**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
                1934For
                the quarterly period endedDecember
                31, 2006o
            Transition
                report under Section 13 or 15(d) of the Exchange ActFor
                the transition period from__________to__________Commission
                file number1-8086




General
      DataComm Industries, Inc.








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





6
      Rubber
      Avenue, Naugatuck, CT 06770







203-729-0271











(Former
      Name, Former Address and Former Fiscal Year, if Changed


Since
      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.





Ye
      s 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
x  No
o




**APPLICABLE
      ONLY TO CORPORATE ISSUER**





State
      the
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of January 31, 2007:





3,470,813
      shares of Common Stock


651,275
      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 of December 31, 2006 and September
                30,
                2006
            3Condensed
                Consolidated Statements of Operations for the Three Months Ended
                December
                31, 2006 and 2005
            4Condensed
                Consolidated Statements of Cash Flows for the Three Months Ended
                December
                31, 2006 and 2005.
            5Notes
                to the Condensed Consolidated Financial Statements
            6**Item
                2**.
            **Management’s
                Discussion and Analysis or Plan of Operation**
            15**Item
                3.**
            **Controls
                and Procedures.**
            29**PART
                II**
            **OTHER
                INFORMATION****Item
                1**.
            **Legal
                Proceedings**
            29**Item
                2**.
            **Unregistered
                Sales of Equity Securities and Use of Proceeds**.
            30**Item
                3**.
            **Defaults
                Upon Senior Securities**
            30**Item
                4**.
            **Submission
                of Matters of a Vote of Security Holders**.
            30**Item
                5**.
            **Other
                Information**
            .30**Item
                6**.
            **Exhibits**
            30





2




**PART
      I. FINANCIAL INFORMATION**





**ITEM
      1. FINANCIAL STATEMENTS**





**General
      DataComm Industries, Inc.**


***Condensed
      Consolidated Balance Sheets***


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




**December
                31,**
            
            **September
                30,****2006**
            
            **2006*****(Unaudited)****Assets:***Current
                assets:*Cash
                and cash equivalents
            
            **$**
            **207**
            
            **$**
            **246**Accounts
                receivable, less allowance for doubtful accounts of$495
                at December 31, 2006 and $489 at September 30, 2006
            
            
            **2,313**
            
            
            **2,486**Inventories
            
            
            **2,391**
            
            
            **2,554**Other
                current assets
            
            
            **144**
            
            
            **591**Total
                current assets
            
            
            **5,055**
            
            
            **5,877**Property,
                plant and equipment, net
            
            
            **3,903**
            
            
            **3,973**Total
                Assets
            
            **$**
            **8,958**
            
            **$**
            **9,850****Liabilities
                and Stockholders’ Deficit:***Current
                liabilities:*Current
                portion of long-term debt ($2,081 at December 31, 2006
                andSeptember
                30, 2006 owed to related parties)
            
            **$**
            **28,787**
            
            **$**
            **29,051**Accounts
                payable
            
            
            **2,276**
            
            
            **2,658**Accrued
                payroll and payroll-related costs
            
            
            **515**
            
            
            **596**Accrued
                interest
            
            
            **8,646**
            
            
            **7,904**Other
                current liabilities
            
            
            **4,157**
            
            
            **4,700**Total
                current liabilities
            
            
            **44,381**
            
            
            **44,909**Other
                liabilities
            
            
            **534**
            
            
            **539**Total
                Liabilities
            
            
            **44,915**
            
            
            **45,448**Commitments
                and contingencies
            
            
            **—**
            
            
            **—**Stockholders’
                deficit:9%
                Preferred stock, par value $1.00 per share, 3,000,000 sharesauthorized,
                781,996 shares issued and outstanding at December 31,
                2006and
                September 30, 2006; $30.1 million liquidation preferenceat
                December 31, 2006
            
            
            **782**
            
            
            **782**Class
                B common stock, par value $.01 per share, 5,000,000 sharesauthorized;
                651,275 shares issued and outstanding at December 31,
                2006and
                653,947 shares at September 30, 2006
            
            
            **7**
            
            
            **7**Common
                stock, par value $.01 per share, 25,000,000 shares authorized;issued:
                3,470,813 shares at December 31, 2006 and 3,468,141 shares atSeptember
                30, 2006
            
            
            **35**
            
            
            **35**Capital
                in excess of par value
            
            
            **198,842**
            
            
            **198,751**Accumulated
                deficit
            
            
            **(235,638**
            **)**
            
            **(235,183**
            **)**Accumulated
                other comprehensive income
            
            
            **15**
            
            
            **10**Total
                Stockholders’ Deficit
            
            
            **(35,957**
            **)**
            
            **(35,598**
            **)**Total
                Liabilities and Stockholders’ Deficit
            
            **$**
            **8,958**
            
            **$**
            **9,850**





*
      Derived
      from the Company’s audited consolidated balance sheet at September 30,
      2006.




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**
              **December
                31,****2006**
            
            **2005****Revenues**Product
            
            **$**
            **2,965**
            
            **$**
            **2,574**Service
            
            
            **594**
            
            
            **471**Total
            
            
            **3,559**
            
            
            **3,045**Cost
                of revenues
            
            
            **1,313**
            
            
            **1,367****Gross
                margin**
            
            
            **2,246**
            
            
            **1,678*****Operating
                expenses:***Selling,
                general and administrative
            
            
            **1,339**
            
            
            **1,492**Research
                and product development
            
            
            **608**
            
            
            **857****1,947**
            
            
            **2,349****Operating
                income (loss)**
            
            
            **299**
            
            
            **(671**
            **)*****Other
                income (expense):***Interest
                expense
            
            
            **(795**
            **)**
            
            **(817**
            **)**Loss
                on extinguishment of debt
            
            
            **—**
            
            
            **(389**
            **)**Other,
                net
            
            
            **44**
            
            
            **68****(751**
            **)**
            
            **(1,138**
            **)****Loss
                before income taxes**
            
            
            **(452**
            **)**
            
            **(1,809**
            **)**Income
                tax provision
            
            
            **3**
            
            
            **3****Net
                loss**
            
            
            **(455**
            **)**
            
            **(1,812**
            **)**Dividends
                applicable to preferred stock
            
            
            **(440**
            **)**
            
            **(440**
            **)****Net
                loss applicable to common and Class B stock**
            
            **$**
            **(895**
            **)**
            **$**
            **(2,252**
            **)****Earnings
                (loss) per share:**
              **Common
                and Class B stock (basic and diluted)**
            
            **$**
            **(0.22**
            **)**
            **$**
            **(0.56**
            **)****Weighted
                average number of common and Class B shares
                outstanding:**
              **Common
                stock**
              **Class
                B stock**
            
            
            **3,470,813**
              **651,275**
            
            
            **3,340,403**
              **653,947**





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)





**Three
                Months Ended**
              **December
                31,****2006**
            
            **2005***Cash
                flows from operating activities:*Net
                (loss)
            
            **$**
            **(455**
            **)**
            **$**
            **(1,812**
            **)**Adjustments
                to reconcile net (loss) to net cashprovided
                by operating activities:Depreciation
                and amortization
            
            
            **87**
            
            
            **89**Loss
                on extinguishment of debt
            
            
            **—**
            
            
            **389**Stock
                compensation expense
            
            
            **91**
            
            
            **—**Changes
                in:Accounts
                receivable
            
            
            **173**
            
            
            **188**Inventories
            
            
            **163**
            
            
            **119**Accounts
                payable
            
            
            **(382**
            **)**
            
            **869**Accrued
                payroll and payroll-related costs
            
            
            **(81**
            **)**
            
            **(211**
            **)**Accrued
                interest
            
            
            **680**
            
            
            **437**Other
                net current liabilities
            
            
            **(34**
            **)**
            
            **431**Other
                net long-term assets
            
            
            **—**
            
            
            **(231**
            **)****Net
                cash provided by operating activities**
            
            
            **242**
            
            
            **268***Cash
                flows from investing activities:*Acquisition
                of property, plant and equipment, net
            
            
            **(8**
            **)**
            
            **(23**
            **)****Net
                cash used in investing activities**
            
            
            **(8**
            **)**
            
            **(23**
            **)***Cash
                flows from financing activities:*Principal
                payments on term obligation
            
            
            **(273**
            **)**
            
            **(521**
            **)****Net
                cash used by financing activities**
            
            
            **(273**
            **)**
            
            **(521**
            **)****Net
                decrease in cash and cash equivalents**
            
            
            **(39**
            **)**
            
            **(276**
            **)**Cash
                and cash equivalents, beginning of period
            
            
            **246**
            
            
            **878****Cash
                and cash equivalents, end of period**
            
            **$**
            **207**
            
            **$**
            **602***Supplemental
                disclosures of cash flow information:*Cash
                paid during the period for:Interest
            
            **$**
            **65**
            
            **$**
            **116**Income
                taxes
            
            **$**
            **3**
            
            **$**
            **—**Reorganization
                items (principally pre-petition tax claims)
            
            **$**
            **255**
            
            **$**
            **49**




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 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 three months ended December 31, 2006 are
      not necessarily indicative of results which may be achieved for the entire
      fiscal year ending September 30, 2007. 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 for the fiscal year ended September 30, 2006 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.
      In order to meet its obligations the Company must achieve revenue growth while
      at the same time limiting investments in inventories and capital
      assets.





6




At
      December 31, 2006 the Company had a stockholders’ deficit of approximately $36.0
      million. In addition, it had a working capital deficit of approximately $39.3
      million, and the Company’s principal source of liquidity was cash and cash
      equivalents of $207,000. The large negative working capital reflects the
      classification of all long-term secured debt as current liabilities as described
      below.





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.
      Because operating results can fluctuate significantly 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. As of December 31, 2006 and September 30,
      2006, as a result of not making certain required principal payments on
      its Term Obligation (see Note 4), the Company was in default under its
      senior loan agreement and accordingly, all long term debt and related accrued
      interest was classified as current liabilities at such dates. In January 2007,
      such default was waived by the senior lender as part of a loan amendment (see
      Note 7). Based on the uncertainty as to whether the Company will achieve
      sufficient cash flows from operations to meet its monthly loan payments required
      under its senior loan agreement as amended, the Company’s long-term debt
      and related accrued interest continue to be classified as current liabilities
      in
      the accompanying consolidated balance sheet at December 31,
      2006.





The
      events and circumstances described above 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 2006 financial
      statements.





Management
      has responded to its liquidity and cash flow risks as part of an ongoing
      strategy, by restructuring the sales force, increasing factory shutdown time,
      containing expenses, and reducing the size of the employee workforce. In
      addition, the Company has had to rely upon loans from related parties in the
      amount of $1,975,000, including $125,000 in January 2007 in order to make
      payments on its senior debt, and in January 2007 obtained an amendment
      to its senior loan agreement which reduced required principal payments on its
      Term Obligation (see Note 7). 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.





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 or obtain additional funding sources. 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 months ended December
      31,
      2006 and 2005 (in thousands, except shares and per share data):





7





**Three
                Months Ended December 31,****2006**
            
            **2005**Net
                income (loss)
            
            $
            (455
            )
            $
            (1,812
            )Dividends
                applicable to preferred stock
            
            
            (440
            )
            
            (440
            )Net
                loss applicable to common and Class B stock
            
            $
            (895
            )
            $
            (2,252
            )Net
                loss applicable to common stock-basic and diluted
            
            $
            (754
            )
            $
            (1,883
            )Net
                loss applicable to Class B stock-basic and diluted
            
            $
            (141
            )
            $
            (369
            )






**Three
                  Months Ended December 31,****2006**
              
              **2005**
              
              **2006**
              
              **2005****Common
                  Stock**
              
              **Class
                  B Stock**Numerator
                  for basic and diluted earnings per share - net loss
              
              $
              (754
              )
              $
              (1,883
              )
              $
              (141
              )
              $
              (369
              )Denominator
                  for basic and diluted loss per share - weighted average outstanding
                  shares
              
              
              3,470,813
              
              
              3,340,403
              
              
              651,275
              
              
              653,947Basic
                  and diluted loss per share
              
              $
              (0.22
              )
              $
              (0.56
              )
              $
              (0.22
              )
              $
              (0.56
              )




In
      the
      three months ended December 31, 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 are as follows:





**No.
                of Shares****Three
                Months Ended December 31,********2006**
            
            **2005**Stock
                warrants
            
            
            4,093,251
            
            
            3,945,865Stock
                options
            
            
            2,672,647
            
            
            2,017,326Convertible
                preferred stock
            
            
            781,996
            
            
            782,496Contingently
                issuable shares*
            
            
            2,333,996
            
            
            1,785,983Total
            
            
            9,881,890
            
            
            8,531,670




*
      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 been waived or not taken place (for further discussion of these
      items, see Note 4).




8


**3.
      Inventories**





Inventories
      consist of (in thousands):




**December
                31,**
            
            September
                30,**2006**
            
            2006Raw
                materials
            
            **$**
            **705**
            
            $
            637Work-in-process
            
            
            **1,084**
            
            
            945Finished
                goods
            
            
            **602**
            
            
            972**$**
            **2,391**
            
            $
            2,554





Inventories
      are stated at the lower of cost or market using a first-in, first-out method.
      Reserves in the amount of $3,448,000 and $3,442,000 were recorded at December
      31, 2006 and September 30, 2006, respectively, for excess and obsolete
      inventories.





**4.
      Long-Term Debt**




Long-term
      debt consists of (in thousands):





**December
                  31,**
              
              September
                  30,**2006**
              
              2006Term
                  Obligation
              
              **$**
              **2,328**
              
              $
              2,602PIK
                  Obligation
              
              
              **2,500**
              
              
              2,500Notes
                  Payable to Related Parties, net of debt discount of $45 at December
                  31,
                  2006 and $54 at September 30, 2006
              
              
              **2,036**
              
              
              2,026Debentures
              
              
              **21,923**
              
              
              21,923**28,787**
              
              
              29,051Less
                  current portion
              
              
              **28,787**
              
              
              29,051**$**
              **0**
              
              **$**
              **0**


At
      both
      September 30, 2006 and December 31, 2006, the Company was in default under
      its
      senior loan agreement as a result of not making required principal payments
      on
      its Term Obligation. Accordingly, all long-term debt was classified as current
      liabilities at such dates. Such default was waived by the senior lenders in
      January, 2007 as part of a loan amendment. However, as there  is
      uncertainty whether the Company can achieve sufficient cash flow from operations
      to satisfy the debt service requirements of its senior loan
      agreement as amended, 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 sheet at December 31, 2006.




Interest
      on the PIK Obligation (prior to the loan amendment on January 17, 2007) and
      Debentures was not required to be paid currently. Such accrued interest amounted
      to $8,145,586 and $7,525,245, at December 31, 2006 and September 30, 2006,
      respectively, and is classified as a current liability along with the
      corresponding debt.





Long-term
      debt matures in amounts totaling $2,936,000 in fiscal 2007, $1,200,000 in fiscal
      2008, and $24,651,000 in fiscal 2009 after giving effect to the amendment in
      January 2007 referred to below, assuming that there is no acceleration in the
      future due to an event of default. However, Notes Payable to Related Parties
      in
      the amount of $2,036,000 that mature in fiscal 2007 may not be paid until both
      the Term Obligation and PIK Obligation are repaid in full.





**Term
      Obligation, PIK Obligation and Debentures**





Under
      a
      loan amendment with its senior lenders entered into on January 17, 2007, the
      terms of the Term Obligation and PIK Obligation were substantially modified
      to
      provide for reduced principal payments, extension of terms, elimination of
      the
      minimum financial covenant requirement and other changes. See Note 7,
“Subsequent Event”, for further discussion.





Under
      the
      previous terms of the loan and security agreement, minimum principal payments
      under a term loan due December 31, 2007 (the “Term Obligation”) were $250,000
      per month. Interest was payable monthly at the greater of (i) 7.25% and (ii)
      the
      prime rate plus 2.5% (the prime rate was 8.25% on December 31, 2006). The Term
      Obligation is collateralized by all of the Company’s assets and proceeds from
      the potential sales of non-core assets and certain other proceeds must be used
      to reduce the Term Obligation.





9




The
      Company had reached an agreement with its senior secured lenders to extend
      the
      payment of the Term Obligation principal and interest in 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 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 was 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 a financial covenant
      requirement to maintain a minimum amount of Earnings before Interest, Taxes,
      Depreciation and Amortization (“EBITDA”) on a cumulative quarterly basis for the
      periods ended September 30, 2004 and June 30, 2006. Pursuant to further
      arrangements with the Company’s senior lender, such lender informally agreed to
      defer loan principal payments in the amount of $50,000 due in August 2006,
      $250,000 due in September 2006, $175,000 due in October 2006, $318,750 due
      in
      November 2006 and $243,750 due in December 2006, and to eliminate the EBITDA
      financial covenant requirement for December 31, 2006. As  a result of not
      making these required principal payments, the Company was in default of the
      Term
      Obligation at both September 30, 2006 and December 31, 2006. Such defaults
      were
      waived in January 2007 (see Note 7).





The
      Company’s senior secured lenders have warrants to purchase 10% of the Company’s
      common stock at $0.01 per share. Such lenders may also purchase an additional
      10% of the Company’s common stock at $0.01 per share in the event of a default
      under the loan agreement. However, both such warrants and any common stock
      issued thereunder will be canceled if the secured lender’s outstanding debt is
      fully paid by December 31, 2008 (December 31, 2007 prior to the loan amendment
      on January 17, 2007). No amounts have been ascribed to the warrants issued
      to
      the secured lenders. Due to the nominal exercise price of the warrants, the
      underlying common shares are being accounted for as contingent interest.
      Accordingly, upon an event of default under the Term Obligation or the PIK
      Obligation described below, if not waived, or the nonpayment of indebtedness
      in
      full by December 31, 2008, the then quoted market price of the common shares
      which become issuable will be charged to operations.





The
      Company also previously entered into a loan with the senior secured lenders
      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 based on reductions in the Term Obligation under terms of an
      agreement which expired on December 31, 2004, leaving the principal balance
      owed
      of $2.5 million at December 31, 2006. However, the amount owing under the PIK
      Obligation was adjusted effective with the loan amendment on January 17, 2007
      (see Note 7).





Debentures
      together with accrued interest mature on October 1, 2008. The Debentures were
      issued to unsecured creditors as part of the Company’s Plan of Reorganization.
      No principal is payable on the Debentures until the senior secured lenders’
claims are paid in full and no principal has been paid at December 31, 2006.
      Interest accrues at the annual rate of 10%, but such rate shall be reduced
      (in
      increments to 7 1⁄4%) if the Debentures are paid in full on or before September
      15, 2007.





10


**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
      plus accrued interest thereon in secured loans from such directors maturing
      between September 29, 2005 and September 29, 2006 were extended. Such amendments
      generally provided that 50% of each such amended and restated note was to be
      payable one and two years from the original due dates. 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
      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. In connection with the restructuring of the loans, in the
      quarter ended December 31, 2005, the Company recorded a non-cash loss on
      extinguishment of debt of $389,000 representing the value of the warrants
      issued. Such warrant value was determined based upon an appraisal by an outside
      consultant.





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 909,000 shares of common stock
      at $0.275 per share . 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 the assets of the Company behind the first lien of
      the
      Company’s senior lenders.





On
      January 16, 2007, Mr. Modlin made a demand loan of $125,000 to the Company
      (see
      Note 7).





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




At
      December 31, 2006, the Company has two stock-based employee compensation plans,
      which are described more fully in Note 6. Prior to October 1, 2006, the
      Company accounted for those plans under the recognition and measurement
      provisions of APB Opinion  No. 25, Accounting for Stock Issued to
      Employees, and related Interpretations, as permitted by FASB Statement No.
      123,
      Accounting for Stock-Based Compensation. No stock-based employee compensation
      cost was recognized in the Statement of Operations for the year ended September
      30, 2006, as all options granted under those plans had an exercise price equal
      to the market value of the underlying common stock on the date of
      grant.




Effective
      October 1, 2006, the Company adopted the fair value recognition provisions
      of
      SFAS No. 123 (R) “Accounting for Stock-Based Compensation” (“SFAS No. 123R”)
      using the modified prospective transition method.  Under that
      transition method, compensation cost recognized in fiscal 2007 includes: (a)
      compensation cost for all share-based payments (including stock options) granted
      prior to, but not yet vested as of October 1, 2006, based on the grant date
      fair value estimated in accordance with the original provisions of SFAS
      No. 123, and (b) compensation cost for all share-based payments granted
      subsequent to October 1, 2006, based on the grant-date fair value estimated
      in
      accordance with the provisions of SFAS No. 123R. Results for prior periods
      have not been restated. Compensation cost is recorded over the stock
      options’ vesting
      periods. As a result of adopting SFAS No. 123R, compensation
      cost recognized in the quarter ended December 31, 2006 was $90,571 and net
      loss
      for the quarter was increased by such amount or $0.02 per share (basic and
      diluted). The following table reflects the effect on net loss and net loss
      per share if the fair value based method had been applied to all outstanding
      and
      unvested stock options for the quarter ended December 31, 2005:




11




**Three
                  Months**
                **Ended**
                **December
                  31,****2005**Net
                  loss, as reported
              
              $
              (1,812
              )Add:
                  stock-based employee compensation expenseincluded
                  in reported net loss
              
              
              —Deduct:
                  total stock-based employee compensationexpense
                  determined under fair value based methodfor
                  all awards
              
              
              (78
              )Proforma
                  net loss
              
              
              (1,890
              )Dividends
                  applicable to preferred stock
              
              
              (443
              )Proforma
                  net loss applicable to common and Class B stock
              
              $
              (2,333
              )Proforma
                  loss per share (basic and diluted)
              
              $
              (0.58
              )


The
      value
      of options is estimated using the Black-Scholes method to compute the
      proforma amounts presented above.




**Note
      6. Employee Incentive Plans**


The
        Company adopted a 2003 Stock and Bonus Plan (“2003 Plan”)
        reserving
        459,268 shares of Class B Stock and 459,268 shares of common stock. On January
        26, 2005, the Board of Directors adopted a new 2005 Stock and Bonus plan
        (“2005 Plan”)
        covering
        1,200,000 shares of common stock. The 2005 plan is similar to the 2003 Plan.
        No
        shares of Class B stock are authorized under the 2005 Plan. On November 22,
        2005, the Board of Directors amended the 2005 Plan to increase the options
        available for grant by 1,200,000. Officers and key employees may be granted
        incentive stock options at an exercise price equal to or greater than the
        market
        price on the date of grant and non-incentive stock options at an exercise
        price
        equal to, greater than or less than the market price on the date of grant.
        While
        individual options can be issued under various provisions, most options,
        once
        granted, generally vest in increments of 20% per year over a five-year period
        and expire within ten years. At December 31, 2006 there were 486,948 options
        available for future issuance under the plans.
 
 In
        October 10, 2006, the Stock Option Committee of the Board of Directors granted
        qualified stock options pursuant to the Corporation’s 2005 Stock and Bonus Plan
        to purchase 362,400 shares of Common Stock at 18 cents per share, including
        grants of 30,000 Plan shares to each of Lee M. Pashall, Aletta Richards and
        John
        L. Segall, Directors, William G. Henry, Vice President, Finance and
        Administration and Principal Financial Officer and George Gray, Vice President,
        Operaitons and Chief Technology Officer, and an aggregate of 112,400 of such
        options to all of its employees other than its officers and directors. The
        committee also granted to Howard S. Modlin, Chairman and Chief Executive
        Officer, a stock option under the Plan to purchase 551,121 shares at 20 cents
        a
        share. All such options vest iin increments of 20% a year over a five year
        period and expire ten years after grant.
 
 On
        December 17, 2006, Mr. Lee M. Paschall, Director and Audit Committee Financial
        Expert, died after a brief illness.
  A
        summary
        of option activity under the Plans as of December 31, 2006, and changes during
        the three months then ended is presented below:
  Shares
                
                Weighted
                    Average Exercise Price
                
                
                Weighted
                    Average Remaining Contractual
                    Term
                
                
                Aggregate
                  Intrinsic
                  ValueOptions
                    outstanding, September 30, 2006
                
                
                1,782,226
                
                $
                1.26Options
                    granted
                
                
                914,521
                
                
                0.19Options
                    exercised
                
                
                —
                
                
                -Options
                    cancelled or expired
                
                
                (24,100
                )
                
                3.76Options
                    Outstanding, December 31, 2006
                
                
                2,672,647
                
                $
                0.88
                
                
                8.84
                
                $
                0.00Vested
                    or expected to vest at December 31, 2006
                
                
                2,145,916
                
                $
                0.70
                
                
                8.84
                
                $
                0.00Exercisable
                    at December 31, 2006
                
                
                476,131
                
                $
                3.04
                
                
                8.10
                
                $
                0.00
  As
          of
          December 31, 2006, there was $476,332 of total unrecognized compensation
          cost
          related to nonvested options which is expected to be recognized over a
          weighted-average period of 5.45 years.
  The
          weighted-average grant-date fair value of options
          granted during the quarter ended December 31, 2006 was $0.19 per share,
          which
          was estimated using the Black Scholes model and the following weighted
          average
          assumptions:
 Risk-free
                      interest rate
                  
                  4.55Volatility
                      (%)
                  
                  277%Expected
                      life (in years)
                  
                  6.50Dividend
                      yield rate
                  
                  Nil
 Expected
            volatility is based on historical volatility in the Company’s stock price over
            the expected life of the options. The risk-free interest rate is based
            on the
            annual yield on the measurement date of a zero coupon U.S. Treasury Bond,
            the
            maturity of which equals the options expected life. The
            weighted average expected life of 6.50 years reflects the alternative
            simplified
            method permitted by SEC Staff Accounting Bulletin No. 107, which defines
            the
            expected life as the average of the contractual term of the options and
            the
            weighted average vesting period for all option tranches. The
            dividend yield assumption is based on the Company's intent not to issue
            a
            dividend.


12




**Note
      7. Subsequent Event**





**Changes
      to Senior Loan Agreement and Related Gain on Restructuring of Debt, Court
      Approval and Temporary Related-Party Loan**





In
      the
      Company’s Form 10-KSB for the year ended September 30, 2006 as filed with the
      Securities and Exchange Commission, the Company reported that it was in
      continuing negotiations with its senior lender, Ableco Finance LLC (“Ableco”),
      to establish a new schedule of payments for the Company’s outstanding debt and
      also to eliminate the financial covenant requirement.





On
      January 17, 2007, pursuant to an amendment to the senior loan agreement (“Loan
      Agreement”), the Company and Ableco have agreed to the following
      changes:





(a)
            to
                reduce the principal amortization of the Term Obligation (and thereafter,
                the PIK Obligation) to $100,000 a month commencing January 15,
                2007.





(b)
            to
                reduce and fix the outstanding amount of the PIK obligation, including
                principal and interest, at $3,000,000 as of January 16,
                2007.





(c)
            to
                provide for a further reduction of the PIK Obligation by 50%, or
                $1,500,000, if both the Term Obligation and $1,500,000 of the PIK
                Obligation are repaid by December 31,
                2007.





13


(d)
            to
                extend the maturity date of the Loan Agreement from December 31,
                2007 to
                December 31, 2008 and to extend dates in the existing warrants issued
                to
                Ableco Affiliates from December 31, 2007 to December 31,
                2008.





(e)
            to
                eliminate the minimum EBITDA (Earnings Before Interest, Taxes,
                Depreciation and Amortization) financial
                covenant;





(f)
            to
                waive any prior defaults related to required loan amortization payments
                and to satisfying the minimum EBITDA financial
                covenant;





(g)
            to
                provide for certain affiliates of Ableco to sell Debentures with
                a face
                value approximating $2,471,000 to the Company for consideration of
                $1.00;
                and





(h)
            to
                permit Howard S. Modlin, the Company’s CEO, to make up to $2,000,000 in
                additional loans to the Company; repayment of principal of all such
                loans
                requires Ableco approval;





As
      a
      result of the changes to the Loan Agreement and the Debenture purchase, the
      Company expects to record a gain on restructuring of debt in the approximate
      amount of $4,060,000 in the quarter ending March 31, 2007. The amendment
      eliminates the loan default referred to in the Company’s Form 10-KSB report for
      the year ended September 30, 2006 as filed with the Securities and Exchange
      Commission.





Certain
      provisions of the foregoing amendment are subject to court approval in the
      Bankruptcy Court which had retained jurisdiction to finally determine the amount
      of the PIK Obligation. The Company has no reason to believe such court approval
      will not be obtained.





As
      permitted by the Loan Agreement as amended, on January 17, 2007 Howard S. Modlin
      made a demand loan of $125,000 to the Company which was intended to be a
      short-term loan.





**Note
      8. Recent Accounting Pronouncements**





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 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.





14


**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 FOR THE YEAR ENDED
      SEPTEMBER 30, 2006 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.





Background





As
      of
      September 30, 2006, the most recent fiscal year end, the Company had an
      accumulated deficit from net losses totaling $235.2 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 debt
      obligations. 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.





The
      Company has consolidated its operations into its owned facility in Naugatuck,
      Connecticut and downsized its staff and operating assets to more properly
      reflect its reduced operating requirements. As of December 31, 2006 the Company
      has 91 employees.





Unless
      otherwise stated, all references to “Notes” in the following discussion of
“Results of Operations” and “Liquidity and Capital Resources” are to the “Notes
      to Condensed Consolidated Financial Statements included in Item 1 in this Form
      10-QSB.





15




**RESULTS
      OF OPERATIONS**





**Revenues**




Three
                Months Ended December 31,(in
                thousands)
            
            **2006**
            
            2005Product
            
            **$**
            **2,965**
            
            $
            2,574Service
            
            
            **594**
            
            
            471Total
                Revenues
            
            **$**
            **3,559**
            
            $
            3,045





Revenues
      for the three months ended December 31, 2006 increased $514,000, or 16.9%,
      to
      $3,559,000 from $3,045,000 reported for the three months ended December 31,
      2005. Product revenues increased $391,000, or 15.2%, while service revenues
      increased by $123,000, or 26.1%.





Sales
      of
      multi-service switches increased approximately $760,000 due to customer demand
      for new releases of these products. Inter-networking products sales increased
      approximately $340,000 as existing customers expanded their networks. These
      increases were partially offset by approximately $670,000 resulting from
      continued declines in sales of network access products to large
      telecommunication carriers.





The
      increase in service revenues in the quarter was due primarily to the acquisition
      of the multi-service 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 focused strategy to address network monitoring and
      security.





The
      Company anticipates that demand for its legacy network access products will
      continue to decline and due to the “Risk Factors” mentioned below, there can be
      no assurance that orders for new products and products with enhanced features
      will increase to offset this decline. Accordingly, the ability to forecast
      future revenue trends in the current environment is difficult.





**Gross
      Margin**




Three
                Months Ended December 31,(in
                thousands)
            
            **2006**
            
            2005Gross
                Margin
            
            **$**
            **2,246**
            
            $
            1,678Percentage
                of Revenues
            
            
            **63.1**
            **%**
            
            55.1
            %




Gross
      margin, as a percentage of revenues, in the three months ended December 31,
      2006
      was 63.1% as compared to 55.1% in the three months ended December 31, 2005.
      The
      increase of 8.0% was primarily due to sales of higher margined products,
      primarily multi-service switches (+3.6%), factory utilization and other
      efficiencies associated with higher volumes (+6.6%) offset by lower profit
      margins in the services business due to higher sub-contract costs
      (-2.2%).





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 revenues is expected to
      vary.





16


**Selling,
      General and Administrative**




Three
                  Months Ended December 31,(in
                  thousands)
              
              **2006**
              
              2005Selling,
                  general and administrative
              
              **$**
              **1,339**
              
              $
              1,492Percentage
                  of revenues
              
              
              **37.6**
              **%**
              
              49.0
              %


The
      Company’s selling, general and administrative (“SG&A”) expenses decreased to
      $1,339,000, or 37.6% of revenue in the three months ended December 31, 2006
      from
      $1,492,000, or 49.0% of revenue in the three months ended December 31, 2005.
      The
      decrease in spending in the quarter of $153,000, or 10.3% was primarily a result
      of lower legal expenses than the prior year when litigation to recover monies
      was active ($109,000), recovery of questionable accounts receivable ($22,000),
      reduced travel by the sales organization ($33,000) and other net reductions
      of
      $58,000 offset by $69,000 of stock compensation expense as a result of adopting
      Statement of Financial Accounting Standards No. 123(R) in the 2006
      quarter.





**Research
      and Product Development**




Three
                  Months Ended December 31,(in
                  thousands)
              
              **2006**
              
              2005Research
                  and product development
              
              **$**
              **608**
              
              $
              857Percentage
                  of revenues
              
              
              **17.1**
              **%**
              
              28.1
              %


Research
      and product development (“R&D”) expenses decreased to $608,000, or 17.1% of
      revenues in the three months ended December 31, 2006 as compared to $857,000
      or
      28.1% of revenues in the three months ended December 31, 2005. The decrease
      of
      $249,000, or 29%, was due to a reduction in engineering staff ($147,000) and
      in
      use of outside consultants ($100,000) and other net reductions ($15,000) offset
      by additional stock compensation expense of $13,000.





**Other
      Income (Expense)**





Interest
      expense decreased to $795,000 in the three months ended December 31, 2006 from
      $817,000 in the three months ended December 31, 2005, due to lower senior debt
      levels resulting from principal payments made by the Company, offset by higher
      interest rates on Notes Payable to Related Parties and higher variable interest
      rates in the 2006 quarter on senior and other secured debt.





Additional
      items included in other income (expense) for the three months ended December
      31,
      2006 and 2005 totaled $44,000 and $(321,000), respectively. The 2006 quarterly
      amount includes $25,000 in sales of components no longer used, $37,000 income
      from a tradename license, offset by $18,000 in net loses primarily from foreign
      exchange. The 2005 quarterly amount includes a $389,000 loss from extinguishment
      of debt (see Note 4), $33,000 in sales of components no longer used, $33,000
      income from a tradename license and other items totaling $2,000.





17


**Provision
      for Income Taxes**





Income
      tax provisions for each of the three months ended December 31, 2006 and 2005
      of
      $3,000 reflect current state tax provisions only. No federal income tax
      provisions or tax benefits were provided in the three months ended December
      31,
      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. The Company has federal
      tax credit and net operating loss carryforwards of approximately $11.9 million
      and $213.3 million, respectively, as of September 30, 2006.





**Liquidity
      and Capital Resources**


**December
                  31,**
              
              September
                  30,(in
                  thousands)
              
              **2006**
              
              2006Cash
                  and cash equivalents
              
              **$**
              **207**
              
              $
              246Working
                  capital (deficit)
              
              
              **(39,326**
              **)**
              
              (39,032
              )Total
                  assets
              
              
              **8,958**
              
              
              9,850Long-term
                  debt, including current portion
              
              
              **28,787**
              
              
              29,051Total
                  liabilities
              
              
              **44,915**
              
              
              45,448




Three
                Months Ended December 31,******2006**
            
            2005Net
                cash provided (used) by:Operating
                activities
            
            **$**
            **242**
            
            $
            268Investing
                activities
            
            
            **(8**
            **)**
            
            (23
            )Financing
                activities
            
            
            **(273**
            **)**
            
            (521
            )




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.





**Cash
      Flows**





Net
      cash
      provided by operating activities totaled $242,000 in the three months ended
      December 31, 2006. The net loss in the quarter was $455,000. Included in this
      net loss were non-cash expenses for depreciation and amortization of $87,000
      and
      stock compensation expense of $91,000. A decrease in accounts receivable due
      to
      customer collections being higher than sales levels resulted in a source of
      cash
      of $173,000. Inventories were lower by $163,000 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. Unpaid interest which
      accrued on the Company’s debt increased $680,000 as a source of cash. Uses of
      cash include a decrease in unpaid vendor liabilities of $382,000, a reduction
      in
      accrued payroll of $81,000 due to timing of payrolls and a reduction in other
      net current liabilities of $34,000. The reduction in other net current
      liabilities reflects the proceeds received from a portion of a prior year legal
      settlement (+$213,000), and a prior year subsidiary liquidation (+$137,000)
      and
      other cash sources of $75,000, offset by reduction in deferred income on service
      contracts (-$236,000) and by annual cash payments of pre-petition tax claims (-$223,000).





Net
      cash
      provided by operating activities totaled $268,000 in the three months ended
      December 31, 2005. The net loss in the 2005 quarter was $1,812,000. Included
      in
      this net loss were non-cash expenses for loss on extinguishment of debt of
      $389,000 and for depreciation of $89,000. A decrease in accounts receivable
      due
      to customers collections being higher than new sales levels resulted in source
      of cash of $188,000. Inventories were lower by $119,000 as the Company was
      able
      to achieve shipments of on-hand inventories to satisfy customer orders and
      generate a source of cash through reduced purchasing. Unpaid interest which
      accrued on the Company’s debt increased $448,000. Other sources of cash include
      an increase in customer deposits of $468,000, an increase in unpaid vendor
      liabilities of $232,000, and a reduction in prepaid insurance of
      $147,000.





18


Net
      cash
      used by investing activities in the three months ended December 31, 2006 and
      2005 was $8,000 and $23,000, respectively, for the acquisition of equipment.





Cash
      used
      by financing activities in the three months ended December 31, 2006 and 2005
      was
      $273,000 and $521,000, respectively, representing payments made on the Company’s
      senior debt.





**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
      bankruptcy-related and other unpaid professional fees, delinquent property
      taxes, priority tax claims from 2001 and prior years, and monthly payments
      of
      principal and interest under senior secured debt. 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 Note 4). 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. 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 December 31, 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.





The
      Company’s failure to make required payments under the senior loan agreement
      would constitute an event of default.





Since
      emerging from bankruptcy, the Company has incurred operating losses of
      approximately $600,000 and interest expense, including unpaid interest on
      Debentures, of approximately $11 million. Furthermore, the ability of the
      Company to meet cash flow and loan payment 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 ($4.8 million at December 31, 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. Additional extension of time to pay and
      reduction of obligations were obtained in the January 17, 2007 amendment
      referred to in Note 7.





Under
      the
      Company’s 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.





19


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
      December 31, 2006 the Company’s principal source of liquidity included cash and
      cash equivalents of $207,000 compared to $246,000 at September 30, 2006. At
      December 31, 2006, the Company’s working capital was a deficit of approximately
      $38.9 million, compared to a deficit of approximately $39.0 million at September
      30, 2006. 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.





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 2006
      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 for the year ended September
      30,
      2006 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.





20


*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.





*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.





*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 December 31, 2006 and September
      30, 2006, real estate represented the only significant remaining long-lived
      asset that has not been fully written down for impairment.





**Recent
      Accounting Pronouncements**





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.





21


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.




**RISK
      FACTORS** **





*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 (see Item 6 in the Company’s annual
      report on Form 10-KSB for the year ended September 30, 2006 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, 2006).





The
      Company’s failure to make required payments under the senior loan agreement
      would constitute an event of default.




Since
      emerging from bankruptcy, the Company has incurred operating losses of
      approximately $600,000 and interest expenses, including unpaid interest on
      Debentures of approximately $11 million. Furthermore, the ability of the Company
      to meet cash flow and loan payment requirements is directly affected by the
      factors described in this “Risk Factors” section.





22


There
      can
      be no assurance that the Company will be able to avoid an event of default
      on
      its senior secured loan agreement. If there is such a default, the senior
      secured lenders may accelerate payment of the outstanding debt ($4.8 million
      at
      December 31, 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 December 31, 2006). Based
      on
      the uncertainty of the Company achieving sufficient cash flows from operations
      to meet its monthly loan payment obligations, the Company’s long-term debt has
      been classified as current liabilities in the accompanying consolidated balance
      sheets at both December 31, 2006 and September 30, 2006.





*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 44% of net sales in fiscal 2006. 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.





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.





23


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 45% and 55% of
      sales in fiscal 2006 and 2005, 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 2007, 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.





*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.





24


*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.





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”.





25


*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, Alcatel-Lucent 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”.





26


*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.





*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.





27


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.





*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.





28


*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 up to 10% 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. Since Ableco’s loan was not
      repaid in full by September 15, 2006, the Trustee may designate two more
      directors, and, after payment in full of Ableco’s loan, 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.





**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**





None.





29


**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 $11,436,691.00 as of
      December 31, 2006.





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





Not
      applicable





**ITEM
      5. OTHER INFORMATION**





See
      Note
      7 “Subsequent Event”, included in the Notes to Condensed Consolidated Financial
      Statements included in Part I of the Form 10-QSB, concerning the “Changes to
      Senior Loan Agreement and Related Gain on Restructuring of Debt, Court Approval
      and Temporary Related - Party Loan”.





**ITEM
      6. EXHIBITS**





(a)
      Exhibits Index:




Exhibit
                  Number
              
              Description
                  of Exhibit31.1
              
              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


30





**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.********February
              14, 2007**
            
            **/s/
              William G. Henry****William
                G. Henry**
              **Vice
                President, Finance and Administration**
              **Chief
                Financial Officer**