            
            
            653,947
            
            
            664,978Basic
                earnings (loss) per common share
            
            
            (0.40
            )
            
            0.22
            
            
            (0.40
            )
            
            0.20Diluted
                earnings (loss) per common share
            
            
            (0.40
            )
            
            0.15
            
            
            (0.40
            )
            
            0.14













****
            
            **Nine
              Months Ended June
              30,****2006**
            
            **2005**
            
            **2006**
            
            **2005****Common
                Stock**
            
            **Class
                B Stock**Numerator
                for basic earnings per share-net income (loss)
            
            
            (3,368
            )
            
            2,490
            
            
            (648
            )
            
            450Effect
                of dilutive securities:Reallocation
                of net income for potentialdilutive
                common shares
            
            
            -
            
            
            153
            
            
            -
            
            
            (153
            )Add
                back convertible notes interest
            
            
            -
            
            
            84
            
            
            -
            
            
            17Numerator
                for diluted earningsper
                share - net income (loss)
            
            
            (3,368
            )
            
            2,727
            
            
            (648
            )
            
            314Denominator
                for basic earnings pershare
                - weighted average outstanding shares
            
            
            3,398,668
            
            
            3,317,017
            
            
            653,947
            
            
            664,978Effect
                of dilutive securitiesEmployee
                stock options
            
            
            -
            
            
            235,872
            
            
            -
            
            
            -Warrants
            
            
            -
            
            
            185,494
            
            
            -
            
            
            -Convertible
                notes payable
            
            
            -
            
            
            1,612,556
            
            
            -
            
            
            -Dilutive
                potential common shares
            
            
            -
            
            
            2,033,922
            
            
            -
            
            
            -Denominator
                for diluted earnings per share - shares
            
            
            3,398,668
            
            
            5,350,939
            
            
            653,947
            
            
            664,978Basic
                earnings (loss) per common share
            
            
            (0.99
            )
            
            0.75
            
            
            (0.99
            )
            
            0.68Diluted
                earnings (loss) per common share
            
            
            (0.99
            )
            
            0.51
            
            
            (0.99
            )
            
            0.47







9







In
      the
      nine months ended June 30, 2006 and 2005, no effect has been given to certain
      outstanding options and warrants, convertible securities and contingently
      issuable shares in computing diluted loss per share as their effect would be
      antidilutive. Such share amounts which could potentially dilute basic earnings
      per share at June 30, 2006 and 2005 are as follows:











**No.
              of
              Shares********2006**
            
            ******2005**Stock
                warrants
            
            
            3,945,865
            
            
            -Stock
                options
            
            
            1,857,926
            
            
            1,101,675Convertible
                preferred stock
            
            
            782,496
            
            
            787,900Convertible
                loans
            
            
            -
            
            
            -Contingently
                issuable shares*
            
            
            2,141,657
            
            
            1,785,983Total
            
            
            8,727,944
            
            
            3,675,558







*
      Common
      stock contingently issuable to the Company’s senior secured lenders in the event
      of default or if certain payment terms are not met are excluded from the
      computation of earnings per share because the contingency defined in the loan
      agreement has not taken place (for further discussion of these items, see Note
      4).





**3.
      Inventories**





Inventories
      consist of (in thousands):







**June
                30,**
              **2006**
            
            September
                30,
              2005Raw
                materials
            
            **$**
            **762**
            
            $
            821Work-in-process
            
            
            **735**
            
            
            1,014Finished
                goods
            
            
            **1,128**
            
            
            1,413**$**
            **2,625**
            
            $
            3,248





Inventories
      are stated at the lower of cost or market using a first-in, first-out method.
      Reserves in the amount of $3,736,000 and $3,508,000 were recorded at June 30,
      2006 and September 30, 2005, respectively, for excess and obsolete inventories.





**4.
      Long-Term Debt and Loss on Extinguishment of Debt**





Long-term
      debt consists of (in thousands):


**June
                30,**
              **2006**
            
            September
                30,
              2005Term
                Obligation
            
            **$**
            **3,252**
            
            $
            5,225PIK
                Obligation
            
            
            **2,500**
            
            
            2,500Notes
                Payable to Related Parties, net of debt discount of $77
                atJune
                30, 2006 and $61 at September 30, 2005
            
            
            **2,003**
            
            
            1,539Debentures
            
            
            **21,923**
            
            
            21,930Note
                Payable
            
            
            **114**
            
            
            -**29,792**
            
            
            31,194Less
                current portion
            
            
            **29,792**
            
            
            31,194**$**
            **0**
            
            **$**
            **0**





There
      is
      uncertainty whether the Company can achieve sufficient earnings and cash flow
      from operations to meet its future obligations or to satisfy the loan
      requirements of its senior lenders. Therefore, the senior secured debt (the
      Term
      Obligation and PIK Obligation) and the Debentures and Notes Payable to Related
      Parties, which contain cross default provisions, are classified as current
      liabilities on the accompanying balance sheets at June 30, 2006 and September
      30, 2005 (see Note 1).






10






Interest
      on the PIK Obligation and Debentures is not required to be paid currently.
      Such
      accrued interest amounted to $6,904,903 and $5,074,589, at June 30, 2006 and
      September 30, 2005, respectively, and is classified as a current liability
      along
      with the corresponding debt.





Long-term
      debt matures in amounts totaling $2,454,000 in fiscal 2006, $2,802,000 in fiscal
      2007, and $24,536,000 on October 1, 2008, assuming that there is no acceleration
      in the future due to an event of default.





In
      conjunction with the issuance of Notes Payable to Related Parties, the Company
      issued warrants, the value of which was recorded as debt discount. See “Notes
      Payable to Related Parties” below.





**Term
      Obligation, PIK Obligation and Debentures**





Under
      the
      terms of the loan and security agreement which became effective September 15,
      2003, minimum principal payments under the Term Obligation are $250,000 per
      month. Interest was payable monthly at the annual rate of 7.25% through December
      31, 2003, and thereafter at the greater of (i) 7.25% and (ii) the prime rate
      plus 2.5% (the prime rate was 8.25% on June 30, 2006). In addition, proceeds
      from the potential sales of non-core assets and certain other proceeds must
      be
      used to reduce the Term Obligation.





The
      Company reached an agreement with its senior secured lender to extend the
      payment of the Term Obligation principal and interest in the aggregate amount
      of
      $283,355 otherwise due on February 1, 2006, to be paid in four equal
      installments over the month of February 2006. Furthermore, on July 21, 2006
      the
      senior loan agreement was amended to provide for further deferrals of principal
      payment requirements under the Term Obligation and to modify the EBITDA
      financial covenant requirements (see Note 11 - Subsequent Events).





As
      part
      of the 2003 loan and security agreement, the Company also entered into a loan
      in
      the original principal amount of $5 million, subject to adjustment, due December
      31, 2007 (the “PIK Obligation”). Interest accrues at the same rates as the Term
      Obligation. Principal in the amount of $2.5 million and accrued interest thereon
      were forgiven under terms of an agreement which expired on December 31, 2004.
      The amount owing under the PIK Obligation may be challenged by the Company
      through the Bankruptcy Court.





Debentures
      with principal and interest due on or before October 1, 2008 were issued to
      unsecured creditors as part of the Company’s Plan of Reorganization.





For
      further details of the loan and security agreement and a description of the
      Term
      Obligation, PIK Obligation and Debentures, see Note 4, “Reorganization Plan and
      Emergence from Chapter 11” included in Item 7 of the Company’s annual report on
      Form 10-KSB/A for the year ended September 30, 2005 as filed with the Securities
      and Exchange Commission.






11





**Notes
      Payable to Related Parties**





On
      December 9, 2005, the Company entered into amendments of its loan arrangements
      with Howard S. Modlin, Chairman of the Board and Chief Executive Officer, and
      John Segall, a Director. Pursuant to such amendments, an aggregate of $1,600,000
      in secured loans from such directors maturing between September 29, 2005 and
      September 29, 2006 were extended. Such amendments provided that 50% of each
      such
      amended and restated note was amended to be payable one year from the original
      due date and 50% of each such amended and restated note was amended to be
      payable two years from the original due date. The conversion features of four
      notes held by Mr. Modlin, which were convertible into an aggregate of 1,103,897
      shares of Common Stock, and three notes held by Mr. Segall, which were
      convertible into an aggregate of 508,659 shares of Common Stock, were
      eliminated, and unpaid accrued interest aggregating $230,945, was added to
      the
      amended and restated notes. Interest accrues at the rate of 10% per annum from
      December 9, 2005 and the first interest payment on the amended and restated
      notes was due May 1, 2006 (payment of interest on the amended loans has been
      deferred indefinitely in agreement with Mr. Segall and Mr. Modlin). In
      connection with the transactions, Mr. Modlin and Mr. Segall each received seven
      year warrants expiring December 8, 2012 to purchase common stock at $0.575
      cents
      per share covering 2,084,204 shares and 1,100,047 shares, respectively. The
      transactions were unanimously approved by the Company’s Board of Directors on
      December 9, 2005. On February 17, 2006, the Company borrowed $250,000 from
      Mr.
      Modlin in the form of a demand note which bore interest at the rate of 10%
      per
      annum. On April 20, 2006, the Corporation entered into an amendment of its
      loan
      arrangement with Mr. Modlin, whereby the $250,000 demand loan made by Mr. Modlin
      on February 17, 2006 was amended and restated into a term note, 50% of which
      is
      payable February 17, 2007 and 50% of which is payable February 17, 2008. Mr.
      Modlin received a seven year warrant expiring April 19, 2013 to purchase common
      stock at 27 1⁄2 cents per share covering 909,090 shares. The warrant was valued at
      $69,000 based upon an appraisal by an outside consultant and was recorded as
      debt discount and is being amortized as additional interest expense over the
      term of the debt. All loans made by Mr. Modlin and Mr. Segall are secured by
      all
      of the assets of the Company behind the first lien of the Company’s senior
      lenders.





**Loss
      on Extinguishment of Debt**





In
      connection with the restructuring of the loans from related-party directors
      in
      December 2005 described above, the Company recorded a non-cash loss on
      extinguishment of debt of $389,000. Due to the related-party nature of the
      loans, the fair value of the restructured loans excluding the warrants was
      assumed to be the same as the previous loans, and the loss represents the value
      of the warrants issued with the restructured loans. Such warrant value was
      determined based upon an appraisal by an outside consultant.





**Note
      5. Accounting for Stock-Based Compensation**





As
      permitted under Statement of Financial Accounting Standards No. 123, “Accounting
      for Stock-Based Compensation” (“SFAS 123”), the Company has elected to continue
      to measure costs for its employee stock compensation plans by using the
      accounting methods prescribed by Accounting Principles Board Opinion No. 25,
      “Accounting for Stock Issued to Employees”, which allows that no compensation
      cost be recognized provided the exercise price of options granted is equal
      to or
      greater than fair market value of the Company’s stock at date of grant. The
      Company will be required to adopt SFAS 123R effective October 1,
      2006.





12






Proforma
      results, representative of financial results which would have been reported
      by
      the Company if it had adopted the fair value based method of accounting for
      stock-based compensation under SFAS No. 123, are summarized below (amounts
      in
      thousands, except per share data):








**Three
                Months Ended June
                30,**
            
            **Nine
                Months Ended June
                30,********2006**
            
            ******2005**
            
            **2006**
            
            ******2005**Net
                income (loss), as reported
            
            $
            (1,201
            )
            $
            1,325
            
            $
            (2,696
            )
            $
            4,269Deduct:
                total stock-based employee compensation
              expense
                determined under fair value based method
              for
                all awards
            
            
            (81
            )
            
            (61
            )
            
            (246
            )
            
            (116
            )Proforma
                net income (loss)
            
            
            (1,282
            )
            
            1,264
            
            
            (2,942
            )
            
            4,153Dividends
                applicable to preferred stock
            
            
            (440
            )
            
            (443
            )
            
            (1,320
            )
            
            (1,329
            )Proforma
                net income (loss) applicable to common and
              Class
                B stock
            
            $
            (1,722
            )
            $
            821
            
            $
            (4,262
            )
            $
            2,824Proforma
                earnings (loss) per shareBasic-common
                stock
            
            $
            (0.42
            )
            $
            0.21
            
            $
            (1.03
            )
            $
            0.72Basic-Class
                B stock
            
            $
            (0.42
            )
            $
            0.19
            
            $
            (1.03
            )
            $
            0.65Diluted-common
                stock
            
            $
            (0.42
            )
            $
            0.14
            
            $
            (1.03
            )
            $
            0.48Diluted-Class
                B sotck
            
            $
            (0.42
            )
            $
            0.13
            
            $
            (1.03
            )
            $
            0.44








The
      Black-Scholes method was used to compute the proforma amounts presented above,
      utilizing the weighted average assumptions for stock-based compensation granted
      in the nine months ended June 30, 2006 and 2005 summarized below.





**Nine
                Months Ended June
                30,****2006**
            
            **2005**Risk-free
                interest rate
            
            
            4.40
            
            
            3.69Volatility
                (%)
            
            
            322
            %
            
            319
            %Expected
                life (in years)
            
            
            5.00
            
            
            5.00Dividend
                yield rate
            
            
            Nil
            
            
            Nil






13





**Note
                6. Gain on Sale of Minority Investment and Trademark License
                Agreement**
              
              In
                November 2004, the Company sold its 25% minority interest in General
                DataComm de Mexico, S.A. de C.V. for $300,000 and recorded a gain
                in the
                same amount. The proceeds were applied to the Company’s outstanding loans
                with its senior lenders. In addition, the Company has entered into
                a
                twelve month trademark license agreement with the purchaser for the
                period
                beginning December 1, 2005 for an aggregate license fee of $75,000
                ($150,000 in the prior year), amortized in equal monthly installments
                and
                recorded in “other income”.
              
              **Note
                7. 2005 Employee Incentive Plans**
              
              On
                November 22, 2005, the Stock Option Committee of the Board of Directors
                granted qualified stock options pursuant to the Corporation’s 2005 Stock
                and Bonus Plan (“Plan”) to purchase 367,750 shares of Common Stock at $.45
                per share, including grants of options for 30,000 shares to each
                of Lee M.
                Paschall, Aletta Richards and John L. Segall, Directors, and George
                Best,
                Vice President, Sales and Marketing, William G. Henry, Vice President,
                Finance and Administration and Principal Finance Officer, and George
                Gray,
                Vice President, Operations and Chief Technology Officer, and an aggregate
                of 187,750 of such options to all of its employees other than its
                officers. The Committee also granted to Howard S. Modlin, Chairman
                and
                Chief Executive Officer, a separate stock option with terms substantially
                similar to the options granted under the Plan, to purchase 551,121
                shares
                at $.50 per share. The options vest in increments of 20% one, two,
                three,
                four and five years after grant and expire ten years after grant.
                The
                shares issuable under such options were not registered under the
                Securities Act of 1933 and must be held for investment unless so
                registered or an exemption from registration exists. The Company
                registered the shares before the first options were exercised. The
                Board
                of Directors has also amended the plan to authorize an additional
                1,200,000 shares available for grant to cover certain granted options
                and
                allow for future grants.





**Note
      8.**  **Recovery
      of Lease Receivable and Related Party Transaction**





On
      February 28, 2006, the Company concluded litigation pursuant to a settlement
      agreement relating to amounts owed to its subsidiary, DataComm Leasing
      Corporation under an equipment lease agreement. The Company recorded a recovery
      gain in the amount of $425,000, which was net of legal fees and expenses
      totaling $275,000. The law firm of Weisman Celler Spett & Modlin, P.C., in
      which Mr. Howard S. Modlin is President, earned fees in the amount of $231,000
      on this settlement, under a contingency agreement that had been previously
      approved by the Company’s Board of Directors. Mr. Modlin is Chairman, President
      and Chief Executive Officer of the Company.





**Note
      9. Recovery on Note Receivable Arising from Sale of
      Business**





In
      August
      2001, the Company received a note in the amount of $17.0 million as partial
      consideration for the sale of its Asynchronous Transfer Mode business and
      retained a security interest in the underlying assets. As repayment of the
      note,
      which constituted the principal consideration in the transaction, was dependent
      on future successful operations of the purchaser (Ahead Communications Systems,
      Inc. or “ACS”), the Company determined that it retained substantial risks of
      ownership of the business. Accordingly, although legal transfer of ownership
      of
      the business occurred, the sale was not treated as a divestiture for accounting
      purposes. Shortly after the sale, the Company, ACS and ACS’ parent company in
      Austria (Ahead Communications Systems AG), which had guaranteed payment of
      the
      note, all filed for bankruptcy protection, ACS defaulted on the note payment
      and
      disputes arose relating to the division sale agreements. Accordingly, in fiscal
      2001 the Company recorded an impairment charge related to the assets sold to
      ACS
      by providing a valuation allowance against the note for its unpaid principal
      amount. On May 5, 2005 the Company received a payment of $2,747,848 in partial
      satisfaction of the note, as a result of the liquidation of ACS’ parent company
      in Austria. Such payment was used to reduce senior secured debt as required
      under the Company’s senior loan agreement. The Company recorded a gain for the
      amount of the payment in the quarter ended March 31, 2005.






14






On
      May
      19, 2005, the Company, ACS and the Official Committee of Unsecured Creditors
      in
      the ACS bankruptcy case filed with the Bankruptcy Court for the District of
      Connecticut, a jointly approved Chapter 11 Plan (the “Plan”) which was confirmed
      on June 15, 2005 by the Bankruptcy Court and which became effective June 30,
      2005. Under the Plan, all remaining property after payment of amounts due for
      administration claims, priority tax claims, unsecured claims and priority claims
      was transferred to a newly organized Connecticut subsidiary of the Company
      which
      was later merged into General DataComm, Inc. and operated at the Company’s
      office in Naugatuck, Connecticut. Employment was offered to and accepted by
      all
      employees of ACS.





The
      Company recorded a gain of $1,989,000 in the quarter ended June 30, 2005 to
      reflect the fair value of the ACS assets received less liabilities assumed
      in
      final settlement of the note that ACS owed to the Company. Such assets and
      liabilities and resulting gain were as follows:





Cash
            
            $
            834,000Accounts
                receivable, net
            
            
            1,170,000Inventories
            
            
            500,000Other
                current assets
            
            
            131,000Total
                current assets
            
            
            2,635,000Property,
                plant and equipment
            
            
            233,000Total
                Assets
            
            
            2,868,000Accounts
                payable
            
            
            193,000Accrued
                payroll and payroll-related expenses
            
            
            358,000Other
                current liabilities
            
            
            328,000Total
                Liabilities
            
            
            879,000Net
                gain
            
            $
            1,989,000





All
      of
      the above assets for which values were ascribed were acquired by ACS after
      the
      original assets were transferred in fiscal 2001. Because the final settlement
      of
      the ACS note occurred on June 30, 2005, results of operations of the ACS
      business are included in the Company’s Consolidated Statements of Operations
      commencing July 1, 2005.








15





**Note
      10. Liquidation of UK Subsidiaries**





**General
      DataComm Limited**





In
      July
      2002, General DataComm Limited (UK), an inactive subsidiary, was turned over
      to
      liquidators for the purpose of finalizing the accounts. At that time, the
      subsidiary’s estimated income tax liability was $375,000 and amounts due other
      creditors totaled $338,000 and such amounts were reflected as liabilities in
      the
      Company’s consolidated financial statements.





The
      liquidators subsequently advised the Company that the income tax liability
      in
      the amount of $5,806 had been agreed with the local authorities. Therefore
      the
      Company recorded a reduction in income tax reserves and a corresponding credit
      in the income tax provision in the amount of $369,194 in the three month period
      ended March 31, 2005 reflecting this lower liability.





Furthermore,
      although all claims and recoveries have not been finalized, the liquidators
      have
      advised that there have been recoveries which will be used to pay off a portion
      or all of the remaining creditor claims. The Company intends to record such
      recoveries as income when it receives a final report from the subsidiary’s
      liquidators.





**General
      DataComm Advanced Research Centre Limited**





In
      April
      2003, General DataComm Advanced Research Centre Limited (UK), an inactive
      subsidiary, was turned over to liquidators for the purpose of finalizing the
      accounts. At that time, the potential income taxes owed were estimated to be
      approximately $378,000 and such amount is reflected as an income tax liability
      in the Company’s consolidated financial statements. The ultimate amount of the
      tax liability will be re-evaluated and adjusted, if necessary, upon receipt
      of a
      final report from the subsidiary’s liquidators.





**Note
      11. Subsequent Events**





**Amendment
      to Senior Loan Agreement**





On
      July
      21, 2006 the senior loan agreement was amended to reduce principal payments
      to
      $25,000 per week for the period commencing May 1, 2006 to and including August
      25, 2006; to defer principal payments, due in the amount of $250,000 from the
      first business day to the last business day of September and October 2006 and
      to
      increase the principal payments due from $250,000 to $393,750 for the months
      of
      November 2006 through February 2007, and defer such payments from the first
      business day to the last business day of each respective month. The net effect
      of these principal payment adjustments is to reduce earlier payment requirements
      and increase later payment requirements such that by the end of February 2007
      all principal payments are again equal to the original loan schedule.
      Furthermore, the amendment included a provision that eliminated the financial
      covenant requirement for the periods ended September 30, 2004 and June 30,
      2006.






16







**Notice
      of Court Ruling**





On
      July
      28, 2006, the Company was notified that it had received a favorable decision
      in
      its case against Miranda Technologies Inc. and Miranda Media Networks Inc.
      (Miranda), which was brought in the Superior Court in Montreal, Quebec, Canada.
      The court has ruled in the Company’s favor on most issues and awarded
      remuneration to be paid to the Company which the Company expects to be
      approximately $1,200,000 Canadian dollars ($1,056,000 U.S. dollars) including
      interest and expenses. The court also dismissed counter-claims against the
      Company brought by Miranda. The time for each party’s right to appeal this
      decision has not expired. The case against Miranda was brought as a result
      of
      disputes concerning contingent compensation and other payments owed to the
      Company arising out of the sale of the Company’s Multi-Media Division and former
      Canadian subsidiary to Miranda in June 2001. Any payment received by the Company
      in excess of expenses relating to the lawsuit is required to be used to pay
      down
      senior debt owed to Ableco Finance LLC and the net recovery will be recognized
      as a gain when it is determined that the litigation is concluded and payment
      is
      assured.





**Note
      Payable to Related Party**





On
      August
      10, 2006, the Company borrowed $24,000 from Mr. Howard Modlin, Chairman, in
      the
      form of a demand note which bears interest at the rate of 10% per annum, for
      the
      purpose of replacing senior indebtedness.





**Note
      12. Recent Accounting Pronouncements**





In
      December 2004, the FASB issued a revision of SFAS No. 123, “Share-Based
      Payment,” referred to as SFAS 123(R), which supersedes APB Opinion No. 25,
“Accounting for Stock Issued to Employees”. This statement focuses primarily on
      transactions in which an entity obtains employee services in exchange for
      share-based payments, including grants of employee stock options. Under SFAS
      123(R), a company is required to measure the cost of employee services received
      in exchange for an award of equity instruments based on the grant-date fair
      value of the award, with such cost recognized over the applicable vesting
      period. The provisions of SFAS 123 (R) are required to be applied by the Company
      as of the beginning of the first annual reporting period that begins after
      December 15, 2005. As such, the Company is required to adopt the provisions
      of
      SFAS 123 (R), at the beginning of the first quarter of fiscal 2007. As a result
      of adopting SFAS 123 (R), the Company will recognize as compensation expense
      in
      its financial statements the unvested portion of options granted prior to the
      effective date and the cost of stock options granted to employees after the
      effective date based on the fair value of the stock options at grant date.
      Accordingly, the adoption of SFAS 123R’s fair value method could have a
      significant impact on the Company’s results of operations, although it will have
      no impact on the Company’s overall financial position. The impact of adoption of
      SFAS 123R cannot be predicted at his time because it will depend on levels
      of
      share-based payments granted in the future.





In
      November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of
      ARB No. 43 Chapter 4”, referred to as SFAS No. 151. SFAS No. 151 amends
      Accounting Research Bulletin (“ARB”) No. 43, Chapter 4, “Inventory Pricing,” to
      clarify the accounting for idle facility expense, freight, handling costs and
      waste (spoilage). Previously these costs were recognized as current period
      expenses when they were considered “so abnormal.” SFAS No 151 requires those
      items be recognized as current period charges regardless of whether they meet
      the “so abnormal” criteria. In addition, SFAS No. 151 clarifies that fixed
      overhead allocations to inventory costs be based on normal capacity of
      production facilities. SFAS No. 151 is effective for inventory costs incurred
      during 2007 and earlier application is permitted. It is believed that the
      Company’s current accounting policies closely align to the new rules.
      Accordingly, the standard will not have a material impact on the Company’s
      financial statements.






17





In
      July
      2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
      No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB
      Statement No. 109” (FIN 48), which prescribes a recognition threshold and
      measurement attribute for the financial statement recognition and measurement
      of
      a tax position taken or expected to be taken in a tax return. FIN 48 also
      provides guidance on derecognition, classification, interest and penalties,
      accounting in interim periods, disclosure and transition. FIN 48 is effective
      for fiscal years beginning after December 15, 2006. We do not expect the
      adoption of FIN 48 to have a material impact on our financial reporting, and
      we
      are currently evaluating the impact, if any, the adoption of FIN 48 will have
      on
      our disclosure requirements.





**ITEM
      2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
      OPERATION**





THE
      FOLLOWING DISCUSSION AND ANALYSIS OF THE COMPANY’S FINANCIAL CONDITION AND THE
      RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
      STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN THIS QUARTERLY REPORT ON
      FORM 10-QSB AND IN THE COMPANY’S ANNUAL REPORT ON FORM 10-KSB/A FOR THE YEAR
      ENDED SEPTEMBER 30, 2005 AS FILED WITH THE SECURITIES AND EXCHANGE
      COMMISSION.





THIS
      REPORT ON FORM 10-QSB CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING
      OF
      SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. FOR THIS
      PURPOSE, STATEMENTS CONTAINED HEREIN THAT ARE NOT STATEMENTS OF HISTORICAL
      FACT
      MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS. WITHOUT LIMITING THE FOREGOING,
      THE WORDS “BELIEVES”, “ANTICIPATES”, “PLANS”, “EXPECTS” AND SIMILAR EXPRESSIONS
      ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING
      STATEMENTS INVOLVE RISKS AND UNCERTAINTIES AND ARE NOT GUARANTEES OF FUTURE
      PERFORMANCE. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE INDICATED IN SUCH
      FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS INCLUDING, BUT NOT
      LIMITED TO, THOSE SET FORTH UNDER THE HEADING “RISK FACTORS” BELOW. UNLESS
      REQUIRED BY LAW, THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE ANY
      FORWARD-LOOKING STATEMENTS OR REASONS WHY ACTUAL RESULTS MAY
      DIFFER.








18






**Background**





The
      Company has a history of generating net losses and as of September 30, 2005,
      the
      most recent fiscal year end, the Company had an accumulated deficit from net
      losses totaling $233.9 million. In 2001, after implementing a number of
      restructuring and cost reduction programs in an attempt to better align
      operating cost structure with revenues, three of the Company’s four business
      units were sold. However, due to the impact of a general economic downturn
      and a
      decline in the telecommunication industry in particular, and to defaults in
      payments by the purchasers of the three business units, the Company did not
      realize sufficient proceeds from the sales to satisfy its secured lenders.
      By
      the end of fiscal 2001 the number of employees declined to 210 from 1,019 at
      the
      beginning of the year.





As
      a
      result of its inability to meet its debt obligations, on November 2, 2001
      General DataComm Industries, Inc. and its domestic subsidiaries filed a
      voluntary petition for relief under Chapter 11 of the Bankruptcy
      Code.





Pursuant
      to a reorganization plan approved by the Bankruptcy Court, the Company emerged
      from bankruptcy on September 15, 2003.





Thereafter,
      the Company consolidated its remaining operations into its owned facility in
      Naugatuck, Connecticut and downsized its staff and operating assets to more
      properly reflect its reduced operating requirements and currently has 103
      employees. Such number includes the former employees of Ahead Communications
      Systems, Inc. (“ACS”) who accepted employment with the Company when ACS’s assets
      and business were acquired by the Company on June 30, 2005 (see Note 16 in
      the
      Notes to Consolidated Financial Statements included in Item 7 of the Company’s
      annual report on Form 10-KSB/A for the fiscal year ended September 30, 2005
      as
      filed with the Securities and Exchange Commission).





Unless
      otherwise stated, all note references in the following “Results of Operations”
and “Liquidity and Capital Resources” sections are to the Notes to Condensed
      Consolidated Financial Statements included elsewhere in this Form
      10-QSB.





**RESULTS
      OF OPERATIONS**





**Revenues**




Three
                Months Ended June 30,
            
            Nine
                Months Ended June 30,(in
                thousands)
            
            **2006**
            
            2005
            
            **2006**
            
            2005Product
            
            **$**
            **2,597**
            
            $
            3,490
            
            **$**
            **9,416**
            
            $
            10,269Service
            
            
            **608**
            
            
            117
            
            
            **1,895**
            
            
            565Total
                Revenues
            
            **$**
            **3,205**
            
            $
            3,607
            
            **$**
            **11,311**
            
            $
            10,834







19






Revenues
      for the three months ended June 30, 2006 decreased $402,000, or 11.1%, to
      $3,205,000 from $3,607,000 reported for the three months ended June 30, 2005.
      Product revenues decreased $893,000, or 25.6%, while service revenues increased
      by $491,000, an increase to 5.2 times the prior year amount.





Revenues
      from product shipments in the 2005 quarter included approximately $1,200,000
      of
      network access products sold to an integrator for a government order which
      did
      not repeat in the 2006 quarter. In addition, the Company continued to experience
      declines in sales of network access products to large telecommunications
      carriers. These reductions were offset in part by sales of multi-service
      switches which products were acquired on June 30, 2005 and, therefore, were
      not
      a component of revenue in the 2005 quarter.





The
      increase in service revenues in the quarter was due primarily to the acquisition
      of the multi-service switch product business and its base of service customers.
      In addition, the Company continues to grow its service business by expanding
      its
      offerings as part of a focused strategy to address network monitoring and
      security.





Revenues
      for the nine months ended June 30, 2006 increased $477,000, or 4.4%, to
      $11,311,000 from $10,834,000 reported for the nine months ended June 30, 2005.
      Revenues from product shipments in the 2006 period were $853,000, or 8.3%,
      lower
      than in the 2005 period due primarily to the decrease in product revenues in
      three months ended June 30, 2006 discussed above. Service revenues increased
      $1,330,000, to 3.3 times prior revenues also for the same reasons indicated
      for
      the quarterly change discussed above.





A
      decline
      in demand for the Company’s products began in fiscal 2001 due to economic and
      industry-wide factors affecting the telecommunications industry, including
      financial constraints affecting customers and over-capacity in our customers’
markets. The Company anticipates that the current reduced capital spending
      levels for the Company’s products by its customers will continue to affect sales
      until there is an overall recovery in the telecommunications market, which,
      although there is some evidence of improvement, may not change significantly
      in
      2006. Furthermore, even if there is a recovery in the overall telecommunications
      market, there is no assurance that orders for the Company’s products will
      increase. Accordingly, the ability to forecast future revenue trends in the
      current environment is difficult.





**Gross
      Margin**









Three
                Months Ended June 30,
            
            Nine
                Months Ended June 30,(in
                thousands)
            
            **2006**
            
            2005
            
            **2006**
            
            2005Gross
                Margin
            
            **$**
            **1,874**
            
            $
            1,972
            
            **$**
            **6,639**
            
            $
            6,324Percentage
                of Revenues
            
            
            **58.5**
            **%**
            
            54.7
            %
            
            **58.7**
            **%**
            
            58.4
            %








Gross
      margin, as a percentage of revenues, in the three months ended June 30, 2006
      was
      58.5% as compared to 54.7% in the three months ended June 30, 2005. Service
      revenue, which increased in absolute dollars as discussed above and is generally
      more profitable than the product revenue, added 2.1% to the gross profit
      percentage change. In addition, there was 1.7% increase in the product gross
      profit percent. This increase in product gross profit percent resulted from
      the
      net effect of the following items: The positive impact of lower component costs
      of 1.9%, lower inventory obsolescence reserve requirements of 5.4% and other
      product mix and cost changes with a positive impact of 0.5% offset by the
      negative impact on product gross margins of 4.9% resulting from the sale in
      the
      2005 quarter of older inventories that had previously been written off based
      on
      the Company’s accounting policy for obsolescence which sales did not repeat in
      the 2006 quarter and higher fixed production costs of 1.2% as a percentage
      of
      revenue due to lower revenue levels.






20






Gross
      margin, as a percentage of revenues, in the nine months ended June 30, 2006
      was
      58.7% as compared to 58.4% in the nine months ended June 30, 2005. Higher
      margined service revenue added 2.5% to the gross profit percentage, while the
      product gross profit percentage declined 2.2%. This decline resulted primarily
      from the positive impact on product gross margins in the nine months ended
      June
      30, 2005 resulting from a higher percentage of sales of older inventories that
      had previously been written off based on the Company’s policy for obsolescence.





In
      future
      periods, the Company’s gross margin will vary depending upon a number of
      factors, including the mix of products sold, the cost of products manufactured
      at subcontract facilities, the channels of distribution, the price of products
      sold, discounting practices, price competition, increases in material costs
      and
      changes in other components of cost of sales. As and to the extent the Company
      introduces new products, it is possible that such products may have lower gross
      profit margins than other established products in higher volume production.
      Accordingly, gross margin as a percentage of sales may vary.





**Selling,
      General and Administrative**











Three
                Months Ended June 30,
            
            Nine
                Months Ended June 30,(in
                thousands)
            
            ******2006**
            
            2005
            
            **2006**
            
            2005Selling,
                general and administrative
            
            **$**
            **1,493**
            
            
            1,323
            
            
            **4,589**
            
            
            3,658Percentage
                of revenues
            
            
            **46.6**
            **%**
            $
            36.7
            %
            **$**
            **40.6**
            **%**
            $
            33.8
            %





The
      Company’s selling, general and administrative (“SG&A”) expenses increased to
      $1,493,000, or 46.6% of revenue in the three months ended June 30, 2006 from
      $1,323,000, or 36.7% of revenue in the three months ended June 30, 2005. The
      increase in spending in the quarter of $170,000, or 12.8%, included expenses
      associated with the June 30, 2005 acquisition of the multi-service switch
      business, which added $347,000, including payroll and payroll-related costs
      of
      seven employees, and the operating expenses of a sales office in France (See
      Note 9). Other increases in operating expenses amounted to $24,000 offset by
      a
      $201,000 reduction in legal expenses due to lower levels and resolutions of
      outstanding litigation.





21







For
      the
      nine months ended June 30, 2006, SG&A increased to $4,589,000, or 40.6% of
      revenues, from $3,658,000, or 33.8% of revenues in the nine months ended June
      30, 2005. The $931,000, or 25.4% increase in expenses was due to the acquisition
      of the multi-service switch business which added $822,000 of payroll related
      costs, related increased travel expenses of $121,000 and other decreases of
      $12,000.








**Research
      and Product Development**





Three
      Months Ended June 30,  Nine
      Months Ended June 30,





(in
                thousands)
            
            ******2006**
            
            2005
            
            ******2006**
            
            2005Research
              and product development
            
            **$**
            **787**
            
            $
            553
            
            **$**
            **2,502**
            
            $
            1,633Percentage
                of revenues
            
            
            **25.2**
            **%**
            
            15.3
            %
            
            **22.1**
            **%**
            
            15.1
            %





Research
      and product development (“R&D”) expenses increased to $787,000, or 25.2% of
      revenue in the three months ended June 30, 2006 as compared to $553,000, or
      15.3% of revenue, in the three months ended June 30, 2005, due primarily to
      increased costs associated with development of new multi-service switching
      products. A combination of internal engineers and external consultants are
      actively engaged in developing multi-service switches with advanced
      technological features. The Company also continues to explore new network access
      and service products and security applications.





For
      the
      same reason, R&D expenses for the nine months ended June 30, 2006 increased
      to $2,502,000 from $1,633,000 in the comparable prior year period.





**Other
      Income (Expense)**





Interest
      expense decreased to $813,000 and $2,448,000 respectively, in the three and
      nine
      months ended June 30, 2006 from $845,000 and $2,586,000, respectively in the
      three and nine months ended June 30, 2005, due to principal payments made on
      the
      Company’s senior debt offset by higher interest rates on Notes Payable to
      Related Parties and higher variable interest rates on senior and other secured
      debt.





Other
      items included in other income (expense) for the three months ended June 30,
      2006 include $6,000 in sales of components no longer used, $12,000 received
      from
      a tradename license and $3,000 of other items. For the three months ended June
      30, 2005, other income (expense) includes $1,989,000 from the recovery of a
      note
      receivable (see Note 9), $15,000 in sales of components no longer used, $38,000
      received from a tradename license and $8,000 of other items.





22


Other
      items included in other income (expense) for the nine months ended June 30,
      2006
      and 2005 totaled $213,000 and $5,194,000, respectively. The 2006 amount includes
      $389,000 of loss from extinguishment of debt (see Note 4) offset by $425,000
      recovery from lease receivable (see Note 8), $85,000 in sales of components
      no
      longer used, $46,000 received from a tradename license and other items totaling
      $46,000. The 2005 amount includes $4,737,000 from the recovery of a note
      receivable (see Note 9), $300,000 profit on sale of a 25% minority interest
      in a
      Mexican company (see Note 6), $106,000 in sales of components no longer used,
      $82,000 received from a tradename license , $23,000 received from settlement
      of
      litigation and $21,000 of other items, offset by foreign exchange losses of
      $75,000.





**Provision
      for Income Taxes**





The
      tax
      provision for the nine months ended June 30, 2005 includes a credit of $369,194
      due to the favorable settlement of a foreign income tax claim (see Note
      10).





Apart
      from recording this settlement, no federal income tax provisions or tax benefits
      were provided in the three and nine months ended June 30, 2006 and 2005 due
      to
      the valuation allowance provided against the net change in deferred tax assets.
      The Company established a full valuation allowance against its net deferred
      tax
      assets due to the uncertainty of realization of benefits of the net operating
      loss carryforwards from prior years and other deferred tax assets. The Company
      has federal tax credit and net operating loss carryforwards of approximately
      $11.9 million and $214.2 million, respectively, as of September 30, 2005. Income
      tax provisions for the three and nine months ended June 30, 2006 and 2005
      reflect minimum state taxes.





**Liquidity
      and Capital Resources**




June
                30**,**
            
            September
                30,(in
                thousands)
            
            ******2006**
            
            2005Cash and
              cash
              equivalents
            
            **$**
            **426**
            
            $
            878Working
                capital (deficit)
            
            
            **(40,224**
            **)**
            
            (37,943
            )Total
                assets
            
            
            **9,710**
            
            
            10,698Long-term
              debt,
              including current portion
            
            
            **29,792**
            
            
            31,194Total
                liabilities
            
            
            **46,689**
            
            
            45,440




Nine Months Ended June 30,**2006**
            
            2005Net
                cash provided (used) by:Operating
                activities
            
            
            **1,001**
            
            $
            2,166Investing
                activities
            
            
            **(75**
            **)**
            
            3,575Financing
                activities
            
            
            **(1,378**
            **)**
            
            (5,292
            )




Note:
      Significant risk factors exist due to the Company’s limited financial resources
      and dependence on achieving future positive cash flows in order to satisfy
      its
      obligations and avoid a default under its loan and debenture obligations. See
      “Risk Factors” below for further discussion.





23


**Cash
      Flows**





**Nine
      Months Ended June 30, 2006 and 2005**





Net
      cash
      provided by operating activities totaled $1,001,000 in the nine months ended
      June 30, 2006. The net loss in the period was $2,696,000. Included in this
      net
      loss were non-cash expenses for loss on extinguishment of debt of $389,000
      and
      for depreciation and amortization of $286,000. An increase in accounts
      receivable due to new sales levels being higher than customers collections
      resulted in a use of cash of $142,000. Inventories were lower by $623,000 as
      the
      Company was able to achieve shipments of on-hand inventories to satisfy new
      customer orders and generate a source of cash through reduced purchasing. Other
      sources of cash include interest which accrued on the Company’s debt which
      increased $1,785,000 and an increase in unpaid vendor liabilities. Other net
      sources of cash were $125,000.





Net
      cash
      provided by operating activities totaled $2,166,000 in the nine months ended
      June 30, 2005. The net income was $4,269,000. Non-cash items included were
      expenses for depreciation of $190,000, gains on claim reductions of $258,000,
      a
      reduction in the reserve for foreign income taxes of $369,000, an increase
      in
      inventory obsolescence reserves of $164,000 and a reduction in the reserve
      for
      note receivable of $4,737,000. A reduction in accounts receivable amounted
      to
      $250,000. Inventories decreased by $1,048,000 as the Company utilized shipment
      of on-hand inventories to satisfy orders. Accrued interest on Company debt
      grew
      by $1,960,000. Other sources of funds totaled a net amount of
      $3,000.





For
      the
      nine months ended June 30, 2006, cash used by investing activities was $75,000
      for the acquisition of equipment.





For
      the
      nine months ended June 30, 2005, cash provided by investing activities included
      the collection of a note receivable of $3,594,000 offset in part by $19,000
      of
      equipment purchases.





Net
      cash
      used in financing activities was $1,378,000 for the nine months ended June
      30,
      2006. Principal payments on the term obligation were $1,742,000 and on notes
      payable were $189,000. Proceeds from the issuance of notes payable provided
      $553,000 of cash.





Cash
      used
      in financing activities was $5,292,000 for the nine months ended June 30, 2005.
      Principal payments on the term obligation were $5,405,000 and on notes payable
      were $101,000 Proceeds from the issuance of notes payable provided $214,000
      of
      cash.





**Liquidity**





The
      Company has no current ability to borrow additional funds. It must, therefore,
      fund operations from cash balances and cash generated from operating activities.
      The Company has significant short-term obligations including payment of accrued
      professional fees (approximately $1.8 million at June 30, 2006) and monthly
      payments of principal and interest under its senior loan agreement. The Company
      received an extension of payment terms for the amounts due to its senior secured
      lenders on February 1, 2006 and from May 1, 2006 to February 28, 2007 and relief
      from compliance with a financial covenant for the periods ended September 30,
      2004 and June 30, 2006 (see Notes 4 and 11). In fiscal 2004 the Company borrowed
      $1.6 million from related parties in order to meet its current payment
      obligations, which notes were extended in December 2005 (see Note 4). In
      February 2006 an additional $250,000 was borrowed from a related party.
      Furthermore, the Company has other significant future outstanding obligations
      as
      shown in the accompanying condensed consolidated balance sheet at June 30,
      2006.
      In order to meet these and other future payments the Company must achieve
      revenue growth while at the same time limiting investments in inventories and
      capital assets.





24


The
      Company’s failure to make required payments under the senior loan agreement, as
      amended, would constitute an event of default. In addition, the Company is
      required to maintain a minimum level of EBITDA (earnings before interest, taxes,
      depreciation and amortization) on a cumulative quarterly basis in order to
      avoid
      an event of default (see Note 4).





Since
      emerging from bankruptcy, the Company has incurred losses before recoveries
      on
      note and lease receivable, reorganization items and income taxes of
      approximately $8.9 million. Furthermore, the ability of the Company to meet
      cash
      flow and loan covenant requirements is directly affected by the factors
      described below in the section titled “Risk Factors”. There can be no assurance
      that the Company will be able to avoid a default on the senior loan agreement.
      If there is such a default, the senior secured lenders may accelerate payment
      of
      the outstanding debt ($5.7 million at June 30, 2006) and foreclose on their
      security interests which, in turn, would result in cross-defaults of other
      debt
      instruments and likely would require the Company to again file for bankruptcy
      protection.





Under
      the
      Company’s 2003 plan of reorganization, the Company was to pay all creditors 100%
      of their allowed claims based on a five year business plan. However, the Company
      has not met its business plan objectives since emerging from Chapter 11. The
      ability to meet the objectives of this business plan is directly affected by
      the
      factors described below in the “Risk Factors” section. The Company cannot assure
      investors that it will be able to obtain new customers or to generate the
      increased revenues required to meet its business plan objectives. In addition,
      in order to execute the business plan, the Company may need to seek additional
      funding through public or private equity offerings, debt financings or
      commercial partners. Since the Company has virtually no current ability to
      borrow additional funds, it cannot assure investors that it will obtain funding
      on acceptable terms, if at all. If the Company is unable to generate sufficient
      revenues or access capital on acceptable terms, it may be required to (a) obtain
      funds on unfavorable terms that may require the Company to relinquish rights
      to
      certain of its technologies or that would significantly dilute its stockholders
      and/or (b) significantly scale back current operations. Either of these two
      possibilities would have a material adverse effect on the Company’s business,
      financial condition and results of operations.





Since
      filing for Chapter 11 bankruptcy protection, operations have been funded
      primarily through cash generated from operations and loans from related parties.
      Proceeds realized from sales and liquidations of non-core assets were required
      to be used to pay down the senior secured debt.





At
      June
      30, 2006 the Company’s principal source of liquidity included cash and cash
      equivalents of $426,000 compared to $878,000 at September 30, 2005. At June
      30,
      2006, the Company’s working capital was a deficit of approximately $40.2
      million, compared to a deficit of approximately $37.9 million at September
      30,
      2005. Negative working capital reflects the classification of all long-term
      secured debt as current liabilities due to the uncertainty as to whether the
      Company will achieve sufficient cash flows from operations to meet its monthly
      loan payment obligations, and will be able to comply with the EBITDA financial
      covenant during the quarterly periods during fiscal 2006 and beyond (see Note
      4).





The
      Company has significant unpaid prepetition tax claims (approximately $1.0
      million) and professional fees (approximately $1.8 million) at June 30, 2006,
      a
      majority of which are expected to be paid in fiscal 2006. In order to meet
      these
      and other future payments, the Company must achieve revenue growth while at
      the
      same time limiting investments in inventories and capital assets.





As
      a
      result of the potential liquidity and cash flow risks described above, the
      Company’s independent auditors expressed uncertainty about the Company’s ability
      to continue as a going concern in their opinion on the Company’s fiscal 2005
      financial statements.





Management
      has responded to such risks as part of an ongoing strategy by restructuring
      the
      Company’s sales force, increasing factory shutdown time, containing expenses and
      reducing the size of the employee workforce. In addition, the Company has
      obtained $1,850,000 from loans from related parties for replacement of senior
      indebtedness (see Note 4). The Company also is actively marketing for sale
      its
      land and building and pursuing other asset recoveries, the proceeds of which
      would be used to reduce secured debt and related interest.





**Critical
      Accounting Policies**





The
      Company’s financial statements and accompanying notes are prepared in accordance
      with generally accepted accounting principles in the United States, the
      instructions to Form 10-QSB and Article 10 of Regulation S-X. Preparing
      financial statements requires management to make estimates and assumptions
      that
      affect the reported amounts of assets, liabilities, revenue and expenses.
      Management bases its estimates and judgements on historical experience and
      on
      various other factors that are believed to be reasonable under the
      circumstances. Due to the inherent uncertainty involved in making estimates,
      actual results reported in future periods might be based upon amounts that
      differ from those estimates. The following represent what the Company believes
      are among the critical accounting policies most affected by significant
      management estimates and judgements. See Note 2 in Notes to Consolidated
      Financial Statements in Item 7 in Form 10-KSB/A for the year ended September
      30,
      2005 as filed with the Securities and Exchange Commission for a summary of
      the
      Company’s significant accounting policies.





*Revenue
      Recognition* .
      The
      Company recognizes a sale when the product is shipped and the following four
      criteria are met upon shipment: (1) persuasive evidence of an arrangement
      exists; (2) title and risk of loss transfers to the customer; (3) the selling
      price is fixed or determinable; and (4) collectibility is reasonably assured.
      A
      reserve for future product returns is established at the time of the sale based
      on historical return rates and return policies including stock rotation for
      sales to distributors that stock the Company’s products. Service revenue is
      recognized either when the service is performed or, in the case of maintenance
      contracts, on a straight-line basis over the term of the contract.





25


*Warranty
      Reserves* - The
      Company offers warranties of various lengths to its customers depending on
      the
      specific product and the terms of its customer purchase agreements. Standard
      warranties require the Company to repair or replace defective product returned
      during the warranty period at no cost to the customer. An estimate for warranty
      related costs is recorded based on actual historical return rates and repair
      costs at the time of sale. On an on-going basis, management reviews these
      estimates against actual expenses and makes adjustments when necessary. While
      warranty costs have historically been within expectations of the provision
      established, there is no guarantee that the Company will continue to experience
      the same warranty return rates or repair costs as in the past. A significant
      increase in product return rates or the costs to repair our products would
      have
      a material adverse impact on the Company’s operating results.





*Allowance
      for Doubtful Accounts.* The
      Company estimates losses resulting from the inability of its customers to make
      payments for amounts billed. The collectability of outstanding invoices is
      continually assessed. Assumptions are made regarding the customers ability
      and
      intent to pay, and are based on historical trends, general economic conditions
      and current customer data. Should our actual experience with respect to
      collections differ from these assessments, there could be adjustments to our
      allowance for doubtful accounts.





*Impairment
      of Assets Transferred under Contractual Obligations* .
      In
      August 2001, the Company received a note in the amount of $17.0 million as
      partial consideration for the sale of its Asynchronous Transfer Mode business
      and retained a security interest in the underlying assets sold. Shortly
      thereafter, the Company, the purchaser (ACS) and the purchaser’s parent company
      in Austria (Ahead Communications Systems AG) which had guaranteed payment of
      the
      note, all filed for bankruptcy protection, the purchaser defaulted on the note
      payment and disputes arose relating to the division sale agreements.
      Accordingly, in fiscal 2001 the Company recorded an impairment charge related
      to
      the assets sold. On May 5, 2005 the Company received a $2.7 million recovery
      on
      the note and used the proceeds to pay down senior secured debt. On June 30,
      2005
      final settlement of the note occurred when the assets and business of ACS were
      transferred to the Company. Net assets received were valued at fair market
      value.





*Inventories* .
      The
      Company values inventory at the lower of cost or market. Cost is computed using
      standard cost, which approximates actual cost on a first-in, first-out basis.
      Agreements with certain customers provide for return rights. The Company is
      able
      to reasonably estimate these returns and they are accrued for at the time of
      shipment. Inventory quantities on hand are reviewed on a quarterly basis and
      a
      provision for excess and obsolete inventory is recorded based primarily on
      product demand for the preceding twelve months. Historical product demand may
      prove to be an inaccurate indicator of future demand in which case the Company
      may increase or decrease the provision required for excess and obsolete
      inventory in future periods. Furthermore, if the Company is able to sell
      inventory in the future that has been previously written down or off, such
      sales
      will result in higher than normal gross margin.





26


*Deferred
      Tax Assets.* The
      Company has provided a full valuation allowance related to its deferred tax
      assets. In the future, if sufficient evidence of the Company’s ability to
      generate sufficient future taxable income in certain tax jurisdictions becomes
      apparent, the Company will be required to reduce its valuation allowances,
      resulting in income tax benefits in the Company’s consolidated statement of
      operations. Management evaluates the realizability of the deferred tax assets
      and assesses the need for the valuation allowance each period.





*Impairment
      of Long-Lived Assets* .
      The
      Company assesses the impairment of long-lived assets whenever events or changes
      in circumstances indicate that the carrying value may not be recoverable under
      the guidance prescribed by SFAS No. 144. The Company's long-lived assets consist
      of real estate, property and equipment. At both June 30, 2006 and September
      30,
      2005, real estate represented the only significant remaining long-lived asset
      that has not been fully written down for impairment.





**Recent
      Accounting Pronouncements**





In
      December 2004, the FASB issued a revision of SFAS No. 123, “Share-Based
      Payment,” referred to as SFAS 123(R), which supersedes APB Opinion No. 25,
“Accounting for Stock Issued to Employees”. This statement focuses primarily on
      transactions in which an entity obtains employee services in exchange for
      share-based payments, including grants of employee stock options. Under SFAS
      123(R), a company is required to measure the cost of employee services received
      in exchange for an award of equity instruments based on the grant-date fair
      value of the award, with such cost recognized over the applicable vesting
      period. The provisions of SFAS 123 (R) are required to be applied by the Company
      as of the beginning of the first annual reporting period that begins after
      December 15, 2005. As such, the Company is required to adopt the provisions
      of
      SFAS 123 (R), at the beginning of the first quarter of fiscal 2007. As a result
      of adopting SFAS 123 (R), the Company will recognize as compensation expense
      in
      its financial statements the unvested portion of options granted prior to the
      effective date and the cost of stock options granted to employees after the
      effective date based on the fair value of the stock options at grant date.
      Accordingly, the adoption of SFAS 123R’s fair value method could have a
      significant impact on the Company’s results of operations, although it will have
      no impact on the Company’s overall financial position. The impact of adoption of
      SFAS 123R cannot be predicted at his time because it will depend on levels
      of
      share-based payments granted in the future.





In
      November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of
      ARB No. 43 Chapter 4”, referred to as SFAS No. 151. SFAS No. 151 amends
      Accounting Research Bulletin (“ARB”) No. 43, Chapter 4, “Inventory Pricing,” to
      clarify the accounting for idle facility expense, freight, handling costs and
      waste (spoilage). Previously these costs were recognized as current period
      expenses when they were considered “so abnormal.” SFAS No 151 requires those
      items be recognized as current period charges regardless of whether they meet
      the “so abnormal” criteria. In addition, SFAS No. 151 clarifies that fixed
      overhead allocations to inventory costs be based on normal capacity of
      production facilities. SFAS No. 151 is effective for inventory costs incurred
      during 2007 and earlier application is permitted. It is believed that the
      Company’s current accounting policies closely align to the new rules.
      Accordingly, the standard will not have a material impact on the Company’s
      financial statements.





In
      July
      2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
      No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB
      Statement No. 109” (FIN 48), which prescribes a recognition threshold and
      measurement attribute for the financial statement recognition and measurement
      of
      a tax position taken or expected to be taken in a tax return. FIN 48 also
      provides guidance on derecognition, classification, interest and penalties,
      accounting in interim periods, disclosure and transition. FIN 48 is effective
      for fiscal years beginning after December 15, 2006. We do not expect the
      adoption of FIN 48 to have amaterial impact on our financial reporting, and
      we
      are currently evaluating the impact, if any, the adoption of FIN 48 will have
      on
      our disclosure requirements.





27


**RISK
      FACTORS** **





THIS
      QUARTERLY REPORT ON FORM 10-QSB CONTAINS FORWARD-LOOKING STATEMENTS WITHIN
      THE
      MEANING OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
      FOR
      THIS PURPOSE, STATEMENTS CONTAINED HEREIN THAT ARE NOT STATEMENTS OF HISTORICAL
      FACT MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS. WITHOUT LIMITING THE
      FOREGOING, THE WORDS “BELIEVES”, “ANTICIPATES”, “PLANS”, “EXPECTS” AND SIMILAR
      EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE
      FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES AND ARE NOT
      GUARANTEES OF FUTURE PERFORMANCE. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM
      THOSE INDICATED IN SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
      FACTORS INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH UNDER THIS
      HEADING.





*GDC
      Limited and Negative Operating History Since Emerging from
      Bankruptcy.* The
      Company emerged from Bankruptcy on September 15, 2003. The Company had
      voluntarily filed for protection under Chapter 11 of the US Bankruptcy Code
      on
      November 2, 2001, after incurring seven consecutive years of losses and selling
      three of its four operating divisions in 2001.  Accordingly, an investor in
      the Company’s common


stock
      must evaluate the risks, uncertainties, and difficulties frequently encountered
      by a company emerging from Chapter 11 and that operates in rapidly evolving
      markets such as the telecommunications equipment industry.





Due
      to
      the Company’s limited and negative operating history and poor performance since
      emergence, the Company may not successfully implement any of its strategies
      or
      successfully address these risks and uncertainties. As described by the
      following factors, past financial performance should not be considered to be
      a
      reliable indicator of future performance, and investors should not use
      historical trends to anticipate results or trends in future
      periods.





*Limited
      Financial Resources and Risk of Default.* The
      Company has no current ability to borrow additional funds. It must, therefore,
      substantially fund operations from cash balances and cash generated from
      operating activities. The Company has significant short term obligations
      including payment of professional fees and payments of principal and interest
      under its senior loan agreement. Furthermore, the Company has significant
      outstanding obligations and commitments (approximately $45.2 million at
      September 30, 2005) (see Item 6 in the Company’s
      annual report on Form 10-KSB/A for the year ended September 30, 2005 as filed
      with the Securities and Exchange Commission, in the section on “Liquidity” for
      additional discussion of this risk factor and the Company’s contractual cash
      obligations as of September 30, 2005).




28








The
      Company’s failure to make required payments under the senior loan agreement
      would constitute an event of default. In addition, the Company is required
      to
      meet a financial covenant to avoid an event of default (see Note 4 to Notes
      to
      Condensed Consolidated Financial Statements included in Item 1 in this Form
      10-QSB).





Since
      emerging from bankruptcy, the Company has incurred losses before recoveries
      on
      note receivable, reorganization items and income taxes of approximately $8.1
      million. Furthermore, the ability of the Company to meet cash flow and loan
      covenant requirements is directly affected by the factors described in this
      “Risk Factors” section.





There
      can
      be no assurance that the Company will be able to avoid an event of default
      on
      its senior loan agreement. If there is such a default, the senior secured
      lenders may accelerate payment of the outstanding debt ($5.7 million at June
      30,
      2006) and exercise their security interests which likely would require the
      Company to again file for bankruptcy protection. An acceleration by the senior
      secured lenders would also result in a default and acceleration by the debenture
      holders ($21.9 million outstanding at June 30, 2006). Based on the uncertainty
      of the Company achieving sufficient cash flows from operations to meet its
      monthly loan payment obligations and to comply with the EBITDA covenant during
      the quarterly periods during fiscal 2006 and beyond, the Company’s long-term
      debt has been classified as current liabilities in the accompanying consolidated
      balance sheets at both June 30, 2006 and September 30, 2005.





*Dependence
      on Legacy and Recently Introduced Products and New Product Development.* The
      Company’s future results of operations are dependent on market acceptance of
      existing and future applications for the Company’s current products and new
      products in development. The majority of sales continue to be provided by the
      Company’s legacy products, primarily the DSU/CSU, V.34 lines which represented
      approximately 65% of net sales in fiscal 2005. The Company anticipates that
      net
      sales from legacy products will decline over the next several years and net
      sales of new products will increase at the same time, with significant quarterly
      fluctuations possible, and without assurance that sales of new products will
      increase at the same time.





Market
      acceptance of the Company’s recently introduced and future product lines is
      dependent on a number of factors, not all of which are in the Company’s control,
      including the continued growth in the use of bandwidth intensive applications,
      continued deployment of new telecommunication services, market acceptance of
      multiservice access devices, the availability and price of competing products
      and technologies, and the success of the Company’s sales and marketing efforts.
      Failure of the Company’s products to achieve market acceptance would have a
      material adverse effect on the Company’s business, financial condition and
      results of operations. Failure to introduce new products in a timely manner
      in
      order to replace sales of legacy products could cause customers to purchase
      products from competitors and have a material adverse effect on the Company’s
      business, financial condition and results of operations.





29


New
      products under development may require additional development work, enhancement
      and testing or further refinement before the Company can make them commercially
      available. The Company has in the past experienced delays in the introduction
      of
      new products, product applications and enhancements due to a variety of internal
      factors, such as reallocation of priorities, financial constraints, difficulty
      in hiring sufficient qualified personnel, and unforeseen technical obstacles,
      as
      well as changes in customer requirements. Such delays have deferred the receipt
      of revenue from the products involved. If the Company’s products have
      performance, reliability or quality shortcomings, then the Company may
      experience reduced orders, higher manufacturing costs, delays in collecting
      accounts receivable, and additional warranty and service expenses.





*Customer
      Concentration.* Our
      historical customers have consisted primarily of Regional Bell Operating
      Companies, long distance service providers, wireless service providers, and
      resellers who sell to these customers. The market for the services provided
      by
      the majority of these service providers has been influenced largely by the
      passage and interpretation of the Telecommunications Act of 1996 (the “1996
      Act”). Service providers require substantial capital for the development,
      construction, and expansion of their networks and the introduction of their
      services.  The ability of service providers to fund such expenditures often
      depends on their ability to budget or obtain sufficient capital resources. 
Over the past several years, resources made available by these customers for
      capital acquisitions have declined, particularly due to recent negative market
      conditions in the United States.  If the Company’s current or potential
      service provider customers cannot successfully raise the necessary funds, or
      if
      they experience any other adverse effects with respect to their operating
      results or profitability, their capital spending programs may be adversely
      impacted which could materially adversely affect the Company’s business,
      financial condition and results of operations.





A
      small
      number of customers have historically accounted for a majority of the Company’s
      sales. Sales to the Company’s top five customers accounted for 55% and 56% of
      sales in fiscal 2005 and 2004, respectively. There can be no assurance that
      the
      Company’s current customers will continue to place orders with the Company, that
      orders by existing customers will continue at the levels of previous periods,
      or
      that the Company will be able to obtain orders from new customers. GDC expects
      the economic climate and conditions in the telecommunication equipment industry
      to remain unpredictable in fiscal 2006, and possibly beyond. The loss of one
      or
      more service provider customers, such as occurred during the past three years
      through industry consolidation or otherwise, could have a material adverse
      effect on our sales and operating results. A bankruptcy filing by one or more
      of
      the Company’s major customers could materially adversely affect the Company’s
      business, financial condition and results of operations.




*Dependence
      on Key Personnel.* The
      Company’s future success will depend to a large extent on the continued
      contributions of its executive officers and key management, sales, and technical
      personnel. Each of the Company’s executive officers, and key management, sales
      and technical personnel would be difficult to replace. The Company does not
      have
      employment contracts with its key employees. The Company implemented significant
      cost and staff reductions in recent years, which may make it more difficult
      to
      attract and retain key personnel. The loss of the services of one or more of
      the
      Company’s executive officers or key personnel, or the inability to attract
      qualified personnel, could delay product development cycles or otherwise could
      have a material adverse effect on the Company’s business, financial condition
      and results of operations.





30


*Dependence
      on Key Suppliers and Component Availability.* The
      Company generally relies upon several contract manufacturers to assemble
      finished and semi-finished goods. The
      Company’s products use certain components, such as microprocessors, memory chips
      and pre-formed enclosures that are acquired or available from one or a limited
      number of sources. Component
      parts that are incorporated into board assemblies are sourced directly by the
      Company from suppliers. The
      Company has generally been able to procure adequate supplies of these components
      in a timely manner from existing sources.





While
      most components are standard items, certain application-specific integrated
      circuit chips used in many of the Company’s products are customized to the
      Company’s specifications. None of the suppliers of components operate under
      contract. Additionally, availability of some standard components may be affected
      by market shortages and allocations. The Company’s inability to obtain a
      sufficient quantity of components when required, or to develop alternative
      sources due to lack of availability or degradation of quality, at acceptable
      prices and within a reasonable time, could result in delays or reductions in
      product shipments which could materially affect the Company’s operating results
      in any given period. In addition, as referenced above the Company relies heavily
      on outsourcing subcontractors for production. The inability of such
      subcontractors to deliver products in a timely fashion or in accordance with
      the
      Company’s quality standards could materially adversely affect the Company’s
      operating results and business.





The
      Company uses internal forecasts to manage its general finished goods and
      components requirements. Lead times for materials and components may vary
      significantly, and depend on factors such as specific supplier performance,
      contract terms, and general market demand for components. If orders vary from
      forecasts, the Company may experience excess or inadequate inventory of certain
      materials and components, and suppliers may demand longer lead times and higher
      prices. From time to time, the Company has experienced shortages and allocations
      of certain components, resulting in delays in fulfillment of customer orders.
      Such shortages and allocations may occur in the future, and could have a
      material adverse effect on the Company’s business, financial condition and
      results of operations.





*Fluctuations
      in Quarterly Operating Results.* The
      Company’s sales are subject to quarterly and annual fluctuations due to a number
      of factors resulting in more variability and less predictability in the
      Company’s quarter-to-quarter sales and operating results. As a small number of
      customers have historically accounted for a majority of the Company’s sales,
      order volatility by any of these major customers has had and may have an impact
      on the Company in the prior, current and future fiscal years.





Most
      of
      the Company’s sales require short delivery times. The Company’s ability to
      affect and judge the timing of individual customer orders is limited. Large
      fluctuations in sales from quarter-to-quarter could be due to a wide variety
      of
      factors, such as delay, cancellation or acceleration of customer projects,
      and
      other factors discussed below. The Company’s sales for a given quarter may
      depend to a significant degree upon planned product shipments to a single
      customer, often related to specific equipment or service deployment projects.
      The Company has experienced both acceleration and slowdown in orders related
      to
      such projects, causing changes in the sales level of a given quarter relative
      to
      both the preceding and subsequent quarters.





31


Delays
      or
      lost sales can be caused by other factors beyond the Company’s control,
      including late deliveries by the third party subcontractors the Company is
      using
      to outsource its manufacturing operations and by vendors of components used
      in a
      customer’s products, slower than anticipated growth in demand for the Company’s
      products for specific projects or delays in implementation of projects by
      customers and delays in obtaining regulatory approvals for new services and
      products. Delays and lost sales have occurred in the past and may occur in
      the
      future. The Company believes that sales in the past have been adversely impacted
      by merger and restructuring activities by some of its top customers. These
      and
      similar delays or lost sales could materially adversely affect the Company’s
      business, financial condition and results of operations. See “Customer
      Concentration” and “Dependence on Key Suppliers and Component Availability”.





The
      Company’s backlog at the beginning of each quarter typically is not sufficient
      to achieve expected sales for that quarter. To achieve its sales objectives,
      the
      Company is dependent upon obtaining orders in a quarter for shipment in that
      quarter. Furthermore, the Company’s agreements with certain of its customers
      typically provide that they may change delivery schedules and cancel orders
      within specified timeframes, typically up to 30 days prior to the scheduled
      shipment date, without significant penalty. Some of the Company’s customers have
      in the past built, and may in the future build, significant inventory in order
      to facilitate more rapid deployment of anticipated major projects or for other
      reasons. Decisions by such customers to reduce their inventory levels could
      lead
      to reductions in purchases from the Company in certain periods. These
      reductions, in turn, could cause fluctuations in the Company’s operating results
      and could have an adverse effect on the Company’s business, financial condition
      and results of operations in the periods in which the inventory is
      reduced.





Operating
      results may also fluctuate due to a variety of factors, including market
      acceptance of the Company’s new lines of products, delays in new product
      introductions by the Company, market acceptance of new products and feature
      enhancements introduced by the Company, changes in the mix of products and
      or
      customers, the gain or loss of a significant customer, competitive price
      pressures, changes in expenses related to operations, research and development
      and marketing associated with existing and new products, and the general
      condition of the economy.





All
      of
      the above factors are difficult for the Company to forecast, and these or other
      factors can materially and adversely affect the Company’s business, financial
      condition and results of operations for one quarter or a series of quarters.
      The
      Company’s expense levels are based in part on its expectations regarding future
      sales and are fixed in the short term to a certain extent. Therefore, the
      Company may be unable to adjust spending in a timely manner to compensate for
      any unexpected shortfall in sales. Any significant decline in demand relative
      to
      the Company’s expectations or any material delay of customer orders could have a
      material adverse effect on the Company’s business, financial condition, and
      results of operations. There can be no assurance that the Company will be able
      to sustain profitability on a quarterly or annual basis. In addition, the
      Company has had, and in some future quarter may have operating results below
      the
      expectations of public market analysts and investors. In such event, the price
      of the Company’s common stock would likely be materially and adversely affected.
      See “Potential Volatility of Stock Price”.





32


*Competition.* The
      markets for telecommunications network access and multi-service equipment
      addressed by the Company’s products can be characterized as highly competitive,
      with intensive equipment price pressure. These markets are subject to rapid
      technological change, wide-ranging regulatory requirements, the entrance of
      low
      cost manufacturers and the presence of formidable competitors that have
      greater name recognition and financial resources. Certain
      technology such as the V.34 and DSU/CSU portion of the SpectraComm and InnovX
      lines are not considered new and the market has experienced decline in recent
      years.





Industry
      consolidation could lead to competition with fewer, but stronger competitors.
      In
      addition, advanced termination products are emerging, which represent both
      new
      market opportunities, as well as a threat to the Company’s current products.
      Furthermore, basic line termination functions are increasingly being integrated
      by competitors, such as Cisco, Lucent Technologies, Inc. and Nortel Networks,
      into other equipment such as routers and switches. To the extent that current
      or
      potential competitors can expand their current offerings to include products
      that have functionality similar to the Company’s products and planned products,
      the Company’s business, financial condition and results of operations could be
      materially adversely affected. Many of the Company’s current and potential
      competitors have substantially greater technical, financial, manufacturing
      and
      marketing resources than the Company. In addition, many of the Company’s
      competitors have long-established relationships with network service providers.
      There can be no assurance that the Company will have the financial resources,
      technical expertise, manufacturing, marketing, distribution and support
      capabilities to compete successfully in the future.





*Rapid
      Technological Change.* The
      network access and telecommunications equipment markets are characterized by
      rapidly changing technologies and frequent new product introductions. The rapid
      development of new technologies increases the risk that current or new
      competitors could develop products that would reduce the competitiveness of
      the
      Company’s products. The Company’s success will depend to a substantial degree
      upon its ability to respond to changes in technology and customer requirements.
      This will require the timely selection,


development
      and marketing of new products and enhancements on a cost-effective basis. The
      development of new, technologically advanced products is a complex and uncertain
      process, requiring high levels of innovation. The Company may need to supplement
      its internal expertise and resources with specialized expertise or intellectual
      property from third parties to develop new products.





Furthermore,
      the communications industry is characterized by the need to design products
      that
      meet industry standards for safety, emissions and network interconnection.
      With
      new and emerging technologies and service offerings from network service
      providers, such standards are often changing or unavailable. As a result, there
      is a potential for product development delays due to the need for compliance
      with new or modified standards. The introduction of new and enhanced products
      also requires that the Company manage transitions from older products in order
      to minimize disruptions in customer orders, avoid excess inventory of old
      products and ensure that adequate supplies of new products can be delivered
      to
      meet customer orders. There can be no assurance that the Company will be
      successful in developing, introducing or managing the transition to new or
      enhanced products, or that any such products will be responsive to technological
      changes or will gain market acceptance. The Company’s business, financial
      condition and results of operations would be materially adversely affected
      if
      the Company were to be unsuccessful, or to incur significant delays in
      developing and introducing such new products or enhancements. See “Dependence on
      Legacy and Recently Introduced Products and New Product Development”.





33
 *Compliance
        with Regulations and Evolving Industry Standards.* The
        market for the Company’s products is characterized by the need to meet a
        significant number of communications regulations and standards, some of which
        are evolving as new technologies are deployed. In the United States, the
        Company’s products must comply with various regulations defined by the Federal
        Communications Commission and standards


established
      by Underwriters Laboratories and Bell Communications Research and certain new
      products introduced, for example in the SpectraComm line, will need to be NEBS
      Certified. As standards continue to evolve, the Company will be required to
      modify its products or develop and support new versions of its products. The
      failure of the Company’s products to comply, or delays in compliance, with the
      various existing and evolving industry standards, could delay introduction
      of
      the Company’s products, which could have a material adverse effect on the
      Company’s business, financial condition and results of operations.





*GDC
      May Require Additional Funding to Sustain Operations.* The
      Company emerged from Chapter 11 bankruptcy on September 15, 2003. Under the
      plan
      of reorganization, the Company was to pay all creditors 100% of their allowed
      claims based upon a five year business plan. However, the company has not met
      its business plan objectives since emerging from Chapter 11. The ability to
      meet
      the objectives of this business plan is directly affected by the factors
      described in this “Risk Factors” section. The Company cannot assure investors
      that it will be able to obtain new customers or to generate the increased
      revenues required to meet our business plan objectives. In addition, in order
      to
      execute the business plan, the Company may need to seek additional funding
      through public or private equity offerings, debt financings or commercial
      partners. The Company cannot assure investors that it will obtain funding on
      acceptable terms, if at all. If the Company is unable to generate sufficient
      revenues or access capital on acceptable terms, it may be required to (a) obtain
      funds on unfavorable terms that may require the Company to relinquish rights
      to
      certain of our technologies or that would significantly dilute our stockholders
      and/or (b) significantly scale back current operations. Either of these two
      possibilities would have a material adverse effect on the Company’s business,
      financial condition and results of operations.





*Risks
      Associated with Entry into International Markets* .
      The
      Company has had limited direct sales to customers outside of North America
      since
      2001. The Company has little recent experience in international markets with
      the
      exception of a few direct customers and resellers/integrators and sales into
      Western Europe through the former Ahead Communications Systems’ subsidiary in
      France (now General DataComm SARL), which was acquired by the Company on June
      30, 2005. The Company intends to expand sales of its products outside of North
      America and to enter certain international markets, which will require
      significant management attention and financial resources. Conducting business
      outside of North America is subject to certain risks, including longer payment
      cycles, unexpected changes in regulatory requirements and tariffs, difficulty
      in
      supporting foreign customers, greater difficulty in accounts receivable
      collection and potentially adverse tax consequences. To the extent any Company
      sales are denominated in foreign currency, the Company’s sales and results of
      operations may also be directly affected by fluctuation in foreign currency
      exchange rates. In order to sell its products internationally, the Company
      must
      meet standards established by telecommunications authorities in various
      countries, as well as recommendations of the Consultative Committee on
      International Telegraph and Telephone. A delay in obtaining, or the failure
      to
      obtain, certification of its products in countries outside the United States,
      could delay or preclude the Company’s marketing and sales efforts in such
      countries, which could have a material adverse effect on the Company’s business,
      financial condition and results of operations.





34


*Risk
      of Third Party Claims of Infringement.* The
      network access and telecommunications equipment industries are characterized
      by
      the existence of a large number of patents and frequent litigation based on
      allegations of patent infringement. From time to time, third parties may assert
      exclusive patent, copyright, trademark and other intellectual property rights
      to
      technologies that are important to the Company. The Company has not conducted
      a
      formal patent search relating to the technology used in its products, due in
      part to the high cost and limited benefits of a formal search. In addition,
      since patent applications in the United States are not publicly disclosed until
      the related patent is issued and foreign patent applications generally are
      not
      publicly disclosed for at least a portion of the time that they are pending,
      applications may have been filed which, if issued as patents, could relate
      to
      the Company’s products. Software comprises a substantial portion of the
      technology in the Company’s products. The scope of protection accorded to
      patents covering software-related inventions is evolving and is subject to
      a
      degree of uncertainty which may increase the risk and cost to the Company if
      the
      Company discovers third party patents related to its software products or if
      such patents are asserted against the Company in the future.





The
      Company may receive communications from third parties asserting that the
      Company’s products infringe or may infringe the proprietary rights of third
      parties. In its distribution agreements, the Company typically agrees to
      indemnify its customers for any expenses or liabilities resulting from claimed
      infringements of patents, trademarks or copyrights of third parties. In the
      event of litigation to determine the validity of any third-party claims, such
      litigation, whether or not determined in favor of the Company, could result
      in
      significant expense to the Company and divert the efforts of the Company’s
      technical and management personnel from productive tasks. In the event of an
      adverse ruling in such litigation, the Company might be required to discontinue
      the use and sale of infringing products, expend significant resources to develop
      non-infringing technology or obtain licenses from third parties. There can
      be no
      assurance that licenses from third parties would be available on acceptable
      terms, if at all. In the event of a successful claim against the Company and
      the
      failure of the Company to develop or license a substitute technology, the
      Company’s business, financial condition, and results of operations could be
      materially adversely affected.





35




*Limited
      Protection of Intellectual Property.* The
      Company relies upon a combination of patent, trade secret, copyright, and
      trademark laws and contractual restrictions to establish and protect proprietary
      rights in its products and technologies. The Company has been issued certain
      U.S. and Canadian patents with respect to certain products. There can be no
      assurance that third parties have not or will not develop equivalent
      technologies or products without infringing the Company’s patents or that a
      court having jurisdiction over a dispute involving such patents would hold
      the
      Company’s patents valid, enforceable and infringed. The Company also typically
      enters into confidentiality and invention assignment agreements with its
      employees and independent contractors, and non-disclosure agreements with its
      suppliers, distributors and appropriate customers so as to limit access to
      and
      disclosure of its proprietary information. There can be no assurance that these
      statutory and contractual arrangements will deter misappropriation of the
      Company’s technologies or discourage independent third-party development of
      similar technologies. In the event such arrangements are insufficient, the
      Company’s business, financial condition and results of operations could be
      materially adversely affected. The laws of certain foreign countries in which
      the Company’s products are or may be developed, manufactured or sold may not
      protect the Company’s products or intellectual property rights to the same
      extent as do the laws of the United States and thus, make the possibility of
      misappropriation of the Company’s technology and products more likely.





*Potential
      Volatility of Stock Price.* The
      trading price of the Company’s common stock may be subject to wide fluctuations
      in response to quarter-to-quarter variations in operating results, announcements
      of technological innovations or new products by the Company or its competitors,
      developments with respect to patents or proprietary rights, general conditions
      in the telecommunication network access and equipment industries, changes in
      earnings estimates by analysts, or other events or factors. In addition, the
      stock market has experienced extreme price and volume fluctuations, which have
      particularly affected the market prices of many
      technology companies and which have often been unrelated to the operating
      performance of such companies. Company-specific factors or broad market
      fluctuations may materially adversely affect the market price of the Company’s
      common stock. The Company has experienced significant fluctuations in its stock
      price and share trading volume in the past and may continue to do so.





*The
      Company is Controlled by a Small Number of Stockholders and Certain
      Creditors* .
      Mr.
      Howard Modlin, Chairman of the Board and Chief Executive Officer, and President
      of Weisman Celler Spett & Modlin, P.C., legal counsel for the Company, owns
      approximately 70% of the Company’s outstanding shares of Class B stock and has
      stock options and warrants that would allow him to acquire approximately 54%
      of
      the Company’s common stock. Furthermore, Mr. Modlin is also trustee for the
      benefit of the children of Mr. Charles P. Johnson, the former Chairman of the
      Board and Chief Executive Officer, and such trust holds approximately 12% of
      the
      outstanding shares of Class B stock. Class B stock under certain circumstances
      has 10 votes per share in the election of Directors. The Board of Directors
      is
      to consist of no less than three and no more than thirteen directors, one of
      which was designated by the Creditors Committee (and thereafter may be
      designated by the Trustee). The holders of the 9% Preferred Stock are presently
      entitled to designate two directors until all arrears on the dividends on such
      9% Preferred Stock are paid in full. In addition, until the Company’s primary
      secured loan obligations are paid in full, the primary secured lender, Ableco
      Finance LLC (“Ableco”) is entitled to designate three directors and, upon
      default in its loan, its affiliate shall have the right under the two warrants
      it holds, to (i) acquire from 5% (currently 5%) to 51% of the outstanding Common
      Stock depending on the amount of the outstanding secured debt at such time,
      and
      (ii) acquire 10% of the outstanding Common Stock on a diluted basis. If Ableco’s
      loan is not repaid in full by September 15, 2006, the Trustee may designate
      two
      more directors, and in the event of a payment default under the Debentures
      which
      is not cured within 60 days after written notice, the Trustee shall be entitled
      to select a majority of the Board of Directors. Accordingly, in absence of
      a
      default under Ableco’s loan, or a payment default under the Debenture, Mr.
      Modlin may be able to elect all members of the Board of Directors not designated
      by the holders of the 9% Preferred Stock, Ableco and the Trustee and determine
      the outcome of certain corporate actions requiring stockholder approval, such
      as
      mergers and acquisitions of the Company. This level of ownership by such persons
      and entities could have the effect of making it more difficult for a third
      party
      to acquire, or of discouraging a third party from attempting to acquire, control
      of the Company. Such provisions could limit the price that certain investors
      might be willing to pay in the future for shares of Company’s common stock,
      thereby making it less likely that a stockholder will receive a premium in
      any
      sales of shares. To date, the holders of the 9% Preferred Stock and Ableco
      have
      not designated any directors.





36


**ITEM
      3. CONTROLS AND PROCEDURES**





For
      the
      period covered by this report, the Company carried out an evaluation, under
      the
      supervision and with the participation of the Company’s management, including
      the Company’s Chairman and Chief Executive Officer, and Vice President and Chief
      Financial Officer, of the effectiveness of the design and operation of the
      Company’s disclosure controls and procedures pursuant to Exchange Act Rule
      13a-15. Based upon that evaluation, the Company’s President and Chief Executive
      Officer, and Vice President and Chief Financial Officer, have concluded that
      the
      Company’s disclosure controls and procedures are effective to ensure the
      information required to be disclosed in reports filed or submitted under the
      Securities Exchange Act of 1934 is recorded, processed, summarized and reported
      within the time periods specified in Securities and Exchange Commission rules
      and forms. There have been no significant changes in the Company’s internal
      controls over financial reporting that occurred during the period covered by
      this quarterly report on Form 10-QSB that has materially affected, or is
      reasonably likely to materially affect, the Company’s internal control over
      financial reporting.





**PART
      II. OTHER INFORMATION**











**ITEM
      1. LEGAL PROCEEDINGS**





See
      Note
      11 “Subsequent Events”, the section on “Notice of Court Ruling”, included in
      Part I of this Form 10-QSB included in the Notes to Condensed Consolidated
      Financial Statements.





**ITEM
      2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS**





Not
      applicable





**ITEM
      3. DEFAULTS UPON SENIOR SECURITIES**





Payment
      of dividends on the 9% Cumulative Convertible Exchangeable Preferred Stock
      were
      suspended June 30, 2000. Such dividend arrearages total $10,563,696.00 as of
      June 30, 2006.





**ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**





Not
      applicable





**ITEM
      5. OTHER INFORMATION**





See
      Note
      11 “Subsequent Events”, included in the Notes to Condensed Consolidated
      Financial Statements included in Part I of the Form 10-QSB, concerning the
      “Notice of Court Ruling” and “Amendment to Loan Agreement”.





**ITEM
      6. EXHIBITS**





(a)
      Exhibits Index:







Exhibit Number
            Description of
              Exhibit10.1
            Seventh Amendment to Loan
              and
              Security Agreement dated as ofAugust
              20, 2002 between General DataComm Industries, Inc., et al, andABLECO
              Finance LLC.31.1
            Certification
                of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a)
                under the Securities Exchange Act of 1934.31.2
            Certification
                of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a)
                under the Securities Exchange Act of 193432.1
            Certification
                of Chief Executive Officer and Chief Financial Officer pursuant to
                18
                U.S.C. Section 1350, as adopted pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002








37










**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.**Date: **August
              14, 2006**
            By:
            /s/ **/
              William G. Henry****William
                G. Henry**
              **Vice
                President, Finance and Administration**
              **Chief
                Financial Officer**




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