UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





(Mark
One)


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





For the
quarterly period ended December 31,
2007





OR





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





For the
transition period from__________to__________





COMMISSION
FILE NUMBER 1-8086





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





DELAWARE
            06-0853856(State
      of other jurisdiction of incorporation or organization)
            I.R.S. EmployerIdentification
      No.)








6
      Rubber Avenue, Naugatuck, CT
            06770(Address
      of principal executive offices)
            (Zip
      Code)








Registrant’s
telephone number, including area code 203-729-0271





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





Yes
      T    No
      £





Indicate
by check mark whether the registrant is a large accelerated filer or a
non-accelerated filer.  See definition of “accelerated filer” and
“large accelerated filer” in Rule 12b-2 of the Exchange Act (check
one):





Large
      accelerated filer   £
            Accelerated
      filer   £
            Non-accelerated
      filer   T





Indicate
by check mark whether the registrant is a Shell company (as defined in Rue 12b-2
of the Exchange Act):





Yes
      £    No
      T





As of
January 31, 2008, there were outstanding the following number of shares of each
of the issuer’s classes of common equity:





3,474,373
shares of common stock, par value $0.01 per share


647,715
shares of Class B stock, par value $0.01 per share







1





GENERAL DATACOMMINDUSTRIES, INC.





INDEX
TO QUARTERLY REPORT ON FORM 10-Q











PART
      I
            FINANCIAL
      INFORMATION
            PageItem 1.
            Financial Statements
      (unaudited):Condensed
      Consolidated Balance Sheets as of December 31, 2007 and September 30,
      2007
            3Condensed
      Consolidated Statements of Operations forthe Three Months Ended December
      31, 2007 and 2006
            4Condensed
      Consolidated Statements of Cash Flows for the Three Months Ended December
      31, 2007 and 2006
            5Notes
      to the Condensed Consolidated Financial Statements
            6Item 2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            12Item
      3.
            Quantitative
      and Qualitative Disclosure About Market Risk
            24Item
      4.
            Controls
      and Procedures
            24PART
      II
            OTHER
      INFORMATIONItem 3.
            Defaults
      Upon Senior Securities
            25Item
      5.
            Other Information
            25Item 6.
            Exhibits
            25





2
 Index





PART
I.  FINANCIAL INFORMATION





ITEM
1.  FINANCIAL STATEMENTS





General DataCommIndustries, Inc., and Subsidiaries


Condensed
Consolidated Balance Sheets


(in
thousands except shares)




December 31,
            
            
            September 30,2007
            
            
            2007*(Unaudited)Assets:Current
      assets:Cash
      and cash equivalents
            
            $
            288
            
            
            $
            1,296Accounts
      receivable, less allowance for doubtful accounts of $269 at December 31,
      2007 and $250 at September 30, 2007
            
            
            2,369
            
            
            
            1,711Inventories
            
            
            3,013
            
            
            
            2,766Other current assets
            
            
            578
            
            
            
            676Total current assets
            
            
            6,248
            
            
            
            6,449Property, plant and equipment,
      net
            
            
            3,654
            
            
            
            3,687Total Assets
            
            
            9,902
            
            
            
            10,136Liabilities
      and Stockholders’ Deficit:Current
      liabilities:Current
      portion of long-term debt ($2,476 owed to related parties at December 31,
      2007 and $2,351 at September 30, 2007)
            
            
            21,917
            
            
            
            2,355Accounts
      payable
            
            
            3,031
            
            
            
            2,810Accrued
      payroll and payroll-related costs
            
            
            567
            
            
            
            565Accrued
      interest
            
            
            8,903
            
            
            
            466Other current liabilities
            
            
            2,494
            
            
            
            3,051Total current liabilities
            
            
            36,912
            
            
            
            9,247Long-term
      debt, less current portion
            
            
            4,500
            
            
            
            23,953Accrued
      interest
            
            
            42
            
            
            
            7,946Other liabilities
            
            
            714
            
            
            
            722Total Liabilities
            
            
            42,168
            
            
            
            41,868Commitments
      and contingencies
            
            
            -
            
            
            
            -Stockholders’
      deficit:9%
      Preferred stock, par value $1.00 per share, 3,000,000 shares authorized,
      781,996 shares issued and outstanding at December 31, 2007
      and  September 30, 2007; $32.7 million liquidation preference at
      December 31, 2007
            
            
            782
            
            
            
            782Class
      B stock, par value $.01 per share, 5,000,000 shares
      authorized;  647,715 shares issued and outstanding at December
      31, 2007 and September 30, 2007
            
            
            6
            
            
            
            6Common
      stock, par value $.01 per share, 25,000,000 shares authorized; issued and
      outstanding at December 31, 2007 and September 30, 2007: 3,474,373
      shares
            
            
            35
            
            
            
            35Capital
      in excess of par value
            
            
            199,088
            
            
            
            199,021Accumulated
      deficit
            
            
            (232,202
            )
            
            
            (231,601
            )Accumulated other comprehensive
      income
            
            
            25
            
            
            
            25Total Stockholders’ Deficit
            
            
            (32,266
            )
            
            
            (31,732
            )Total Liabilities and Stockholders’
      Deficit
            
            $
            9,902
            
            
            $
            10,136





* Derived
from the Company’s audited consolidated balance sheet at September 30,
2007.




The
accompanying notes are an integral part of these


condensed
consolidated financial statements.





3
 Index





General DataCommIndustries, Inc. and Subsidiaries


Condensed
Consolidated Statements of Operations (Unaudited)


(in
thousands except share data)




Three
      Months EndedDecember 31,2007
            
            
            2006Revenues:Product
            
            $
            3,419
            
            
            $
            2,965Service
            
            
            661
            
            
            
            594Total
            
            
            4,080
            
            
            
            3,559Cost
      of revenues:Product
            
            
            1,460
            
            
            
            1,143Service
            
            
            473
            
            
            
            170Total
            
            
            1,933
            
            
            
            1,313Gross
      margin
            
            
            2,147
            
            
            
            2,246Operating
      expenses:Selling,
      general and administrative
            
            
            1,553
            
            
            
            1,339Research and product
      development
            
            
            683
            
            
            
            6082,236
            
            
            
            1,947Operating  income
      (loss)
            
            
            (89
            )
            
            
            299Interest
      expense
            
            
            (777
            )
            
            
            (795
            )Other income, net
            
            
            118
            
            
            
            44(659
            )
            
            
            (751
            )Loss
      before income taxes
            
            
            (748
            )
            
            
            (452
            )Income tax provision
            
            
            3
            
            
            
            3Net
      loss
            
            
            (751
            )
            
            
            (455
            )Dividends applicable to preferred
      stock
            
            
            (440
            )
            
            
            (440
            )Net loss applicable to common and Class B
      stock
            
            $
            (1,191
            )
            
            $
            (895
            )Loss
      per share:Common and Class B stock (basic and
      diluted)
            
            $
            (0.29
            )
            
            $
            (0.22
            )Weighted
      average number of common and Class B shares outstanding:Common
      stock
            
            
            3,474,373
            
            
            
            3,470,813Class B stock
            
            
            647,715
            
            
            
            651,275





The
accompanying notes are an integral part of these


condensed
consolidated financial statements.





4
 Index





General DataCommIndustries, Inc.


Condensed
Consolidated Statements of Cash Flows (Unaudited)


(In
thousands)




Three
      Months EndedDecember 31,2007
            
            
            2006Cash
      flows from operating activities:Net
      loss
            
            $
            (751
            )
            
            $
            (455
            )Adjustments
      to reconcile net loss to net cash (used in) provided by operating
      activities:Depreciation
      and amortization
            
            
            67
            
            
            
            87Stock
      compensation expense
            
            
            66
            
            
            
            91Changes
      in:Accounts
      receivable
            
            
            (658
            )
            
            
            173Inventories
            
            
            (247
            )
            
            
            163Accounts
      payable
            
            
            221
            
            
            
            (382
            )Accrued
      payroll and payroll-related costs
            
            
            2
            
            
            
            (81
            )Accrued
      interest
            
            
            560
            
            
            
            680Other
      net current liabilities
            
            
            (311
            )
            
            
            (34
            )Other net long-term assets
            
            
            (32
            )
            
            
            -Net cash (used in) provided by operating
      activities
            
            
            (1,083
            )
            
            
            242Cash
      flows from investing activities:Acquisition of property, plant and equipment,
      net
            
            
            (25
            )
            
            
            (8
            )Net cash used in investing
      activities
            
            
            (25
            )
            
            
            (8
            )Cash
      flows from financing activities:Principal
      payments on senior debt
            
            
            -
            
            
            
            (273
            )Principal
      payments on notes payable
            
            
            (25
            )Proceeds from notes payable to related
      parties
            
            
            125Net cash provided by (used in) financing
      activities
            
            
            100
            
            
            
            (273
            )Net
      decrease in cash and cash equivalents
            
            
            (1,008
            )
            
            
            (39
            )Cash and cash equivalents, beginning of
      period
            
            
            1,296
            
            
            
            246Cash and cash equivalents, end of
      period
            
            $
            288
            
            
            $
            207Supplemental
      disclosures of cash flow information:Cash
      paid during the period for:Interest
            
            $
            154
            
            
            $
            65Income taxes
            
            $
            6
            
            
            $
            3





The
accompanying notes are an integral part of these


condensed
consolidated financial statements.





5
 Index





GENERAL DATACOMMINDUSTRIES, INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)








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-Q and Article 8
of Regulation S-X.  Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for year end financial statements.  In the opinion of management,
these statements include all adjustments, consisting of normal and recurring
adjustments, considered necessary for a fair presentation of the results for the
periods presented.  The results of operations for the three months
ended December 31, 2007 are not necessarily indicative of results which may be
achieved for the entire fiscal year ending September 30, 2008.  The
unaudited interim financial statements should be read in conjunction with the
consolidated financial statements and notes thereto contained in the Company’s
annual report on Form 10-KSB for the fiscal year ended September 30, 2007 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.  Debentures were issued to unsecured creditors as part
of the plan of reorganization.  However, the Company has not met its
business plan objectives since emerging from Chapter 11 and, therefore, there
can be no assurance that any such outstanding claims will be paid.





At
December 31, 2007 the Company had a stockholders’ deficit of approximately $32.3
million and a working capital deficit of approximately $30.7
million.  Debentures in the principal amount of $19,453,000 along with
accrued interest thereon ($8,369,000) mature on October 1,
2008.  While a Subordinated Security Agreement signed by the Indenture
Trustee on behalf of the Debenture holders provides that no payments may be made
to Debenture holders while senior secured debt is outstanding, in the absence of
such payment restrictions the Company does not presently have the ability to
repay the Debentures.  A failure to pay the Debentures when due and
payable could result in an Event of Default being declared under the Indenture
governing the Debentures.





The
conditions described above raise substantial doubt about the Company’s ability
to continue as a going concern. Management
has responded to its liquidity and cash flow risks by replacing its senior debt
in 2007 on more favorable terms and by selling patents in February 2008 for
$4,000,000 while retaining rights to use the patented technologies (See Note 7).
In addition, management has implemented operational
changes:  restructuring the sales force, increasing factory shutdown
time, constraining expenses, and reducing and reallocating the employee
workforce.   The Company also continues to pursue the sale or
lease of its headquarters land and building in Naugatuck, CT.





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 asset sales, or obtain additional funding
sources or successfully renegotiate the terms of the Debentures.  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 this uncertainty.





6
 Index





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 common share assumes the
conversion of Class B stock into common stock.  Diluted earnings per
share gives effect to all potential dilutive common shares outstanding during
the period.  In computing diluted earnings per share, which only
applies in the event there is net income, the average price of the Company’s
common stock for the period is used in determining the number of shares assumed
to be purchased from exercise of stock options and
warrants.  Dividends applicable to preferred stock represent
accumulating dividends that are not declared or accrued.  The
following table sets forth the computation of basic and diluted earnings (loss)
applicable to common and Class B stock for the three months ended December 31,
2007 and 2006 (in thousands, except shares and per share data):




Three Months Ended
      December 31,2007
            
            
            2006Net
      loss
            
            $
            (751
            )
            
            $
            (455
            )Dividends applicable to preferred
      stock
            
            
            (440
            )
            
            
            (440
            )Net loss applicable to common and Class B
      stock
            
            $
            (1,191
            )
            
            $
            (895
            )Net
      loss applicable to common stock-basic and diluted
            
            $
            (1,004
            )
            
            $
            (754
            )Net loss applicable to Class B stock-basic and
      diluted
            
            $
            (187
            )
            
            $
            (141
            )






Three Months Ended
      December 31,2007
            
            
            2006
            
            
            2007
            
            
            2006Common Stock
            
            
            Class B StockNumerator
      for basic and diluted earnings per share – net loss
            
            $
            (1,004
            )
            
            $
            (754
            )
            
            $
            (187
            )
            
            $
            (141
            )Denominator for basic and diluted loss per share –
      weighted average outstanding shares
            
            
            3,474,373
            
            
            
            3,470,813
            
            
            
            647,715
            
            
            
            651,275Basic and diluted loss per
      share
            
            $
            (0.29
            )
            
            $
            (0.22
            )
            
            $
            (0.29
            )
            
            $
            (0.22
            )








In the
three months ended December 31, 2007 and 2006, 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 SharesThree Months Ended
      December 31,2007
            
            
            2006Stock
      warrants
            
            
            4,093,251
            
            
            
            4,093,251Stock
      options
            
            
            2,635,807
            
            
            
            2,672,647Convertible
      preferred stock
            
            
            143,223
            
            
            
            143,223Contingently issuable
    shares*
            
            
            -
            
            
            
            2,206,242Total
            
            
            6,872,281
            
            
            
            9,115,363




*  Common
stock contingently issuable to the Company’s senior secured lenders in the event
of default or if certain payment terms were not met are excluded from the
computation of earnings per share because the contingency defined in the loan
agreement had not taken place.  Such contingency was cancelled when
the senior loan was paid off on July 30, 2007.





7
 Index





3.  Inventories





Inventories
consist of (in thousands):





December 31,
            
            
            September 30,2007
            
            
            2007Raw
      materials
            
            $
            692
            
            
            $
            665Work-in-process
            
            
            1,262
            
            
            
            1,020Finished goods
            
            
            1,059
            
            
            
            1,081$
            3,013
            
            
            $
            2,766





Inventories
are stated at the lower of cost or market using a first-in, first-out
method.  Reserves in the amount of  $2,748,000 and
$2,883,000 were recorded at December 31, 2007 and September 30, 2007,
respectively, for excess and obsolete inventories.





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





Long-term
      debt consists of (in thousands):
            
            December 31,
            
            
            September 30,2007
            
            
            2007Notes
      Payable to Related Parties, net of debt discount of $11 at December 31,
      2007 and $19 at September 30, 2007
            
            
            2,464
            
            
            
            2,332Note
      Payable
            
            
            -
            
            
            
            23Debentures
      due October 1, 2008
            
            
            19,453
            
            
            
            19,453Real Estate Mortgage due July 31,
      2009
            
            
            4,500
            
            
            
            4,50026,417
            
            
            
            26,308Less current portion
            
            
            21,917
            
            
            
            2,355$
            4,500
            
            
            $
            23,953





Long-term
debt matures in amounts totaling $21,918,000 in the next twelve months, of which
$19,453,000 in Debentures is due October 1, 2008.  In the following
twelve months, the Real Estate Mortgage in the amount of $4,500,000 is due July
31, 2009.





Notes
Payable to Related Parties





On
December 9, 2005, Mr. Howard S. Modlin, Chairman of the Board and Chief
Executive Officer, and Mr. John Segall, a Director, restructured existing loans
and entered into new senior secured loans with the Company in the principal
amounts of $1,198,418 and $632,527, respectively.  Interest accrues at
the rate of 10% per annum.   In connection with the transactions,
Mr. Modlin and Mr. Segall each received seven year warrants expiring December 8,
2012 to purchase common stock at $0.575 per share covering 2,084,204 shares and
1,100,047 shares, respectively.





On
February 17, 2006, the Company borrowed $250,000 from Mr. Modlin in the form of
a demand note which bore interest at the rate of 10% per annum.  On
April 20, 2006, the Corporation entered into an amendment of its loan
arrangement with Mr. Modlin whereby the $250,000 demand loan made by Mr. Modlin
on February 17, 2006 was amended and restated into a term note, 50% of which was
payable February 17, 2007 (such payment was deferred indefinitely in agreement
with Mr. Modlin) and 50% of which is payable February 17, 2008.  Mr.
Modlin received a seven year warrant expiring April 19, 2013 to purchase 909,000
shares of common stock at $0.275 per share.  The warrant, valued at
$69,000, was recorded as debt discount and is being amortized as additional
interest expense over the term of the debt.





In the
quarters ended March 31, 2007 and December 31, 2007, Mr. Modlin made demand
loans to the Company totaling $270,000 and $125,000, respectively.





As of
December 31, 2007, no principal or interest payments required under the terms of
any of the above loans have been made to Mr. Modlin or Mr. Segall under
agreement with such individuals.  Accrued interest on all such loans
amounted to $450,066 and $389,748 at December 31, 2007 and September 30, 2007,
respectively.  All loans made by Mr. Modlin and Mr. Segall are
collateralized by all the assets of the Company.





8
 Index





Debentures





Debentures
together with accrued interest mature on October 1, 2008.  The
Debentures were issued to unsecured creditors in 2003 as part of the Company’s
Plan of Reorganization.  No principal or interest is payable on the
Debentures until the senior secured lenders’ claims are paid in full and no
principal or interest has been paid through December 31,
2007.  Interest accrues at the annual rate of 10% and totaled
$8,369,000 at December 31, 2007.  While principal and/or interest on
the Debentures may not be paid while the senior secured debt, including such
debt owed to Mr. Modlin and Mr. Segall, is outstanding, in the absence of such
payment restrictions the Company does not presently have the ability to repay
the Debentures.  A failure to pay the Debentures when due and payable,
could result in an Event of Default being declared under the Indenture governing
the Debentures and the Company’s business, financial condition, and results of
operations could be materially adversely affected thereby.





Real
Estate Mortgage





The real
estate mortgage entered into July 30, 2007 in the amount of $4,500,000 is
secured by the Company’s premises in Naugatuck, CT.  The mortgage
requires monthly payments of interest at the rate of 30-day LIBOR plus 6% (such
interest was 10.82% at December 31, 2007).  No principal payments are
required until the full amount of the mortgage matures on July 30,
2009.  The mortgage contains no financial performance
covenants.





5.  Accounting
for Stock-Based Compensation





Effective
October 1, 2006, the Company adopted the fair value recognition provisions of
SFAS No. 123 (R) “Accounting for Stock-Based Compensation” (“SFAS No. 123R”)
using the modified prospective method.  Under that transition method,
compensation cost recognized includes: (a) compensation cost for all share-based
payments (including stock options) granted prior to, but not yet vested as of
October 1, 2006, based on the grant date fair value estimated in accordance with
the original provisions of SFAS No. 123, and (b) compensation cost for all
share-based payments granted subsequent to October 1, 2006, based on the
grant-date fair value estimated  in accordance with the provisions of
SFAS No. 123R.  Results for prior periods were not
restated.  Compensation cost is recorded over the stock options’
vesting periods.  As a result of adopting SFAS No. 123R, compensation
cost recognized in the quarter ended December 31, 2007 and 2006 was $65,905 and
$90,571, respectively.




6.  Employee
Incentive Plans





Stock
Awards, Grants and Options


The
Company has adopted a 2003 Stock and Bonus Plan (“2003 Plan”) reserving 459,268
shares of Class B stock and 459,268 shares of common stock and a 2005 Stock and
Bonus Plan (“2005 Plan”) reserving 2,400,000 shares of common
stock.  No shares of Class B stock are authorized under the 2005
Plan.  Officers and key employees may be granted incentive stock
options at an exercise price equal to or greater than the market price on the
date of grant and non-incentive stock options at an exercise price equal to,
greater than or less than the market price on the date of
grant.  While individual options can be issued under various
provisions, most options, once granted, generally vest in increments of 20% per
year over a five-year period and expire within ten years. At December 31, 2007
there were 463,616 options available for future issuance under the
plans.





On
October 10, 2006, the Stock Option Committee of the Board of Directors granted
stock options pursuant to the Company’s 2005 Plan to purchase 363,400 shares of
Common Stock at the quoted market price of $.18 per share, including grants of
30,000 Plan shares to each of Lee M. Paschall, Aletta Richards and John L.
Segall, Directors, William G. Henry, Vice President, Finance and Administration
and Principal Financial Officer and George Gray, Vice President, Operations and
Chief Technology Officer, and an aggregate of 213,400 of such options to all of
its employees other than its officers and directors.  The committee
also granted to Howard S. Modlin, Chairman and Chief Executive Officer, a stock
option under the 2005 Plan to purchase 551,121 shares at $.20 a
share.  All such options vest in increments of 20% a year over a five
year period and expire then years after grant.





9
 Index





On
October 11, 2007, 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 312,900 shares of Common Stock at the quoted market price of $.25
per share, including grants of 30,000 shares to Aletta Richards and John L.
Segall, Directors, William G. Henry, Vice President, Finance and Administration
and Principal Financial Officer and George Gray, Vice President, Operations and
Chief Technology Officer, and an aggregate of 192,900 of such options to all of
its employees other than its officers and directors.  The Committee
also granted to Howard S. Modlin, Chairman and Chief Executive Officer, a stock
option with terms similar to options granted under the Plan to purchase 551,121
shares at $.275 a share.  All such options vest in increments of 20%
one, two, three, four and five years after grant and expire ten years after
grant.





A summary
of stock options outstanding under the Company’s stock plans as of September 30,
2007, and changes during the three months then ended, December 31, 2007 is
presented below:





Shares
            
            
            Weighted Average Exercise
    Price
            
            
            Weighted Average Remaining Contractual Term
      (Yrs)
            
            
            Aggregate Intrinsic ValueOptions
      outstanding, September 30, 2007
            
            
            2,635,807
            
            
            $
            0.77Options
      granted
            
            
            864,021
            
            
            
            0.27Options
      exercised
            
            
            --
            
            
            
            --Options cancelled or
expired
            
            
            (2,390
            )
            
            
            30.88Options outstanding, December 31,
      2007
            
            
            3,497,438
            
            
            
            0.64
            
            
            
            8.33
            
            
            $
            0Vested or expected to vest at December 31,
      2007
            
            
            3,139,239
            
            
            
            0.58
            
            
            
            8.34
            
            
            
            0Exercisable at December 31,
      2007
            
            
            970,357
            
            
            
            1.37
            
            
            
            7.55
            
            
            
            0





As of
December 31, 2007, there was $414,757 of total unrecognized compensation cost
related to nonvested options which is expected to be recognized over a
weighted-average period of 1.83 years.





The
weighted-average grant-date fair value of options granted during the three
months ended December 31, 2007 was $0.23 per share, which was estimated using
the Black Scholes model and the following weighted average
assumptions:





Risk-free
      interest rate (%)
            3.76%Volatility
      (%)
            133%Expected
      life (in years)
            6.50Dividend
      yield rate
            Nil





Expected
volatility is based on historical volatility in the Company’s stock price over
the expected life of the options.  The risk-free interest rate is
based on the annual yield on the measurement date of a zero coupon U.S. Treasury
Bond, the maturity of which equals the options’ expected life.  The
weighted average expected life of 6.50 years reflects the alternative simplified
method permitted by SEC Staff Accounting Bulletin No. 107, which defines the
expected life as the average of the contractual term of the options and the
weighted average vesting period for all option tranches.  The dividend
yield assumption is based on the Company’s intent not to issue a
dividend.





Employee
Retirement Savings and Deferred Profit Sharing Plan





Under the
retirement savings provisions of the Company’s retirement plan established under
Section 401(k) of the Internal Revenue Code, employees are generally eligible to
contribute to the plan after three months of continuous service in amounts
determined by the plan.  The Company does not make matching
contributions and, therefore, no amounts have been charged to
expense.





10
 Index





7.  Subsequent
Event





Sale of
Patents





On
February 5, 2008, General DataComm Industries, Inc. completed the sale of
selected patents and patent applications to Fournier Assets Limited Liability
Company for proceeds of $4,000,000. The patents and patent applications sold
relate to the Company’s product lines, and the Company retains a non-exclusive,
royalty-free license under the patents for all its product lines.





As a
result of the sale, the Company will record a gain in the approximate amount of
$3,900,000 in the Quarter ending March 31, 2008.  The Company intends
to use the funds for general corporate purposes, including payment of debt and
interest and for working capital.





8.   Contingencies





On
December 19, 2007, a sole supplier of a proprietary component critical to one of
the Company’s products in its Xedge product line, announced the discontinuation
of the component and rejected previously accepted orders that had been placed
for the component by the Company.  Thereafter, the Company attempted
to exercise its rights to obtain the documentation necessary to allow the
Company to manufacture the component under its contracts with the
supplier.  The Company has been unable to date to obtain this
documentation and, as a result, on February 8, 2008 the Company filed a legal
claim in Connecticut Superior Court against the supplier.





If the
component is unavailable to the Company in the future, the Company may
experience a significant decline in revenues and would likely have to increase
development costs in order to develop or replacement component.  Such
events could have a material adverse effect on the Company’s business, financial
condition and results of operations.





9.  Recent
Accounting Pronouncements





On
October 1, 2007, the Company adopted the provisions of FASB Interpretation No.
48 (“FIN 48”), “Accounting for
Uncertainty in Income Taxes,” which clarifies the accounting for the
uncertainty in income taxes recognized in the financial statements in accordance
with FASB Statement No. 109, “Accounting for Income
Taxes”. FIN 48 provides guidance on the financial statement recognition
and measurement of a tax position taken or expected to be taken in a tax return.
FIN 48 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosures, and transition. Prior to
implementation of FIN 48, the Company had a had a liability for unrecognized
foreign and state tax benefits amounting to $313,000 provided in its balance
sheet all of which, if recognized, would affect the Company’s effective tax
rate. In adopting FIN 48, the liability for unrecognized tax benefits was
reduced by $180,000 and accrued interest through September 30, 2007 and
penalties aggregating $30,000 related to unrecognized tax benefits were accrued
resulting in a net reduction of $150,000 to the accumulated deficit at October
1, 2007. The Company files a consolidated federal income tax return with its
subsidiaries. In addition, the Company and/or its subsidiaries file in various
state and foreign jurisdictions. The Company is no longer subject to
examinations by taxing authorities for fiscal years before September 30, 2004.
The Company classifies interest and penalties as selling, general and
administrative expenses. Interest and penalties recognized in the period ended
December 31, 2007 amounted to $1,100 and accrued interest and penalties included
in the balance sheet amounted to approximately $151,100 at such
date.


In
September 2006, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 157, “Fair Value
Measurements”.  SFAS No. 157 defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair
value.  SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007.  The Company is currently evaluating the impact of
this standard on the consolidated financial statements.





In
February 2007, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 159, “The Fair
Value Option for Financial Assets and Financial
Liabilities”,  SFAS No. 159 provides an option to report
selected financial assets and financial liabilities using fair
value.  The standard establishes required presentation and disclosures
to facilitate comparisons with companies that use different measurements for
similar assets and liabilities.  SFAS No. 159 is effective for fiscal
years beginning after November 15, 2007, with early adoption allowed only if
SFAS No. 157 is also adopted.  The Company is currently evaluating the
impact of this standard on the consolidated financial statements.





11
 Index





ITEM 2.  MANAGEMENT’SDISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS





THE
FOLLOWING DISCUSSION AND ANALYSIS OF THE COMPANY’S FINANCIAL CONDITION
AND  RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN THIS QUARTERLY
REPORT ON FORM 10-Q AND IN THE COMPANY’S ANNUAL REPORT ON FORM 10-KSB FOR THE
YEAR ENDED SEPTEMBER 30, 2007 AS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION.





THIS
REPORT ON FORM 10-Q 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.





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





RESULTS
OF OPERATIONS





Revenues





Three Months Ended
      December 31,(in
      thousands)
            
            2007
            
            
            2006Product
            
            $
            3,419
            
            
            $
            2,965Service
            
            
            661
            
            
            
            594Total
      Revenues
            
            $
            4,080
            
            
            $
            3,559





Revenues
for the three months ended December 31, 2007 increased $521,000, or 14.6%, to
$4,080,000 from $3,559,000 reported for the three months ended December 31,
2006. Product revenues increased $454,000, or 15.3%, while service revenues
increased by $67,000 or 11.3%.





Sales of
high-end multi-service switches increased approximately $580,000 as existing
customers in South East Asia and the United States expanded their networks.
Furthermore, the Company realized increased sales of $227,000 from its line of
security software products.  These increases were offset by
approximately $350,000 resulting from continued declines in sales of network
access products to large telecommunication carriers.





The
increase in service revenues in the quarter was due primarily to support
services sold along with the security software products.





12
 Index





Foreign
sales accounted for 35% and 50% of revenue for the three months ended December
31, 2007 and 2006, respectively.





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





Gross
Margin





Three Months Ended
      December 31,(in
      thousands)
            
            2007
            
            
            2006Product
            
            $
            1,959
            
            
            $
            1,822Service
            
            
            188
            
            
            
            424Total
      Gross Margin
            
            
            2,147
            
            
            $
            2,246Percentage
      of Product Revenues
            
            
            57.3
            %
            
            
            61.4
            %Percentage
      of Service Revenues
            
            
            28.4
            %
            
            
            71.4
            %Percentage
      of Total Revenues
            
            
            52.6
            %
            
            
            63.1
            %





Gross
Margin as a percentage of revenues, in the three months ended December 31, 2007
was 52.6% as compared to 63.1% in the three months ended December 31, 2006, a
decrease of 10.5%.





Product
gross margin, as a percentage of product revenues, decreased
4.2%.  This decrease was due primarily to the low margin sales of the
Company’s line of security software products (-2.8%).  Other decreases
include the impact of lower sales prices due to competitive pressures (-0.5%), a
reduction in shipments of high-margin products (primarily multi-plexer products)
to a government contractor (– 1.1%) and other net items (+0.2%).





Service
gross margin, as a percentage of service revenues, declined
43.0%.   In the three months ended December 31, 2007, the Company
started a new business venture in Texas to target sub contract service work from
major telecommunications providers.  These start-up costs, with no
revenue, reduced gross margins by 21.6%.  Low margin service support
on security software reduced gross margin another 4.4%.  The balance
of the reduction (-17.0%) results from compensation and additional strategic
investments made in the area of professional services to position this as an
area for growth.





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, the
costs of the service organization and changes in other components of cost of
sales.  As and to the extent the Company introduces new products and
services, it is possible that such products and services may have lower gross
profit margins than other established products in higher volume production and
than traditional service offerings.  Accordingly, gross margin as a
percentage of revenues is expected to vary.





Selling,
General and Administrative





Three Months Ended
      December 31,(in
      thousands)
            
            2007
            
            
            2006Selling,
      general and administrative
            
            $
            1,553
            
            
            $
            1,339Percentage
      of revenues
            
            
            38.1
            %
            
            
            37.6
            %





13
 Index





The
Company’s selling, general and administrative expenses increased to $1,553,000,
or 38.1% of revenue in the three months ended December 31, 2007 from $1,339,000,
or 37.6% of revenue in the three months ended December 31, 2006.  The
increase in spending in the quarter of $214,000, or 16.0% was primarily a result
of higher compensation costs of $165,000 due to a combination of new hires in
the sales force, higher commissions associated with increased revenues and
related employer taxes.  In addition, higher utility rates added
$27,000 to expenses and  increased legal costs contributed to a
$30,000 increase in professional fees.  Other items were a net
decrease of $8,000.





Research
and Product Development





Three Months Ended
      December 31,(in
      thousands)
            
            2007
            
            
            2006Research
      and product development
            
            $
            683
            
            
            $
            608Percentage
      of revenues
            
            
            16.7
            %
            
            
            17.1
            %





Research
and product development expenses increased to $683,000, or 16.7% of
revenues in the three months ended December 31, 2007 as compared to $608,000 or
17.1% of revenues in the three months ended December 31, 2006.  The
increase of $75,000, or 12.3%, was due to primarily to an increase in
engineering compensation costs of $81,000 due to additions to the staff and
salary adjustments, and other net reductions of $6,000.





Interest
Expense





Interest
expense decreased to $777,000 in the three months ended December 31, 2007 from
$795,000 in the three months ended December 31, 2006.  The lower
interest charges resulted primarily from a reduction in high interest-bearing
obligations which were paid off in 2007, and a repurchase of debentures from the
Company’s then senior lender in 2007.





Other
Income (Expense)





Other
income (expense) for the three months ended December 31, 2007 and 2006 totaled
$118,000 and $44,000, respectively.  The 2007 quarterly amount
includes $100,000 from a negotiated professional fee reduction, $14,000 of
income from a trade name license and other items totaling $4,000.  The
2006 quarterly amount includes $25,000 in sales of components no longer used,
$37,000 of income from a trade name license, offset by $18,000 in net losses,
primarily from foreign exchange related to the weak U.S. dollar.





Provision
for Income Taxes





Income
tax provisions for each of the three months ended December 31, 2007 and 2006 of
$3,000 reflect current state tax provisions only.  No federal income
tax provisions or tax benefits were provided in the three months ended December
31, 2007 and 2006 due to the valuation allowance provided against the net change
in deferred tax assets.  The Company established a full valuation
allowance against its net deferred tax assets due to the uncertainty of
realization of benefits of the net operating loss carryforwards from prior
years.  The Company has federal tax credit and net operating loss
carryforwards of approximately $11.9 million and $214.3 million, respectively,
as of September 30, 2007.





Liquidity
and Capital Resources





December 31,
            
            
            September 30,(in
      thousands)
            
            2007
            
            
            2007Cash
      and cash equivalents
            
            $
            288
            
            
            $
            1,296Working
      capital (deficit)
            
            
            (30,664
            )
            
            
            (2,798
            )Total
      assets
            
            
            9,902
            
            
            
            10,136Long-term
      debt, including current portion
            
            
            26,417
            
            
            
            26,308Total
      liabilities
            
            
            42,168
            
            
            
            41,868





14
 Index




Three Months Ended
      December 31,2007
            
            
            2006Net
      cash provided (used) by:Operating
      activities
            
            $
            (1,083
            )
            
            $
            242Investing
      activities
            
            
            (25
            )
            
            
            (8
            )Financing
      activities
            
            
            100
            
            
            
            (273
            )





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





Cash
Flows





Net cash
used in operating activities totaled $1,083,000 in the three months ended
December 31, 2007.  The net loss in the quarter was
$751,000.  Included in this net loss were non-cash expenses for
depreciation and amortization of $67,000 and stock compensation expense of
$66,000.  An increase in accounts receivable primarily due to
increased sales and higher shipments toward the end of the quarter resulted in a
use of cash of $658,000.  Inventories were higher  due to
purchases of materials required to meet product delivery requirements and
resulted in a use of cash of $247,000.  Unpaid interest which accrued
on the Company’s debt increased $560,000 as a source of cash.  Other
net uses of cash included an advance of proceeds toward an insurance claim
relating to product damaged in shipment of $100,000, offset by a reduction in
deferred income on service contracts $189,000 due to older contracts expiring
and not being renewed, and other uses of $31,000.





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


(-$223,000).





Net cash
used by investing activities in the three months ended December 31, 2007 and
2006 was $25,000 and $8,000, respectively, for the acquisition of
equipment.





Net cash
provided by financing activities was $100,000 in the three months ended December
31, 2007.  Proceeds from notes payable to related parties were
$125,000 offset by payments made on notes payable of $25,000.  Net
cash used by financing activities in the three months ended December 31, 2006
was $273,000, representing payments made on the Company’s senior
debt.





Liquidity





The
Company has no current ability to borrow additional funds.  It must,
therefore, fund operations from cash balances, cash generated from operating
activities and any cash that may be generated from the sale of non-core assets
such as real estate and others.  The Company has significant
short-term obligations including amounts due for unpaid professional fees,
delinquent property taxes, priority tax claims from 2001 and prior years, and
monthly payments of interest on its mortgage.  Furthermore, the
Company has other significant future outstanding obligations as shown in the
accompanying condensed consolidated balance sheet at December 31,
2007.  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.





15
 Index





Under the
Company’s plan of reorganization, the Company was to pay all creditors 100% of
their allowed claims based on a five year business plan.  However, the
Company has not met its business plan objectives since emerging from Chapter
11.  The ability to meet the objectives of this business plan is
directly affected by the factors described below in the “Risk Factors”
section.  The Company cannot assure investors that it will be able to
obtain new customers or to generate the increased revenues required to meet its
business plan objectives. In addition, in order to execute the business plan,
the Company may need to seek additional funding through public or private equity
offerings, debt financings or commercial partners. Since the Company has
virtually no current ability to borrow additional funds, it cannot assure
investors that it willobtain 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.





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 2007
financial statements.





Management
has responded to its liquidity and cash flow risks in 2007 by replacing its
senior debt with mortgage debt on more favorable terms.  Such mortgage
financing requires payments of interest (only) and contains no financial
covenants.  In addition, management has implemented operational
changes:  restructuring the sales force, increasing factory shutdown
time, constraining expenses, and reducing and reallocating the employee
workforce.  The Company also continues to pursue the sale or lease of
its headquarters land and building in Naugatuck, CT.  Furthermore, on
February 5, 2008 the Company completed the sale of certain patents for proceeds
of $4,000,000 and received a royalty-free license to continue to use the
patented technologies in its products.





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-Q and Article 8 of Regulation S-X.  Preparing
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenue and
expenses.  Management bases its estimates and judgements on historical
experience and on various other factors that are believed to be reasonable under
the circumstances.  Due to the inherent uncertainty involved in making
estimates, actual results reported in future periods might be based upon amounts
that differ from those estimates.  The following represent what the
Company believes are among the critical accounting policies most affected by
significant management estimates and judgements.  See Note 2 in Notes
to Consolidated Financial Statements in Item 7 in Form 10-KSB for the year ended
September 30, 2007 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.





16
 Index





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





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





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





Impairment of Long-Lived
Assets.  The Company assesses the impairment of long-lived
assets whenever events or changes in circumstances indicate that the carrying
value may not be recoverable under the guidance prescribed by SFAS No.
144.  The Company's long-lived assets consist of real estate, property
and equipment.  At both December 31, 2007 and September 30, 2007, real
estate represented the only significant remaining long-lived asset that has not
been fully written down for impairment.





Recent
Accounting Pronouncements





On
October 1, 2007, the Company adopted the provisions of FASB Interpretation No.
48 (“FIN 48”), “Accounting for
Uncertainty in Income Taxes,” which clarifies the accounting for the
uncertainty in income taxes recognized in the financial statements in accordance
with FASB Statement No. 109, “Accounting for Income
Taxes”. FIN 48 provides guidance on the financial statement recognition
and measurement of a tax position taken or expected to be taken in a tax return.
FIN 48 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosures, and transition. Prior to
implementation of FIN 48, the Company had a had a liability for unrecognized
foreign and state tax benefits amounting to $313,000 provided in its balance
sheet all of which, if recognized, would affect the Company’s effective tax
rate. In adopting FIN 48, the liability for unrecognized tax benefits was
reduced by $180,000 and accrued interest through September 30, 2007 and
penalties aggregating $30,000 related to unrecognized tax benefits were accrued
resulting in a net reduction of $150,000 to the accumulated deficit at October
1, 2007. The Company files a consolidated federal income tax return with its
subsidiaries. In addition, the Company and/or its subsidiaries file in various
state and foreign jurisdictions. The Company is no longer subject to
examinations by taxing authorities for fiscal years before September 30, 2004.
The Company classifies interest and penalties as selling, general and
administrative expenses. Interest and penalties recognized in the period ended
December 31, 2007 amounted to $1,100 and accrued interest and penalties included
in the balance sheet amounted to approximately $151,100 at such
date.


17
 Index





In
September 2006, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 157, “Fair Value
Measurements”.  SFAS No. 157 defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair
value.  SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007.  The Company is currently evaluating the impact of
this standard on the consolidated financial statements.





In
February 2007, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 159, “The Fair
Value Option for Financial Assets and Financial
Liabilities”,  SFAS No. 159 provides an option to report
selected financial assets and financial liabilities using fair
value.  The standard establishes required presentation and disclosures
to facilitate comparisons with companies that use different measurements for
similar assets and liabilities.  SFAS No. 159 is effective for fiscal
years beginning after November 15, 2007, with early adoption allowed only if
SFAS No. 157 is also adopted.  The Company is currently evaluating the
impact of this standard on the consolidated financial statements.





RISK FACTORS





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





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





Limited
Financial Resources and Risk of Default.The Company has no
current ability to borrow additional funds.  It must, therefore,
substantially fund operations from cash balances, cash generated from operating
activities and, if possible, cash generated from the sale of non-core
assets.  The Company has significant short term  accounts
payable and accrued expense obligations.  The Company also has
significant outstanding contractual cash obligations and commitments (see Item 6
in the Company’s annual report on Form 10-KSB for the year ended September 30,
2007 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, 2007).





While the
Company recorded an operating profit in fiscal 2007, in prior years and after
emerging from bankruptcy,


the
Company incurred operating losses and has a working capital deficit.
Furthermore, the ability of the Company to meet cash flow requirements,
including mortgage payments, is directly affected by the factors described in
this “Risk Factors” section.





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. Sales of the Company’s legacy
products, primarily the digital service unit and V.34 lines, declined to
approximately 30% of product sales in fiscal 2007 from 44% in fiscal 2006. The
Company anticipates that net sales from legacy products will decline over the
next several years and net sales of new products will increase at the same time,
with significant quarterly fluctuations possible, and without assurance that
sales of new products will increase at the same time.





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





18
 Index





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 reducedorders, higher
manufacturing costs, delays in collecting accounts receivable, and additional
warranty and service expenses.





Customer
Concentration.The Company’s customers include the former 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.  In the past,  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 approximately 67% and 45% of
revenues in fiscal 2007 and 2006, respectively, and one customer accounted for
approximately 30% of revenues in fiscal 2007.  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 2008, and
possibly beyond. The loss of one or more service provider customers, such as
occurred during past years through industry consolidation or otherwise, could
have a material adverse effect on our sales and operating results. A bankruptcy
filing by one or more of the Company’s major customers could materially
adversely affect the Company’s business, financial condition and results of
operations.





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





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





19
 Index





On
December 19, 2007, a sole suppler of a proprietary component critical to the
Company’s Xedge product line, announced the discontinuation of the component and
rejected previously accepted orders that had been placed for the component by
the Company.  Thereafter, the Company attempted to exercise its rights
under its supply contract to obtain the technical documentation necessary to
allow the Company to manufacture the product.  The Company has
therefore, been unsuccessful in obtaining the manufacturing documentation and,
as a result, on February 8, 2008 the Company filed a legal claim in Connecticut
superior court against the supplier.





If the
product is unavailable to the Company in the future, the Company may experience
a significant decline in revenues and would likely have to increase development
costs in order to replace the component product.  Such events could
have a material adverse effect on the Company’s business, financial condition
and results of operations.





While
most other 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. Except for the sole supplier noted above, 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”.





20
 Index





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
amaterial 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. Insuch 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 digital service units portion of the SpectraComm line are not considered new
and the market has experienced decline in recent years.





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





Rapid Technological
Change.The network access
and telecommunications equipment markets are characterized by rapidly changing
technologies and frequent new product introductions. The rapid development of
new technologies increases the risk that current or new competitors could
develop products that would reduce the competitiveness of the Company’s
products. The Company’s success will depend to a substantial degree upon its
ability to respond to changes in technology and customer requirements. This will
require the timely selection, development and marketing of new products and
enhancements on a cost-effective basis. The development of new, technologically
advanced products is a complex and uncertain process, requiring high levels of
innovation. The Company may need to supplement its internal expertise and
resources with specialized expertise or intellectual property from third parties
to develop new products.





21
 Index





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





Risks
Associated with Entry into International Markets.  The Company
has limited experience in international markets with the exception of a few
direct customers and resellers/integrators and sales into Western Europe through
its 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.





22
 Index





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.





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. (See Note
7.  “Subsequent Event” regarding the sale of certain patents and
patent rights and license back of technology.)





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.





23
 Index





The
Company is Controlled by a Small Number of Stockholders and Certain
Creditors.  In particular, 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 71% of the
Company’s outstanding shares of Class B stock and has stock options and warrants
that would allow him to acquire approximately 57% 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 Debenture 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 the event of a payment default under the Debentures which is
not cured within 60 days after written notice, the Debenture Trustee shall be
entitled to select a majority of the Board of Directors.  Accordingly,
in absence of a default under the Debentures, Mr. Modlin may be able to elect
all members of the Board of Directors not designated by the holders of the 9%
Preferred Stock, and the Debenture 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 ofdiscouraging 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 anysales of
shares.  To date, the holders of the 9% Preferred Stock have not
designated any directors.





Potential default on
Debentures.  Debentures in the principal amount of $19,453,000
together with accrued interest ($8,369,000 at December 31, 2007) mature on
October 1, 2008.  While principal and/or interest on the Debentures
may not be paid while the senior secured debt, including such debt owed to Mr.
Modlin and Mr. Segall, is outstanding, in the absence of such payment
restrictions the Company does not presently have the ability to repay the
Debentures.  A failure to pay the Debentures when due and payable,
could result in an Event of Default being declared under the Indenture governing
the Debentures and the Company’s business, financial condition, and results of
operations could be materially adversely affected thereby.





ITEM 3.QUANTITATIVE AN QUALITATIVE DISCLOSURES ABOUT
MARKET RISK





The
Company is exposed to certain market risks, including foreign currency
fluctuations and interest rate fluctuations.





The
Company is exposed to foreign currency exchange risk primarily through
transactions denominated in foreign currencies.  The vast majority of
the Company’s foreign transactions are denominated in U. S.
dollars and, therefore,  an adverse change in foreign currency
exchange rates is not expected to have a direct material effect on the Company’s
results of operations, financial position or cash flows.  However,
there could be a negative impact on future sales orders if, as a result of such
a change in foreign exchange rates, customers determined that the Company’s
sales prices were not competitive.  The Company cannot quantify the
impact on orders on reduced margins thereon in the event customers object to
such prices.





The
Company is exposed to interest rate fluctuations on its variable rate,
LIBOR-based mortgage loan.  A one-percent increase or decrease in
30-day LIBOR would result in an increase or decrease in interest expense of
$45,000 on an annualized basis.





ITEM 4.  CONTROLSAND 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-Q that has materially
affected, or is reasonably likely to materially affect, the Company’s internal
control over financial reporting.





24
 Index





PART
II. OTHER INFORMATION








ITEM 3.  DEFAULTSUPON SENIOR SECURITIES





Payment
of dividends on the 9% Cumulative Convertible Exchangeable Preferred Stock were
suspended June 30, 2000.  Such dividend arrearages total
$13,196,182.50 as of December 31, 2007.




ITEM 5.
 OTHERINFORMATION




See Note
7, “Subsequent Event”, included in the Notes to Condensed Consolidated Financial
Statements included in Part I of this Form 10-Q, concerning the “Sale of
Patents.”




ITEM 6.  EXHIBITS





(a)  Exhibits
Index:





Exhibit
NumberDescription
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.February 14,
      2008
            /s/ William G.
      HenryWilliam
      G. HenryVice
      President, Finance and AdministrationChief
      Financial Officer






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