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 December 31,
2009





OR





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








For the transition period from
__________to__________





COMMISSION
FILE NUMBER 1-8086





GENERAL
DATACOMM INDUSTRIES, INC.


(Exact
name of registrant as specified in its charter)





DELAWARE
              06-0853856(State
      of other jurisdiction of
              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.





YesxNo ̈





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).





YesxNo ̈





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 ̈Nox





As of
January 31, 2010, there were outstanding the following number of shares of each
of the issuer’s classes of common equity:


3,526,230
shares of common stock, par value $0.01 per share


596,773
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 months ended December 31, 2009 and 2008 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.





PagePART I
                            FINANCIAL
      INFORMATIONItem 1.
                            Financial Statements
      (unaudited):Condensed
      Consolidated Balance Sheets as of December 31, 2009 and September 30,
      2009
                            
                            3Condensed
      Consolidated Statements of Operations for the Three Months Ended December
      31, 2009 and 2008
                            
                            4Condensed
      Consolidated Statements of Cash Flows for the Three Months Ended December
      31, 2009 and 2008
                            
                            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 Disclosure About Market Risk
                            
                            22Item
      4.
                            Controls
      and Procedures
                            
                            22PART II
                            OTHER
      INFORMATIONItem 1.
                            Legal
      Proceedings
                            
                            22Item 1A.
                            Risk
      Factors
                            
                            22Item 3.
                            Defaults
      Upon Senior Securities
                            
                            23Item 6.
                            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)





December 31,
                            
                            
                            September 30,2009
                            
                            
                            2009Assets:Current
      assets:Cash
      and cash equivalents
                            
                            $
                            16
                            
                            
                            $
                            79Accounts
      receivable, less allowance for doubtful receivables of $249 at December
      31, 2009 and $224 at September 30, 2009
                            
                            
                            261
                            
                            
                            
                            264Inventories
                            
                            
                            2,105
                            
                            
                            
                            2,435Other
      current assets
                            
                            
                            326
                            
                            
                            
                            323Total
      current assets
                            
                            
                            2,708
                            
                            
                            
                            3,101Property,
      plant and equipment, net
                            
                            
                            3,215
                            
                            
                            
                            3,309Total
      Assets
                            
                            
                            5,923
                            
                            
                            
                            6,410Liabilities
      and Stockholders’ Deficit:Current
      liabilities:Current
      portion of long-term debt (including $5,146 owed to
      related  parties at December 31, 2009 and September 30, 2009,
      respectively)
                            
                            
                            22,123
                            
                            
                            
                            22,163Accounts
      payable (including $1,627 and $1,534 owed to a related party at December
      31, 2009 and September 30, 2009, respectively)
                            
                            
                            3,371
                            
                            
                            
                            3,014Accrued
      payroll and payroll-related costs
                            
                            
                            190
                            
                            
                            
                            461Accrued
      interest (including $1,959 and $1,817 owed to related parties at December
      31, 2009 and September 30, 2009, respectively)
                            
                            
                            12,762
                            
                            
                            
                            12,189Other
      current liabilities (including $518 and $888 owed to a related party at
      December 31, 2009 and September 30, 2009, respectively)
                            
                            
                            3,364
                            
                            
                            
                            3,473Total
      current liabilities
                            
                            
                            41,810
                            
                            
                            
                            41,300Long-term
      debt, less current portion
                            
                            
                            4,500
                            
                            
                            
                            4,500Other
      liabilities
                            
                            
                            469
                            
                            
                            
                            469Total
      Liabilities
                            
                            
                            46,779
                            
                            
                            
                            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 December 31, 2009 and
      September 30, 2009 respectively; $36.0 million liquidation preference,
      including $16.6 million of cumulative dividend arrearages at December 31,
      2009
                            
                            
                            777
                            
                            
                            
                            782Class
      B stock, par value $.01 per share, 5,000,000 shares
      authorized;  596,773 and 634,615 shares issued and outstanding
      at December 31, 2009 and September 30, 2009 respectively
                            
                            
                            6
                            
                            
                            
                            6Common
      stock, par value $.01 per share, 25,000,000 shares authorized; 3,526,230
      and 3,487,473 shares issued and outstanding at December 31, 2009 and
      September 30, 2009 respectively
                            
                            
                            35
                            
                            
                            
                            35Capital
      in excess of par value
                            
                            
                            199,387
                            
                            
                            
                            199,369Accumulated
      deficit
                            
                            
                            (241,064
                            )
                            
                            
                            (240,054
                            )Accumulated
      other comprehensive income
                            
                            
                            3
                            
                            
                            
                            3Total
      Stockholders’ Deficit
                            
                            
                            (40,856
                            )
                            
                            
                            (39,859
                            )Total
      Liabilities and Stockholders’ Deficit
                            
                            $
                            5,923
                            
                            
                            $
                            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
                            December 31,2009
                          
                          
                          2008Revenues:Product
                          
                          $
                          2,240
                          
                          
                          $
                          1,745Service
                          
                          
                          325
                          
                          
                          
                          599Total
                          
                          
                          2,565
                          
                          
                          
                          2,344Cost
      of revenues:Product
                          
                          
                          1,549
                          
                          
                          
                          1,251Service
                          
                          
                          101
                          
                          
                          
                          278Total
                          
                          
                          1,650
                          
                          
                          
                          1,529Gross
      margin
                          
                          
                          915
                          
                          
                          
                          815Operating
      expenses:Selling,
      general and administrative
                          
                          
                          729
                          
                          
                          
                          1,082Research
      and product development
                          
                          
                          448
                          
                          
                          
                          5291,177
                          
                          
                          
                          1,611Operating
      loss
                          
                          
                          (262
                          )
                          
                          
                          (796
                          )Interest
      expense
                          
                          
                          (719
                          )
                          
                          
                          (720
                          )Other
      income, net
                          
                          
                          (26
                          )
                          
                          
                          26Loss
      before income taxes
                          
                          
                          (1,007
                          )
                          
                          
                          (1,490
                          )Income
      tax provision
                          
                          
                          3
                          
                          
                          
                          3Net  loss
                          
                          
                          (1,010
                          )
                          
                          
                          (1,493
                          )Dividends
      applicable to preferred stock
                          
                          
                          (440
                          )
                          
                          
                          (440
                          )Net  loss
      applicable to common and Class B stock
                          
                          $
                          (1,450
                          )
                          
                          $
                          (1,933
                          )Earnings
      (loss) per share:Basic
      and diluted – common stock
                          
                          $
                          (0.35
                          )
                          
                          $
                          (0.47
                          )Basic
      and diluted – Class B stock
                          
                          $
                          (0.35
                          )
                          
                          $
                          (0.47
                          )Weighted
      average number of common and Class B shares outstanding:Basic
      and diluted - common stock
                          
                          
                          3,506,009
                          
                          
                          
                          3,487,473Basic
      and diluted – Class B stock
                          
                          
                          616,517
                          
                          
                          
                          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)





Three Months EndedDecember 31,2009
                          
                          
                          2008Cash
      flows from operating activities:Net
      loss
                          
                          $
                          (1,010
                          )
                          
                          $
                          (
      1,493
                          )Adjustments
      to reconcile net loss to net cash provided (used) by operating
      activities:Depreciation
      and amortization
                          
                          
                          84
                          
                          
                          
                          88Stock
      compensation expense
                          
                          
                          13
                          
                          
                          
                          38Changes
      in:Accounts
      receivable
                          
                          
                          3
                          
                          
                          
                          (73
                          )Inventories
                          
                          
                          330
                          
                          
                          
                          538Accounts
      payable
                          
                          
                          357
                          
                          
                          
                          48Accrued
      payroll and payroll-related costs
                          
                          
                          (271
                          )
                          
                          
                          (125
                          )Accrued
      interest
                          
                          
                          574
                          
                          
                          
                          560Other
      net current liabilities
                          
                          
                          (90
                          )
                          
                          
                          137Other
      net long-term assets
                          
                          
                          (2
                          )
                          
                          
                          (15
                          )Net
      cash used by operating activities
                          
                          
                          (12
                          )
                          
                          
                          (297
                          )Cash
      flows from investing activities:Acquisition
      of property, plant and equipment, net
                          
                          
                          (11
                          )
                          
                          
                          (4
                          )Net
      cash used by investing activities
                          
                          
                          (11
                          )
                          
                          
                          (4
                          )Cash
      flows from financing activities:Proceeds
      from notes payable to related party
                          
                          
                          -
                          
                          
                          
                          250Principal
      payments on notes payable to unrelated party
                          
                          
                          (40
                          )
                          
                          
                          (13
                          )Net
      cash provided (used) by financing activities
                          
                          
                          (40
                          )
                          
                          
                          237Net
      decrease  in cash and cash equivalents
                          
                          
                          (63
                          )
                          
                          
                          (64
                          )Cash
      and cash equivalents, beginning of period
                          
                          
                          79
                          
                          
                          
                          136Cash
      and cash equivalents, end of period
                          
                          $
                          16
                          
                          
                          $
                          72Supplemental
      disclosures of cash flow information:Cash
      paid during the period for:Interest
                          
                          $
                          137
                          
                          
                          $
                          104Income
      and franchise taxes
                          
                          $
                          -
                          
                          
                          $
                          6





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 months ended December 31, 2009 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 months ended December 31, 2009 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 three months ended December 31, 2009 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
December 31, 2009 the Company had a stockholders’ deficit of approximately $40.9
million, and a working capital deficit of approximately $39.1 million, including
debentures in the principal amount of $19.4 million, together  with
accrued interest thereon ($12.2 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 December 31, 2009, 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 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 December
31, 2009, 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 13 accounting
standards updates.  Management has evaluated these updates and do not
believe the adoption of any of these updates will have a material impact on the
Company’s unaudited condensed financial statements.





In June
2009, the FASB issued FASB ASC 105, Generally Accepted Accounting
Principles, which establishes the FASB Accounting Standards Codification,
referred to above in “Critical
Accounting Policies”,as the sole source of authoritative generally
accepted accounting principles (“GAAP”).  Pursuant to the provisions
of FASB ASC 105, the Company has updated references to GAAP in its financial
statements issued for the period ended September 30, 2009.  The
adoption of FASB ASC 105 did not impact the Company’s financial position or
results of operations.





In May
2009, the FASB issued guidance related to changes to accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued, otherwise known
as “subsequent events”.  In particular, these changes set forth (i)
the period after the balance sheet date during which management of a reporting
entity should evaluate events or transactions that my occur, (ii) the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date and (iii) the disclosures that an entity
should make about events or transactions that occurred after the balance sheet
date.  This guidance introduces the concept of financial statements
being available to be issued.  It requires the disclosure of (i) the
date through which an entity has evaluated subsequent events and (ii) the basis
for that date, that is, whether that date represents the date the financial
statements were issued or were available to be issued.  This guidance
should not result in significant changes in the subsequent events that an entity
reports in its financial statements and does not apply to subsequent events or
transactions that are within the scope of other applicable generally accepted
accounting principles that provide different guidance on the accounting
treatment for subsequent events or transactions.  The adoption of
these changes had no significant impact to the financial statements of the
Company.





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 months ended December
31, 2009 and 2008 (in thousands, except shares and per share data):





Three Months Ended
                    December 31,2009
                  
                  
                  2008Net
      loss
                  
                  $
                  (1,010
                  )
                  
                  $
                  (1,493
                  )Dividends
      applicable to preferred stock
                  
                  
                  (440
                  )
                  
                  
                  (440
                  )Net
      loss applicable to common and Class B stock
                  
                  $
                  (1,450
                  )
                  
                  $
                  (1,933
                  )Net  loss
      applicable to common stock-basic and diluted
                  
                  $
                  (1,233
                  )
                  
                  $
                  (1,635
                  )Net  loss
      applicable to Class B stock-basic and diluted
                  
                  $
                  (217
                  )
                  
                  $
                  (298
                  )




8





Three Months Ended December 31,2009
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2008Common Stock
                      
                      
                      Class B StockNumerator
      for basic and diluted earnings per share – net loss
                      
                      $
                      (1,233
                      )
                      
                      $
                      (1,635
                      )
                      
                      $
                      (217
                      )
                      
                      $
                      (298
                      )Denominator
      for basic and diluted earnings per share-weighted average outstanding
      shares
                      
                      
                      3,506,009
                      
                      
                      
                      3,487,473
                      
                      
                      
                      616,517
                      
                      
                      
                      634,615Basic
      and diluted loss per share
                      
                      $
                      (0.35
                      )
                      
                      $
                      (0.47
                      )
                      
                      $
                      (0.35
                      )
                      
                      $
                      (0.47
                      )





In the
three months ended December 31, 2009 and 2008, 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 December 31, 2009 and 2008 which could potentially
dilute basic earnings per share are as follows:





No. of SharesThree Months Ended December 31,2009
                    
                    
                    2008Stock
      warrants
                    
                    
                    4,093,341
                    
                    
                    
                    4,093,341Stock
      options
                    
                    
                    3,226,147
                    
                    
                    
                    3,340,896Convertible
      preferred stock
                    
                    
                    142,307
                    
                    
                    
                    143,223Total
                    
                    
                    7,461,795
                    
                    
                    
                    7,577,460





4.  Inventories





Inventories
consist of (in thousands):





December 31,
                      
                      
                      September 30,2009
                      
                      
                      2009Raw
      materials
                      
                      $
                      452
                      
                      
                      $
                      405Work-in-process
                      
                      
                      1,242
                      
                      
                      
                      1,535Finished
      goods
                      
                      
                      411
                      
                      
                      
                      495$
                      2,105
                      
                      
                      $
                      2,435





Inventories
are stated at the lower of cost or market using a first-in, first-out
method.  Reserves in the amount of  $ 2,952,000 and
$2,879,000 were recorded at December 31, 2009 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):
                        
                        December 31,
                        
                        
                        September 30,2009
                        
                        
                        2009Notes
      Payable to Related Parties
                        
                        $
                        2,756
                        
                        
                        $
                        2,756Note
      Payable to Unrelated Party
                        
                        
                        -
                        
                        
                        
                        40Debentures
      matured October 1, 2008
                        
                        
                        19,367
                        
                        
                        
                        19,367Real
      Estate Mortgage due July 31, 2011
                        
                        
                        4,500
                        
                        
                        
                        4,50026,623
                        
                        
                        
                        26,663Less
      current portion
                        
                        
                        22,123
                        
                        
                        
                        22,163$
                        4,500
                        
                        
                        $
                        4,500





Long-term
debt totaling $ 22,123,000 has matured as of December 31, 2009, 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.


9


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.





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, 2009 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.  The warrant was valued at $69,000 based upon an appraisal by
an outside consultant and was recorded as debt discount and amortized as
additional interest expense over the initial term of the debt.





In the
quarters ended March 31, 2007 and December 31, 2007, Mr. Modlin made demand
loans to the Company totaling $270,000 and $125,000, respectively, 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 $456,925 and $374,926 at December 31,
2009 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 February16,
2010.  Interest accrues at the annual rate of 10% and totaled
$12,211,000 at December 31, 2009.  (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.  The mortgage
required monthly payments of interest at the rate of 30-day LIBOR plus 8% with a
minimum interest of 12% (such interest was 12% at December 31,
2009).  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 30, 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 that is payable no later than August 1,
2010.  The mortgage contains no financial performance
covenants.


10





6.  Employee
Incentive Plans





Stock Award, 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.
At December 31, 2009 there were 567,326 options available for future issuance
under the plans.





On
October 11, 2007, the Stock Option Committee of the Board of Directors granted
stock options pursuant to the Company’s 2005 Plan to purchase 312,900 shares of
common stock at the quoted market price of $.25 per share, including grants of
30,000 shares to Aletta Richards and John L. Segall, Directors, William G.
Henry, Vice President, Finance and Administration and Principal Financial
Officer and George Gray, Vice President, Operations and Chief Technology
Officer, and an aggregate of 192,900 of such options to all of its employees
other than its officers and directors.  The Committee also granted to
Howard S. Modlin, Chairman and Chief Executive Officer, a stock option with
terms similar to the options granted under the 2005 Plan to purchase 551,121
shares at $.275 a share.  All such options vest in increments of 20%
per year over a five year period and expire ten years after grant.





A summary
of stock options outstanding under the Company’s stock plans as of September 30,
2009 and changes during the three months ended December 31, 2009 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
                  
                  
                  (3,006
                  )
                  
                  
                  26.88Options
      outstanding, December 31, 2009
                  
                  
                  3,226,147
                  
                  
                  $
                  0.49
                  
                  
                  
                  6.36
                  
                  
                  $
                  0Vested
      or expected to vest at  December 31, 2009
                  
                  
                  2,715,041
                  
                  
                  $
                  0.45
                  
                  
                  
                  6.37
                  
                  
                  $
                  0Exercisable
      at December 31, 2009
                  
                  
                  2,128,309
                  
                  
                  $
                  0.58
                  
                  
                  
                  6.10
                  
                  
                  $
                  0





As of
December 31, 2009, there was $76,573 of total unrecognized compensation cost
related to nonvested options which is expected to be recognized over a weighted
average period of 1.40 years.  There were no options granted during
the three months ended December 31, 2009.





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 three months ended
December 31, 2009 and 2008.





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 quarter ended December 31, 2009, Mr. Modlin
made purchases with a face value of $2,295,384 for an aggregate purchase price
of $2,238,000 under this agreement.  In the quarter ended December 31,
2008, Mr. Modlin purchased $1,311,869 of receivables for a price of
$1,280,000.  For accounting purposes, the discount is recorded as an
expense at the time of purchase.


11


Subsequent
to December 31, 2009 and through February  15, 2010, Mr. Modlin made
additional receivable purchases with a face value of $  1,189,000 for
an aggregate purchase price of $  1,160,000.





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 $212,000 U.S. at December 31, 2009).  The Company has
sufficient reserves recorded at December 31, 2009 to absorb this expense should
such payment become necessary.  However the Company believes that the
claims are without merit and has entered an appeal in this case.





9.  Subsequent
Events





Effective
February 15, 2010 the Company reduced the factory work week from five days to
three days to reduce operating costs.





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





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.


12





RESULTS
OF OPERATIONS





Revenues


Three Months Ended December 31,(in
      thousands)
                  
                  2009
                  
                  
                  2008Product
                  
                  $
                  2,240
                  
                  
                  $
                  1,745Service
                  
                  
                  325
                  
                  
                  
                  599Total
      Revenues
                  
                  $
                  2,565
                  
                  
                  $
                  2,344





Revenues
for the three months ended December 31, 2009 increased $221,000, or 9.4%, to
$2,565,000 from $2,344,000 reported for the three months ended December 31,
2008.  Product revenues increased $ 495,000, or 28.4%, while service
revenues decreased $ 274,000, or 45.7%.





The
product sales increase in the quarter-to-quarter comparison was primarily due to
a 36% increase in shipments of multi-service switches to existing domestic and
international customers, associated with the release of new product features and
capabilities.  In addition, network access products increased 14% to
accommodate demand for services being rolled out by large telephone
companies.  Sales of the multi-service switch product line constituted
approximately 68% of product revenue in the 2009 quarter while the network
access product line constituted approximately 32% of product revenue, compared
to approximately 64% multi-service switches and 36% access products in the 2008
quarter.





The
decrease in service revenue was due to expiration of a service contract in
Europe where the customer transitioned the equipment and to subcontract work for
a large telephone company in the 2008 quarter that did not repeat in the 2009
quarter.





Foreign
sales accounted for approximately 36% and 39% of revenue in the three months
ended December 31, 2009 and 2008, respectively.





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





Gross
Margin





Three Months Ended December 31,(in
      thousands)
                  
                  2009
                  
                  
                  2008Product
                  
                  $
                  691
                  
                  
                  $
                  494Service
                  
                  
                  224
                  
                  
                  
                  321Total
      Gross Margin
                  
                  $
                  915
                  
                  
                  
                  815Percentage
      of Product Revenues
                  
                  
                  30.8
                  %
                  
                  
                  28.3
                  %Percentage
      of Service Revenues
                  
                  
                  68.9
                  %
                  
                  
                  53.6
                  %Percentage
      of Total Revenues
                  
                  
                  35.7
                  %
                  
                  
                  34.8
                  %





Gross
margin, as a percentage of revenues in the three months ended December 31, 2009,
was 35.7% as compared to 34.8% in the three months ended December 31, 2008, an
increase of 0.9%.





Product
gross margin, as a percentage of product revenue, increased
2.5%.  Manufacturing efficiencies associated with higher sales volumes
contributed a 14.2% improvement in gross profit margin.  Another 2.0%
improvement resulted from lower spending on factory labor and
expenses.  These improvements were offset by competitive pricing
offered on certain contracts (-3.3%), lower component prices in the 2008 quarter
(-6.1%) and the favorable impact of selling inventories previously written down
in the 2008 quarter that did not repeat in the 2009 quarter
(-4.3%).


13


Service
gross margin, as a percentage of service revenue, increased
15.3%.  The improvement was due to operating cost reductions
offsetting the reduced revenue level.  Cost reductions resulted from
the service organization being restructured to adjust to a lower revenue stream
from recurring contracts.  Compensation cost reductions and related
expenses, along with lower use of outside contractors, accounted for the
reduction.





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 December 31,(in
      thousands)
                  
                  2009
                  
                  
                  2008Selling,
      general and administrative
                  
                  $
                  729
                  
                  
                  
                  1,082Percentage
      of revenues
                  
                  
                  28.4
                  %
                  
                  
                  46.2
                  %





Selling,
general and administrative expenses decreased to $ 729,000, or  28.4%
of revenues in the three months ended December 31, 2009, from $1,082,000, or
46.2% of revenues in the three months ended December 31, 2008.  The
decrease in spending in the quarter of $ 353,000, or 32.6%, was primarily a
result of  closure of a sales office in France which reduced expenses
by $117,000, and lower compensation costs of $ 159,000 due to salary and benefit
reductions, including certain job eliminations, for domestic sales and
administrative staff.  In addition, professional fees were lower by
$114,000 due to lower anticipated audit fees and a reduction in legal support
activities.  Other items were a net increase of $37,000.





Research and Product
Development


Three Months Ended December 31,(in
      thousands)
                  
                  2009
                  
                  
                  2008Research
      and product development
                  
                  $
                  448
                  
                  
                  $
                  529Percentage
      of revenues
                  
                  
                  17.5
                  %
                  
                  
                  22.6
                  %





Research and product development
expenses decreased to $448,000, or17.5% of revenues in the three months endedDecember 31,
2009, as compared to
$529,000, or22.6% of revenues in the three months endedDecember 31, 2008.  The decrease of
$81,000, or15.3%, was primarily the result of lower
compensation costs of $109,000due to headcount
reductions resulting froma
combination ofattritionand lay-offs,andoffset in part by highercosts ofoutsidecontractorsof $42,000 engaged to assist with
design of multi-service switch products and features.Other net reductions were
$14,000.





Interest Expense





Interest expensedecreased to $719,000 in the three months endedDecember 31, 2009from $720,000 in the three months endedDecember 31, 2008.Debt levels and interest rates remain
approximately the same in both periods.





The Company is currently only paying
interest on the real estate mortgage.  Such payments amounted to
$137,000 in the three month period ended December 31, 2009.





Other Income
(Expense)





Other income (expense) for the three
months endedDecember
31, 2009and 2008totaled $(26,000)and $26,000, respectively.  The
2009quarterly amount includes$57,000 of discount associated with the
sales of accounts receivables offset in part by$24,000 received from a tradename license
and $7,000in other net income
items.  The 2008quarterly amount includes$32,000 of discount associated with the
sales of accounts receivables offset by $50,000 received in a legal settlement
and $ 8,000 in other net income items.


14


Provision for Income
Taxes





The income tax provisionsfor the three months endedDecember 31, 2009and 2008 reflect current state tax
provisions only.No federal
income tax provisions were provided in the three months endedDecember 31, 2009and 2008due 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 2009.  The Company has federal tax
credit and net operating loss carryforwards of approximately $1.9million and $214.4million, respectively,atSeptember 30, 2009.





Liquidity and Capital
Resources





Deecember 31,
                    
                    
                    September 30,(in
      thousands)
                    
                    2009
                    
                    
                    2009Cash
      and cash equivalents
                    
                    $
                    16
                    
                    
                    $
                    79Working
      capital (deficit)
                    
                    
                    (39,102
                    )
                    
                    
                    (38,199
                    )Total
      assets
                    
                    
                    5,923
                    
                    
                    
                    6,410Long-term
      debt, including current portion
                    
                    
                    26,623
                    
                    
                    
                    26,663Total
      liabilities
                    
                    
                    46,779
                    
                    
                    
                    46,269





Three Months Ended December 31,2009
                  
                  
                  2008Net
      cash provided (used) by:Operating
      activities
                  
                  $
                  (12
                  )
                  
                  $
                  (297
                  )Investing
      activities
                  
                  
                  (11
                  )
                  
                  
                  (4
                  )Financing
      activities
                  
                  
                  (40
                  )
                  
                  
                  237





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





Cash Flows





Net cash used by operating activities
totaled $12,000in thethreemonths endedDecember 31, 2009. The net loss in the period was
$1,010,000. Included in this net loss were
non-cash expenses for depreciation and amortization of $84,000and stock compensation expense of
$13,000.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
$3,000. However, a lower level of sales of accounts receivables to be invoiced
(to a related party) resulted in a use of cash of $370,000. Inventories were
lower by $330,000 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. An increase in unpaid accounts payable resulted in a source
of cash of $357,000.Unpaid
interest which accrued on the Company’s debt increased $574,000 as a source of cash.Deferred revenue, primarily on product
shipments awaiting customer acceptance, added $276,000 as a source of cash.Othernet usesof cashtotaled $ 269,000.





Net cash used by investing activities in
the three months ended December 31, 2009 was $11,000 for the acquisition of
equipment.





Net cashused by financing activities in thethreemonths endedDecember 31, 2009was$40,000, comprised ofpayments on a note payable to an
unrelated party.


15





Liquidityand Going Concern





The Company incurred a net loss and used
a significant amount of cash in its operating activities for thethreemonths endedDecember 31, 2009 and prior.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 and
any cash that may be generated from the sale of non-core assets such as real
estate and otherassets.  In
addition, atDecember
31, 2009the Company had a stockholders’ deficit
of approximately $40.9million, and a working capital deficit
of approximately $39.1million, including debentures in the
principal amount of $19.4million, together  with
accrued interest thereon ($12.2million), 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 ofDecember 31, 2009, 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
byimplementingoperational changes,
includingclosing 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 13 accounting standards
updates.  We have evaluated these updates and do not believe the
adoption of any of these updates will have a material impact on our unaudited
condensed financial statements.





In June
2009, the FASB issued FASB ASC 105, Generally Accepted Accounting
Principles, which establishes the FASB Accounting Standards Codification,
referred to above in “Critical
Accounting Policies”,as the sole source of authoritative generally
accepted accounting principles (“GAAP”).  Pursuant to the provisions
of FASB ASC 105, the Company has updated references to GAAP in its financial
statements issued for the period ended September 30, 2009.  The
adoption of FASB ASC 105 did not impact the Company’s financial position or
results of operations.





In May
2009, the FASB issued guidance related to changes to accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued, otherwise known
as “subsequent events”.  In particular, these changes set forth (i)
the period after the balance sheet date during which management of a reporting
entity should evaluate events or transactions that my occur, (ii) the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date and (iii) the disclosures that an entity
should make about events or transactions that occurred after the balance sheet
date.  This guidance introduces the concept of financial statements
being available to be issued.  It requires the disclosure of (i) the
date through which an entity has evaluated subsequent events and (ii) the basis
for that date, that is, whether that date represents the date the financial
statements were issued or were available to be issued.  This guidance
should not result in significant changes in the subsequent events that an entity
reports in its financial statements and does not apply to subsequent events or
transactions that are within the scope of other applicable generally accepted
accounting principles that provide different guidance on the accounting
treatment for subsequent events or transactions.  The adoption of
these changes had no significant impact to the financial statements of the
Company.





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 and December 31, 2009 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.


16


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),  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 and continue to decline in fiscal 2010. 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.





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.


17


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.





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.


18


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.





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.




19




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.





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.





20




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 infavor 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.





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.





21




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
December 31, 2009.  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 December 31, 2009 such accounts receivable
were not significant.





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
December 31, 2009 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 December 31, 2009 that have materially
affected, or are reasonably likely to materially affect, the registrant’s
internal control over financial reporting.





PART
II. OTHER INFORMATION





ITEM  1.  LEGAL
PROCEEDINGS





None.





ITEM  1A.   RISK
FACTORS





Not
required by smaller reporting companies.





22




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 $16,608,289
as of December 31, 2009.




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.February 16, 2010
                    
                    /s/ William G. HenryWilliam
      G. HenryVice
      President, Finance and AdministrationChief
      Financial
Officer


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