UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





(Mark One)


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





For the quarterly period ended June
      30, 2010





OR





 ̈
            TRANSITION REPORTPURSUANT TOSECTION 13 OR 15(d) OF THESECURITIESEXCHANGE ACTOF
  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
                I.R.S.
      Employerincorporation
      or organization)
                Identification
      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 x                      No
 ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).





Yes x                      No
 ̈




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.




Large accelerated filer
                 ̈
                Accelerated filer
                 ̈Non-accelerated filer
                 ̈
                Smaller reporting company
                x


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





Yes  ̈      No
x





As
of July 30, 2010, there were outstanding the following number of shares of each
of the issuer’s classes of common equity:


3,526,295
shares of common stock, par value $0.01 per share


596,708
shares of Class B stock, par value $0.01 per share





GENERAL
DATACOMM INDUSTRIES, INC.





INDEX
TO QUARTERLY REPORT ON FORM 10-Q





The
financial statements for the three and nine months ended June 30, 2010 and 2009
have not been reviewed by an independent accounting firm.  In
addition, the financial statements for the years ended September 30, 2009 and
2008 are unaudited.    The Company has limited financial
resources.  The Company’s previous audit firm resigned on January 5,
2009 and, while the Company is in the process of appointing new auditors, such
appointment is pending its ability to pay audit fees.  See Note 1 to
Notes to Condensed Consolidated Financial Statements for discussion of the
Company’s liquidity and going concern issues.





PagePARTI
                          FINANCIALINFORMATIONItem 1.
                          Financial Statements
      (unaudited):Condensed
      Consolidated Balance Sheets as of June 30, 2010 and September 30,
      2009
                          
                          3Condensed
      Consolidated Statements of Operations for the Three and Nine Months Ended
      June 30, 2010 and 2009
                          
                          4Condensed
      Consolidated Statements of Cash Flows for the Nine Months Ended June 30,
      2010 and 2009
                          
                          5Notes
      to Condensed Consolidated Financial Statements
                          
                          6Item 2.
                          Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                          
                          12Item
      3.
                          Quantitative
      and Qualitative Disclosures About Market Risk
                          
                          22Item
      4.
                          Controls
      and Procedures
                          
                          22PARTII
                          OTHER INFORMATIONItem1.
                          Legal Proceedings
                          
                          23Item 1A.
                          Risk Factors
                          
                          23Item3.
                          Defaults Upon Senior Securities
                          
                          23Item6.
                          Exhibits
                          
                          23Signatures
                          
                          23


2




PART
I.  FINANCIAL INFORMATION





ITEM
1.  FINANCIAL STATEMENTS





General
DataComm Industries, Inc. and Subsidiaries


Condensed
Consolidated Balance Sheets


(Unaudited)


(in
thousands except shares)





June 30,
                              
                              
                              September 30,2010
                              
                              
                              2009Assets:Current
      assets:Cash
      and cash equivalents
                              
                              $
                              14
                              
                              
                              $
                              79Accounts
      receivable, less allowance for doubtful receivables of $114 at June 30,
      2010 and $224 at September 30, 2009
                              
                              
                              47
                              
                              
                              
                              264Inventories
                              
                              
                              1,965
                              
                              
                              
                              2,435Other
      current assets
                              
                              
                              326
                              
                              
                              
                              323Total
      current assets
                              
                              
                              2,352
                              
                              
                              
                              3,101Property,
      plant and equipment, net
                              
                              
                              3,091
                              
                              
                              
                              3,309Total
      Assets
                              
                              $
                              5,443
                              
                              
                              $
                              6,410Liabilities
      and Stockholders’ Deficit:Current
      liabilities:Current
      portion of long-term debt (including $8,937 owed to
      related  parties at June 30, 2010 and September 30, 2009
      )
                              
                              $
                              22,201
                              
                              
                              $
                              22,163Accounts
      payable (including $1,691 and $1,534 owed to a related party
      at  June 30, 2010 and September 30, 2009,
      respectively)
                              
                              
                              3,110
                              
                              
                              
                              3,014Accrued
      payroll and payroll-related costs
                              
                              
                              163
                              
                              
                              
                              461Accrued
      interest (including $4,796 and $4,115 owed to related parties at June 30,
      2010 and September 30, 2009, respectively)
                              
                              
                              13,864
                              
                              
                              
                              12,189Other
      current liabilities (including $1,533 and $888 owed to a related party at
      June 30, 2010 and September 30, 2009, respectively)
                              
                              
                              4,189
                              
                              
                              
                              3,473Total
      current liabilities
                              
                              
                              43,527
                              
                              
                              
                              41,300Long-term
      debt, less current portion
                              
                              
                              4,500
                              
                              
                              
                              4,500Other
      liabilities
                              
                              
                              441
                              
                              
                              
                              469Total
      Liabilities
                              
                              
                              48,468
                              
                              
                              
                              46,269Commitments
      and contingencies (Notes 5 and 8)
                              
                              
                              -
                              
                              
                              
                              -Stockholders’
      Deficit:9%
      Preferred stock, par value $1.00 per share, 3,000,000 shares authorized;
      776,996 and 781,996 shares issued and outstanding at June 30, 2010 and
      September 30, 2009, respectively; $36.9 million liquidation preference,
      including  $17.5 million of cumulative dividend arrearages at
      June 30, 2010
                              
                              
                              777
                              
                              
                              
                              782Class
      B stock, par value $.01 per share, 5,000,000 shares
      authorized;  596,708 and 634,615 shares issued and outstanding
      at June 30, 2010 and September 30,  2009,
      respectively
                              
                              
                              6
                              
                              
                              
                              6Common
      stock, par value $.01 per share, 25,000,000 shares authorized; 3,526,295
      and 3,487,473 shares issued and outstanding at June 30, 2010 and September
      30, 2009, respectively
                              
                              
                              35
                              
                              
                              
                              35Capital
      in excess of par value
                              
                              
                              199,413
                              
                              
                              
                              199,369Accumulated
      deficit
                              
                              
                              (243,259
                              )
                              
                              
                              (240,054
                              )Accumulated
      other comprehensive income
                              
                              
                              3
                              
                              
                              
                              3Total
      Stockholders’ Deficit
                              
                              
                              (43,025
                              )
                              
                              
                              (39,859
                              )Total
      Liabilities and Stockholders’ Deficit
                              
                              $
                              5,443
                              
                              
                              $
                              6,410





The
accompanying notes are an integral part of these


condensed
consolidated financial statements.


3





General
DataComm Industries, Inc. and Subsidiaries


Condensed
Consolidated Statements of Operations


(Unaudited)


(in
thousands except share data)





Three Months Ended
                                  
                                  
                                  Nine Months EndedJune 30,
                                  
                                  
                                  June 30,2010
                                  
                                  
                                  2009
                                  
                                  
                                  2010
                                  
                                  
                                  2009Revenues:Product
                                  
                                  $
                                  1,403
                                  
                                  
                                  $
                                  1,914
                                  
                                  
                                  $
                                  4,837
                                  
                                  
                                  $
                                  5,207Service
                                  
                                  
                                  328
                                  
                                  
                                  
                                  292
                                  
                                  
                                  
                                  997
                                  
                                  
                                  
                                  1,401Total
                                  
                                  
                                  1,731
                                  
                                  
                                  
                                  2,206
                                  
                                  
                                  
                                  5,834
                                  
                                  
                                  
                                  6,608Cost
      of revenues:Product
                                  
                                  
                                  876
                                  
                                  
                                  
                                  1,123
                                  
                                  
                                  
                                  3,040
                                  
                                  
                                  
                                  3,674Service
                                  
                                  
                                  99
                                  
                                  
                                  
                                  116
                                  
                                  
                                  
                                  321
                                  
                                  
                                  
                                  591Total
                                  
                                  
                                  975
                                  
                                  
                                  
                                  1,239
                                  
                                  
                                  
                                  3,361
                                  
                                  
                                  
                                  4,265Gross
      margin
                                  
                                  
                                  756
                                  
                                  
                                  
                                  967
                                  
                                  
                                  
                                  2,473
                                  
                                  
                                  
                                  2,343Operating
      expenses:Selling,
      general and administrative
                                  
                                  
                                  618
                                  
                                  
                                  
                                  1,104
                                  
                                  
                                  
                                  2,141
                                  
                                  
                                  
                                  3,279Research
      and product development
                                  
                                  
                                  408
                                  
                                  
                                  
                                  341
                                  
                                  
                                  
                                  1,351
                                  
                                  
                                  
                                  1,2781,026
                                  
                                  
                                  
                                  1,445
                                  
                                  
                                  
                                  3,492
                                  
                                  
                                  
                                  4,557Operating
      loss
                                  
                                  
                                  (270
                                  )
                                  
                                  
                                  (478
                                  )
                                  
                                  
                                  (1,019
                                  )
                                  
                                  
                                  (2,214
                                  )Interest
      expense
                                  
                                  
                                  (709
                                  )
                                  
                                  
                                  (698
                                  )
                                  
                                  
                                  (2,131
                                  )
                                  
                                  
                                  (2,161
                                  )Other
      income (expense), net
                                  
                                  
                                  23
                                  
                                  
                                  
                                  111
                                  
                                  
                                  
                                  (46
                                  )
                                  
                                  
                                  118Loss
      before income taxes
                                  
                                  
                                  (956
                                  )
                                  
                                  
                                  (1,065
                                  )
                                  
                                  
                                  (3,196
                                  )
                                  
                                  
                                  (4,257
                                  )Income
      tax provision  (benefit)
                                  
                                  
                                  3
                                  
                                  
                                  
                                  (9
                                  )
                                  
                                  
                                  9
                                  
                                  
                                  
                                  (40
                                  )Net  loss
                                  
                                  
                                  (959
                                  )
                                  
                                  
                                  (1,056
                                  )
                                  
                                  
                                  (3,205
                                  )
                                  
                                  
                                  (4,217
                                  )Dividends
      applicable to preferred stock
                                  
                                  
                                  (440
                                  )
                                  
                                  
                                  (440
                                  )
                                  
                                  
                                  (1,320
                                  )
                                  
                                  
                                  (1,320
                                  )Net  loss
      applicable to common and Class B stock
                                  
                                  $
                                  (1,399
                                  )
                                  
                                  $
                                  (1,496
                                  )
                                  
                                  $
                                  (4,525
                                  )
                                  
                                  $
                                  (5,537
                                  )Earnings
      (loss) per share:Basic
      and diluted – common stock
                                  
                                  $
                                  (0.34
                                  )
                                  
                                  $
                                  (0.36
                                  )
                                  
                                  $
                                  (1.10
                                  )
                                  
                                  $
                                  (1.34
                                  )Basic
      and diluted – Class B stock
                                  
                                  $
                                  (0.34
                                  )
                                  
                                  $
                                  (0.36
                                  )
                                  
                                  $
                                  (1.10
                                  )
                                  
                                  $
                                  (1.34
                                  )Weighted
      average number of common and Class B shares outstanding:Basic
      and diluted - common stock
                                  
                                  
                                  3,526,295
                                  
                                  
                                  
                                  3,487,473
                                  
                                  
                                  
                                  3,519,451
                                  
                                  
                                  
                                  3,487,473Basic
      and diluted – Class B stock
                                  
                                  
                                  596,708
                                  
                                  
                                  
                                  634,615
                                  
                                  
                                  
                                  603,391
                                  
                                  
                                  
                                  634,615





The
accompanying notes are an integral part of these


condensed
consolidated financial statements.


4


General
DataComm Industries, Inc.


Condensed
Consolidated Statements of Cash Flows


(Unaudited)


(In
thousands)





Nine Months EndedJune
      30,2010
                              
                              
                              2009Cash
      flows from operating activities:Net
      loss
                              
                              $
                              (3,205
                              )
                              
                              $
                              (
      4,217
                              )Adjustments
      to reconcile net loss to net cash provided (used) by operating
      activities:Depreciation
      and amortization
                              
                              
                              208
                              
                              
                              
                              266Stock
      compensation expense
                              
                              
                              40
                              
                              
                              
                              92Changes
      in:Accounts
      receivable
                              
                              
                              217
                              
                              
                              
                              688Inventories
                              
                              
                              470
                              
                              
                              
                              1,546Accounts
      payable
                              
                              
                              96
                              
                              
                              
                              (16
                              )Accrued
      payroll and payroll-related costs
                              
                              
                              (298
                              )
                              
                              
                              (256
                              )Accrued
      interest
                              
                              
                              1,679
                              
                              
                              
                              1,621Other
      net current liabilities
                              
                              
                              730
                              
                              
                              
                              (47
                              )Other
      net long-term assets
                              
                              
                              (29
                              )
                              
                              
                              (55
                              )Net
      cash used by operating activities
                              
                              
                              (92
                              )
                              
                              
                              (378
                              )Cash
      flows from investing activities:Acquisition
      of property, plant and equipment, net
                              
                              
                              (11
                              )
                              
                              
                              (34
                              )Net
      cash used by investing activities
                              
                              
                              (11
                              )
                              
                              
                              (34
                              )Cash
      flows from financing activities:Proceeds
      from notes payable to related party
                              
                              
                              -
                              
                              
                              
                              250Proceeds
      from notes payable to unrelated party
                              
                              
                              179
                              
                              
                              
                              234Principal
      payments on notes payable to unrelated party
                              
                              
                              (141
                              )
                              
                              
                              (166
                              )Net
      cash provided by financing activities
                              
                              
                              38
                              
                              
                              
                              318Net
      decrease  in cash and cash equivalents
                              
                              
                              (65
                              )
                              
                              
                              (94
                              )Cash
      and cash equivalents, beginning of period
                              
                              
                              79
                              
                              
                              
                              136Cash
      and cash equivalents, end of period
                              
                              $
                              14
                              
                              
                              $
                              42Supplemental
      disclosures of cash flow information:Cash
      paid during the period for:Interest
                              
                              $
                              410
                              
                              
                              $
                              359Income
      and franchise taxes
                              
                              $
                              5
                              
                              
                              $
                              10





The
accompanying notes are an integral part of these


condensed
consolidated financial statements.


5





GENERAL
DATACOMM INDUSTRIES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





1.  Liquidity
and Going Concern





The
accompanying financial statements of General DataComm Industries, Inc. (the
“Company”) for the three and nine months ended June 30, 2010 have been prepared
by the Company on a going concern basis, in accordance with rules and
regulations of the Securities and Exchange Commission.  Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States have been condensed or omitted pursuant to such rules and
regulations.  However, such financial statements have not been
reviewed by an independent public accounting firm due to the Company’s inability
to pay for such review.  In addition, the financial statements for the
years ended September 30, 2009 and 2008 have not been audited by an independent
accounting firm.





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 and nine months ended June 30, 2010 are not
necessarily indicative of results which may be achieved for the entire fiscal
year ending September 30, 2010.  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-K for the fiscal year ended September 30, 2009 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.





The
Company incurred a net loss and used a significant amount of cash in its
operating activities for the nine months ended June 30, 2010 and in recent
years preceding such date.  The Company has no current ability to
borrow additional funds except as may be provided pursuant to a receivable sales
agreement with a related party.  It must, therefore, fund operations
from cash balances, cash generated from operating activities including the sale
of its accounts receivable and any cash that may be generated from the sale of
non-core assets such as real estate and other assets.  In addition, at
June 30, 2010 the Company
had a stockholders’ deficit of approximately $43.0 million, and a working
capital deficit of approximately $41.2 million, including debentures in the
principal amount of $19.4 million, together  with accrued interest
thereon ($13.2 million), which matured 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,
and that no event of default may be declared under the indenture, while senior
secured debt is outstanding, in the absence of such restrictions the Company
does not have the ability to repay the debentures.  As of June 30, 2010, senior secured
debt consists of notes payable to related parties and a real estate
mortgage.  A failure to pay the debentures when they become due and
payable as described above, 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.  To continue operations, management
has responded by entering into a receivable sales agreement with a related party
to provide liquidity and by implementing operational changes, including closing
its foreign offices, reducing certain salaries, restructuring the sales force,
increasing factory and office shutdown time, constraining expenses and reducing
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, obtain additional funding
sources or resolve the repayment 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


2.  Summary
of Significant 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 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 judgments 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
judgments.  See Note 2 in Notes to Consolidated Financial Statements
in Item 8 in the Company’s Annual Report on Form 10-K for the year ended
September 30, 2009 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 or thereafter, 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) collectability 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.





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 the
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.  The Company's long-lived assets consist
of real estate, equipment and other personal property.  At June 30, 2010, real estate
represented the most significant long-lived asset that has not been fully
depreciated or written down for impairment.


7


Recently
Issued Accounting Standards





Since the
filing of the Company’s Form 10-K for the fiscal year ended September 30, 2009,
the Financial Accounting Standards Board (“FASB”) has issued 26 accounting
standards updates.  Management has evaluated these updates and does
not believe the adoption of any of these updates has had or will have a material
impact on the Company’s unaudited condensed financial statements.





3.
Earnings (Loss) Per Share





Basic
earnings per share is computed by allocating net income available to common
stockholders and to Class B shareholders 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 and nine months ended June 30, 2010 and 2009 (in
thousands, except shares and per share data):





Three Months Ended
                      June 30,
                    
                    
                    Nine Months Ended
                      June 30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Net
      loss
                    
                    $
                    (959
                    )
                    
                    $
                    (1,056
                    )
                    
                    $
                    (3,205
                    )
                    
                    $
                    (4,217
                    )Dividends
      applicable to preferred stock
                    
                    
                    (440
                    )
                    
                    
                    (440
                    )
                    
                    
                    (1,320
                    )
                    
                    
                    (1,320
                    )Net
      loss applicable to common and Class B stock
                    
                    $
                    (1,399
                    )
                    
                    $
                    (1,496
                    )
                    
                    $
                    (4,525
                    )
                    
                    $
                    (5,537
                    )Net  loss
      applicable to common stock-basic and diluted
                    
                    $
                    (1,197
                    )
                    
                    $
                    (1,266
                    )
                    
                    $
                    (3,863
                    )
                    
                    $
                    (4,685
                    )Net  loss
      applicable to Class B stock-basic and diluted
                    
                    $
                    (202
                    )
                    
                    $
                    (230
                    )
                    
                    $
                    ( 662
                    )
                    
                    $
                    (852
                    )





Three Months Ended June 30,2010
                          
                          
                          2009
                          
                          
                          2010
                          
                          
                          2009Common Stock
                          
                          
                          Class B StockNumerator
      for basic and diluted earnings per share – net loss
                          
                          $
                          (1,197
                          )
                          
                          $
                          (1,266
                          )
                          
                          $
                          (202
                          )
                          
                          $
                          (230
                          )Denominator
      for basic and diluted earnings per share-weighted average outstanding
      shares
                          
                          
                          3,526,295
                          
                          
                          
                          3,487,473
                          
                          
                          
                          596,708
                          
                          
                          
                          634,615Basic
      and diluted loss per share
                          
                          $
                          (0.34
                          )
                          
                          $
                          (0.36
                          )
                          
                          $
                          (0.34
                          )
                          
                          $
                          (0.36
                          )





Nine Months Ended June 30,2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009Common Stock
                      
                      
                      Class B StockNumerator
      for basic and diluted earnings per share – net loss
                      
                      $
                      (3,863
                      )
                      
                      $
                      (4,685
                      )
                      
                      $
                      (662
                      )
                      
                      $
                      (852
                      )Denominator
      for basic and diluted earnings per share-weighted average outstanding
      shares
                      
                      
                      3,519,451
                      
                      
                      
                      3,487,473
                      
                      
                      
                      603,391
                      
                      
                      
                      634,615Basic
      and diluted loss per share
                      
                      $
                      (1.10
                      )
                      
                      $
                      (1.34
                      )
                      
                      $
                      (1.10
                      )
                      
                      $
                      (1.34
                      )


8





In the
three and nine months ended June 30, 2010 and 2009, no effect has been given to
certain outstanding options, warrants and convertible securities in computing
diluted loss per share as their effect would be antidilutive.  Such
share amounts outstanding at June 30, 2010 and 2009 which could potentially
dilute basic earnings per share are as follows:





No. of SharesJune 30,2010
                  
                  
                  2009Stock
      warrants
                  
                  
                  4,093,341
                  
                  
                  
                  4,093,251Stock
      options
                  
                  
                  3,221,397
                  
                  
                  
                  3,252,981Convertible
      preferred stock
                  
                  
                  142,307
                  
                  
                  
                  143,223Total
                  
                  
                  7,457,045
                  
                  
                  
                  7,489,455





4.  Inventories





Inventories
consist of (in thousands):





June 30,
                        
                        
                        September 30,2010
                        
                        
                        2009Raw
      materials
                        
                        $
                        621
                        
                        
                        $
                        405Work-in-process
                        
                        
                        953
                        
                        
                        
                        1,535Finished
      goods
                        
                        
                        391
                        
                        
                        
                        495$
                        1,965
                        
                        
                        $
                        2,435





Inventories
are stated at the lower of cost or market using a first-in, first-out
method.  Reserves in the amount of $ 2,888,000 and $2,879,000 were
recorded at June 30, 2010 and September 30, 2009, respectively, for excess and
obsolete inventories.





5.  Long-Term
Debt and Fair Value Contingency





Long-term
debt consists of (in thousands):





June 30,
                      
                      
                      September 30,2010
                      
                      
                      2009Notes
      Payable to Related Parties
                      
                      $
                      2,756
                      
                      
                      $
                      2,756Note
      Payable to Unrelated Party
                      
                      
                      78
                      
                      
                      
                      40Debentures
      matured October 1, 2008
                      
                      
                      19,367
                      
                      
                      
                      19,367Real
      Estate Mortgage due July 31, 2011
                      
                      
                      4,500
                      
                      
                      
                      4,50026,701
                      
                      
                      
                      26,663Less
      current portion
                      
                      
                      22,201
                      
                      
                      
                      22,163$
                      4,500
                      
                      
                      $
                      4,500





Long-term
debt totaling $ 22,123,000 has matured as of June 30, 2010, of which $19,367,000
in debentures matured October 1, 2008 but are restricted from being paid until
senior debt is paid (see discussion below).  The real estate mortgage
in the amount of $4,500,000 is due July 31, 2011, pursuant to an amendment dated
December 31, 2009.





The
Company believes that the values of the note payable to unrelated party and real
estate mortgage approximate their respective fair values.  Also, notes
payable to related parties are considered to approximate fair value when
considering their senior secured interest in the Company’s
assets.  However, the estimated fair value of debentures, with a face
value totaling $19,367,000 is considered to be substantially lower than carrying
value due to the debentures being subordinated to both the real estate and
related party debt.  However, due to the extremely limited market (if
any) for the debentures, the Company is unable to determine the current fair
value.





Notes
Payable to Related Parties and Warrants





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.


9





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 and 50% of which was payable February 17, 2008 (such
payments were deferred until July 30, 2010 in agreement with Mr.
Modlin).  Mr. Modlin received a seven year warrant expiring April 19,
2013 to purchase 909,090 shares of common stock at $0.275 per
share.





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, and which
bore interest at the annual rate of 10%.  Such loans were paid off in
the quarter ended March 31, 2008.  On April 30, May 13, July 9,
September 18 and October 1, 2008, Mr. Modlin made demand loans to the Company
bearing interest at the annual rate of 10% in the amounts of $175,000, $75,000,
$110,000, $175,000 and $250,000, respectively.   The loan made on
July 9, 2008 was repaid on July 17, 2008.





Accrued
interest on all such loans amounted to $593,590 and $374,926 at June 30, 2010
and September 30, 2009, respectively.  All loans made by Mr. Modlin
and Mr. Segall are collateralized by all the assets of the Company and are
presently due and payable.  No demand for payment of such loans has
been made by either Mr. Modlin or Mr. Segall and, if made, the Company presently
would be unable to make such payments.  All warrants have exercise
prices that are above the current market price of common stock.





Debentures





Debentures
together with accrued interest matured on October 1, 2008.  The
debentures have a subordinated security interest in all the assets of the
Company.  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 lenders’ claims are paid
in full and no principal or interest has been paid as of August 16,
2010.  Interest accrues at the annual rate of 10% and totaled
$13,171,000 at June 30, 2010 (see Note 1 “Liquidity and Going
Concern”).





Debentures
were issued to the following related parties:  $125,000 to William G.
Henry, Vice President, Finance and Administration; $50,000 to George M. Gray,
Vice President, Operations and Engineering, $16,400 to Howard S. Modlin,
Chairman of the Board of Directors and Chief Executive Officer and $19,900 to
John L. Segall, Director.  In addition, a debenture in the amount of
$2,179,000 was issued to the law firm of Weisman Celler Spett & Modlin,
P.C., of which Mr. Modlin is President.





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.  Through July 31,
2010, the mortgage required monthly payments of interest at the rate of 30-day
LIBOR plus 8% with a minimum interest rate of 12% (such interest rate was 12% at
June 30, 2010).  No principal payments are required until the full
amount of the mortgage matures.   Effective December 31, 2009,
the Company amended the mortgage to extend the maturity date from July 31, 2010
to July 31, 2011, to increase the interest rate effective August 1, 2010 to
LIBOR plus 9% with a minimum interest of 13% and to charge a fee in the amount
of $45,000, which was paid on August 1, 2010.  The mortgage contains
no financial performance covenants.





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
and no further shares of Class B stock are available under the 2003
Plan.  Officers and key employees may be granted 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.


10





At June
30, 2010 there were 572,076 options available for future issuance under the 2003
and 2005 Plans.





A summary
of stock options outstanding under the Company’s stock plans as of September 30,
2009 and changes during the nine months ended June 30, 2010 are presented
below:





Shares
                          
                          
                          Weighted
                            Average
                            Exercise Price
                          
                          
                          Weighted Average
                            Remaining
                            Contractual Term
                            (Yrs)
                          
                          
                          Aggregate
                            Intrinsic
                            ValueOptions
      outstanding, September 30, 2009
                          
                          
                          3,229,153
                          
                          
                          $
                          0.52Options
      granted
                          
                          
                          -
                          
                          
                          
                          -Options
      exercised
                          
                          
                          -
                          
                          
                          
                          -Options
      cancelled or expired
                          
                          
                          (7,756
                          )
                          
                          
                          10.60Options
      outstanding, June 30, 2010
                          
                          
                          3,221,397
                          
                          
                          $
                          0.49
                          
                          
                          
                          5.86
                          
                          
                          $
                          0Vested
      or expected to vest at  June 30, 2010
                          
                          
                          2,811,227
                          
                          
                          $
                          0.46
                          
                          
                          
                          5.82
                          
                          
                          $
                          0Exercisable
      at June 30, 2010
                          
                          
                          2,270,253
                          
                          
                          $
                          0.58
                          
                          
                          
                          5.54
                          
                          
                          $
                          0





As of
June 30, 2010, there was $48,000 of total unrecognized compensation cost related
to nonvested options which is expected to be recognized over a weighted average
period of 1.34 years.  There were no options granted during the nine
months ended June 30, 2010.





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.





The
deferred profit sharing portion of the plan provides that the Company may make
contributions to the plan out of profits at the discretion of the
Company.  There were no such contributions in the nine months ended
June 30, 2010 and 2009.





7.  Receivable
Sales Agreement with Related Party and Subsequent Event





On
October 24, 2008, the Company’s subsidiary, General DataComm, Inc., entered into
a Receivable Sales Agreement with Howard S. Modlin, the Company’s Chief
Executive Officer, pursuant to which Mr. Modlin purchased receivables at a 2.5%
discount.   In the nine months ended June 30, 2010, Mr. Modlin
made purchases with a face value of $6,586,154 for an aggregate purchase price
of $6,421,500 under this agreement.  In the nine months ended June 30,
2009, Mr. Modlin purchased $5,141,268 of receivables for a price of
$5,016,000.  For accounting purposes, the discount is recorded as an
expense at the time of purchase.





Subsequent
to June 30, 2010 and through August 16, 2010, Mr.
Modlin purchased  $1,097,000 of receivables.





8.  Litigation





The
Company received an adverse ruling from a France court dated November 1, 2009
regarding compensation owed to a former employee, in the amount of 151,603 Euros
(approximately $185,000 U.S. at June 30, 2010).  The Company has a
liability recorded at June 30, 2010 to absorb this expense should such payment
become necessary.





9.  Subsequent
Events





Subsequent
events were evaluated through the filing date of August 16,
2010.


11





ITEM
2.  MANAGEMENT’S DISCUSSION 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-K FOR THE YEAR ENDED
SEPTEMBER 30, 2009 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 June 30,
                      
                      
                      Nine Months Ended June 30,(in thousands)
                      
                      2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009Product
                      
                      $
                      1,403
                      
                      
                      $
                      1,914
                      
                      
                      $
                      4,837
                      
                      
                      $
                      5,207Service
                      
                      
                      328
                      
                      
                      
                      292
                      
                      
                      
                      997
                      
                      
                      
                      1,401Total
      Revenues
                      
                      $
                      1,731
                      
                      
                      $
                      2,206
                      
                      
                      $
                      5,834
                      
                      
                      $
                      6,608





Revenues
for the three months ended June 30, 2010 decreased $475,000, or 21.5%, to
$1,731,000 from $2,206,000 reported for the three months ended June 30,
2009.  Product revenues decreased $ 511,000, or 26.7%, while service
revenue increased $ 36,000, or 12.3%.





The
product sales decrease in the quarter-to-quarter comparison was primarily due to
a 64% decrease in shipments of multi-service switches. The 2009 quarter included
shipments under a contract with a large telecommunications company that did not
repeat at the same level in the 2010 quarter.  Partially offsetting
this decline was a 57% increase in shipments of network access products,
primarily due to shipments to a new customer in the transportation
industry.  Sales of the multi-service switch product line constituted
approximately 34% of product revenue in the 2010 quarter while the network
access product line constituted approximately 66% of product revenue, compared
to approximately 69% multi-service switches and 31% access products in the 2009
quarter.





The
increase in service revenue in the quarter was primarily due to expanded
maintenance contracts for multi-service switches.





Revenues
for the nine months ended June 30, 2010 decreased $774,000, or 11.7%, to
$5,834,000 from $6,608,000 reported for the nine months ended June 30,
2009.  Product revenues decreased $370,000, or 7.1%, while service
revenues decreased $404,000, or 28.8%.


12


The
product sales decrease in the nine month comparison resulted from the items
described in the quarter comparison above, offset in part by a $141,000 product
sales increase in the first half of the fiscal year due to an increase in
network access products sold to telephone companies.





The
decrease in service revenue in the nine month comparison was primarily due to
the expiration of a service contract in Europe where the customer transitioned
the equipment, and to project work performed for a large telephone company in
the prior year that did not repeat at the same level in the current year, offset
by a modest increase in the quarter comparison as described above.





Foreign
sales accounted for approximately 31% and 42% of revenue in the nine months
ended June 30, 2010 and 2009, respectively.





The
Company anticipates that demand for its legacy network access products will
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 June 30,
                      
                      
                      Nine Months Ended June 30,(in
      thousands)
                      
                      2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009Product
                      
                      $
                      527
                      
                      
                      $
                      791
                      
                      
                      $
                      1,797
                      
                      
                      $
                      1,533Service
                      
                      
                      229
                      
                      
                      
                      176
                      
                      
                      
                      676
                      
                      
                      
                      810Total
      Gross Margin
                      
                      $
                      756
                      
                      
                      $
                      967
                      
                      
                      $
                      2,473
                      
                      
                      $
                      2,343Percentage
      of Product Revenue
                      
                      
                      37.6
                      %
                      
                      
                      41.3
                      %
                      
                      
                      37.2
                      %
                      
                      
                      29.4
                      %Percentage
      of Service Revenue
                      
                      
                      69.8
                      %
                      
                      
                      60.3
                      %
                      
                      
                      67.8
                      %
                      
                      
                      57.8
                      %Percentage
      of Total Revenue
                      
                      
                      43.7
                      %
                      
                      
                      43.8
                      %
                      
                      
                      42.4
                      %
                      
                      
                      35.5
                      %





Gross
margin, as a percentage of revenues in the three months ended June 30, 2010, was
43.7% as compared to 43.8% in the three months ended June 30, 2009, a decrease
of 0.1%.





Product
gross margin, as a percentage of product revenue, decreased 3.7% to 37.6% from
41.3% in the prior year’s quarter. The impact of selling a lower volume of
inventories that were previously written down reduced the gross profit margin
1.6% when compared to the prior year.  Manufacturing costs, while
lower in the current year, did not offset the lower sales volumes and had a
negative effect of 0.9% on the quarter’s gross profit margin.  Lower
component prices in the prior year, along with other items, account for an
additional 1.2% reduction in the current quarter’s gross profit
margin.





Service
gross margin, as a percentage of service revenue, increased 9.5% to 69.8% from
60.3% in the prior year’s quarter.  The improvement was due to a
combination of the $36,000, or 12.3%, increase in service revenue discussed
above, and lower operating expenses of $17,000, a 14.7% decrease, due primarily
to lower equipment depreciation related to lower capital spending levels, and to
lower use of outside contractors.





Gross
margin, as a percentage of revenue in the nine months ended June 30, 2010, was
42.4% as compared to 35.5% in the nine months ended June 30, 2009, an increase
of 6.9%.





Product
gross margin, as a percentage of product revenue, increased 7.8% to 37.2% from
29.4% in the prior year’s nine month period.  The increase was due to
the sale of inventories that were previously written down (+4.0%) and
improvement in manufacturing plant utilization (+5.6%). Favorable component
pricing in the prior year did not repeat at the same level in 2010 and this,
along with other items, resulted in a net reduction of 1.8% in gross profit
margin.





Service
gross margin, as a percentage of service revenue, increased 10.0% to 67.8% from
57.8% in the prior year’s nine month period.  This improvement was due
to operating cost reductions partially offset by the impact of reduced revenue
levels.


13





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
traditional service offerings.  Accordingly, gross margin as a
percentage of revenues is expected to vary.





Selling,
General and Administrative




Three Months Ended June 30,
                        
                        
                        Nine Months Ended June 30,(in
      thousands)
                        
                        2010
                        
                        
                        2009
                        
                        
                        2010
                        
                        
                        2009Selling,
      general and administrative
                        
                        $
                        618
                        
                        
                        $
                        1,104
                        
                        
                        $
                        2,141
                        
                        
                        $
                        3,279Percentage
      of revenues
                        
                        
                        35.7
                        %
                        
                        
                        50.0
                        %
                        
                        
                        36.7
                        
                        
                        
                        49.6
                        %





Selling,
general and administrative expenses decreased to $618,000, or 35.7% of revenues
in the three months ended June 30, 2010, from $1,104,000, or 50.0% of revenues
in the three months ended June 30, 2009.  The decrease in spending in
the quarter of $486,000, or 44.0%, was primarily a result of reorganizing the
Company’s European operations which resulted in the closing of a sales office in
France and which reduced expenses by $228,000, and lower compensation costs of
$67,000 due to salary and benefit reductions, including certain job eliminations
for domestic sales and administrative staff.  Other reductions were
due to lower professional fees of $73,000, and to reduced marketing costs for
travel and product demonstrations and other items totaling
$118,000.





Selling,
general and administrative expenses decreased to $2,141,000, or 36.7% of
revenues in the nine months ended June 30, 2010, from $3,279,000, or 49.6% of
revenues in the nine months ended June 30, 2009.  The decrease in
spending of  $1,138,000, or 34.7%, was primarily due to the reorganization
of the Company’s European operations which reduced expenses by $474,000, and
lower compensation costs of $441,000.  In addition, professional fees
were lower by $172,000 due to lower legal and anticipated audit
fees.  Other items were a net decrease of $51,000.





Research
and Product Development





Three Months Ended June 30,
                    
                    
                    Nine Months Ended June 30,(in
      thousands)
                    
                    2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Research
      and product development
                    
                    $
                    408
                    
                    
                    $
                    341
                    
                    
                    $
                    1,351
                    
                    
                    $
                    1,278Percentage
      of revenues
                    
                    
                    23.6
                    %
                    
                    
                    15.5
                    %
                    
                    
                    23.2
                    %
                    
                    
                    19.3
                    %





Research
and product development expenses increased to $408,000 or 23.6% of revenues in
the three months ended June 30, 2010, from $341,000, or 15.5% of revenues in the
three months ended June 30, 2009.  The increase of $67,000, or 19.6%,
was primarily the result of higher costs of outside contractors of $37,000 and
higher engineering supply costs of $40,000, offset by lower compensation
costs of $9,000 due to a combination of wage reductions and headcount reductions
from attrition and lay-offs.  Other net decreases were
$1,000.





Research
and product development expenses increased to $1,351,000, or 23.2% of revenues
in the nine months ended June 30, 2010, from $1,278,000, or 19.3% of revenues in
the nine months ended June 30, 2009.  The increase of $73,000, or
5.7%, was due to higher costs of outside contractors of $212,000 and higher
engineering supply costs of $57,000, offset by lower compensation costs of
$172,000.  Other net decreases were $24,000.





Interest
Expense





Interest
expense increased to $709,000 in the three months ended June 30, 2010 from
$698,000 in the three months ended June 30, 2009.  The increased
interest charges of $11,000 resulted from a $50,000 positive settlement of
claims in the 2009 quarter, offset by lower fee amortization in the extension
period.  Interest expense decreased to $2,131,000 in the nine months
ended June 30, 2010 from $2,161,000 in the nine months ended June 30, 2009 due
to lower fee amortization in the extension period.


14





The
Company is currently paying interest only on the real estate
mortgage.  Such payments amounted to $410,000 in the nine month period
ended June 30, 2010.





Other
Income (Expense)





Other
income (expense) for the three months ended June 30, 2010 and 2009 totaled
$23,000 and $111,000, respectively.  The 2010 quarterly amount
includes income of $24,000 received from a tradename license, foreign
exchange gains of $25,000 and other net income items of $22,000 offset in
part by $48,000 of discount associated with the sales of accounts receivable.
The 2009 quarterly amount includes income of $124,000 resulting from a
settlement of claims and $21,000 received from a tradename license and $11,000
in other net income items offset in part by $45,000 of discount associated with
the sales of accounts receivable.





Other
income (expense) for the nine months ended June 30, 2010 and 2009 totaled
($46,000) and $118,000 respectively.  The 2010 amount includes
$164,000 of discount associated with the sales of accounts receivable offset in
part by income of $72,000 received from a tradename license, foreign exchange
gains of $34,000 and other net income items of $12,000.  The 2009
amount includes $61,000 received from a tradename license and $174,000 resulting
from a settlement of claims and $2,000 in other net income items offset in
part by $45,000 of discount associated with the sales of accounts
receivable.





Provision
for Income Taxes





The
income tax provisions for the three and nine months ended June 30, 2010 in the
amounts of $3,000 and $9,000, respectively, reflect current state tax provisions
only.  The income tax provision for the three months ended June 30,
2009 reflects a benefit of $12,000 resulting from a reduction in reserves for
state taxes no longer deemed necessary, offset by $3,000 in current state tax
liabilities.  The income tax provision for the nine months ended June
30, 2009 includes $37,000 related to a refund of prior years’ general business
credit under provisions of the Housing and Economic Recovery Act of 2008, and a
benefit of $12,000 resulting from a reduction in reserves for state taxes no
longer deemed necessary, offset by $9,000 in current state tax
liabilities.





No
federal income tax provisions were provided in the nine months ended June 30,
2010 due to the valuation allowance provided against deferred tax
assets.  The Company established a full valuation allowance against
its net deferred tax assets due to the uncertainty of realization of benefits of
the net operating loss carryforwards from prior years and the operating losses
in fiscal 2010.  The Company has federal tax credit and net operating
loss carryforwards of approximately $11.8 million and $201.6 million,
respectively, at September 30, 2009.





Liquidity
and Capital Resources





June 30,
                      
                      
                      September 30,(in thousands)
                      
                      2010
                      
                      
                      2009Cash
      and cash equivalents
                      
                      $
                      14
                      
                      
                      $
                      79Working
      capital (deficit)
                      
                      
                      (41,175
                      )
                      
                      
                      (38,199
                      )Total
      assets
                      
                      
                      5,443
                      
                      
                      
                      6,410Long-term
      debt, including current portion
                      
                      
                      26,701
                      
                      
                      
                      26,663Total
      liabilities
                      
                      
                      48,468
                      
                      
                      
                      46,269





Nine Months Ended June 30,2010
                  
                  
                  2009Net
      cash provided (used) by:Operating
      activities
                  
                  $
                  (92
                  )
                  
                  $
                  (444
                  )Investing
      activities
                  
                  
                  (11
                  )
                  
                  
                  (6
                  )Financing
      activities
                  
                  
                  38
                  
                  
                  
                  381





Note:  Significant
risk factors exist due to the Company’s limited financial resources and its
present inability to repay its senior debt and its debentures which matured on
October 1, 2008.   See “Risk Factors” below for further
discussion.


15


Cash
Flows





Net cash
used by operating activities totaled $92,000 in the nine months ended June 30,
2010.  The net loss in the period was $ 3,205,000.  Included
in this net loss were non-cash expenses for depreciation and amortization of
$208,000 and stock compensation expense of $40,000.   A decrease
in accounts receivable due to levels of customer collections and sales of
accounts receivable (to a related party)   being higher than new
sales levels resulted in a source of cash of $217,000.  An increased
level of sales of accounts receivables to be invoiced (to a related party)
resulted in a source of cash of $645,000.  Inventories were lower by
$470,000 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
$1,679,000 as a source of cash.  Deferred revenue, primarily on
product shipments awaiting customer acceptance, added $86,000 as a source of
cash.  A decrease in accrued payroll expenses due primarily to the
timing of payrolls resulted in a use of cash of $298,000. Other net sources of
cash totaled $ 66,000.





Net cash
used by investing activities in the nine months ended June 30, 2010 was $11,000
for the acquisition of equipment.





Net cash
provided by financing activities in the nine months ended June 30, 2010 was
$38,000, comprised of the proceeds of $179,000 from a note payable to an
unrelated party less $141,000 in payments made on the same note.





Liquidity
and Going Concern





The
Company incurred a net loss and used a significant amount of cash in its
operating activities for the nine months ended June 30, 2010 and in recent years
preceding such date.  Currently the Company has not been able to
borrow additional funds except as may be provided pursuant to a receivable sales
agreement with a related party.  However, it is attempting to borrow
funds but to date has been unsuccessful and has no assurance of success in the
future. 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 other assets.  In addition, at
June 30, 2010 the Company had a stockholders’ deficit of approximately $43.0
million, and a working capital deficit of approximately $ 41.2 million,
including debentures in the  principal amount of $19.4 million,
together  with accrued interest thereon ($13.2 million at June 30,
2010), which matured 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, and that no
event of default may be declared under the indenture, while senior secured debt
is outstanding, in the absence of such restrictions the Company does not have
the ability to repay the debentures.  As of June 30, 2010, senior
secured debt consists of notes payable to related parties and a real estate
mortgage.  A failure to pay the debentures when they become due and
payable as described above 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.  To continue operations, management
has responded by entering into a receivable sales agreement with a related party
to provide liquidity and by implementing operational changes, including closing
its foreign offices, reducing certain salaries, restructuring the sales force,
increasing factory and office shutdown time, constraining expenses and reducing
the employee workforce.  The Company also continues to pursue the sale
or lease of its headquarters’ land and building in Naugatuck, CT.





Critical
Accounting Policies





A
detailed description of the Company’s significant accounting policies can be
found in the Company’s most recent Annual Report on Form 10-K for the year ended
September 30, 2009 as filed with the Securities and Exchange
Commission.





Recently
Issued Accounting Standards





Since the
filing of our Form 10-K for the fiscal year ended September 30, 2009, the
Financial Accounting Standards Board (“FASB”) has issued 26 accounting standards
updates.  Management has evaluated these updates and does not believe
the adoption of any of these updates has had or will have a material impact on
the Company’s unaudited condensed financial statements.


16





RISK FACTORS





The Financial Statements are
Unaudited and the Quarterly Financial Statements Have Not Been
Reviewed.  The financial statements in Form 10-K for the years
ended September 30, 2009 and 2008 as filed with the Securities and Exchange
Commission have not been audited by an independent accounting
firm.  The financial statements in Forms 10-Q for the quarters ended
December 31, 2008, March 31, 2009, June 30, 2009, December 31,
2009,  March 31, 2010 and June 30, 2010 as filed with the Securities
and Exchange Commission have not been reviewed by an independent accounting
firm. While the Company’s internal control over financial reporting is a process
designed to provide reasonable assurance regarding the fair presentation of
financial statements in accordance with generally accepted accounting
principles, because of its inherent limitations such internal control may not
prevent or detect misstatements that may arise in an audit or review by an
independent accounting firm.





GDC’s
Negative Operating History Since Emerging from Bankruptcy. The Company
emerged from bankruptcy on September 15, 2003. 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.





Non-payment of Debentures and
Certain Senior Debt, and Going Concern.The Company has
outstandingdebentures in the
principal amount of approximately $19.4 million which, together with accrued
interest thereon matured on October 1, 2008.  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, and that no event of
default may be declared under the indenture, while the senior secured debt,
including debt owed to Mr. Modlin and Mr. Segall (Chairman and Chief Executive
Officer, and Director, respectively) and a real estate mortgage, is
outstanding.  In the absence of such restrictions the Company does not
presently have the ability to repay the debentures.  A failure to pay
the debentures when they become due and payable as described above, could result
in an event of default being declared under the indenture governing the
debentures. The senior debt owed to Messrs. Modlin and Segall is due and payable
but payment has not been demanded by either of them.   Together
with the other conditions described in the Liquidity and Capital Resources
section above and elsewhere in this Form 10-Q, such condition raises substantial
doubt about the Company’s ability to continue as a going concern.





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 digital service unit and V.34 product lines, declined to
approximately 22% of product sales in fiscal 2009 from 26% in fiscal 2008
year-to-date sales levels in fiscal 2010 are about at the same level as in
fiscal 2009. The Company anticipates that net sales from legacy products will
continue to 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 result in customers purchasing
products from competitors and have a material adverse effect on the Company’s
business, financial condition and results of operations.





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


17





Customer
Concentration and Economic Conditions.The Company’s customers
include local exchange carriers, inter-exchange carriers, wireless service
providers, and resellers who sell to these customers. Such 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 for such capital acquisitions have varied along with 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 57%
and 54% of revenues in fiscal 2009 and 2008.  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. The Company expects the economic climate and conditions in the
telecommunication equipment industry to remain unpredictable in fiscal 2010 and
beyond.  Additionally, world economic conditions could have a material
adverse affect on the Company’s operations.  The loss of one or more
of our service provider customers, such as occurred in the past through industry
consolidation or otherwise, could have a material adverse effect on our sales
and operating results.  A bankruptcy filing by one or more of the
Company’s major customers could materially adversely affect the Company’s
business, financial condition and results of operations.





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





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





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





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


18





Fluctuations
in Quarterly and Annual 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 Economic Condition” and “Dependence on Key Suppliers and
Component Availability”.





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





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





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





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


19





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 and Alcatel/Lucent, into other equipment such as
routers and switches. To the extent that current or potential competitors can
expand their current offerings to include products that have functionality
similar to the Company’s products and planned products, the Company’s business,
financial condition and results of operations could be materially adversely
affected.  Many of the Company’s current and potential competitors
have substantially greater technical, financial, manufacturing and marketing
resources than the Company. In addition, many of the Company’s competitors have
long-established relationships with network service providers. There can be no
assurance that the Company will have the financial resources, technical
expertise, manufacturing, marketing, distribution and support capabilities to
compete successfully in the future.





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





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





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 Telcordia Technologies, and new
products introduced in the SpectraComm line and other products designed for
telecommunications carrier networks 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 was
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 its business plan objectives
in the future.  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  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.


20





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 formerly active
subsidiary in France, which was acquired by the Company in 2005 and de-activated
in 2009. 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, difficulties
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 fluctuations in foreign currency
exchange rates. In order to sell its products internationally, the Company must
meet standards established by telecommunications authorities in various
countries.  A delay in obtaining, or the failure to obtain,
certification of its products in countries outside the United States could delay
or preclude the Company’s marketing and sales efforts in such countries, which
could have a material adverse effect on the Company’s business, financial
condition and results of operations.





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





The
Company may receive communications from third parties asserting that the
Company’s products infringe or may infringe the proprietary rights of third
parties. In its distribution agreements, the Company typically agrees to
indemnify its customers for any expenses or liabilities resulting from claimed
infringements of patents, trademarks or copyrights of third parties. In the
event of litigation to determine the validity of any third-party claims, such
litigation, whether or not determined in favor of the Company, could result in
significant expense to the Company and divert the efforts of the Company’s
technical and management personnel from productive tasks. In the event of an
adverse ruling in such litigation, the Company might be required to discontinue
the use and sale of infringing products, expend significant resources to develop
non-infringing technology or obtain licenses from third
parties.  There can be no assurance that licenses from third parties
would be available on acceptable terms if at all.  In the event of a
successful claim against the Company and the failure of the Company to develop
or license a substitute technology, the Company’s business, financial condition,
and results of operation 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 and has licensed certain U.S., Canadian and other
foreign patents with respect to certain products, including licenses granted
under patents sold in 2008. There can be no assurance that third parties have
not or will not develop equivalent technologies or products without infringing
the Company’s patents and/or patent licenses or that a court having jurisdiction
over a dispute involving such patents would hold the Company’s patents and/or
licenses 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.


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





The Company
is Controlled by a Small Number of Stockholders and Certain
Creditors.In particular, Mr. 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 73% of the Company’s
outstanding shares of Class B stock  and has stock options and
warrants that would upon exercise allow him to own approximately 58% of the
Company’s common stock, although all such options and warrants have exercise
prices which are substantially over the market price of the common stock on June
30, 2010.  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 1.2% 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
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.  To date, the holders of the 9% Preferred Stock have not
designated  any directors.  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 the absence of a payment 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 of
discouraging a third party from attempting to acquire, control of the Company.
Such provisions could limit the price that certain investors might be willing to
pay in the future for shares of the Company’s common stock, thereby making it
less likely that a stockholder will receive a premium in any sale of
shares.





ITEM 3.  QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Market
risk represents the risk of loss that impacts the Company’s financial position,
results of operations or cash flows due to adverse changes in financial and
commodity market prices and interest rates.





Historically
the Company has had little or no exposure to market risk in the area of changes
in foreign currency except to the extent the Company invoices customers in
foreign currencies and is, therefore, subject to foreign currency exchange rate
risk on any individual invoice while it remains unpaid, a period that normally
is less than 90 days.  At June 30, 2010 such accounts receivable were
not significant.  In addition, the Company has potential liabilities
of approximately 350,000 Euros that are disputed, but if paid would be subject
to foreign exchange risk.





The
interest rate on the Company’s $4.5 million real estate mortgage fluctuates
based upon the London Interbank Borrowing Rate to the extent such rate exceeds a
base of 4%, which may result in a different rate of interest being charged than
if such interest was based on the U.S. bank prime lending rate.





ITEM
4.  CONTROLS AND PROCEDURES





The
registrant carried out an evaluation, under the supervision and with the
participation of the registrant’s management, including the registrant’s Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
registrant’s disclosure controls and procedures, as defined in Rules 13a-15(e)
or 15d-15(e) of the Securities Exchange Act of 1934.  Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that the registrant’s disclosure controls and procedures as of June
30, 2010 were effective to ensure that information required to be disclosed by
the registrant in reports that it files or submits under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission’s rules and
forms.





There
were no changes in the registrant’s internal control over financial reporting
that occurred during the quarter ended June 30, 2010 that have materially
affected, or are reasonably likely to materially affect, the registrant’s
internal control over financial reporting.


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PART
II. OTHER INFORMATION





ITEM  1.  LEGAL
PROCEEDINGS





None.





ITEM  1A.   RISK
FACTORS





Not
required by smaller reporting companies.





ITEM
3.  DEFAULTS UPON SENIOR SECURITIES





Payment
of dividends on the 9% Cumulative Convertible Exchangeable Preferred Stock were
suspended June 30, 2000. Such dividend arrearages total $17,482,410 as of June
30, 2010.





ITEM
6.  EXHIBITS





(a)  Exhibits
Index:





Exhibit Number
            
            Description of Exhibit31.1
            
            Certification
      of Principal Executive Officer pursuant to Rule 13a-14(a) or Rule
      15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.31.2
            
            Certification
      of Principal Financial Officer pursuant to Rule 13a-14(a) or Rule
      15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.32.1
            
            Certification
      of Principal Executive Officer and Principal 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.August
      16, 2010
            
            /s/ William G. HenryWilliam
      G. HenryVice
      President, Finance and AdministrationChief
      Financial Officer


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