UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-QSB

(Mark One)

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

                  For the quarterly period ended March 31, 2006
                                                 --------------

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

              For the transition period from__________to__________

                          Commission file number 1-8086
                                                 ------

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

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


                      6 Rubber Avenue, Naugatuck, CT 06770
--------------------------------------------------------------------------------
                    (Address of Principal Executive Officers)


                                  203-729-0271
--------------------------------------------------------------------------------
                (Issuer's Telephone Number, Including Area Code)


--------------------------------------------------------------------------------
         (Former Name, Former Address and Former Fiscal Year, if 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.
                                  Yes |X| No|_|

                     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|_|

                       APPLICABLE ONLY TO CORPORATE ISSUER

      State the number of shares outstanding of each of the issuer's classes of
common equity, as of April 30, 2006:

                        3,468,050 shares of Common Stock
                         653,947 shares of Class B Stock


   Transitional Small Business Disclosure Format (check one): Yes |_|  No |X|

                                       1
<PAGE>

                        GENERAL DATACOMM INDUSTRIES, INC.

                    INDEX TO QUARTERLY REPORT ON FORM 10-QSB


<TABLE>
<CAPTION>
PART I   FINANCIAL INFORMATION                                                         Page
------                                                                                 ----
<S>      <C>                                                                           <C>
Item 1.     Financial Statements (unaudited):
              Condensed Consolidated Balance Sheets as of
                March 31, 2006 and September 30, 2005 ....................................3
              Condensed Consolidated Statements of Operations for
                the Three Months and Six Months Ended March 31, 2006 and 2005 ............4
              Condensed Consolidated Statements of Cash Flows for
                the Three Months and Six Months Ended March 31, 2006 and 2005.............5
              Notes to the Condensed Consolidated Financial Statements....................6

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

Item 3.     Controls and Procedures......................................................32

PART II  OTHER INFORMATION

Item 1.     Legal Proceedings............................................................32


Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds..................32

Item 3.     Defaults Upon Senior Securities..............................................32

Item 4.     Submission of Matters of a Vote of Security Holders..........................32

Item 5.     Other Information............................................................32

Item 6.     Exhibits.....................................................................33
</TABLE>

                                       2
<PAGE>

                          PART I. FINANCIAL INFORMATION

                          ITEM 1. FINANCIAL STATEMENTS

                        General DataComm Industries, Inc.
                      Condensed Consolidated Balance Sheets
                          (in thousands except shares)


<TABLE>
<CAPTION>
                                                                                    March  31,     September 30,
                                                                                      2006             2005*
                                                                                   (Unaudited)
                                                                                  -------------    -------------
<S>                                                                               <C>              <C>
Assets:
Current assets:
     Cash and cash equivalents                                                    $         407    $         878
     Accounts receivable, less allowance for doubtful accounts of
      $588 at March 31, 2006 and $671 at September 30, 2005                               2,852            2,078
     Inventories                                                                          2,641            3,248
     Other current assets
                                                                                            519              261
                                                                                  -------------    -------------
Total current assets                                                                      6,419            6,465
                                                                                  -------------    -------------
Property, plant and equipment, net                                                        4,117            4,233
                                                                                  =============    =============
Total Assets                                                                      $      10,536    $      10,698
                                                                                  =============    =============
Liabilities and Stockholders' Deficit:
Current liabilities:
     Current portion of long-term debt ($ 2,081 at March 31, 2006 and
        $1,600 at September 30, 2005 owed to related parties)                     $      30,433    $      31,194
     Accounts payable                                                                     2,470            1,444
     Accrued payroll and payroll-related costs                                              399              471
     Other current liabilities                                                           12,264           11,299
                                                                                  -------------    -------------
Total current liabilities                                                                45,566           44,408
                                                                                  -------------    -------------
Other liabilities                                                                           817            1,032
                                                                                  =============    =============
Total Liabilities                                                                        46,383           45,440
                                                                                  =============    =============

Commitments and contingencies                                                                --               --

Stockholders' deficit:
   9% Preferred stock, par value $1.00 per share, 3,000,000 shares authorized,
      782,496 shares issued and outstanding at March 31, 2006 and
      787,800 at September 30, 2005; $29.7 million liquidation
      preference at March 31, 2006                                                          782              788
   Class B common stock, par value $.01 per share, 5,000,000 shares authorized;
      653,947 shares issued and outstanding                                                   7                7
   Common stock, par value $.01 per share, 25,000,000 shares
      authorized;
      issued:  3,468,050 shares at March 31, 2006 and 3,342,364 shares
      at September 30, 2005                                                                  35               33
   Capital in excess of par value                                                       198,682          198,433
   Accumulated deficit                                                                 (235,353)        (233,858)
   Common stock held in treasury, at cost; no shares at March 31, 2006
      and 1,961 shares at September 30, 2005                                                 --             (145)
                                                                                  -------------    -------------
Total Stockholders' Deficit                                                             (35,847)         (34,742)
                                                                                  =============    =============
Total Liabilities and Stockholders' Deficit                                       $      10,536    $      10,698
                                                                                  =============    =============
</TABLE>

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


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


                                       3
<PAGE>

                        General DataComm Industries, Inc.
           Condensed Consolidated Statements of Operations (Unaudited)
                        (in thousands except share data)

<TABLE>
<CAPTION>
                                                                         Three Months Ended           Six Months Ended
                                                                            March  31,                    March 31,
                                                                    --------------------------    --------------------------
                                                                        2006          2005           2006            2005
                                                                    -----------    -----------    -----------    -----------
<S>                                                                 <C>            <C>            <C>            <C>
Revenues
  Product                                                           $     4,245    $     3,133    $     6,819    $     6,779
  Service                                                                   816            227          1,287            448
                                                                    -----------    -----------    -----------    -----------

  Total                                                             $     5,061    $     3,360    $     8,106    $     7,227

Cost of revenues                                                          1,974          1,294          3,341          2,875
                                                                    -----------    -----------    -----------    -----------

Gross margin                                                              3,087          2,066          4,765          4,352

Operating expenses:

  Selling, general and administrative                                     1,604          1,079          3,096          2,335
  Research and product development                                          858            534          1,715          1,080
                                                                    -----------    -----------    -----------    -----------
                                                                          2,462          1,613          4,811          3,415

Operating  income (loss)                                                    625            453            (46)           937

Other income (expense):
  Interest expense                                                         (818)          (869)        (1,635)        (1,741)
  Loss on extinguishment of debt                                             --             --           (389)
  Recovery of lease receivable, net                                         425             --            425             --
  Gain on sale of minority interest                                          --             --             --            300
  Recovery of note receivable                                                --          2,748             --          2,748
  Other, net                                                                 88             55            156             96
                                                                    -----------    -----------    -----------    -----------
                                                                           (305)         1,934         (1,443)         1,403

Income (loss) before reorganization items and income taxes                  320          2,387         (1,489)         2,340

Reorganization Items:
  Claim adjustments                                                          --            101             --            246
                                                                    -----------    -----------    -----------    -----------

Income (loss) before income taxes                                           320          2,488         (1,489)         2,586

Income tax provision (benefit)                                                3           (364)             6           (358)
                                                                    -----------    -----------    -----------    -----------

Net income (loss)                                                           317          2,852         (1,495)         2,944

Dividends applicable to preferred stock                                    (440)          (443)          (880)          (886)
                                                                    -----------    -----------    -----------    -----------

Net income (loss) applicable to common and Class B stock            $      (123)   $     2,409    $    (2,375)   $     2,058
                                                                    ===========    ===========    ===========    ===========
Earnings (loss) per share:
  Basic-common stock                                                $     (0.03)   $      0.61    $     (0.59)   $      0.53
  Basic - Class B stock                                             $     (0.03)   $      0.55    $     (0.59)   $      0.47
  Diluted-common stock                                              $     (0.03)   $      0.39    $     (0.59)   $      0.36
  Diluted-Class B stock                                             $     (0.03)   $      0.36    $     (0.59)   $      0.33
                                                                    -----------    -----------    -----------    -----------

Weighted average number of common and Class B shares outstanding:
   Basic-common stock                                                 3,386,072      3,318,039      3,363,978      3,310,877
   Basic-Class B stock                                                  653,947        664,978        653,947        664,978
   Diluted-common stock                                               3,386,072      5,598,604      3,363,978      5,351,985
   Diluted-Class B stock                                                653,947        664,978        653,947        664,978
                                                                    ===========    ===========    ===========    ===========
</TABLE>

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

                                       4
<PAGE>

                        General DataComm Industries, Inc.
           Condensed Consolidated Statements of Cash Flows (Unaudited)
                                 (In thousands)

<TABLE>
<CAPTION>
                                                         Three Months Ended     Six  Months Ended
                                                              March 31               March 31
                                                         ------------------    ------------------
                                                           2006       2005       2006       2005
                                                         -------    -------    -------    -------
<S>                                                      <C>        <C>        <C>        <C>
Cash flows from operating activities:
Net income (loss)                                        $   317    $ 2,852    $(1,495)   $ 2,944
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
     Depreciation and amortization                           103         52        192        120
     Gain on claim reductions                                 --       (101)        --       (246)
     Reduction in note receivable                             --     (2,748)        --     (2,748)
     Reduction in reserve for foreign income taxes            --       (369)        --       (369)
     Loss on extinguishment of debt                           --         --        389         --
     Changes in:
        Accounts receivable                                 (962)       856       (774)       561
        Inventories                                          488        185        607        831
        Accounts payable                                     157        124      1,026         67
        Accrued payroll and payroll-related costs            139          3        (72)       100
        Other net current liabilities                       (161)       (89)       707        875
        Other net long-term assets                            17         39       (214)      (157)
                                                         -------    -------    -------    -------

Net cash  provided by operating activities                    98        804        366      1,978
                                                         =======    =======    =======    =======

Cash flows from investing activities:
  Acquisition of property, plant and equipment, net          (23)       (12)       (46)       (12)
  Note receivable collections                                 --         --         --         11
                                                         -------    -------    -------    -------
Net cash (used)  provided by investing activities            (23)        12        (46)        (1)
                                                         =======    =======    =======    =======

Cash flows from financing activities:

  Proceeds from notes payable to related parties             250         --        250         --
  Proceeds from notes payable                                303        283        303        283
  Payments on notes payable                                  (76)       (69)       (76)       (69)
  Principal payments on term obligation                     (747)      (794)    (1,268)    (1,844)
                                                         -------    -------    -------    -------

Net cash used by financing activities                       (270)      (580)      (791)    (1,630)
                                                         =======    =======    =======    =======

Net (decrease) increase in cash and cash equivalents        (195)       212       (471)       347

Cash and cash equivalents, beginning of period               602        721        878        586
                                                         -------    -------    -------    -------


Cash and cash equivalents, end of period                 $   407    $   933        407    $   933
                                                         =======    =======    =======    =======

Supplemental disclosures of cash flow information:
Cash paid during the period for:
     Interest                                            $   128    $   189    $   244    $   424
     Income taxes                                        $    --    $    42    $    --    $    45
     Reorganization items                                $   213    $    17    $   262    $   230
                                                         =======    =======    =======    =======
</TABLE>

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

                                       5
<PAGE>

                        GENERAL DATACOMM INDUSTRIES, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (unaudited)


Note 1 - Basis of Presentation and Liquidity

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

On November 2, 2001, General DataComm Industries, Inc. and its domestic
subsidiaries filed a voluntary petition for relief under Chapter 11 of the
Bankruptcy Code in the United States Bankruptcy Court for the District of
Delaware. The Company continued in possession of its properties and the
management of its business as debtors in possession.

The Company emerged from Chapter 11 effective on September 15, 2003 pursuant to
a court-approved plan of reorganization. Under this plan, the Company was to pay
all creditors 100% of their allowed claims based upon a five year business plan.
However, the Company has not met its business plan objectives since emerging
from Chapter 11 and cannot assure its investors that it will be able to obtain
new customers or to generate the increase in revenues required to meet its
business plan objectives.

The Company has virtually no current ability to borrow additional funds. It
must, therefore, fund operations from cash balances and cash generated from
operating activities. The Company has significant short-term obligations
including payment of accrued professional fees (approximately $1.8 million at
March 31, 2006) and monthly payments of principal and interest (currently such
monthly principal and interest total approximately $280,000) under its senior
loan agreement. The Company received an extension of payment terms for the
amounts due February 1, 2006 and May 1, 2006 to its senior secured lenders (see
Notes 4 and 11). In fiscal 2004 the Company borrowed $1.6 million from related
parties in order to meet its current payment obligations, which notes were
extended in December 2005 (see Note 4). In February 2006 an additional $250,000
was borrowed from a related party. Furthermore, the Company has significant
future outstanding obligations as shown in the accompanying condensed
consolidated balance sheet at March 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. In addition, the Company is required to
maintain a minimum level of EBITDA (earnings before interest, taxes,
depreciation and amortization) each quarter to avoid an event of default (see
Note 4) . The Company's quarterly operating results are subject to fluctuations
due to a number of factors resulting in more variability and less predictability
in the Company's quarter-to-quarter sales and operating results. Such factors
include (but are not limited to): dependence on a small number of customers,
short delivery times, dependence on subcontract manufacturers, low order
backlog, ability to timely develop new products and market acceptance of new
products. The Company did not meet the EBITDA financial covenant for the period
ended September 30, 2004 and received a waiver for such period. While the
Company's calculations for the period ended March 31, 2006 show that the Company
was in compliance with the financial covenant, future compliance will require
improved earnings. There can be no assurance that the Company will be able to
avoid an event of default on the loan agreement. If there is such a default, the
senior secured lenders may accelerate payment of the outstanding debt ($6.2
million at March 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 of principal outstanding at
March 31, 2006). Based on the uncertainty of the Company achieving sufficient
cash flows from operations to meet its monthly loan payment obligations, and
complying with the EBITDA covenant during the quarterly periods during fiscal
2006 and 2005, the Company's long-term debt has been classified as current
liabilities in the accompanying consolidated balance sheets at both March 31,
2006 and September 30, 2005.

                                       6
<PAGE>

At March 31, 2006 the Company had a stockholders' deficit of approximately $35.8
million. In addition, it had a working capital deficit of approximately $39.1
million, and the Company's principal source of liquidity was cash and cash
equivalents of $407,000. The large negative working capital reflects the
classification of all long-term secured debt as current liabilities.

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

The potential liquidity and cash flow risks 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 2005
financial statements.

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

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.

                                       7
<PAGE>

Note 2 - Earnings (Loss) Per Share

Basic earnings per share is computed by allocating net income available to
common stockholders and to Class B shares based on their contractual
participation rights to share in such net income as if all the income for the
year had been distributed. Such allocation reflects that common stock is
entitled to cash dividends, if and when paid, 11.11% higher per share than Class
B stock. However, a net loss is allocated evenly to all shares. The income
(loss) allocated to each security is divided by the respective weighted average
number of common and Class B shares outstanding during the period. Diluted
earnings per share gives effect to all potential dilutive common shares
outstanding during the period. In computing diluted earnings per share, which
only applies in the event there is net income, the average price of the
Company's common stock for the period is used in determining the number of
shares assumed to be purchased from exercise of stock options and warrants.
Dividends applicable to preferred stock represent accumulating dividends that
are not declared or accrued. The following table sets forth the computation of
basic and diluted earnings (loss) applicable to common and Class B stock for the
three and six months ended March 31, 2006 and 2005 (in thousands, except shares
and per share data):

<TABLE>
<CAPTION>
                                                                      Three Months Ended March 31,
                                                               2006         2005         2006         2005
                                                           ----------    ----------   ----------    ----------
                                                                 Common Stock              Class B Stock
                                                           ------------------------   ------------------------

<S>                                                        <C>            <C>         <C>           <C>
Numerator for basic earnings per share-net income (loss)         (103)        2,041          (20)          368
Effect of dilutive securities:
   Reallocation of net income for potential
   dilutive common shares                                          --           135           --          (135)
   Add back convertible note interest                              --            27           --             6
                                                           ----------    ----------   ----------    ----------
Numerator for diluted earnings
   per share - net income (loss)                                 (103)        2,203          (20)          239
                                                           ----------    ----------   ----------    ----------
Denominator for basic earnings per
   share - weighted average outstanding shares              3,386,072     3,318,039      653,947       664,978
Effect of dilutive securities:

   Employee stock options                                          --       297,020           --            --
   Warrants                                                        --       370,989           --            --
   Convertible notes payable                                       --     1,612,556           --            --
                                                           ----------    ----------   ----------    ----------
Dilutive potential common shares                                   --     2,280,565           --            --
                                                           ----------    ----------   ----------    ----------
Denominator for diluted earnings per share - shares         3,386,072     5,598,604      653,947       664,978
                                                           ----------    ----------   ----------    ----------
Basic earnings (loss) per common share                          (0.03)         0.61        (0.03)         0.55
Diluted earnings (loss) per common share                        (0.03)         0.39        (0.03)         0.36
                                                           ----------    ----------   ----------    ----------

<CAPTION>
                                                                        Six Months Ended March 31,
                                                               2006         2005         2006         2005
                                                           ----------    ----------   ----------    ----------
                                                                 Common Stock              Class B Stock
                                                           ------------------------   ------------------------
<S>                                                        <C>            <C>         <C>           <C>
Numerator for basic earnings per share-net income (loss)       (1,988)        1,743         (387)          315
Effect of dilutive securities:
   Reallocation of net income for potential
   dilutive common shares                                          --           108           --          (108)
   Add back convertible notes interest                             --            55           --            11
                                                           ----------    ----------   ----------    ----------

Numerator for diluted earnings
   per share - net income (loss)                               (1,988)        1,906         (387)          218
                                                           ----------    ----------   ----------    ----------
Denominator for basic earnings per
   share - weighted average outstanding shares              3,363,978     3,310,877      653,947       664,978
                                                           ----------    ----------   ----------    ----------
Effect of dilutive securities
   Employee stock options                                          --       243,058           --            --
   Warrants                                                        --       185,494           --            --
   Convertible notes payable                                       --     1,612,556           --            --
                                                           ----------    ----------   ----------    ----------
Dilutive potential common shares                                   --     2,041,108           --            --
                                                           ----------    ----------   ----------    ----------
Denominator for diluted earnings per share - shares         3,363,978     5,351,985      653,947       664,978
                                                           ----------    ----------   ----------    ----------
Basic earnings (loss) per common share                          (0.59)         0.53        (0.59)         0.47
Diluted earnings (loss) per common share                        (0.59)         0.36        (0.59)         0.33
                                                           ----------    ----------   ----------    ----------
</TABLE>


                                       8
<PAGE>


In the three and six months ended March 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
                                  Six Months Ended
                                      March 31,
                                ---------------------
                                  2006        2005
                                ---------   ---------
Stock warrants                  3,945,865     761,614
Stock options                   1,847,426   1,102,175
Convertible preferred stock       782,496     787,900
Convertible loans                      --   1,612,556
Contingently issuable shares*   1,785,983   1,785,983
                                ---------   ---------
Total                           8,361,770   6,050,228
                                ---------   ---------



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

3. Inventories

Inventories consist of (in thousands):

                                                      March 31,   September 30,
                                                        2006          2005
                                                      ---------   -------------
Raw materials                                         $     709   $         821
Work-in-process                                             764           1,014
Finished goods                                            1,168           1,413
                                                      ---------   -------------
                                                      $   2,641   $       3,248
                                                      =========   =============


Inventories are stated at the lower of cost or market using a first-in,
first-out method. Reserves in the amount of $3,547,000 and $3,508,000 were
recorded at March 31, 2006 and September 30, 2005, respectively, for excess and
obsolete inventories.

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

Long-term debt consists of (in thousands):              March 31,  September 30,
                                                         2006           2005
                                                       ---------   -------------
Term Obligation                                        $   3,725   $       5,225
PIK Obligation                                             2,500           2,500
Notes Payable to Related Parties, net of debt
  discount of $30 at March 31, 2006 and $61
  at September 30, 2005                                    2,051           1,539
Debentures                                                21,930          21,930
Note Payable                                                 227              --
                                                       ---------   -------------
                                                          30,433          31,194
Less current portion                                      30,433          31,194
                                                       ---------   -------------
                                                       $       0   $           0
                                                       =========   =============

For the quarter ended September 30, 2004, the Company would have been in default
of the financial covenant in its loan agreement with its senior secured lenders
had it not obtained a waiver. The waiver did not extend to future financial
covenant calculations, which are performed quarterly. Furthermore, there is
uncertainty whether the Company can achieve sufficient cash flow from operations
to meet its future obligations or satisfy the covenant. Therefore, the senior
secured debt (the Term Obligation and PIK Obligation) and the Debentures and
Notes Payable to Related Parties, which contain cross default provisions, are
classified as current liabilities on the accompanying balance sheets at March
31, 2006 and September 30, 2005 (see Note 1).

                                       9
<PAGE>

Interest on the PIK Obligation and Debentures is not required to be paid
currently. Such accrued interest amounted to $6,291,113 and $5,074,589, at March
31, 2006 and September 30, 2005, respectively, and is classified as a current
liability along with the corresponding debt.

Long-term debt matures in amounts totaling $3,551,000 in fiscal 2006, $1,821,000
in fiscal 2007, and $25,061,000 in fiscal 2008, assuming that there is no
acceleration in the future due to an event of default.

In conjunction with the issuance of notes payable to related parties on
September 30, 2004, the Company issued warrants, the value of which was recorded
as debt discount. See "Notes Payable to Related Parties" below.


Term Obligation, PIK Obligation and Debentures

Under the terms of the loan and security agreement which became effective
September 15, 2003, minimum principal payments under the Term Obligation are
$250,000 per month. Interest was payable monthly at the annual rate of 7.25%
through December 31, 2003, and thereafter at the greater of (i) 7.25% and (ii)
the prime rate plus 2.5% (the prime rate was 7.75% on March 31, 2006). In
addition, proceeds from the potential sales of non-core assets and certain other
proceeds must be used to reduce the Term Obligation.

The Company reached an agreement with its senior secured lender to extend the
payment of the term loan principal and interest in the aggregate amount of
$283,355 otherwise due on February 1, 2006, to be paid in four equal
installments over the month of February 2006.

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

Debentures with principal and interest due in fiscal 2008 were (or will be)
issued to unsecured creditors as part of the Company's Plan of Reorganization.

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

Notes Payable to Related Parties

                                       10
<PAGE>

On December 9, 2005, the Company entered into amendments of its loan
arrangements with Howard S. Modlin, Chairman of the Board and Chief Executive
Officer, and John Segall, a Director. Pursuant to such amendments, an aggregate
of $1,600,000 in secured loans from such directors maturing between September
29, 2005 and September 29, 2006 were extended. Such amendments provided that 50%
of each such amended and restated note was amended to be payable one year from
the original due date and 50% of each such amended and restated note was amended
to be payable two years from the original due date. The conversion features of
four notes held by Mr. Modlin, which were convertible into an aggregate of
1,103,897 shares of Common Stock, and three notes held by Mr. Segall, which were
convertible into an aggregate of 508,659 shares of Common Stock, were
eliminated, and unpaid accrued interest aggregating $230,945, was added to the
amended and restated notes. In addition, while interest will continue to accrue
at the rate of 10% per annum from December 9, 2005, the first interest payment
on the amended and restated notes is not due until May 1, 2006 (payment of
interest on the amended loans has been deferred in agreement with Messers.
Segall and Modlin). In connection with the transactions, Mr. Modlin and Mr.
Segall each received seven year warrants expiring December 8, 2012 to purchase
common stock at $0.575 cents per share covering 2,084,204 shares and 1,100,047
shares, respectively. The transactions were unanimously approved by the
Company's Board of Directors on December 9, 2005. On February 17, 2006, the
Company borrowed $250,000 from Mr. Modlin in the form of a demand note which
bore interest at the rate of 10% per annum. On April 20, 2006, the demand note
was converted into a term note. (see Note 11 - Subsequent Events). All loans
made by Mr. Modlin and Mr. Segall are secured by all of the assets of the
Company behind the first lien of the Company's senior lenders.

Loss on Extinguishment of Debt

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


Note 5. Accounting for Stock-Based Compensation

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


                                       11
<PAGE>

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

<TABLE>
<CAPTION>
                                                        Three Months          Six Months
                                                       Ended March 31,      Ended March 31,
                                                      ----------------    -----------------
                                                       2006      2005       2006       2005
                                                      -----    -------    -------    -------
<S>                                                   <C>      <C>        <C>        <C>
Net income (loss), as reported                        $ 317    $ 2,852    $(1,495)   $ 2,944
Deduct:  total stock-based employee compensation
  expense determined under fair value based method
  for all awards                                        (87)       (46)      (164)       (55)
                                                      -----    -------    -------    -------
Proforma net income (loss)                              230      2,806     (1,659)     2,889
Dividends applicable to preferred stock                (440)      (443)      (880)      (886)
                                                      -----    -------    -------    -------
Proforma net income (loss) applicable to common and
   Class B stock                                      $(210)   $ 2,363    $(2,539)   $ 2,003
                                                      =====    =======    =======    =======
Proforma  earnings (loss) per share
Basic-common stock                                   $(0.06)   $  0.60    $ (0.75)   $  0.51
Basic-Class B stock                                  $(0.06)   $  0.54    $ (0.75)   $  0.46
Diluted-common stock                                 $(0.06)   $  0.38    $ (0.75)   $  0.34
Diluted-Class B sotck                                $(0.06)   $  0.34    $ (0.75)   $  0.30
                                                     ======    =======    =======    =======
</TABLE>


The Black-Scholes method was used to compute the proforma amounts presented
above, utilizing the weighted average assumptions for stock-based compensation
granted in the six months ended March 31, 2006 and 2005 summarized below.

                                Six Months Ended
                                  March 31,
                              2006        2005
                           ---------    ---------

Risk-free interest rate         4.40         3.69
Volatility (%)                   322%         319%
Expected life (in years)        5.00         5.00
Dividend yield rate              Nil          Nil

                                       12
<PAGE>

Note 6. Gain on Sale of Minority Investment and Trademark License Agreement

In November 2004, the Company sold its 25% minority interest in General DataComm
de Mexico, S.A. de C.V. for $300,000 and recorded a gain in the same amount. The
proceeds were applied to the Company's outstanding loans with its senior
lenders. In addition, the Company has entered into a twelve month trademark
license agreement with the purchaser for the period beginning December 1, 2005
for an aggregate license fee of $100,000 ($150,000 in the prior year), amortized
in equal monthly installments and recorded in "other income".

Note 7. 2005 Employee Incentive Plans

On November 22, 2005, the Stock Option Committee of the Board of Directors
granted stock options pursuant to the Corporation's 2005 Stock and Bonus Plan
("Plan") to purchase 367,750 shares of Common Stock at $.45 per share, including
grants of options for 30,000 shares to each of Lee M. Paschall, Aletta Richards
and John L. Segall, Directors, and George Best, Vice President, Sales and
Marketing, William G. Henry, Vice President, Finance and Administration and
Principal Finance Officer, and George Gray, Vice President, Operations and Chief
Technology Officer, and an aggregate of 187,750 of such options to all of its
employees other than its officers. The Committee also granted to Howard S.
Modlin, Chairman and Chief Executive Officer, a separate stock option with terms
substantially similar to the options granted under the Plan, to purchase 551,121
shares at $.50 per share.

The options vest in increments of 20% one, two, three, four and five years after
grant and expire ten years after grant. The shares issuable under such options
were not registered under the Securities Act of 1933 and must be held for
investment unless so registered or an exemption from registration exists. The
Company registered the shares before the first options were exercised. The Board
of Directors has also amended the plan to authorize an additional 1,200,000
shares available for grant to cover certain granted options and allow for future
grants.

Note 8. Recovery of Lease Receivable and Related Party Transaction, Net

On February 28, 2006 the Company concluded litigation pursuant to a settlement
agreement relating to amounts owed to its subsidiary, DataComm Leasing
Corporation under an equipment lease agreement. The Company recorded a recovery
gain in the amount of $425,000, which was net of legal fees and expenses
totaling $175,000.

The law firm of Weisman Celler Spett & Modlin, P.C., in which Mr. Howard S.
Modlin is President, earned fees in the amount of $231,000 on this settlement,
under a contingency agreement that had been previously approved by the Company's
Board of Directors. Mr. Modlin is Chairman, President and Chief Executive
Officer of the Company.

                                       13
<PAGE>

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

In August 2001, the Company received a note in the amount of $17.0 million as
partial consideration for the sale of its Asynchronous Transfer Mode business
and retained a security interest in the underlying assets. As repayment of the
note, which constituted the principal consideration in the transaction, was
dependent on future successful operations of the purchaser (Ahead Communications
Systems, Inc. or "ACS"), the company determined that it retained substantial
risks of ownership of the business. Accordingly, although legal transfer of
ownership of the business occurred, the sale was not treated as a divestiture
for accounting purposes. Shortly after the sale, the Company, ACS and ACS'
parent company in Austria (Ahead Communications Systems AC), which had
guaranteed payment of the note, all filed for bankruptcy protection, ACS
defaulted on the note payment and disputes arose relating to the division sale
agreements. Accordingly, in fiscal 2001 the Company recorded an impairment
charge related to the assets sold to ACS by providing a valuation allowance
against the note for its unpaid principal amount. On May 5, 2005 the Company
received a payment of $2,747,848 in partial satisfaction of the note, as a
result of the liquidation of ACS' parent company in Austria. Such payment was
used to reduce senior secured debt as required under the Company's Plan of
Reorganization, which was approved when it emerged from Chapter 11 bankruptcy on
September 15, 2003, and the loan agreement entered into as part of the Plan of
Reorganization. The Company recorded a gain for the amount of the payment in the
quarter ended March 31, 2005.

Note 10. Liquidation of UK Subsidiary

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

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

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


Note 11.  Subsequent Events

The Company reached an informal agreement with its senior secured lender to
extend $225,000 of the $250,000 principal payment on the Term Obligation
otherwise due on May 1, 2006. The Company is currently in negotiations with the
objective of rescheduling the $225,000 of principal payments and future payments
as well. There can be no assurance that such negotiations will be successful and
that the senior secured lender will not declare a payment default. Such a
default could have a material adverse effect on the Company and would likely
result in the Company filing Chapter 11 again.

On April 20, 2006, the Corporation entered into an amendment of its loan
arrangement with Howard S. Modlin, Chairman of the Board and Chief Executive
Officer. Pursuant to such amendment, a $250,000 demand loan made by Mr. Modlin
on February 17, 2006 was amended and restated into a term note, 50% of which is
payable February 17, 2007 and 50% of which is payable February 17, 2008. Mr.
Modlin received a seven year warrant expiring April 19, 2013 to purchase common
stock at 27 1/2 cents per share covering 909,090 shares.


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

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


                                       14
<PAGE>
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

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

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

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

Thereafter, the Company consolidated its remaining operations into its owned
facility in Naugatuck, Connecticut and downsized its staff and operating assets
to more properly reflect its reduced operating requirements and currently has 98
employees. Such number includes the former employees of Ahead Communications
Systems, Inc. ("ACS") who accepted employment with the Company when ACS's assets
and business were acquired by the Company on June 30, 2005 pursuant to a plan
approved by the Bankruptcy Court in Connecticut having jurisdiction over ACS
(see Note 16 in the Notes to Consolidated Financial Statements included in Item
7 in Form 10-KSB/A for the fiscal year ended September 30, 2005 as filed with
the Securities and Exchange Commission).

RESULTS OF OPERATIONS

                                       15
<PAGE>

Revenues

                   Three Months      Six Months
                 Ended March 31,   Ended March 31,
                 ---------------   ---------------
(in thousands)    2006     2005     2006     2005
                 ------   ------   ------   ------

Product          $4,245   $3,133   $6,819   $6,779
Service             816      227    1,287      448
                 ------   ------   ------   ------
Total Revenues   $5,061   $3,360   $8,106   $7,227

Revenues for the three months ended March 31, 2006 increased $1,701,000, or
50.6%, to $5,061,000 from $3,360,000 reported for the three months ended March
31, 2005. Product revenues increased $1,112,000, or 35.5%, while service
revenues increased by $589,000, an increase of 3.6 times the prior year amount.

Revenues from product shipments in the 2006 quarter included a number of new
large orders from one customer who is integrating the Company's products into a
mission-critical application for a government agency. These orders alone
represented 27% of total product revenues in the quarter and account for the
growth in revenues over the prior year. The balance of the product business
reflects shipments of newly-acquired (Ahead Communications Systems, Inc. or
"ACS") multi-service switches offset by declines in shipments of legacy products
to large telecommunications carriers.

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

Revenues for the six months ended March 31, 2006 increased $879,000, or 12.2%,
to $8,106,000 from $7,227,000 reported for the six months ended March 31, 2005.
Revenues from product shipments in the 2006 period were slightly higher than in
the 2005 period and reflect the large orders in the quarter ended March 31, 2006
mentioned above, additional international business as a result of the Company's
initiatives in that area and shipments of newly-acquired multi-service switches,
offset by a decrease in shipments of legacy products to large telecommunications
carriers. Service revenues increased for the same reasons indicated above.

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

Gross Margin

                     Three Months            Six Months
                   Ended March 31,         Ended March 31,
                --------------------    --------------------
(in thousands)    2006        2005        2006       2005
                --------    --------    --------    --------
Gross Margin    $  3,087    $  2,066    $  4,765    $  4,352
Percentage of
    Revenues        61.0%       61.5%       58.8%       60.2%


                                       16
<PAGE>

(Gross margin, as a percentage of revenues, in the three months ended March 31,
2006 was 61.0% as compared to 61.5% in the three months ended March 31, 2005.
Service revenue, which increased in absolute dollars as discussed above and is
generally more profitable than the product revenue, added 1.6% to the gross
profit percentage. This was more than offset by a 2.1% decline in the product
gross profit percent. This decline in product gross profit percent resulted from
the net effect of the following items: The negative impact on product gross
margins of 8.8% resulting from the sale in the 2005 quarter of older inventories
that had previously been written off based on the Company's accounting policy
for obsolescence offset by the positive impact of higher product sales level
resulting in lower fixed production costs of 2.9% as a percentage of revenues,
lower year-over-year costs of components increasing product sales margins by
1.5% and other product mix and cost changes with a positive impact of 2.3%.

Gross margin, as a percentage of revenues, in the six months ended March 31,
2006 was 58.8% as compared to 60.2% in the six months ended March 31, 2005.
Higher margined service revenue added 2.2% to the gross profit percentage, while
the product gross profit percentage declined 3.6%. This decline resulted from
the positive impact on product gross margins in the six months ended March 31,
2005 resulting from a higher percentage of sales of older inventories that had
previously been written off based on the Company's policy for obsolescence.

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

Selling, General and Administrative

                             Three Months                 Six Months
                            Ended March 31,            Ended March 31,
                         ----------------------    ----------------------
(in thousands)             2006         2005         2006         2005
                         ---------    ---------    ---------    ---------
Selling, general and
administrative           $   1,604    $   1,079    $   3,096    $   2,335
Percentage of revenues        31.7%        32.1%        38.2%        32.3%

The Company's selling, general and administrative ("SG&A") expenses increased to
$1,604,000, or 31.7% of revenue in the three months ended March 31, 2006 from
$1,079,000, or 32.1% of revenue in the three months ended March 31, 2005. The
increase in spending in the quarter of $525,000, or 49% included expenses
associated with the June 30, 2005 acquisition of the business and assets of ACS,
which added $247,000, including the payroll and payroll-related costs of seven
employees, and the operating expenses of a sales office in France (see Note 16
in Notes to Consolidated Financial Statements included in Item 7 of Form
10-KSB/A for the year ended September 30, 2005 as filed with the Securities and
Exchange Commission). In addition , higher energy prices resulted in increased
utility costs of $23,000, and other increases in operating expenses amounted to
$31,000. Furthermore, the March 31, 2005 quarter included the benefit of
reductions in state sales, use and franchise taxes of $224,000 due to resolution
of audit issues.

For the six months ended March 31, 2006, SG&A increased to $3,096,000, or 38.2%
of revenues, from $2,335,000, or 32.3% of revenues in the six months ended March
31, 2005. The 101% or $761,000 increase in expenses was due to the acquisition
of the business and assets of ACS which added $431,000, of increased travel
expenses of $49,000, other increases of $57,000 and the impact of the $224,000
tax benefit in the March 31, 2005 quarter.

                                       17
<PAGE>

Research and Product Development

                             Three Months                 Six Months
                            Ended March 31,            Ended March 31,
                         ----------------------    ----------------------
(in thousands)             2006          2005         2006         2005
                         ---------    ---------    ---------    ---------
Research and product
development              $     858    $     534    $   1,715    $   1,080
Percentage of revenues        16.9%        15.9%        21.1%        14.9%

Research and product development ("R&D") expenses increased to $858,000, or
16.9% of revenue in the three months ended March 31, 2006 as compared to
$534,000, or 15.9% of revenue, in the three months ended March 31, 2005, due
primarily to increased costs associated with development of new ACS products. A
combination of internal engineers and external consultants are actively engaged
in developing multi-service switches with advanced technological features. The
Company also continues to explore new network access and service products with a
focus on security applications.

For the same reason, R&D expenses for the six months ended March 31, 2006
increased to $1,715,000 from $1,080,000 as compared to the comparable prior year
period.

Other Income (Expense)

Interest expense decreased to $818,000 in the three months ended March 31, 2006
from $869,000 in the three months ended March 31, 2005, due to principal
payments made on the Company's senior debt offset by higher interest rates on
Notes Payable to Related Parties and higher variable interest rates on senior
and other secured debt.

Other items included in other income (expense) for the three months ended March
31, 2006 include $425,000 from the recovery of a lease receivable net of
expenses and the net amount of $88,000 which is comprised of $43,000 in sales of
components no longer used, foreign exchange gains of $30,000, $12,000 received
from a tradename license and $3,000 of other items. For the three months ended
March 31, 2005, other income (expense) includes $2,748,000 from the recovery of
a note receivable (see Note 9) and the net amount of $55,000 which includes
$69,000 in sales of components no longer used, $24,000 received from a tradename
license, $23,000 received from settlement of litigation and $3,000 of other
items, offset by foreign exchange losses of $64,000.

Other items included in other income (expense) for the six months ended March
31, 2006 and 2005 totaled $192,000 and $3,144,000 respectively. The 2006 amount
includes $389,000 of loss from extinguishment of debt (see Note 4) offset by
$425,000 recovery from lease receivable (see Note 8), $79,000 in sales of
components no longer used, $45,000 received from a tradename license and other
items totaling $32,000. The 2005 amount includes $2,748,000 from the recovery of
a note receivable (see Note 9), $300,000 profit on sale of a 25% minority
interest in a Mexican company, $79,000 in sales of components no longer used,
$44,000 received from a tradename license, $23,000 received from settlement of
litigation and $18,000 of other items offset by foreign exchange losses of
$68,000.

All note references above are to the Notes to Condensed Consolidated Financial
Statements included elsewhere in this form 10QSB

Provision for Income Taxes

                                       18
<PAGE>

The tax provision for the three and six months ended March 31, 2005 includes a
credit of $369,194 due to the favorable settlement of a foreign income tax claim
(see Note 10).

Apart from recording this settlement, no federal income tax provisions or tax
benefits were provided in the three and six months ended March 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 and other deferred tax assets. The
Company has federal tax credit and net operating loss carryforwards of
approximately $11.9 million and $214.2 million, respectively, as of September
30, 2005. Income tax provisions for the three and six months ended March 31,
2006 and 2005 reflect minimum state taxes.

Liquidity and Capital Resources
                                               March 31,     September 30,
(in thousands)                                   2006            2005
                                            -------------    -------------
Cash and cash equivalents                   $         407    $         878
Working capital (deficit)                         (39,147)         (37,943)
Total assets                                       10,536           10,698
Long-term debt, including current portion          30,433           31,194
Total liabilities                                  46,383           45,440



                                    Three Months                Six Months
                                   Ended March 31,            Ended March 31,
                               ----------------------        ------------------
(in thousands)                     2006        2005          2006       2005
                               ---------    ---------        -----    ---------
Net cash provided (used) by:
     Operating activities      $      98    $     804          366    $   1,978
     Investing activities            (23)          12          (46)          (1)
     Financing activities           (270)        (580)        (791)      (1,630)


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

Three Months Ended March 31, 2006 and 2005

Net cash provided by operating activities totaled $98,000 in the three months
ended March 31, 2006. The net income in the quarter was $317,000. Included in
this net income were non-cash expenses for depreciation and amortization of
$103,000. An increase in accounts receivable due to new sales levels being
higher than customers collections resulted in a use of cash of $962,000.
Inventories were lower by $488,000 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 $658,000. Other sources and uses of cash include an decrease in
customer deposits of $472,000, payments of $208,000 in priority tax claims and
an increase in prepaid insurance of $281,000, an increase in unpaid vendor
liabilities of $157,000, an increase of $269,000 in deferred income on service
contracts and $29,000 of other items.

                                       19
<PAGE>

Net cash provided by operating activities totaled $804,000 in the three months
ended March 31, 2005. The net income in the quarter was $2,852,000. Non-cash
items included in this net income were expenses for depreciation of $52,000,
gain on claim reductions of $101,000, reduction in the reserve for foreign
income tax of $369,000 and reduction in the reserve for notes receivable of
$2,748,000. A reduction in accounts receivable due to a reducing trend of
monthly sales in the quarter and successful collections of December's sales
resulted in a source of cash of $856,000. Inventories were lower by $185,000 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 $598,000. Tax settlements
which resulted in lower liabilities of $251,000 and prepayments of insurance of
$327,000 both result in uses of funds. Other sources of cash totaled a net
amount of $57,000.

Net cash used by investing activities in the 2006 quarter was $23,000 compared
to $12,000 in the 2005 quarter, for the acquisition of equipment in both
periods.

Cash used by financing activities of $270,000 in the 2006 quarter is comprised
of proceeds from notes payable of $303,000 and from notes payable to related
parties of $250,000, offset by payments on notes payable of $76,000 and
principal payments required under the Company's senior secured debt of $747,000.

Cash used by financing activities of $580,000 in the 2005 quarter is comprised
of proceeds from notes payable of $283,000 offset by payments on notes payable
of $69,000 and on secured debt of $794,000.

Six Months Ended March 31, 2006 and 2005

Net cash provided by operating activities totaled $366,000 in the six months
ended March 31, 2006. The net loss in the period was $1,495,000. Included in
this net loss were non-cash expenses for loss on extinguishment of debt of
$389,000 and for depreciation and amortization of $192,000. An increase in
accounts receivable due to new sales levels being higher than customers
collections resulted in a use of cash of $774,000. Inventories were lower by
$607,000 as the Company was able to achieve shipments of on-hand inventories to
satisfy new customer orders and generate a source of cash through reduced
purchasing. Other sources of cash include interest which accrued on the
Company's debt which increased $1,095,000, an increase of $389,000 in unpaid
vendor liabilities. Other net uses of cash were $37,000.

Net cash provided by operating activities totaled $1,978,000 in the six months
ended March 31, 2005. The net income was $2,944,000. Non-cash items included
were expenses for depreciation of $120,000, gain on claim reductions of
$246,000, a reduction in the reserve for foreign income taxes of $369,000 and a
reduction in the reserve for note receivable of $2,748,000. A reduction in
accounts receivable amounted to $561,000. Inventories decreased by $831,000 as
the Company utilized shipment of on-hand inventories to satisfy orders. Other
uses of funds totaled a net amount of $299,000.

For the six months ended March 31, 2006, cash used by investing activities was
$46,000 for the acquisition of equipment.

For the six months ended March 31, 2005, cash used by investing activities
included $12,000 of equipment purchases in the March 2005 quarter offset in part
by the collection of a note receivable of $11,000.

Net cash used in financing activities was $791,000 for the six months ended
March 31, 2006. Payments on the term obligation were $1,268,000 and on notes
payable were $76,000. Proceeds for the issuance of notes payable provided
$553,000 of cash.

                                       20
<PAGE>

Cash used in financing activities was $1,630,000 for the six months ended March
31, 2005. Payments on the term obligation were $1,844,000 and on notes payable
were $69,000 Proceeds from the issuance of notes payable, net of repayments,
provided $283,000 of cash.

The Company has virtually 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 professional fees and payments of principal and interest
(currently such principal and interest totals approximately $280,000 each month)
under its senior loan agreement. Furthermore, the Company has significant
outstanding obligations to pay total long-term debt of approximately $30.4
million, along with interest thereon.

The Company's failure to make required payments under the senior loan agreement
would constitute an event of default. In addition, the Company is required to
meet a financial covenant to avoid an event of default (see Note 4 to Notes to
Condensed Consolidated Financial Statements included in Item 1 in this Form
10-QSB). Although the Company was not in default of the financial covenant as of
September 30, 2004 it was necessary for the Company to obtain a waiver of
compliance with such covenant in order to avoid a default as the Company did not
meet the financial covenant requirement for the September 30, 2004 quarter.

Since emerging from bankruptcy, the Company has incurred losses before
recoveries on note receivable, reorganization items and income taxes of
approximately $6.8 million. Furthermore, the ability of the Company to meet cash
flow and loan covenant requirements is directly affected by the factors
described below in the section titled "Risk Factors". There can be no assurance
that the Company will be able to avoid a default on the senior loan agreement.
If there is such a default, the senior secured lenders may accelerate payment of
the outstanding debt ($6.2 million at March 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.

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

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

At March 31, 2006 the Company's principal source of liquidity included cash and
cash equivalents of $407,000 compared to $878,000 at September 30, 2005. At
March 31, 2006, the Company's working capital was a deficit of approximately
$39.1 million, compared to a deficit of approximately $37.9 million at September
30, 2005. Negative working capital reflects the classification of all long-term
secured debt as current liabilities as a result of non-compliance with a
financial covenant in 2004 (for which a waiver was obtained) (see Note 4 of
Notes to Condensed Consolidated Financial Statements included in Item 1 in this
Form 10-QSB).

                                       21
<PAGE>

The Company has significant unpaid prepetition tax claims (approximately $1.0
million) and professional fees (approximately $1.8 million) at March 31, 2006, a
majority of which are expected to be paid in fiscal 2006. In order to meet these
and other future payments, the Company must achieve revenue growth while at the
same time limiting investments in inventories and capital assets.

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

Management has responded to such risks as part of an ongoing strategy by
restructuring the Company's sales force, increasing factory shutdown time,
containing expenses and reducing the size of the employee workforce. In
addition, the Company has obtained $1,850,000 from loans from related parties
for replacement of senior indebtedness (see Note 4 of the Notes to Condensed
Consolidated Financial Statements included in Item 1 in this Form 10-QSB). The
Company also is actively marketing for sale its land and building and pursuing
other asset recoveries, the proceeds of which would be used to reduce secured
debt and related interest.

Critical Accounting Policies

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

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

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.

                                       22
<PAGE>

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

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

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

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 March 31, 2006 and September 30, 2005, real estate
represented the only significant remaining long-lived asset that has not been
fully written down for impairment.

Recent Accounting Pronouncements

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

                                       23
<PAGE>

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.

RISK FACTORS

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

      GDC Limited and Negative Operating History Since Emerging from Bankruptcy.
The Company emerged from Bankruptcy on September 15, 2003. The Company had
voluntarily filed for protection under Chapter 11 of the US Bankruptcy Code on
November 2, 2001, after incurring seven consecutive years of losses and selling
three of its four operating divisions in 2001. Accordingly, an investor in the
Company's common stock must evaluate the risks, uncertainties, and difficulties
frequently encountered by a company emerging from Chapter 11 and that operates
in rapidly evolving markets such as the telecommunications equipment industry.

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

                                       24
<PAGE>

      Limited Financial Resources and Risk of Default. The Company has virtually
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 (currently such
principal and interest totals approximately $280,000 per month) under its senior
loan agreement. Furthermore, the Company has significant outstanding obligations
and commitments (approximately $45.2 million at September 30, 2005) (see Item 6
in the Company's annual report on Form 10-KSB/A for the year ended September 30,
2005 as filed with the Securities and Exchange Commission, in the section on
"Liquidity" for additional discussion of this risk factor and the Company's
contractual cash obligations as of September 30, 2005).

The Company's failure to make required payments under the senior loan agreement
would constitute an event of default. In addition, the Company is required to
meet a financial covenant to avoid an event of default (see Note 4 to Notes to
Condensed Consolidated Financial Statements included in Item 1 in this Form
10-QSB). On September 30, 2004, it was necessary to obtain a waiver of
compliance with such covenant in order to avoid a default as the Company did not
meet the financial covenant requirement for the September 30, 2004 quarter.


Since emerging from bankruptcy, the Company has incurred losses before
recoveries on note receivable, reorganization items and income taxes of
approximately $6.8 million. Furthermore, the ability of the Company to meet cash
flow and loan covenant requirements is directly affected by the factors
described in this "Risk Factors" section.

There can be no assurance that the Company will be able to avoid an event of
default on its senior loan agreement. If there is such a default, the senior
secured lenders may accelerate payment of the outstanding debt ($6.2 million at
March 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 March 31, 2006). Based on the
uncertainty of the Company achieving sufficient cash flows from operations to
meet its monthly loan payment obligations and to comply with the EBITDA covenant
during the quarterly periods during fiscal 2006 and 2005, the Company's
long-term debt has been classified as current liabilities in the accompanying
consolidated balance sheets at both March 31, 2006 and September 30, 2005.

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

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

                                       25
<PAGE>

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

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

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

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

                                       26
<PAGE>

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

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

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

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

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

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".

                                       27
<PAGE>

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".

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

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

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<PAGE>

      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".

      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.

                                       29
<PAGE>

      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 ACS subsidiary in France, 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.

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.

                                       30
<PAGE>

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

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

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

                                       31
<PAGE>

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

Not applicable

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

Not applicable


ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Payment of dividends on the 9% Cumulative Convertible Exchangeable Preferred
Stock were suspended June 30, 2000. Such dividend arrearages total
$10,123,542.00 as of March 31, 2006.

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

Not applicable

ITEM 5. OTHER INFORMATION

Not applicable

                                       32
<PAGE>

ITEM 6. EXHIBITS

(a) Exhibits Index:

Exhibit
Number    Description of Exhibit
------    ----------------------

31.1     Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or
         Rule 15d-14(a) under the Securities Exchange Act of 1934.

31.2     Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or
         Rule 15d-14(a) under the Securities Exchange Act of 1934

32.1     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

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.


May 15, 2006           /s/ William G. Henry
------------           --------------------
                       William G. Henry
                       Vice President, Finance and Administration
                       Chief Financial Officer



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